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When the government creates a startup opportunity

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It is a truism amongst mentors that startups have to solve problems, and eventually do so profitably. What I like to see is what I call a forcing function, an exogenous force that creates a problem that a startup to solve.

A great example of this is in The Wall Street Journal article IRS Sending Warning Letters to More Than 10,000 Cryptocurrency Holders. “Taxpayers should take these letters very seriously. The IRS is expanding efforts involving virtual currency,” IRS Commissioner Chuck Rettig said.

While the price of Bitcoin and other digital currencies bounces up and down like a drunken yo-you, you can rest assured that like death, IRS taxes are a sure thing. So now everyone investing in crypto currencies has more to worry about than the value of their portfolio: their income tax obligations. But who’s been tracking their crypto gains and losses?

Chandan Lodha and Jon Lerner, the founders behind CoinTracker, spotted this problem and built a company to solve it. Cointracker supports fee tracking, margin trading, and the most integrations, while handling traders with millions of transactions. They support over 300 exchanges and 2500 cryptocurrencies.

The two are former Googlers, and cofounded the company after going through the prestigious startup program Y Combinator. They secured a seed round of $1.5 million. As the saying goes, the way to make money on a gold rush is to sell the picks and shovels and that’s certainly the tack that Cointracker has taken, with the IRS forcing crypto traders to track their transactions and file returns covering their crypto investments.

The origin story of Cointracker is typical; the founders were trying to find something to track their own crypto investment hobby. When they couldn’t find anything suitable they built it themselves. As with many tools, ease of use is critical:

“The key reason we’ve had some success to date is due to focusing on the UX,” Lodha said. “There are tons of other tools but one thing that really resonates with our users is that we’ve made it easy to use for mainstream people, not just expert cryptography folks.

And like many services, the business model is freemium: the basic tracking service is free but users pay from$49 up to $999 per year for more advanced features centered around optimizing tax filings by computing capital gains reports using FIFO, LIFO or HIFO accounting.

So if you are looking to start a new venture, pay attention to new government laws and regulations, you may well find that they are creating a new problem for taxpayers – one that you can profitably solve.

What is venture debt and why you might want to employ it

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Venture debt is a way to raise non-dilutive capital, but it is most appropraite for capital intensive businesses. Those businesses may need to buy equipment to startup their firms, but prefer to invest their venture capital in hiring talent or expanding their marketing. We raised venture debt at Course Technology – the debt was secured by the value of our computing infrastructure. It didn’t hurt that the wife of one of our venture capital investors was a partner in the venture debt firm.

Frankly I haven’t heard anything or thought much about venture debt in years until coming across the article What Does This Venture Debt Firm Look For Before Investing in Start-Ups? on Entrepreneur India. Rahul Khanna, managing director of Trifecta Capital, which has made over 50 venture debt deals in the past five years provides their criteria for making an investment.

First, “We look to partner with business in the emerging economy who are creating new categories or are clear leaders in existing categories,” says Khanna. But before doing a deal they sit down with the equity investors to make sure their expectations for the business are in alignment.

Like most VCs, Trifecta Capital back the entrepreneur. While they recognize that the founder is the expert on their business, Trifecta does attempt to highlight areas that might be a blindspot for the founder, much like equity investors and mentors.

One mistake they see, which I also see quite often, is failure to build a strong team when scaling up. Investors invest in teams, not just founders. And while a founder or co-founder can develop a product, to bring it to market and scale the company a full team, including sales and marketing executives, is necessary.

So if you have capital intensive business, have raised money from a name brand VC, and want to avoid further dilution, I encourage you to look into venture capital if you are in need of additional funding. But make sure you have a full team in place first.

A game-changing piece of advice from a mentor named Steve Jobs

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Well, when your mentor is Steve Jobs, as it was with Marc Benioff, founder and CEO of Salesforce.com, you might hope for a game-changing piece of advice. But it took Marc quite some years to actually apply what seemed inscrutable to him at the time.

The story in The Wall Street Journal, The Lesson I Learned from Steve Jobs, sub-titled A challenge from technology’s greatest showman led Marc Benioff to a breakthrough insight about how to find true innovation at Salesforce.com written by Marc Benioff, holds several lessons for founders and is charmingly written by Marc – highly recommended reading.

