Lessons Learned from Failing a Start-up

The failed start-up I chose to use I hope is relevant, I found it because I googled the question and it was in the list somewhere. It’s not really in regards to failing in the early stages of start-up, but this article struck me and I thought it important to share. The article is by Alyson Shontel and is very recent. It’s about a male entrepreneur who on the outside appeared to be happy an expert at his profession, but on the inside he was not.

While sitting in his parked car, Jody Sherman shot himself in the head only days before his 48^th birthday. He had plans to meet up with a friend and hours after he didn’t show he was reported missing. Sherman was head of 28 others in a company called Ecomom which was backed by 65 investors, figures released stated that they had raised $20 million in total during their time as a start-up, but were in debit, and none of the staff knew how. His wife had no idea either. Many anonymous interviews took place and the general consensus was that he had trouble in his earlier years and while there were ups and downs he eventually became successful. Later in his career he moved his company to Vegas and it was said that he was never completely happy with that decision. He made poor financial decisions, and he also had issues with the taxation department.

As head on Ecomom, he was the only one with access to the organisations financial information, and he also had a black Amex on which he put the company’s expenses and refused a corporate card.
He also had securitized debit which to me illustrates the volume of money he owed to others.

Late last year he raised a large amount of money for his organisation, and while the article didn’t distinguish exactly what it was, it had destroyed his ambition. Once this deal was closed he used “fraud” and “sham” when refering to venture capital.

This is one of the hardest things I’ve ever had to do. And I hope to not have to raise more money for a very long time... I had no business raising that last round of financing...I hadn’t made our metrics or our terms—not anything near it. But I got it done.

Others gave input on what he had once said, and what they thought and gone on, but suicide always leaves questions. The article further lists awkward situations and failed attempts of trying to get back on top but it never happened and things were just not the same. The strong message I get from this and the part that stands out the most was that last amount of money he raised for Ecomom, and what he allegedly said after the fact. It makes me wonder what he did to raise the money, to leave such a foul taste in his mouth. I think the failure here came from Sherman’s dishonesty, maybe if he had been honest and open with his staff and wife he could have sorted through his financial issues and worked his way out.

Shontel, Alyson (2013) http://au.businessinsider.com/jody-sherman-ecomom-2013-4

Interesting further reading regarding start-ups and mental health

http://www.spundge.com/notebooks/7917/

Creating a Compellin gPitch for Investment

From my research on this topic I have reached the conclusion that elevator pitches are beginning to become somewhat out dated. In my opinion, Twitter is the current day version of an elevator pitch.

So let us break down the numbers!

How long is an elevator pitch..?

Let’s say two minutes tops.

Now how many words in two minutes?

On average, Wiki says 31 words per minute.

The average length of a word in the English language is 4.5 letters long (Robinson 1980, as cited in Lythgoe 2010), so first we round that down to 4 letters..

Then we divide Twitters allowance (140 characters) by our 4 letters, which leaves 35.

35 words!

So for a standard elevator pitch, that’s three twitter posts/updates.

From these facts it is evident that Twitter is the contemporary elevator pitch. Twitter results in the resourceful entrepreneur being able to provide an elevator pitch to all of her or his twitter followers in just three Twitter posts!

References:

Wpm - http://en.wikipedia.org/wiki/Words_per_minute

Lythgoe, Jane 2012 - http://yehweh.org/profiles/blogs/the-average-number-of-letters

 

Niche vs Commodity in Early Stage Commercialisation

One of the most important take home messages I have found while researching entrepreneurs for this unit, is that those that are successful don’t begin with the goal of making money – they are just doing what they love and the money comes later, once the business is successful.
This could be where niche markets are born, because if you have an idea you think is commercially viable for a specific group of people, that’s a niche market. It is born from people doing what they love, as opposed to trying to flog off a commercial product. The money comes later.
Niche markets are generally undiscovered territory. The people working in them with their ideas and products are going it alone, where as the commodity driven commercial products generally have legacy statistics to back up their business decisions as to when who and how, and so on!

 In Hofstrand’s article he discusses commodities and differentiated products as existing on opposing ends of a spectrum. He explains the differences between the two bluntly without faff, which is helpful! So on the most fundamental level, commodities are identical from others like them, they are “fungible”, and people that produce them are referred to as “price takers”. This is because the producers have no say over what their product is worth. Because it is the same product across the board, the buyers do not care where they get the product from, only how much.

