Entrepreneur Myths (32 page)

For Strategic Partners:
Value-added strategic partners provide credibility and validity to your startup with a possibility of generating a halo effect. For example, if Facebook became your strategic partner, this could add value to the company. I don’t mean simply having a Facebook page, but having Facebook as a true, strategic corporate partner. For example, Zynga is a key strategic partner with Facebook in the social game arena.

For Distribution:
Distribute or die. This is critical for early-stage startups. Distribution varies, depending on the sector, but it is highly valuable if the startup has the ability to access distribution quickly or has added some sort of exclusivity in the startup's favor, not the other way around. Investors will see value in distribution. I funded an African American beer company, Brothers Brewery, because it had regional distribution in grocery stores and needed capital to gear up for national distribution. This is not an easy task to accomplish during the startup phase.

For Personal Money Invested:
The value of the amount of money you personally invest is subjective because it is relative to the financial worth. The value is in the eye of the beholder (EOTB). If you’re a multimillionaire and you only put $10,000 into your venture but want others to put in millions, the value of your money invested is less valuable. A general rule of thumb is that whatever you invest, apply 1X to 3X.

For Sweat Equity Invested:
The value is in the eye of the beholder (EOTB). See Myth 44: Sweat equity is highly valuable. A general rule of thumb is to multiply the sweat hours invested into the ventures by 1X to 3X.

For International Expansion:
Any potential distribution or licensing opportunities creates an additional value for your company — even if zero or minimal revenues are generated in the short term. Astute investors know that it takes time and effort to expand into international markets and if you already have some of the expansion completed, add some point to your valuation meter.

For Investor Value of Current Investors:
Some of your early-stage investors add more value to your venture than others. For instance, it's valuable to have Ron Conway invest into your company because he’s considered the S&P of the early-stage market. Media-known angels with successful investment records create a halo effect for the startup.

For Investor Commitments in Next Rounds:
Soft-circling capital and pimping the company for the next round of investors based on promised next-phase metrics could increase the value of the company. Higher value depends on whether you’re blowing smoke up anyone’s ass or you actually meet your promised metrics. You have to prove there is real interest for bigger money during the soft-circle phase. You can’t say you soft-circled $50 million dollars without any circling. Bullshitting is a dangerous business.

Intangibles

For Brand Equity:
Few startups can create large brand equity in the early stages unless they are funded by prominent investors, celebrities, accelerated by silicon pimps like Y Combinator, or founded by entrepreneurs that already created high-flyer companies. In addition, right now a halo effect is easier to create in the startup phase if your venture is in the consumer sector. It comes down to brand recognition. Startup Halo Effect: multiplier effect due to efforts above.

Bubbleprenuer Multiplier:
Add whatever you can get away with due to the current market conditions, the bubble factor and the region. For instance, Silicon Valley currently has bubbles in some sectors such as social media. But bubbles are not present in all sectors. If you see a bubble in your sector, ride it, but don’t be an asshole. If you take money at an unrealistic valuation, sooner or later you will face the possibility of a down round unless your business takes off like a rocket. Basically, add value depending on the number of VCs knocking on your door.

The Donald Factor:
This is the most intangible of the intangibles. Value depends on how you feel on a particular day during the startup phase. Some years ago, a VC asked me the valuation of the company. I told him, “I feel the company is worth eight million today.” He smirked and said, “Based on how you feel today?” I didn’t get any money from him. Looking back, I don’t think I was wrong to make this statement. Hey, The Donald does it. All kidding aside, the numbers, when using The Donald Factor, vary from zero to a few billion bucks — depending on your mood swings, market conditions and/or whether Google, Apple, Facebook or Twitter decided to compete against you, partner with you or invest into your ass.

How did I get all these valuation parameters above? I could say I got them out of my ass, but the reality is that it’s based on my experience of evaluating 100s of startups and investing into more than 25. But these comments are still valuable when setting the valuation of your company. It’s good to go through the exercise so that you don’t miss any intrinsic value of your venture.

My advice: Every entrepreneur should value his or her venture on a monthly basis. It is important for your entrepreneurial psyche while working 20-7 to get your venture off the ground. Don’t be delusional about your valuation if your venture does not yet have revenues or customer traction. If you take out some of the humor above, The Donald is right. Value is in the eye of the beholder when you value a company. Don’t leave out your feelings when you value your venture. Valuations are as much a part of subjectivity as crunching the real numbers.

Brain Candy: questions to consider and ponder

(Q1)
Does the value of your business change daily based on how you feel, just like The Donald?

(Q2)
What key metrics do you use in valuing your venture?

(Q3)
What do you think about using my rule of thumb metrics when it comes to valuations? Did I miss anything?