The first lesson is how Marc got a summer internship at Apple working in the Mac group. He had programmed several games while in high school and managed to find a bug in the Mac’s software. Unlike most of us, he directly contacted the Mac group to tell them about the bug and managed to leverage that conversation into a summer internship. Lesson one, bring something of value when you trying to create a new relationship. Marc was a mere summer intern but he managed to steel himself to chat with Steve Jobs not once but many times that summer, managing to forge a relationship out of their shared love for technology and science, as well as a passion for meditation and Eastern philosophy. Lesson number two: find common ground with someone with whom you seek to build a relationship.

Marc kept in touch with Steve Jobs after his internship ended and as he says, “as my career progressed he became a mentor of sorts.” Lesson number three: work to maintain relationships, even if at a distance. I won’t spoil Marc’s story for you except to say that Jobs advised him that though he had a slick web site, he needed a lot more, including a Salesforce “application ecosystem.” (Keep in mind this was many years before the Apple App Store.) Here’s how Marc was finally able to apply his mentor’s advice:

One evening, over dinner in San Francisco, I was struck by an irresistibly simple idea. What if any developer from anywhere in the world could create their own application for the Salesforce platform? And what if we offered to store these apps in an online directory that allowed any Salesforce user to download them? I wouldn’t say this idea felt entirely comfortable. I’d grown up with the old view of innovation as something that should happen within the four walls of our offices. Opening our products to outside tinkering was akin to giving our intellectual property away. Yet, at that moment, I knew in my gut that if Salesforce was to become the new kind of company I wanted it to be, we would need to seek innovation everywhere.

Salesforce’s App Exchange has become a huge driver of the company’s success, attracting thousands of developers and adding tremendous value to the core application. I’ll let Marc give you lesson four in his own words:

Steve helped me understand that no great innovation in business ever happens in a vacuum. They’re all built on the backs of hundreds of smaller breakthroughs and insights—which can come from literally anywhere. AppExchange now has more than 5,000 apps, ranging from sales engagement and project management tools to collaboration aids.

Building an ecosystem is about acknowledging that the next game-changing innovation may come from a brilliant technologist and mentor based in Silicon Valley, or it may come from a novice programmer based halfway around the world. A company seeking to achieve true scale needs to seek innovation beyond its own four walls and tap into the entire universe of knowledge and creativity out there.

What’s the number one issue for early stage founders?

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The founders I mentor are, with few exceptions, engineers and scientists, and as such they have a deep knowledge of their product’s subject domain and usually have made excellent progress on developing their product. But as angel Jeffery Potvin says in the Inc. article Need Funding? Ask This Angel for Advice, sub-titled Founders need resources to learn best practices around obtaining investments in their businesses: Most entrepreneurs are “builders, not sellers.”  I’m in violent agreement both with this quote and with the article’s sub-title. The number one issue, measured by the amount of time I spend mentoring founders about it, is how, when, why, and where to raise capital. I resonate with Mr. Potvin’s experience as a founder:

When entrepreneur turned angel investor Jeffery Potvin decided to turn some of his success into investments, he met a lot of interesting people with “great ideas and terrible pitches.” He says, “I kept seeing the same problem over and over: They couldn’t get attention and their value proposition didn’t make sense.

Early on in my career I was very fortunate to be mentored by an executive in Apple’s Higher Education group. She taught me about how to create visual and engaging pitches, pitches that were simple, clear, and compelling in conveying our value proposition. In other words, she was teaching me Apple’s best practices in creating pitches, as defined by its co-founder, Steve Jobs. (Perhaps proof of her success was in not only in our garnering an investment from Apple’s venture group, but for several other startups over the years.) I’ve created dozens and reviewed hundreds of pitches since that time. I find that pitch review is one of the key ways I can mentor founders. Mr. Potvin also has words worth reading about mentorship

“But throughout the years, and though through ups and downs, I always had mentors,” he says. “And there was a value in those mentorships.” However, they weren’t from the startup world. So, in retrospect, he realized that they didn’t always know how to guide him as he worked to build his first company Hardboot, which provides outsourced technical resources for enterprise companies. “But all the things I didn’t do right, I learned from. And with OPN, I want to help others learn how to do them so that they can drive their business forward.” In fact, he says he’s learned one simple lesson about whether a burgeoning business should seek investment: “If you want to grow a stable business, you don’t need money. If you want to grow fast, you need money.”

Im in total agreement with his last sentence, though I phrase it somewhat differently. I advise founders that investors invest in one thing: growth. If founders aren’t committed to building a high-growth company they should not pursue outside investment; rely on friends and family and customer revenue to support building a stable business.

