Grade A Entrepreneurs

How bad is it for startups seeking financing? This is the title of a post by Jeremy Liew on November 24^th[1]. Well, it’s bad and as usual, Jeremy Liew says it pretty much like it is:

1. Angel financing had dried;
2. A slowing economy has reduced near term revenue growth expectations;
3. Venture Capitalists are focusing on their portfolio companies.

Jeremy Liew ends his piece on a more positive note: there will be “better times ahead.” When? I would not bet that it is any time soon. So, brace for the worst (you can only be pleasantly surprised, after all), and bootstrap! If you have already secured a first round of financing, consider putting on the bootstrapper’s boots and live as if no second round was to come in the near future. So, here is my two cents piece of advice for today:

Build the leanest possible organization

If you are an early startup with little to no money (your credit card and the charitable contribution of your loved ones), get people to work for equity. Given that not everybody can live on love, fresh air and savings, find a bunch of friends or friends or friends who have a day job and are committed to working with you from 6:00 PM to 10 PM during the week and most of the weekend. These 30-40 hours are about half the number of hours that an employee must put on in a startup. My friend Bernard Gallet, one of the most brilliant programmers (and CTO of several companies) I had in my career, also reminds you that you should not discard what companies such as Rent-A-Coder or Elance offer for a reasonable fee if you have a small budget. Do not expect them to design your product, of course, but they can be a useful resource for specific capabilities that do not require access to the entire source code, interfaces or utilities. Also leverage the huge amount of open source available out there! The end result is that if you really believe in your project (and make others believe in it), you will be just fine. Make sure, though, that your employees’ partners (or your own partner) embrace this lifestyle. Otherwise, you are in for counterproductive tensions and conflicts that can be deadly for startups.

No matter how tiny the team may be, operate as a full-fledged company with regular coordination meetings and a pervasive sense of accountability: Have a real board of advisors, a real board of directors, a bookkeeper one or two hours per month (lots of startups tend to neglect this aspect because there is not much to compute, which is a bad idea), and a corporate attorney (you do not need much either, but be always clean and many good firms differ payments for young startups). Also, immediately buy all relevant domain names and trademarks even if your headquarters are your basement.

Remark: If you are a funded young company, even if you have a decent cash runway (I recommend six months at all times with virtually no new sales), also live the lean life, even if you believe that the company is not threatened. In fact, it is a perfect time to resume a pre-funding spirit (most of what I say above and below applies), refocus energies and remove people you feel are not busy 150% of the time. If your runway is less than six months, reduce your headcount and your expenses so that you remain constantly at this security level. I neglected to do this in one of the companies where I was the CEO and I did regret it. The risk that you will be overwhelmed by customers’ demands is extremely low.

The landscape is likely to worsen. The companies that will win are the ones that will outlast their competitors, not the ones that believe that they must “grab market shares” as if there were no tomorrow (such frantic mindset can be a sure method to jeopardize tomorrows actually).

Generate revenue

It has become customary to create an early product, show “some” traction and then look for money to move the company forward. What if you simply delayed your exhausting quest for VCs or angels and spent your time actively generating some revenue? Finding money to fund actual growth, even when it is modest, is easier than looking for money to fund ideas or prototypes.

You may scratch your head because this is not the strategy you envisioned. Think twice. For example, if you planned to create a base of millions of users considering that there are “metrics” other than cold, hard cash, be open to an about-face. Why not forget, at least temporarily, about the alternative metrics or potential buyers interested in acquiring rolling eye-balls or targeted bustling social networks? Acquirers are also impacted by the recession and will be less prone to buying you for zillions. Their most reasonable strategy will be to let your assets smoothly wind up into their hands for peanuts. Remember, in a bad economy, the whole point is to last constructively. So make money!

Stop thinking of business models that do not yield immediate revenue. The most prosaic modus operandi for start-ups or young companies is to be opportunistic – call this a “multi-pronged business model” if you want to sound less of an earthling. True, some VCs may look at this approach somewhat warily, but not all of them. VCs who have created companies before the Internet bubble will respect you, be interested in seeing how you fare under tough circumstances, like your sense of survival, and might be open to assist you faster than you think (if you want them to do so). So how do you make “opportunistic” revenues? Here below is a reminder of the two simplest methods for you to discuss with your labor camp’s pals:

• If you are a traditional software company, scale down the number of features planned for the first release and sell consulting services associated with the alpha/beta version of your scaled-down product. It’s a good deal for everybody. Your customers get something adapted to their needs, and you learn from them what they actually need (which may be slightly different from your initial grand vision). You will also come to the conclusion that your product should be more user-customizable than what it is currently. Become a “product company” only when you feel you have reached a reasonable level of sales predictability. For complex pieces of software, selling training is also a very good way to generate cash. Stay away from the big deals that take forever to negotiate (unless you are paid for consulting services during the same time). Remember, you want cash now.

• If you are a webware company, try to set your sight below the B2C castles in the clouds and look at the landscape with your feet on the ground. Most innovative B2C webwares can also be positioned as B2B2C products and, thus, have a stronger reach and value within a B2B2C architecture. Look at it this way: 1) You don’t have the money to “buy” users; 2) virality is not always miraculously fast if you are not a celebrity and 3) ad-generated revenue are notoriously slow to come because of 1) and 2). So if your product is of interest to users going to your site, it should also of interest to users going to other sites that already have users. In short, if your product is useful, you will find customers. You may even find customers who will pay you for consulting services to help them design (technically and strategically) an optimal integration of your widget within their environment.

• In both cases, also look at niches – roughly speaking, at markets that seem unglamorous, may only be a few hundred millions dollars opportunity or even much less, and are allegedly of no interest to VCs (which is not necessarily true). The reality is that there are customers there that could need you and your ideas even in tough economic times (and possibly because of the recession). You will be able to refine your product away from the noise, later consider other “niches” and get larger when you feel that you have the financial stamina to scale – then, VCs will believe you when you tell them that your platform transparently spans multiple industry domains).