Is Entrepreneurial Drive a Good Predictor of Success?

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Ever since I stepped down at Zemanta I declared that I'll be actively helping new startups succeed. I'm still enjoying that time while figuring out what to do next. I don't charge for advice or intros. Well, I always enjoy giving advice over nice lunch, but that's another story.

And so it happend over past  three days, I talked to roughly 10 startups, had deep sessions with 4 of them and talked about 6 additional ones. All of them had one thing in common: they are all first time startups with unexperienced entrepreneurs. 

However it was again the intense experience that revealed a striking question: is the entrepreneur's drive good predictor of success? We've all been there and seen presentations after presentations where some of the presenters seem lifeless and some too driven for their own good. 

It's common understanding that startups need a leader and a time with a drive to succeed. But I'm more and more convinced that the drive is actually overrated or at least misinterpreted. I was approached by a guy with an incredible drive, but more I listened to him, less substance I saw. Some investors I know would love him! 

On the next day  I talked to another startup that is far less outgoing, but with a very clear vision and impressive idea and strategy. They did their fair share of mistakes in the process, but still they understand the risk and are willing to take educated bets. And they know they positioning themselves as a fairly unattractive to potential investors. They were very "European": modest, quite, polite, analytical. 

I have no idea if they'll succeed or not, but they at least gave me a fresh perspective that a startup and it's founders don't need to be moulded in a unified "American" form to be perspective.

 

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PR demistified

I'm not a great fan of PR agencies for startups. I've worked with 5 of them, from the big ones to the small ones and they didn't impressed me (except one with a very clear task). They are fairly expensive and in most cases they try to sell the fact that they know celebrities and top blogs like TechCrunch. Second big selling point is that they are going to provide you with communication strategy. Third one is clipping, following of mentions in the media.

The truth is that top bloggers can separate the weed from the gold. They are actually quite easy to get to just make sure that you're not wasting their time. Send them email, where your subject is not "revolutionary new social network" but rather wrote something meaningful. Go to conferences, stop them and give them your 15sec pitch. Follow up, develop a relationship. It's going to be much more meaningful than spending thousands of dollars for and introduction to a few of them.

Communication strategy sounds great, but the fact is that it most often boils down to the shape that fits well with the PR's mailing list. Here two things is going to happen. First, an expensive one pager is going to be created, probably matched with a quote or two. The content is going to come from you, b/c the nice lady (typically a "director" of some sort) will typically be clueless about what you're actually doing.  Second, they are going to recommend that they send it to a news wire service (which is going to cost you additionally).

Clipping is an interesting service that makes sense with traditional media, however since you're mostly going to be present online, it's exactly what Google and Google News does for you.

Now, don't get me wrong. I do believe that PR agencies have their place in the world, particularly in the corporate one. I just don't believe they found a meaningful model for startups yet.

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Dangers of PR vanity

Startups  need to understand why and when a they needs publicity. It's good to figure out what they want to achieve with PR campaign. Being TechCrunched might be good but not always optimal, nor inexpensive.


There are two reasons why a startup wants a lot of publicity.
- seed the distribution 
- make people involved happy 


In any kind of business you need clients, however there is always a questions of how you get the first ones. If you're lucky and you really nailed your service, the initial users will propagate your service further. If not, you need to find another way to distribute your product. In any case initial publicity makes a lot of sense. On the other hand perpetual investment in publicity to boost your ongoing distribution can be costly and not worth doing it on a long term.


The expensive reason for going into publicity spinroll is just to make people involved feel good. If it doesn't cost you it can make sense, but that's rarely the case.  People that you try to make happy are investors, yourself, partners, users, coworkers. Basically catering to the vanity of the humans involved. I've had a chance to see a situation where investors feed on their own glory and pushed the startup to hire a costly PR agency just to get on TechCrunch and some other blogs. Needless to say the startup could do it without excessive cost and achieve exactly the same result, only the investors would not feel as good about themselves. Distribution didn't follow, just invoices from the PR guys.

Founder/Investor courtship

There is a three step process involved before you start talking about any long term relationship with an investor:

Initial contact/elevator pitch
I believe that the strongest start you can get is by meeting an investors on a live event. Do your elevator pitch and secure an opportunity that you can send them some data and get it read.
There are other ways, like sending them to their email or online form, but in my opinion there are two pajor problems with it. First it gets screened by the most junior person at the firm. Second, due to a sheer volume of the proposals they get, you have to be extremely lucky to get their attention. If you get to talk to a person for 60 seconds, you'll soon see if it makes any sense to pursue that opportunity further or not.

Investment teaser
This is a one pager that you send to an investor. It's not a full deck, but something that grabs their attention for 5 minutes. Give them the top data, have it beautifully designed and avoid the cliches (like word "revolutionary", for example). Most importantly if your company is still interesting, it secures a meeting.