Differentiated products on the other hand are exclusive, which means the producer can charge more for it under the premise that it is better than those that came before it. The producer of the differentiated product is known as the “price maker” as opposed to taker. They make the price because it’s their individual product that the consumer seeks. Hofstrand discusses that perceptions are everything. If the advertising for the product can persuade the consumer that it is better, it may not necessarily be better, but it is successful. He further discusses commodities mimicking niche markets, by merely changing labels, and says this only puts you in a smaller commodity market. While this still does not make you niche, product differentiation is a positive thing.

Hofstrand’s article was interesting and easy to read and understand. It took me quite a few articles to get my head around the subject, even though they both seemed pretty obvious during workshop presentations. When he explained product differentiation he used organic milk as an example, stating that it was only marginally different from the others, but that small margin of difference is product differentiation, which adds to the value. This demonstrates to me that while the production of commodity might not be as rewarding as niche, there is still room to move. This is important especially during early stages of production because why would someone change from a tried and tested product, over to a new one, if it was the same?

Hofstrand, Don (2007) http://www.extension.iastate.edu/agdm/wholefarm/html/c5-203.html

Angel and Venture Capital Investment

As described in the Unit Outline these topics are quite vast and with this one in particular I had difficulty beginning so I referred back to my work shop notes and that’s how I will begin! The following two paragraphs are in reference to Workshop #7 (McGee (2012).

Angel Investors make contributions form their own accounts and often in groups, and often into fields that they know well. They like to know who else contributes to you and their investments can start at $50K, reaching up to $300K. Their contribution secures them a seat at the table, and begins in the early stage of business when you need help. Their seat at the table gives them the right to have a say and they often expect three to ten times upward in their investment, in a period of three to five years. Intellectual Property is important to Angel Investors and they “won’t touch you without it!” (McGee 2012)

 Venture Capital is un-emotional institutional money as opposed to that of an individual’s, and is nearly always a public listing.  They manage large funds of investment, and are in it for the return. The contribution differs throughout the world and in Australia in particular the contributions are $5ooK minimum, to above and beyond $1M (yikes!). Their grand contribution places them at the head of the table, with a large amount of your equity but they do want to make it work. Topping the Angel Investor they are wanting from five to ten times the investment followed by exit in a period of five to seven years. There are few Venture Capitalists in Australia, but Micro Venture Capitalists are slowly investing in Australia.

Growthink.com lists some of the differences between the two -

Professional vs nonprofessional; Venture Capitalists generally belong to large firms and to become a member of such is a gruelling process but a job none the less, where as Angel Investors are more looking to invest their personal savings into a feasible venture.

Other People's Money vs Own Money; as stated during workshop seven, Venture Capitalists are funded by large corporations and institutions, which may limit their choices of investment. Angel Investors have a great deal of say where their money goes, and will often contribute to community needs and other such organisations.

Comparing the two is like comparing apples and oranges because they are two very different types of investor, each suited to different individuals/organisations at different stages.

For lack of a better conclusion, here is a list that side tracked me horrendously, of 105 women that are Angel and Venture Capital Investors!

http://tech.co/femanomics-105-women-in-venture-capital-and-angel-investment-2012-05#.T7Ke-J9Yu6-

References:

Growthink http://www.growthink.com/capital-raising/angel-funding/Angel-Funding-vs-Venture-Capital

McGee, Polly (2012) Workshop #7.

Managing Risk in Early Stage Commercialisation

In Jay Ebbden’s (2005) article titled ‘Managing Risk in a New Venture’, he opens with the fact that you can’t completely avoid risk during early stages of commercialisation, but you can make it less dramatic. He discusses that risk taking comes naturally to entrepreneurs but the risk should be controlled. These risks are generally a product of if the business should fail, and ‘uncertainty surrounding the business, which I think is more aptly titled as simply ‘not knowing’. He offers up a list of possible risks, and some information on how to take positive action against them.

Beginning with ‘simply not knowing’; Research can help the business owner to fill in some of the voids surrounding market risk and this can be done by looking carefully at what Ebbden calls the three sources of business, “the market, the operational model, and the financial model” (2005).
The research should include questions like;

Ø  Is the market big enough to support my business?

Ø  Is the market growing?

Ø  What trends are there in the market that already exist?

Ø  How is the competition structured?

Ø  How does distribution work?

Ebbden cites a mentor of his, "Become a student of your industry", which I think is brilliant advice; the more you understand something the better you can work with it.

