Dharmesh Shah

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Startup Wisdom From Babson Entrepreneurship Forum

By Dharmesh Shah on November 15, 2010

The following is a guest post from Andy Cook.  Andy is founder and chief geek at Rentabilities, a web startup that makes renting easy. -Dharmesh

On Saturday Babson College hosted a great event to get everyone ready for Global Entrepreneurship Week. Speakers and panels talked about what it takes to be an entrepreneur and shared stories from the startup trenches. Dharmesh Shah kindly helped this cash-strapped starter attend by bankrolling my ticket.

We thought a blog recap would be useful for everyone who didn’t have the opportunity to go. I’m personally a sucker for a good startup story so I focused my day on that, but there were also many other interesting panels and speakers participating. Below are my takeaways from the event.

Ben Fischman (Rue La La) - Entrepreneurship is a Skill. Passion is an Emotion

Being a successful entrepreneur all comes down to passion. Entrepreneurship is not genetic, it’s a learned skill. You can learn everything you need to know to run a business. What is genetic is passion, because it’s an emotion. Passionate people get started doing something they love and do it quickly. They don’t plan and plan and wait and wait. They just jump in and see if it works. They go for the 50% solution and see how people like it to mitigate their risk.

If they fail, it doesn’t matter because passionate people find ideas everywhere. You can’t sit down with a nlank white piece of paper and figure out what business to be in. An entrepreneur is someone who can go work at Starbucks for five days and come up with a unique idea to start a business around. Entrepreneur types find ideas everywhere.

Mei Xu (Chesapeake Bay Candle) - Protect Your Finances to Protect Your Company

Not everything needs to be a brand new concept to have an impact. Candles have been around for millenia, but Chesapeake still managed to find a way to do it differently. Entrepreneurship is about reinventing the solution to a problem and solving a problem you are passionate about. As entrepreneurs, protecting your product is important, but protecting your finances is more important. If you protect your company by making smart financial decisions, you will be protecting your overall well being too.

Marshall Carter (NYSE Group) – When to Shoot for an IPO Exit

Marshall Carter gave a brief presentation on how entrepreneurs can use innovation to climb to the Big Board and then opened it up for questions from the audience. One of the best questions that was asked was, “when should a startup go for an IPO?” Marshall’s answer was brief, but very informative:

As long as you can expand without accessing the public markets for capital, you’re not going to need to hire 30 staff members to adhere to Sarbanes Oxley.

Matt Lauzon (Gemvara) - Give me Data, or Give me Death

Think about two things when starting a company:

#1 – Who’s your customer and are they willing to pay. If no one is willing to pay for what you’re offering, there’s not a viable business opportunity.

#2 – How do you test your business opportunity with the least amount of resources.  Be data driven. Instead of signing on 50 jewelers, we could have signed on five. And if I could do it again, that’s what I would have done.

Being data driven starts with making sure you have all the tools to measure, and then figuring out what it is you want to actually measure. From the beginning you need to decide what is success and what is failure. Customers vote on everything Gemvara does. They vote on merchandise is offered, how it is priced, and everything else the company does. Every decision should be based on data provided by your customers.

Another important thing to do at your company is to give data access to anyone, even your interns.  The employees at Gemvara (known as gemvarians) are allowed to talk to Matt or Dan Marques (the gemvarian in charge of analytics) anytime they want about data. When you empower people, they start to feel more comfortable making decisions and feeling like they can run their own tests.

Johnny Earle (Johnny Cupcakes) - Create a Cult of Customers

The driving force of your business is passion and reinventing yourself. Everything in the world has been done before, which means we all have a good chance of failing, and it’s about how you reinvent it. Doing something you’re passionate about and going with that gut feeling makes work not even feel like work. Johnny Cupcakes’ mission is to deliver an experience to its customers rather than just sell them a t-shirt. Here are some examples of how they do it:

  • Went on a a 31 day cross country tour selling shirts out of a van. This was so they could get to know some of their loyal e-commerce customers in person
  • Include random stuff in online orders like stickers, personalized notes, $20 bills, and even Barbie doll heads
  • When the newest store opened, Johnny hired firebreathers and sword swallowers to entertain his customers
  • Instead of the generic postal packaging, they get custom packaging and tissue paper made up

To this day the company has spent little to no money on advertising. It’s been all world of mouth because they’ve created a cult following of loyal customers. We’re all going to die someday so it’s nice to be happy everyday doing something you love. For Johnny Cupcakes, it’s giving their customers a memorable experience every time.