Investment deck
Investment deck is a printable presentation that gives investors an overview of your business. They will usually allocate 60 mins of their time to pitch. Use it wisely. Basically the deck should include all the necessary data you need to explain your case. There will always be additional questions, but here is where you show the best you have.

We'll go into more details about the deck in the following posts.

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How to pitch your business at a cocktail party

After you introduced yourself and learn what the person you're talking to is doing, here is the scenario of an effective pitch:

1. Pitch line - one sentence that encompass what you do. If you can't come up with anything better, use well know analogies like: "We have a Facebook like service that meets Amazon.com, but with a twist X". The key test is that the line should be as simple and rememberable that the person can pitch it further if she likes your product.

2. Demo - use a smart phone and develop a 30-45s video that clearly demonstrates what your doing. Don't do a live demo, you don't have time for that. Have a clear video (that can be seen on a small screen). You'll easily get your listener to watch a short video that you play on your cell phone. Don't add voice, because you're the star of the show. Talk through the video and use it only as tool to deliver the message. Practice a bit and you'll know it word by word in no time.

3. Stop! Stow away the phone, talk to your listener. If they have additional questions, great, if not ask them for their business cards and offer yours, preferably the one with a big logo and clearly spelled URL.  Invite them to try it on.  Thank them and move on.

4. (on the next day). Follow up with a nice email, short description and links to your service.

That's it.

Startup Events

I believe that startup events are a great way to achieve publicity, meet investors, press and get feedback. Startup events are one of the few events across industries that actually make a lot of sense. They are often  free or inexpensive and packed with:
- entrepreneurs
- investors
- bloggers

In other words, that's your community. And entrepreneur should be there pitching his pants off. That's the best audience, you'll get the visibility, practice, feedback and a lot of contacts.

Quite a few flashy events charge significantly to startup to pitch on their events or have a presentation. I think that there are more than enough events where you don't have to do it and still get all the goodies out of it (eg. NY Meetup, Seedcamp and similar). If you're prefunded, use your money wisely, don't spend it on an empty promise.

Mostly you won't have a stage to pitch your business, but that shouldn't stop you. You should still pitch your business to everyone who's willing to listen. Again, on startup events is where your community meets and you should be become an active part of it.

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Are you creating value for your users?

Is your business making money? It's a very straightforward questions to which you can answer with a "Yes", "No" and "Well,yes, kinda"! If the answer is "Yes", the deduction is fairly straightforward. However, there can be various ways of making money, the subquestion might be:"Is it making money with the actual operation?" If you can answer with Yes for the second time, you're golden. You then just worry about growth (if you want one) and sustainability of the model. You're a candidate for a late stage investors. The ones who finance sustainable business. 


If you answer with "Well, yes, kind" it begs for the second question: "So how you make money?" Answer are often: selling coding services to some clients, government grants (particularly popular with European startups) ... and similar. In that case, the key question is: "What do you plan to do in  the future". If you plan to sustain that kind of financing you should get out of sight of investors. Because you have no business model, you're just hedging your inability to build a sustainable business. This might not be bad, as long as you're aware of it and happy with it. You're building a lifestyle business. Not interesting to investors. 


If you're answer is "No" it might not be as bad as you think. Here the two subquestions kick in: "Do you have any revenue?" if the answer is Yes, it's great to have it from your clients by selling your core service/product, and it really helps if it's growing. The second and in my opinion the most important questions to ask is "Are you creating value for your users?" Here you have to have a good answer! If you are creating value for your users, chances are that sooner or later you're going to figure out how to money out of it. And early stage investors will start to pay attention. If your answers are sound and interesting, your chances of success will increase exponentially. 

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Evaluating Investors

Founders often put themselves in a disadvantageous position trying to be as appealing to investors as possible. We all do it and it's nothing to be ashamed off. It's a natural inclination when fishing for money. However there it's no excuse not to step back and think  rationally about which investors to invite in your business.

Here is my formula, how to evaluate investors:

A*(reputation) + B*(network) + C*(experience)

Investor's reputation is important since it brings a huge validation in the community. If your investors are well known and respected in the markets where you operate, it can give you a necessary advantage against competition. It's also hugely important when working on the next fundraising rounds. A good investor can reduce a fundraising cycle significantly, since other investors will want to coinvest.

Investor's network is crucial if you're dependent on partners. And you usually are. When we started Zemanta we knew nobody in UK nor in US. It was through leveraging our investor's networks where we could get to almost anybody we needed. It was crucial for us. Obviously if you have a good network, you don't need to "buy" it from your investors.

Investor's experience can be valuable resource and a free pool of advice if you can work with experienced investors that worked with other startups or are former entrepreneurs in your space. You can hardly buy such experience unless you hire an experienced CEO which is going to be costly.

