I confess that I play air guitar in the shower and I fantasize about hitting the winning basket at the buzzer. I suspect that I am not the only one who does this. For most of us, such dreams leading to wealth and fame fade with the awareness of our meager guitar or basketball skills.
The one dream that cannot be so easily dismissed is that of the entrepreneur; we all secretly believe that we can conjure the “Big Idea”, raise a pile of money, and ride the wave to Lamborghini-ville. Straight Talk for Startups by Randy Komisar and Jantoon Reigersman will improve the odds.
The book is both reality check and detailed manual. While the exhaustive machinations of startup finance can be overwhelming for the casual reader, both novice and seasoned entrepreneurs will find a thorough and practical guide for circumnavigating the many threats that a new business will encounter. The cover promotes “100 Insider Rules for Beating the Odds…”, while the dedication celebrates the rule-breakers who “make this world a better and more interesting place.” The resolution of this apparent contradiction? You have to know the rules before deciding which ones you can afford to break. Think of them more as “prime directives.” Bend and break them if you must, but never forget them.
The 100 rules span the 5 main sections of the book. Here are a few key thoughts.
The first 28 rules should be seen as the most critical for an up-and-coming entrepreneur. The low interest rates in place since the Great Recession of 2008 have resulted in more available money, but also more startups and thus more competition. The opportunity is there, but success depends on getting it right. The authors recommend starting with a 90% certainty business plan, and a 50% aspirational plan.
Entrepreneurs are the exception, not the norm, and venture capitalists see you as a “passionate stranger who hallucinates the future for them.” There is considerable inertia in the system, both from customers who lean toward the status quo, and investors who have lots of options. To stand out, you must be ambitious and aim for an order of magnitude improvement in whatever you are targeting. This goal will require an unfair advantage, so it is wise to focus on fast-growing, dynamic markets. While you need total confidence in your idea, most ventures fail not from poor innovation, but from shoddy execution.
Selecting the Right Investors:
It’s easy to believe that anyone with sufficient funds is a good choice as an investor, but the authors caution that your early investors are your partners, and that you should never take money from strangers. It is important to choose stable investors who think like business operators. Do thorough background checks.
There are many ways to fund a company. Venture capital should be avoided unless you absolutely need it, since it usually demands a substantial piece of your business. Be aware that VC comes in different flavors, and you need to pick the right one.
The Ideal Fundraise:
Who knew that there were so many ways to obtain working capital, and so many decisions to make to secure the best option? How you raise money, and how much you raise, are both important. Never forget that running out of cash is terminal. On the other hand, “More ventures fail from indigestion than starvation.”
The more risk there is in your business, the less attractive the terms for your funds, so it is wise to raise money in stages as you remove that risk. Here the authors offer detailed advice on what needs to be in your 10-20-slide pitch deck. This is where you use that aspirational business plan (the one with the 50% chance) to show investors just what money could accomplish.
Some of the advice in this section seems like common sense, but a startup can easily become a reality distortion bubble. It is for times like these that Straight Talk for Startups is particularly useful. Reading through this section can be sluggish with all its arcane financial jargon, but if you are an entrepreneur in the heat of the moment it will be like manna.
Building and Managing Effective Boards:
Never forget that board members will have loyalty both to your company and to their own firm. Small boards are better than big ones, and you need a lead director along with some independent members who have no material or financial interest in the company.
Choosing a board is also a good time to reflect on how your own role in the company is changing. A startup is a steep learning curve with vast sums of money and people’s livelihoods at risk. This is the time to find some kind of personal help, from an advisor (tactician), coach (CEO skills trainer), and/or mentor (life skills teacher for personal leadership growth).
The vision and drive required of a successful entrepreneur rarely scale up to the operating skills necessary to run a company. As a founder, you should choose the best CEO available. The two riskiest things that investors do are making the initial investment and replacing the founder. It is much better if you make the decision to seek help before they force it on you.
A technology is not a product until it is useful, a product is not a company until you have an organization to put it into the marketplace, and a company is not a business until it can make a profit on its own. Liquidity is what most entrepreneurs dream of, but it doesn’t always equate to “exit”. A good company is built to last and will provide liquidity along the way. The book describes many ways to achieve liquidity besides IPO’s and acquisitions. Typically, growth rate slows as revenues and profits increase, but both are important to valuation. This may result in a “local maximum” for valuation. When considering valuation, always remember that net income is an opinion, but cash flow is a fact.
The story of Graphiq was a good example used in this section. More such stories in previous sections would have made the book a bit more readable but may be hard to come by due to confidentiality considerations.
The authors point out that entrepreneurs really must face three key questions: Why this? Why you? Why now? If you fail, will you feel like you wasted your time, or that you fought the good fight? Ask (and answer) these questions before launching an entrepreneurial effort.
The book is true to its title. It is not a particularly good poolside read, but it is “straight talk” for those involved, or considering involvement, in startups. The authors have extensive resumes, and they share critical and detailed advice about making sure this is what you want to do, raising money without getting caught in any of the many traps, choosing and working with the all-important board, and bringing it all home to liquidity. If you are curious about startups, thinking of joining a startup, putting together your own startup, or working for a startup, Straight Talk for Startups is an essential read.
Author Profile - Paul W. Smith, a Founder and Director of Engineering with INVENtPM LLC, has more than 40 years of experience in research and advanced product development.
Prior to founding INVENtPM, Dr. Smith spent 10 years with Seagate Technology in Longmont, Colorado. At Seagate, he was primarily responsible for evaluating new data storage technologies under development throughout the company, and utilizing six-sigma processes to stage them for implementation in early engineering models. He is a former Adjunct Professor of Mechanical Engineering at the Colorado School of Mines, and currently manages the website “Technology for the Journey”.
Paul holds a doctorate in Applied Mechanics from the California Institute of Technology, as well as Bachelor’s and Master’s Degrees in Mechanical Engineering from the University of California, Santa Barbara.