Matt Graham (BRND MGMT) - Do Yourself a Favor and Find a Mentor

As an entreprenuer, especially a first time one, you should look to people who have more experience than you in whatever it is you are doing. It’s important to know that as a first timer, you just haven’t gone through the types of experiences needed to succeed. What makes a good entrepreneur is the ability to synthesize input from a lot of different sources, and then use your best judgement to make an informed decision.

Most entrepreneurs have an epiphany and can see it all their idea all the way to completion. Be a dreamer and have a vision, but be realistic of how you are going to get there. You have to look at your life and see if you can actually make it happen. As you start break it down and have a better picture of whether it’s reasonable or not, you should ask for advice from people who have done it before to help you succeed faster.

Bob Caspe (Leaf Systems, Sound Vision) - It’s All About the Bottom Line

Business is not about the number of employees or users you have. Business is only about the earnings and your bottom line. Unless you have a rich uncle to fund your business, watch your cash flow carefully. In small businesses especially, it’s wonderful to think about what you’ll be in 10-20 years, but you need to preserve your ability to survive long enough for a good thing to happen to you.

Roger Berkowitz (Legal Sea Foods) - What Business are You in?

While in business school, Roger was asked by his professor what business he was in, to which he responded, “I’m in the restaurant business.” After hearing the answer, the professor decided to assign him (and only him) an environmental impact analysis of his restaurants. One semester and 42 pages later, Roger passed his paper into his professor who didn’t even look at it. Instead, the professor asked Roger what business he was in again, and hesaid “I’m in the fish business.” Roger passed the course.

The point of Roger’s story is that you need to focus on your core business, and only your core business. They’re are really only two metrics in business. You’re either better, or cheaper. For Legals, everything is about quality assurance and consistency. Legal Sea Foods also once tried to open a vineyard in France, and after three disasters decided to close it down and stick to fish again.  If you spread yourself out too thin and are worrying about things that take you away from your focal point, you will hurt yourself.

Joanna Meiseles (Snip-its) - You Don’t Have to Know What You’re Doing

Joanna’s story was hands down the funniest of the day. Before starting Snip-its, the only things she had were a vision, a name, and experience running a hair salon or franchise. Here’s what she did:

  • Got a business plan from a friend for an Italian restaurant in Seattle
  • Changed every instance of the restaurant’s name to Snip-its
  • Changed every instance of pasta to haircuts
  • Looked for $300,000 in investment money because that’s what the restaurant’s plan needed to start

With her business plan in hand, Joanna went to an investment meeting with her mom’s friend in New York, who asked her about EBITA. She had no idea what he was talking, botched the meeting, and ended up crying afterwards. A few weeks later, she got her business plan back in the mail with a check for $10,000 and a note that said “good luck.”
Throughout the history of Snip-its, Joanna basically had no idea what she was doing, but had the chutzpah just to try it out anyways. Her first employees even had to help her buy all the hairdressing supplies for Snip-its because she had never been a hairdresser before. You don’t have to know what you’re doing. You just have to work hard and be willing to take a risk. After opening her fifth store, she decided it was time to franchise because that’s what the restaurant’s business plan said to do. She stole not on the entire plan, but the execution as well as the plan. The saving grace was she learned quickly and leaned on other entrepreneurs for help.

Karen Fabbri (Moxie) - Trust your Instincts

If you have a little voice in the back of your head nagging you, something’s wrong and you need to fix it. If you’re having problems with an employee, take care of the problem by addressing it head on instead of ignoring your gut. Don’t fear the “what if’s.” What if I can’t run the business without them? What if he starts a rival store down the street? You need to listen to the little voice in your head and go with your gut, which probably means firing that person.

And if you’re thinking about starting a business in the first place and your gut is telling you to go for it, then go for it. You have to decide what’s the worst that could happen if you start a business and it fails. If you’re comfortable with the worst case scenario, then why not try it out? You need to always trust your instincts and follow your gut.

Brian Halligan (HubSpot) - Get a Great Mattress and Do What you Love

Don’t go work for a big bank or consulting firm, especially if you’re just getting out of college because you won’t be happy. Start a company or work at a startup instead. You spend 90% either working or sleeping, so get a great mattress and do what you love.

If you’re ever going to start a company, do it now while you’re young. Don’t go to some big firm. It’s a brutal way to live your life. Find a great cofounder who compliments your skill set. If you’re a finance guy, don’t start a company with another finance guy. Find someone who can build stuff instead.