It's important that you think through what you need and what you want. Higher offer can quite diminish in value if one investor brings no network or is unknown. Particularly if your're an unknown startup with no network.

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Board of Directors Meeting Notes

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Writing meeting notes is an art, even though it seems trivial at first. Here is what I came up with:

CEO writes down the take away notes (tasks) for each participants. CEO runs the meeting and sets the pace, he's the one who needs to track the different tasks each participant volunteers for (typically these are tasks like intros, sending reports or data to someone...) and summarizes the take away points in an email after the meeting.

(optional) Somebody (another founder) writes down wider notes that summarize the debate, point by point. Having written notes makes a lot of sense in a couple of weeks time when you have to refresh your memory. However it's quite likely that one cannot run a meeting and jolt down proper notes at the same time.

(optional) Have your lawyer write done formal BoD notes. This is something that I resisted at first, but than realized that makes a lot of sense. A good lawyer will not charge you to dial in to your BoD and will be very valuable at any legal questions you might have. An interest of the lawyer is that he's close by to the company and in the loop, because then he can be much more valuable to the business in the future. And you'll end up with a formal and correct board meeting notes.

Why Europeans don't get the BoDs?

I want to expose a common problem that happens when first time founders get funding and start running the company for the first time. After initial celebrations, the first board meetings can be painful and unexpected. At least that's my take on it. The main reason is in power distance where investors and founders don't operate as partners. And the cause of it is in cultural differences that we bring to the table.  

First a bit of theory: Governing through Board of Directors is an Anglo-American governance mechanism (single tier model). In continental Europe it's quite usual for the company to be governed by the Management Board and Supervisory Board (two tiers). 

This has some important implications. Primary power distance. In a two tier model managers prepare reports, get approvals and respond to request from Supervisory Boards. They often don't debate strategy or operations with supervisors. In BoD model debate is expected and directors steer the course of the company together. 

Funded startups are almost exclusively run by a BoD model. Why? Because investors are used to run companies through BoDs. 

Operationally that means that European or first time founders are expected to work in a model that is unnatural to them, while investors don't understand what's the problem. And that causes frictions. Founders don't know what to say or not, what is expected from them and what not. Investors become nervous since it looks like founders want to hide things with them and almost never get into debate. 

Founders often just accept whatever "suggestion" is being thrown on the table as a directive for the next month. 

And it takes invaluable few months before the discussion becomes productive and that founders and investors learn to play together in harmony. 

Often a few months too long.

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BoD's are run by consensus

BoD's are run by consensus. Period!

And we seek consensus among all participants not just board members.

I cannot imagine how a constructive dialog in a startup is productive if the decision is made by over-voting. In one of the previous posts I explained that you can have also observers and in fact at Zemanta we would routinely have a bunch of them (all representatives of our investors). That doesn't mean that we didn't fought over some decisions. We did, but still when the decision was made, it was accepted by consensus.

However, we always made sure that we had a consensus about important decisions. If the topic was complex, I would routinely prebrief all participants (not just board members) and give them my opinion and my options a few days before.

That ensured:
- we debated the most important topics efficiently and effectively
- investors felt comfortable with the openness and involvement in the process
- we avoided bombshells of unexpected news and views

I don't say that that's the only way, but it sure worked for me pretty well and I plan to stick with it in the future.

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Board of Directors Who's Who

Let's tackle the who's who in the BoD world. Composition will typically reflect the ownership. There are no fixed rules though. At first the board would include all of the founders. For example if a new startup gets founding and two founders own 60% of the company after the investment, the composition of the board might look like:

- CEO (founder)

- founder

- investor

BoD can have even more members, if desired. Trouble with having more than 3 members in the beginning is that typically new investors that join the company in the next rounds will want to have board seat and soon you'll end up with more board members that startup can efficiently handle.

Quite often you have two additional participants at the BoD that are important as well:

- observers

- unofficial observers

Observers are members that have the right to participate at the BoD meeting but have no voting rights. The unofficial ones are the ones who participate there because you allow them to. Typically that might be an associate that helps one of the VCs that's on your Board or a senior partner from one of your investors that would like to stay in touch from time to tome.

I'm a great fan of having all those people at the board meeting as long as they have something to say. At Zemanta we had 5 board members, but routinely ended up having a board meeting with at 10 or 11 participants. And I think we had much better board meetings that we would have if we would formally stick to the rules of who's who at the board. 

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Role of Board of Directors

I'll write a few posts on Board of Directors (BoD), because there are some common misunderstandings about its role and function.

Board of Directors corporate governance tool of choice for most funded startups. It's a common way to formally include investors in running the company. They are other models available, but almost never used in the startup world. 

