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Author Archives: raymond

Playing for the Tie

November 5, 2009 by raymond

Like Playing to Lose, Playing for the Tie is a strategy that doesn’t lead to winning. The difference is that people inadvertently playing to lose think they’re aiming their boat at the far shore, instead they’re heading for an iceberg. Playing for a tie means you’re more scared of losing than winning.

Why is not losing (but not winning) a bad strategy for a startup? Because:

  • Opportunity cost – What aren’t you doing while you’re not succeeding? What next great startup idea are you not working on while your current one treads water?
  • Survival is not (necessarily) a milestone – Survival is a huge achievement for any startup, but it’s not the goal. You have to be able to tell the difference.

Many startups have a strategy to win at the beginning but this gets diluted to a strategy for a tie when things get operational. Here are some telltale signs:

  • You’re afraid to say that you are or will be a world leader in your category (ask yourself why)
  • You never hear your team talk about being the best
  • You gravitate towards any type of validation (“they like me!”) even if it’s too scattered to truly prove your business value
  • You’re risk averse. I’m a firm believer that many risks, like operational risks, can be mitigated in a startup. But you just can’t avoid the fundamental leaps of faith that will be required in proving your business. If you’re afraid of leaping ask yourself what you’re preserving by avoiding risk. If you’re still proving out your business then you really don’t have anything to protect (yet).

Caveat: I’m not saying swing for the fences every time. Be iterative, i.e. get out there and see what sticks. But don’t forget that getting a little traction reduces some risk (a few people like me) and sets you up for new risks (how do I get everyone to like me). See Crossing the Chasm.

Next up: Playing to Win

Playing to Lose

November 4, 2009 by raymond

I heard a bunch of different pitches from startups this week that made me think: too few startups are playing to win. Most people have a strategy for moving from point A to point B but I’m hearing more and more strategies for getting “better” not becoming the “best”. I think it’s a problem.

Here are some strategies that I consider Playing to Lose:

  • You don’t have a strategy. No further explanation necessary.
  • You only have one strategy. A good sign that you are playing to lose is that you can’t describe several alternative strategies in detail. A strategy is only as good as the ones you considered, but rejected. Be a skeptic.
  • You don’t understand the cost of success. When people plan to scale a business they often forget that revenues don’t scale by themselves without a some kind of scaling of expenses. Take headcount. Double headcount and I bet you’ll more than double HR expenses. Double the feature set of your product and I bet it doesn’t maintain itself anymore. These ‘diseconomies’ of scale better be built into your strategy.
  • Your winning strategy is your losing strategy in disguise. Sometimes I hear a strategy for winning that sounds a lot like a strategy for losing. Here’s an example: Your platform is so feature-rich and versatile that it can be used by anyone. Your strategy is to sell it to anyone. But soon you’ll realize that all of your customers are different and all your recurring license revenues are replaced by low-margin service fees for customization. Yep, that’s your winning strategy.

I think you can avoid Playing to Lose by spending more time understanding your winning scenario and making sure it holds up to scrutiny. Why do you think your cost structure will be leaner than other comparable companies? Why will acquisition costs go down, not up? What things get more difficult, not easier, the more you achieve success?

Are you sure your idea of winning is actually winning?

Next up: Playing for the tie

Ontario Emerging Technologies Fund: Good for Investment, Not Good for Angels

August 4, 2009 by raymond

The Ontario Emerging Technologies Fund was unveiled last week and I know investors across the country have been anxiously awaiting the details. Here’s the skinny:

  • $250 million fund size
  • Matches investments for qualified investors (more on that later)
  • Invests in Ontario companies
  • Sectoral targets: clean technology, life sciences and advanced health technologies, and digital media and information and communications technology sectors

Most Angels I talked to previously were wondering what the qualification process would be and whether the fund would discriminate against out-of-province investors.

Now that the details (at least version 1.0) have been released, I can say that there’s good news and bad news.

The good news is that, over five years, $250 million will be flowing to early stage tech ventures in Ontario. This is nothing to sneeze at and a much-needed shot in the arm for Ontario entrepreneurs. Will this encourage new investments? Absolutely, especially in clean tech and life sciences where capital needs are greater.

But several aspects of the fund are not great for Angels and other seed-stage investors, especially in ICT or even the earliest stages of clean tech and life sciences.

Investment Round Must Be $1 Million or More(p. 10, Fund Guidelines, link to PDF)

According to the Kauffman Foundation (Appendix to Returns to Angels Investors in Groups) the average Angel investment is less than $200,000. This is consistent with what I’ve seen in Canada. Many Angel groups and seed funds invest in this range. So why the $1million threshold?

If this is a conscious choice by the OETF to favour later stage deals, they may actually draw Angel dollars away from pure startups and towards later-stage entitities. This would be a bad thing for growing the number of startups in Ontario.

If this is a subtle encouragement to Angels to invest more dollars, it ignores the fact that many (I’d say most) pure startups don’t need $1 million. I would personally never invest in a startup whose capital needs from day one were in this range. It’s not exactly “lean”.