Next is operational risk, which questions the efficiency of the business, it’s inner workings including the staff that work within it, and its ability to achieve what it set out to. There is always a place for money when it comes to risk and during start-up is no exception. Whether there are products that need to be produced or products to be ordered and distributed cost and quality control can be barriers.

Managing financial risk for Ebbden aligns with the others and comes down to doing your homework. This should include financial projections that delineate revenues and costs, and understanding the financial obstacles that are likely to happen. These projections will assist in successful business management, although Ebbden does note that these predictions can only be operative if business is economically practicable.

Risk due to what is at stake is broken into two categories - opportunity risk, and a possibly weightier  financial risk. In any case it is obvious that the risks should be calculated and 'worth it'. The financial risk is the loss investors face when (if!) the business falls through, and no matter where the money came from for the start-up - credit cards, banks, or fff's, the impact is definitely felt. To lessen financial risk in the case of production for example, Ebbden suggests outsourcing - hiring and renting, so as not to be weighed down with property rent and the likes.

In the conclusion for his article Ebbden discusses once more the importance of research, understanding what steps you are taking, not just leaping and bounding. he also warns "not to get caught up in what is called analysis paralysis", meaning don't bury your head so deep in research that you miss your window of opportunity. This is a valid point for the 'over-thinkers' I imagine, I am horrendous at talking myself in and out of things, clothes I think I might like or what movie I want to watch!! Hardly important business decisions that my bank account and car repayments depend on!

"The key is to do enough research that you feel the opportunity is right, take steps to limit the downside risk, then execute your plan!"

-Ebbden

Reference:

http://www.inc.com/resources/startup/articles/20050301/risk.html

Using Social Media for Business

Picking just one article (and a credible one at that...) was a difficult task for this entry, there were many amusing and informative ones to select from, but I ended up selecting a report on social media completed by the Yellow Pages in June of 2012. Seeing as though the report is almost one year old I’m sure there are many updates, but it was bright and colourful and detailed, and it’s the one I chose!  :)

It begins by discussing how much people actually use social media in all its variants, and what generally for, how long for, and where we are when we use it! Yellow goes on to discuss that people create “aliases” for their pets, children, sporting teams, and stuffed toys (Yellow 2012). We also use our “aliases” while running our online businesses, and to network with others. The uses of social media span impressively over connecting with friends, family and associates across the world, to our drive for consumption – searching and researching for things we want to buy and try, looking for coupons discounts and reviews.

In a survey comprising 1,951 Australian businesses and 1,016 Australian consumers, Sensis and the Australian Interactive Media Industry Association determined some facts around the use of social media.

Online Australians using social media	62%
Small businesses using social media	27%
Medium sized businesses using social media	34%

The results of the survey were to help determine the most productive uses of social media, including how to interconnect with the users of the “maturing social media market” (Yellow 2012).

At the time of Yellows report (12 months ago), some examples of use are as follows;

Facebook dominated	97%
Linkedin grew..	9% - 16% in one year
And Twitter	8% - 14%

Yellows report goes on to discuss that the growing number of people using social media creates favourable circumstances for business owners, but states that consumers and their interactions should also be respected.

While one in five people use social media for commercial reasons, and one in four pay attention!
I can personally vouch for this, I ignore the Facebook ads on my pc browser, and when I am using my android application I hide them.

Further statistics in the report indicate use:

Use social media for researching products	16%
Products researched on social media were purchased	40%
Researched and purchased the product online	72%
Sizable portion of products researched on social media were purchased offline, in-store	n/a!?

These figures indicate the positive impact that social media has for both consumers and producers alike, because it creates an ease of access for both parties.

Some slightly more negative figures displayed that many larger corporations spent more time and money trying to keep their social media up to date, and trying to direct people to their pages. Results showed a lack for smaller businesses also, attracting people to their pages.

In conclusion, Yellow’s report labels social media as ‘pervasive’, and I agree. There is no escaping advertising in your news feed, even when the ads are offencive (some bulimic, spray tanned bikini clad twit selling fitness tips), you can try and report them but they just keep coming. It is an important aspect of business for the producer of goods and or services to understand and to utilise in the most efficient way possible.

“Despite the lack of strategic direction behind many businesses’ social media presence, it remains a key area of growth” (Yellow 2012)

Reference:

http://about.sensis.com.au/IgnitionSuite/uploads/docs/FinalYellow_SocialMediaReport_digital_screen.pdf accessed 23 May 2013