Entrepreneur
Myth 46
| Your employees understand your daily pressures

Your employees will not understand the pressures you face every day as an entrepreneur and leader of your enterprise. Unless someone has been an entrepreneur, they can’t understand. This applies to investors too. It’s easy to criticize venture capitalists for decisions they make on deals when you have not been in their shoes.

Your employees haven't put all of their saving into the business like you have. They are not writing the payroll checks. And they aren't the ones who are liable to creditors.

In my younger entrepreneur life, I risked all my savings to fund one of my own ventures. When we got to the product launch phase, we raised some angel capital to roll out the product into retail. I started hiring employees in sales and marketing, operations, finance and manufacturing. The venture was doing well until we hit a snag; we were not able to manufacture the product efficiently and on time. Then the shit really hit the fan. My cash was going down the drain fast because I had all of the employees to pay and no product to sell. And worse, the angel investor had closed his checkbook. I don’t blame him because due to the product being late, the risk in the venture increased substantially. Naturally, I was scrambling for another round of investment. But it’s tough raising money while dealing with the clusterfuck scenario of a product launch delay.

The pressure to make things happen was incredible. I felt like I was going to pop like fucking popcorn. But the employees didn’t understand. At the time, I didn’t realize their attitude was much different than mine. They were not focused on saving the venture — they were focused on saving their own asses and making sure they got a paycheck every two weeks. So, while I was frantically trying to save the company by working day and night to get more investors to the table, they were sending out resumes on my fucking dime, looking for another job — just in case the ship sunk. Looking back, I don’t blame the employees either. It comes down to survival in the down spiral.

Your employees, unless they invested money into your venture, won’t feel the financial pressure you face trying to push the business forward. If the venture isn’t going well, you have to be careful how you communicate the situation to them. Think of yourself as the captain of a ship. At some time, your startup will hit turbulent waters. You have to stay calm during the storm or you will have a bunch of scared fucking sailors.

This leads me to a key question: When the venture hits a snag, do you tell the truth and communicate with your employees about the tough situation? What the hell do you do?

Imagine this scenario:

Hello, everyone. This is the captain speaking. We’ve hit some turbulent financial waters and I’m scrambling to get enough money to meet the payroll this Friday. Don’t worry, I
think
I can pull it off and get the money in before you start writing personal checks. I will
try
to make sure your payroll checks don’t bounce.

Should you be that transparent with your employees? Since your employees won’t understand your financial pressures as an entrepreneur, it's a delicate situation. How you communicate a message to your employees that could make or break your business? Transparency is the best option — to an extent.

Do not say shit like, “The ship is sinking but don’t worry, my employees, we’ll make it because I think I can get it done.” The result would be a psychological disaster. The employees will become scared. No, they’ll be terrified. They’ll start leaving the ship like rats. It’s better to say, “We’ve hit a little snag and we’re working to rectify it.” It’s a tough situation. If you’re 100% transparent, employees may start looking to jump ship before the ship goes down, and that could cause the ship to sink faster. However not being transparent isn't fair to your employees because if the ship goes down, they may have nowhere else to go. So it becomes a clusterfuck dilemma, for sure.

What have I done in these situations? In one of the ventures, I had enough cash flow for one month but chose to tell the employees about the upcoming possible cash flow crunch.  After I told the truth, some employees started packing (at least in their mind) without any regard for the business. Would I be transparent again like that? Yes, but the delivery of the message and damage control would be different. You have to make the message positive to avoid creating panic. That's easier said than done. How you do it depends on the situation at hand. You have not been an entrepreneur unless you've had to lay off an innocent employee because of your own management error.

To avoid these situations, hire fewer employees, and wait until the business is cash flow positive or your venture is sufficiently funded to hire more. That is easier said than done because in a startup you have to burn some money before you hit positive cash flow.

Let me repeat, easier said than done. Unless you’ve been in this particular situation, it’s not easy to explain the hell you go through as an entrepreneur dealing with the daily pressures of being an entrepreneur.

Brain Candy: questions to consider and ponder

(Q1)
If you can’t meet your payroll this week because of some cash flow scenario, what do you tell your employees? Do you tell them that it is temporary? Do you tell them you will get it in next week? Do you shut down the venture, or do you lay off employees until you correct your cash flow?

(Q2)
How do you think it makes you look when you have to admit to your employees that you’re experiencing a cash flow crunch?

(Q3)
How the fuck did you get into the cash flow clusterfuck anyway? What could you have done differently?

(Q4)
Should you have hired employees at a slower rate? Where you overly optimistic?

(Q5)
Are you heavily involved in projecting the cash flow or do you depend on your finance person to manage it? Who watches and manages the costs of your business? Do you have a daily sheet of money in/money out you can look over at the end of each day?