Here’s some additional advice from Mr. Potvin that is worth taking into account by founders thinking about raising capital:

There are a few other tips he’d offer to any founder, particularly those who are perfecting their pitch. “First, before you build anything, define your problem. Then verify it with a company or two. Second, being marketable is everything. Reduce risk. Work with an early customer to ensure that you are solving a problem and to show that there’s a market. And third, get in front of people–at pitch events, speaking at and attending conferences… work on that elevator pitch.”

Too often I find founders fixated on their product and raising capital. This is backwards: you need to focus on the problem you are solving and your customers. Just as form follows function, product follows problem. Too many founders have a solution in search of a problem. And I have to plead guilty to multiple violations of this dictum; I have learned this the hard way.

But nothing says engineers and scientists can’t be great sales people, a very few I have known have been. But if you are like most, you are a builder, not a seller and so my last bit of advice is to consider partnering with a business person with solid sales experience, who also loves your product and buys into your vision. And whether you bring on a sales savvy co-founder or not, take advantage of the multiple mentoring opportunities out there to get good advice on the best practices in raising capital.

Inspiring story of a successful social entrepreneur

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I’ve been privileged to mentor a few social impact ventures at MIT’s Venture Mentoring Service, such as Candorful, which helps transitioning military service members who need to translate their experiences and skills to launch their civilian careers.

Old people like me tend to read the obituaries, a part of the newspaper I assiduously avoided for the first six decades of my life. But now I’m seeing many of the heroes and influencers of my youth in the obit pages and I find I learn a lot by reading their obituaries. Sad, but true. The other day my attention was grabbed, not by a familiar name or face but by the headlinePaul Polak, Entrepreneur for Those Living on $2 a Day, Dies at 86, in The New York Times.  Certainly targeting those who live on $2 a day qualifies as social entrepreneurship. But Mr. Polak, a former psychiatrist and real-estate speculator, took a novel approach: he helped the world’s poorest people create profitable small businesses. 

In an era when foreign aid is largely based on charity, Dr. Polak (pronounced POLE-ack) instead advocated training people to earn livings by selling their neighbors basic necessities like clean water, charcoal, a ride in a donkey cart or enough electricity to charge a cellphone.

Although the nonprofit companies he created did accept donations, their purpose was to help poor people make money. His target market was the 700 million people around the world surviving on less than $2 a day, and he traveled all over the world seeking them out.

Dr. Pollak practiced customer discovery at a scale beyond most entrepreneurs:

“I’ve interviewed over 3,000 families,” he said in 2011. “I spend about six hours a day with each one — walking with them through their fields, asking them what they had for breakfast, how far their kids walk to school, what they feed their dog, what all their sources of income are. This is not rocket science. Any businessman knows this: You’ve got to talk to your customers.”

From those thousands of interviews he developed several successful micro-businesses, included a foot-powered water treadle pump. Beginning in 1982 millions of these pumps were sold in Bangladesh and India for $25 each.

Dr. Polak also knew how to promote his products: “O.K., somewhat cheesy,” Dr. Polak admitted, “but we bought a van with a video setup and took it to villages. A typical open-air audience was 2,000 to 5,000 people.”

Unlike other very successful entrepreneurs – he made his money in real estate – he didn’t start yet another for-profit company nor become an entrepreneur-in-residence or a venture capitalist.

“But, instead of trying to become a Bill Gates or a Donald Trump, I came to the realization that, beyond having enough money to cover my basic living expenses, the marginal value of accumulating more wealth was not really useful,” he told an interviewer this year.

Whether or not you plan to become a social entrepreneur – or already are one – I highly recommend you read the full obit; it is truly inspiring. And if you want more detail, Dr. Polak wrote two books about his efforts to enable the poor to bootstrap themselves through creating their own businesses: Out of Poverty in 2008 and, with Mal Warwick, The Business Solution to Poverty in 2013.

Mentoring makes the big time: Dilbert!

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Not sure that telepathic mentoring actually works! As the saying goes, “If you see something, say something.” But make sure your criticism is constructive and focuses on actions and plans, not on people.

And, of course, mentors should always schedule times to meet with their mentees so no excuse for excuses like “I’ve been too busy lately.”

How do you decide: data or gut instinct?

Screen Shot 2019-10-19 at 9.58.21 AMAs I’ve written before, I consider startups to be decision machines, ones that founders must learn to live with, and if they are too thrive, to conquer. And while I have several posts about decisions, I haven’t tackled the argument of relying on data versa gut instinct. Google considers itself a decision machine, as illustrated by how they decided that the variation of blue would grace their home page. As I recall the color choice of their chief designer was overridden by the one presented by data, as Google AB tested dozens of variation and went with the one dictated by data. The designer left Google soon after.