Angels Must Re-Apply for Qualification for Each Investment (p. 7, Fund Guidelines, link to PDF)

Venture funds can apply for qualification once and have this remain in place for all future investments. Angels, on the other hand, must re-apply for each investment they make. I’m going to give the OETF the benefit of the doubt and assume that getting qualified once will mean getting qualified again. But this doesn’t exactly reward Angels or Angel groups who have a proven track record. Why not treat them the same as VCs?

Ontario Footprint

OETF is not the only fund tied to a specific geographical region so this is not a new complaint. But it still bothers me to see penalties for a company no longer having “enough” of an Ontario footprint:

  • OETF has the right to force repurchase of its shares at a price set by a 3rd party, or
  • OETF has the right to force refund of its investment + 10% compounded annually

As an investor, I prefer the highest return on my investment no matter where the company needs to grow. These kinds of terms discourage investment from outside the province and outside Canada.

Favouring Ontario-Based Investors

Finally, there are some silly questions in the Angel application about proving that you are dedicated to investing in Ontario. Presumably, this doesn’t apply to Angels who live in Ontario. This is counter-productive. It’s better for Ontario to draw in investment dollars from outside the province. And why do I have to prove that I want to invest in Ontario when I’m already showing that by applying to invest in a specific deal?

The not-invented-hear syndrome is not good for startups and it’s not good for regional investment.

Conclusion

I applaud the Ontario Government for taking steps to encourage early-stage investments in the province. It’s difficult for governments to truly take a back seat to private investors when it comes to investments and the OETF is a good example of this struggle. It’s not really the matching investment fund that we had hoped for, but a new investment entity with specific regional and sectoral focuses. It’s still good to have a new player on the scene and I hope that the model evolves based on market feedback.

Angels and entrepreneurs: what do you think of the OETF?

Investors: What Have You Done For Your Startups Lately?

July 27, 2009 by raymond

Over the last two weeks I’ve spent over 24 hours driving to various client meetings for one of our startups. Yes, the ratio of driving time to meeting time (6:1) is pretty high, but these were crucial meetings that were significant milestones for the startup. During these long drives I had a lot of time to think about the crazy things we investors do to help our startups.

At the same time, behind closed doors I hear a lot of entrepreneurs quietly complaining about how little hands-on help or “value add” their investors bring after closing a deal. So I thought I would put out a challenge to Angels and VCs: What Have You Done For Your Startups Lately?

If you’re wondering what more you can do, here are some suggestions:

  • Work your Rolodex – Remember all those times you bragged about your fabulous network? Besides the week after closing, when is the last time you systematically went through your contacts and opened those doors?
  • Make sales calls – Don’t just shoot off intro emails. Pick up the phone and call in favors. In the early days most sales will be through personal persuasion/coercion.
  • Have a good elevator pitch – I’ve met a lot of investors who can’t give a convincing elevator pitch for their startups. Your elevator pitch should be as good as the CEO’s.
  • Know the details – Knowing the size of the market is great for evaluating a business plan, but do you know the crucial details of the business? What specific segments are they targeting? Who are their customers or prospects? What are the features and technology. What’s the price? Knowing the details makes you a knowledgeable ambassador for your startup rather than someone who can just put someone in touch with the CEO.
  • Give feedback – Investors have a habit of dropping out of sight then giving harsh feedback at board meetings. I always tell entrepreneurs to manage upwards, i.e. manage your Board. But the same applies for investors. Be a hands-on mentor to your entrepreneurs. And don’t forget that praise is feedback too.
  • Get your hands dirty – Besides providing sagely advice from the “high level” think about giving day to day help once in awhile. You can be sure your startup needs it. If you’re financially minded (which you are because you’re an investor right?) get into Excel and help the CEO develop projections and budgets. Sit in on practice pitches and help build their next sales deck. Look over their legal documents and fire up your MacBook to test the latest deployment on Safari. Getting tactical means saving the management team precious time.

At Flow we take hands-on to the extreme because that’s our model. Not many investors are writing code, closing sales, executing marketing plans and recruiting employees. But no matter what your model is you can be sure that your startup needs you.

The Thinking Behind Starting Up: 10 Posts

July 20, 2009 by raymond

The Flow Ventures blog has been up and running for over six months and during that time it’s naturally gravitated towards topics for early-stage startups. Partly because that’s our focus at Flow and partly because people still overlook all the difficult work that happens right at the start of a startup. Things like idea screening, brainstorming, finding strategy, and finding competitors are all things entrepreneurs should be doing for themselves, not just when requested by outsiders.

I often tell people that the very first step in a startup is relatively risk free. You haven’t committed your time and money yet and you haven’t made promises to others that obligate you to a certain path. You have time to noodle around finding great ideas and discarding bad ones. This is the time to spend at whiteboards, in cafes debating your ideas, and doing research on the Web and in the real world. This is the time to assume your idea stinks and try to convince yourself that it doesn’t (not the other way around).

We’re going to keep focusing on the early stages of startups but here are 10 blog posts we’ve written so far that provide some practical ways to think about idea and business creation:

Writing this list makes it obvious that there are lots of gaps in our coverage. Hopefully, we’ll fill in some of those gaps over the rest of the year.

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