Brian Cusack (Google) – You Can Talk the Talk, but Can You Carol the Carol?

Brian helped TJX launch a user generated Christmas Carol campaign around YouTube that was extremely successful for the company. And who was the first person to sing a carol for the campaign? Brian Cusack, of course.

You need to believe in the products you are working on, so much that you’re willing to use them yourself enthusiastically. If you can’t advocate and believe in your own product wholeheartedly, then how do you expect your customers to sing the praises of your company?

If you’re energetic and passionate about your product, you’ll be able to take advantage or your size and move swiftly. Find other people who are doing the same things as you and join them on the web. There’s a lot of opportunity for sharing that doesn’t have to be competitive.

Laura Fitton (oneforty)  - Listen. Learn. Care. Serve

Listen – Tune into social media. Look at the space you want to compete in. Listen for mentions of your company’s name through alert notifications. Follow blogs that are relevant to your industry.

Learn – If you launch an initiative and no one clicks through, don’t decide to just keep going and do the same thing. Learn from your mistakes and iterate. Think critically and strategically.

Care – Care about your customers and what you are doing for them through social media. Don’t be afraid to do it wrong and mess it up at first. Just try it out. Dell and most of the other companies who started using Twitter early on screwed it up. They learned from their mistakes, and now they are killing it online.

Serve – Do the stuff your company says it’s going to do and follow through. Solve your customers problems through social media because it’s easy, cheap, and they’ll love you for it.

You don’t need to run around and find the next big innovative thing to work on.  The interesting thing to watch for as an entrepreneur is what happens when the masses catch up. When it hits truly mainstream, they are huge business opportunities among the laggards.

That’s all folks! Hopefully this summary of the day’s events was useful to aspiring entrepreneurs or anyone currently working on a startup. I’d also like to thank everyone at Babson who helped make the event possible and all the speakers (even the ones I missed) for coming out and sharing their hard earned wisdom.

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Chumps vs. Checks: Handling The Venture Capitalist Cold Call

By Dharmesh Shah on November 8, 2010

The following is a guest post from Healy JonesHealy is the Head of Marketing for OfficeDrop, a company that offers small businesses in paper intensive industries cloud scanning software and cloud filing. Previously he was a venture capitalist with Atlas Venture and Summit Partners.

Taking a cold call from a venture capitalist

So you are busy running your startup and suddenly the phone rings and it’s a venture capitalist. What do you do?

VCs of various stages are borrowing a page in the playbook from some of the most successful buyout/growth investor groups and taking an active, outbound approach to finding new investments. In other words, you are more likely than ever to get a cold call from a VC.

This can feel pretty flattering if you are the little startup trying to take on the world. But it can also be a waste of time. Most of these cold callers do not invest in really early-stage startups – they are looking for larger companies.onstartups venture capital cold call

Growth Funds vs. Early-Stage Venture Capital Firms

I realize that the difference between a venture capital fund and a growth equity fund may not be readily apparent. Today there are seed funds, micro-VCs, traditional venture capitalists, later-stage VCs, growth funds, etc. It’s a little confusing.

Traditionally, investing in pre-revenue startups was the purview of venture capital funds. Growth investors focused on companies further along in their lifecycle – companies with substantial revenue and a history of profitable growth. Today, in addition to the whole seed funding movement, the lines between traditional venture firms and growth funds has blurred. However, most cold callers are from growth equity funds that still do not invest in pre-revenue, or even moderate (i.e. sub $10 million) revenue companies.

This is why I recommend that if you are running an early-stage startup that you do not spend a lot of time on the phone with growth fund investors. They are looking for businesses with certain levels of revenue and cash flow, and if you don’t fit the bill they will want to get off the phone too. But if you’ve just gotten some great press, you might not only find yourself deluged with cold calls from growth funds, but might also get a ring from a legitimate early-stage investor whose curiosity was piqued.

Taking the Venture Capitalist’s Cold Call

If you are actually raising capital then I suggest you approach these calls in the same way you would a sales lead: qualify the lead, move the worthless leads out of the funnel ASAP, get the info you need to appeal to the few leads that are actually a potential fit and set yourself up to make a legitimate/strong pitch to those few.

You need to quickly sort through the growth investors who are not a fit for your business. This approach is based on my former experience as a buyout investor, growth stage VC and early-stage venture capitalist, and now as an executive at a startup that has successfully raised a modest amount of venture funding. And oh yeah, I’ve made a lot of cold calls into private companies as an investor and have received them at my startup as well.