But as the founder of a startup you don’t have the luxury of a money machine like Google to indulge in AB testing of every decision. Startups need to be fast, flexible, and focused – the three characteristics not generally possessed by legacy companies and making up the wholly trinity of startup’s competitive advantage.

The article in The Wall Street JournalFeel the Force’: Gut Instinct, Not Data, Is the Thing by John Stoll is worthwhile reading, as it reveals how the mega-movers in the tech world, including Jeff Bezos and Masayoshi Son make their decisions. According to the article ” Research shows that most business leaders trust intuition over analytics.”

KPMG LLP’s recent global CEO survey shows just 35% of executives highly trust their organization’s data. Two-thirds of CEOs ignored insights provided by data analysis or computer models in the past three years because it contradicted their intuition.

Brad Fisher, KPMG’s U.S. leader of data and analytics, said companies beefing up their analytics units must also find ways to sharpen executives’ instincts.

“You should collect as many data points as you can,” he said. “But don’t throw out your intuition.”

But there is a downside to data, as an over-reliance can “numb the intellect and dull decision-making skills. The reality for both founders and venture capitalists is that both must make decisions with just a sliver of the data generally mandated for a decision in established corporations. That accounts for the definition of “venture” in venture capital:  a risky or daring journey or undertaking: pioneering ventures into little-known waters. a business enterprise involving considerable risk.

What I encourage founders to look for are signals, data points that point you to a sound decision. If your job candidate is brusque and rude with your administrative assistant that sharp data point should alert you to an egotistical performer who you don’t want on your team regardless of their alma mater, GPA, or shiny resume. Of course, finding signals that actually lead to effective decision making is not easy and can tend to be impossible by those brought up in the data-driven culture of large tech companies.

Mr. Bezos acknowledges the need for a reliable gut. “If you can make a decision with analysis, you should do so,” he said during a speech I attended last year. “But it turns out in life that your most important decisions are always made with instinct and intuition, taste, heart.”

As venerable professor of entrepreneurship at Harvard Business School, William Sahlman once told me, “Startups are a succession of small experiments.” Despite the fact that many successful people from Mr. Son to Bill Belichick, Coach of The New England Patriots rely on their instincts at the end of the day, the rest of their day may be devoted to gathering and evaluating data.

Startups by their nature have little or no data to help make many of their decisions, from the name of their venture to what market they should target. But there are two types of data, that derived from secondary sources, like Glassdoor, and data derived from primary sources, like interviewing a job candidate.

When there is good secondary data available to help you make a decision, such as salary data on a site like Glassdoor you should go ahead and use it. But data and instinct isn’t either/or, it’s both. Data can either reinforce your gut instinct or cause you to revisit it. The web enables reams of secondary data and founders should make good use of it when appropriate. Just be wary of “paralysis by analysis.” Any  decision can be better than none in many cases.

Founders must hone their instincts through practice. And when data and instinct aren’t sufficient it is time to call on your mentors or advisors, who should have their own instincts honed by many years of practice. When you are trying to convince others – be they investors or customers – you are going to have to lead with your data. As legendary management consultant W. Edwards Deming said, “In God we trust. All others bring data.”

Questions to ask a prospective co-founder

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I’ve written three posts about co-founders: Starting with a co-founder,  Why cofounding a startup is like marriage!  and How to find a technical co-founder, but I was glad to be informed about a very useful article by my MIT Sandbox fellow: 34 Questions to Ask a Potential Co-Founder  on the Founder Institute site, as co-founders is both a common and complex issue. The list of questions was put together by , Jessica Alter (co-founder of FounderDating and Entrepreneur In Residence at Social Capital LP).

The list is broken into four categories: Personalities and Incentives, Personal Priorities,Working Styles and Culture, and Roles and Responsibilities. These are great questions and I strongly recommend you use them as a reference.

The key concept in choosing a cofounder is alignment. If you are you and your prospective co-founder are not aligned with respect to values and goals for the venture then the answers to the rest of the question don’t really matter.