If you want to find out more about formal definitions and duties of BoD, check the Wikipedia, however for practical purposes the advantages of the board is:

- it gives you the chance to brainstorm with your investors and other wise man about your performance and plans once a month

- it brings all investors at the same table and forces them to switch off their cell phones

- gives legal protection to the management for certain decisions (you need the approval of the board, hence investors)

All other roles are important (appointing of the ceo, approving the budget ...), but rarely on a monthly basis.

If you're an entrepreneur don't view the board just as a once-a-month-reporting session. And if you're an investor, don't push entrepreneurs with unimportant details. Take the time to discuss the business and its course. Reporting can be done on paper (and it should be done upfront), discussion almost never.

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Free your innovative self

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How do you decide who you need to hire? Sales guy, CEO, programmers?

Innovation gives startups the edge to compete and to find niches that could become mainstream markets. And that's where entrepreneurs excel. Innovation comes from being free to think broadly and for  that you have to have fun. However often entrepreneurs get suffocated on daily operations, talking to investors, partners, doing the paperwork. Some of it is fun and some of it is plain burden. Something a term procrastination was invented for.

So when you deciding who you need to hire or delegate, think what are things that you really hate on your task list...reporting, designing, coding, talking to clients? I would urge you not to delegate things you really like to do, unless you're really running out of time. There is a good chance you're best in things you really like.

Soon you'll come up with a list of things that you need to delegate sooner or later. If a list is too long and you cannot afford all these people, take it slowly, one at the time. but sooner or later you'll have to come up with a way how to free yourself from things that boggle your mind everyday and limit your ability to innovate.

Is it a Business or a Venture?

Robin Klein from The Accelerator Group once asked me a very simple questions:"Is it a business or a venture?" Even though it might sound silly, the reasoning behind it is really relevant to any founder that wants to raise funds.
A "Venture" in our context is high risk/ high profit value proposition that can scale massively, is unique and has potential to be the next big thing.
A "Business" in our context is a lifestyle type business where founders try to make money from almost anything they can think off, building a product, selling services, do a bit of coding for clients.
Lifestyle business makes a lot of sense. It's lover risk, rewards are almost instant (what you sell is what you eat) and it can show results and reasonable growth.
Unfortunatelly,  venture capitalists don't invest in life style business. If you want to know why, check Fred Wilson's series of posts on economics of VC fund. They are in business of discovering gold, not in the business of making gold harvesting more efficient. For that you need different kind of investors.
Founders should figure out what kind of model they want to pursue and pitch it accordingly. 

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Winning founding team

Ideal founding team as seen in the eyes of the investors consists of:
- sales person
- tech person
- product/marketing person

Ideally all three worked together before and they are all experts in their respective fields.  In best scenario they are dedicated to the project, carry no extra baggage and they're willing to move anywhere and work together.  An extra plus is that they all have startup experience.

Obviously ideal setup is tough to achieve, however it is useful to think about it when founders try to assess their chances with investors, or at least think through how to react to various questions that are going to be raised when talking to investors.

For example, a team of three hackers with no business talent or sales experiences will have trouble persuading investors to invest. Similarly, two pals fresh from college will have trouble persuading investors that they have innovative product that they developed on Excel macros and that is going to scale to conquer the world.

There is a universal answer to the problem: you can always hire the missing talent. The only catch is that the founders should be aware of the  skills they are lacking and how do they plan to address the issue.

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Cultural diferences

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I like to ramble a lot about differences in culture. In my opinion it's one of the main reasons for friction between European startups and American investors. I'll dive into more details later, but just as a taste, consider this.

We all know that some nations are better in doing some things than others. Granted, there is a lot of room for speculation and stereotypes, but still, there is a grain of truth in it. For example what do different nations excel at: French are best in cooking, we all admire German organization, and are fascinated by English politeness, Americans sell, and Italians are eternal romantics.

We all accept that and take it for granted. However consider now the world where traffic was handled by a French policemen, all salesmen were German, all great lovers were English, Americans would cook and Italians organize. Doesn't fit, right?

Yet somehow in the world of startups, we often ignore cultural differences and simply want to model every startup by the same template. Interesting, isn't it?

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Starting a blog

I've started this blog because I was fortunate to be involved with one of the most exciting startup projects in the past decade - Zemanta. I took the startup through a whole early stage life cycle. Founding, pitching, fundraising, developing partnerships and establishing it as brand and business.

The twist behind the story is that the company was founded in Slovenia, with a team of startup virgins, in an environment that hasn't seen foreign investors and without any connections in our target markets. We took it from an initial idea to the a fully operational business with offices in US, and very strong market presence.

I would like to share my experiences of being a CEO of a European startup. I think European startups need more confidence and use their background as advantage, and not just mimic their US counterparts.

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