And, as I’ve written elsewhere, the best way to get to know someone is by doing something with them, something that can cause frustration, irritation, loss of patience, lack of grace, and other undesirable outcomes. Play a sport, like basketball; play a game, like chess; travel together to a conference or trade show. You will learn a lot about how your prospective co-founder acts and re-acts. You are looking for someone who has grace under pressure; can handle frustrating events calmly; is highly competitive; bends, but does not break the rules; and can solve problems – which is why traveling together is such a good test as traveling usually presents frustrating and irritating problems.

You can even kill two birds with one stone by asking some of these questions on your trip to  your conference or trade show.

One trait you need as a founder of a new venture is ability to observe and correlate observational data with other information. You will need to spend a lot of time observing the senior management team, employees, board members, partners – all stakeholders in the venture, as not all important information is as explicit as answering direct questions. There are many helpful articles about becoming a good observer on the web. You can start with How to Be a Good Observer on WikiHow.

 

 

The byproducts of team practice

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Perhaps you’ve read or heard about the fact that it takes 10,000 hours of practice to master something, like playing an instrument. This became a meme thanks to Malcolm Gladwell in his book Outliers  but there is research disputing this “fact” since. But there is no disputing the value of deliberate practice as a vital part of mastery.

What is interesting about this quote from Tom Brady about trust in the Boston Globe article Tom Brady has seen it all, but practice is still ‘very important for me’ by Jim McBride are the byproducts of practice: confidence, trust, good execution.

As rosters evolve, it’s important for Brady to evolve, as well. He needs to work to establish a rapport with all his available weapons — new and old.

“So, even though I maybe have done things, I still recognize that a lot of other players haven’t done those things,’’ he said. “So, my connection with them is very important. Even though I’ve been doing it, the two of us need to do it together.”

According to Brady, repetition is the key to success.

“You know, football is a very coordinated game,” he said. “Everybody needs to be thinking the same thing, reacting the same way, anticipating the same way, in order to be successful. That’s why us being out there as a unit is very important — practicing, executing in practice so you can build confidence, confidence builds trust, and trust leads us to good execution when you’re out on the field.’’

There are many ways you can practice with your team. One I’ve found powerful as a product manager is the post-launch “post-mortem.” Rather than simply heading for the nearest bar to celebrate when you ship V 1.0 of your product, consider scheduling a meeting shortly after launch to review what went right, what went wrong, and what was omitted that should have been included during the product development process. Properly conducted, this team exercise can build trust and improve execution for the next product in the development pipeline. But you have to be careful to avoid finger pointing or blaming; any discussion of what went wrong needs to be constructive and  focused on procedures and tasks, not on individuals. Finally, keep good written records of your post-mortem discussions, they make for great on-boarding material for new members of your product development team.

What other ways can your team practice together to build confidence, to build trust, trust that leads your team to good execution?

Why customer satisfaction is not enough

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For those of you who think your job is done when you have satisfied your customer, the 2019 Trusted Automotive Brand Study (TABS) from AMCI has news for you.  According to the Forbes article Tesla Motors Tumbles In Key Trust Measure by Jack R. Nerad, the TBS Study again affirmed that trust accounts for more than 50% of a consumer’s decision to repurchase or recommend an automotive brand or its dealers.

Satisfying people is just not enough. Based on the hypothesis that emotions beyond satisfaction are the real drivers of customer loyalty and brand enthusiasm, AMCI identified trust as a facet of the buyer-seller relationship worthy of study. And the study revealed that developing and maintaining customer trust is a very, very powerful thing.

Ian Beavis, AMCI Global’s chief strategy officer sees trust as being of a “higher order” than satisfaction, a metric that includes satisfaction but goes far beyond it. Because customer satisfaction has been scrutinized for decades now, most brands are fairly good at executing on it, but the AMCI strategist now believes satisfaction is a cost of entry.

One of the major factors in Tesla’s falling trust is due to their pricing changes. Tesla had thousands of customers put down deposits on the Model 3 based on Elon Musk’s promise of buying a Tesla for only $35,000. That price quickly turned into a myth, as the only models available were packed with extras, bumping the actual price up to the mid-fifty thousand dollar range. Misleading customers about price is a very efficient way to destroy trust!

Ian Beavis has a great analogy that helps one understand the difference between satisfaction and trust. Satisfaction is the absence of illness, but it doesn’t mean a person is fit or healthy,” he said. “Another analogy I’d use is you don’t get a serious relationship because you’re satisfied with dating someone. It takes love and trust to build longterm relationships.”

Your entire customer experience chain from pre-sale to sale to post-sale support and service contributes to building trust in a brand. Making a sale is necessary, but not sufficient to build a trusted brand.