Steps for dealing with a cold call from a venture capitalist:

1) Quickly figure out if your company even fits the financial profile of the investor’s fund. Politely ask “what is the financial profile of your firm’s investments?” The good growth funds will unabashedly let you know what financial statistics they look for in an investment – say $5 million in cash flow and 15% year over year growth rate, or $10 million or more in revenue. If you are a pre-revenue startup then you are wasting your time speaking with these people. I understand that your projections might say you are going to go from zero to $50 million in revenue in the next 18 months, but trust me, you are not a fit for the growth fund today. These groups are usually very strict on investing only in companies that meet specific financial criteria (cash flow breakeven, particular revenue levels, etc) so you don’t want to spend time with them if you are a startup.

2) Ask how much money the fund invests at a time. If the group typically invests $25 million at a time, and you are only looking for a seed investment then you are not a good fit. Be wary of the investor whose fund invests in a ridiculous range of dollar values, say from $1 million to half a billion dollars – the individual you are speaking with is probably on the growth investment side of the fund. You only want to have an in-depth conversation with someone who could potentially meet your startup’s funding needs.

Note that these first two questions were all about financial issues. The goal of these questions is to weed out the growth and buyout investment funds. The majority of investors who cold call are these types of firms, and they make initial investment decisions based on financial metrics. Your pre-revenue startup is not going to get financing from one of these groups. It’s time to get off the phone. Let the cold caller know that you are so far outside of their financial criteria that a conversation does not make sense at this time. You don’t need to share any other information or spend any additional minutes on the phone! You’ve just qualified the investor off of your list and should get back to running your business. Go ahead and give them your email and let them know they can ping you that way in six months/a year to see if anything has changed. Quick note: if you are a growth stage company that meets the investment fund’s financial criteria then keep reading.

If the fund actually invests in your stage of startups, then your next goal should be to figure out how to give a solid pitch to the right person at the fund.

3) Make sure you know who you are talking to. Make sure you know which fund is calling. Learn a little bit about the fund; if it doesn’t sound like the type of fund that would invest in your startup then ask. Figure out who the person is and what their role is. Of course, you want to talk to a partner at the fund, but the person calling may be a more junior associate. A few years ago I wrote a post on talking with a junior VC; this advice may be helpful if you find yourself on the phone with one.

4) Ask what prompted the call. Was it a piece of press? Did they hear about you from someone? Or are they doing research in the industry? Which leads to the next question:

5) It is fair to ask if the fund has any investments in the same industry or any that may be considered competitive. You also want to know if the fund is actively doing diligence in the space for a different investment. I’d expect most VCs to be quite honest in this area! Thesis driven investors will often try to speak with every company and executive in that space. I know I did this in a few specific areas – I called everyone I could. But I also let the startups know I was serious about their industry and expected to find and make an investment. Most executives still were open to having a conversation. In general, I believe that this isn’t a bad move if you are actively looking for capital because:

a. A number of VCs will make more than one investment in a space.

b. If a VC is truly looking across an industry you should be able to get helpful market data out of them.

c. Good VCs will make introductions to potential partners, employees, etc for companies that they like, so getting to know a VC who is spending time in an industry could be valuable.

Be smart about this. Remember that you don’t have to give away every piece of tactical information to have a good first conversation. And do a little research on the thefunded.com – see if they have a good reputation, ask people in your network who know the partner and the fund, etc. This leads to my next point:

6) Now that you know who this investor is, do you want to speak with him/her at this moment? Do you want to do a little research on him/her and the fund first, or are you comfortable speaking right now? Are you ready to deliver a pitch on the phone? Do you have a presentation ready (even if you don’t share the presentation, I’d suggest you use it as a means to structure your conversation. You’ll be much more organized if you use the table of contents to talk about your company than if you talk off the cuff.) Do you actually have the time, or do you have a scrum meeting scheduled in five minutes (and make sure the VC has at least half an hour to devote to you)? If you aren’t ready then you should schedule a call in the future when you have more time. Don’t feel bad, just do it. If you are going to push off the conversation then I’d schedule it right then and there on the phone. Another option, if the VC is in your area, is to ask to meet in person. But again, try to ask for the meeting right then and there and get something on the schedule.

7) If you are ready to pitch, treat it like a pitch. Run through your fund raising presentation. Be organized and efficient. I’d suggest using your “ten minute pitch.” Even thought they called you, you are being judged so take the pitch seriously.

8) Don’t forget to ask questions. If the VC called you, they likely have some opinions on your industry. What other companies are doing well? Which customer verticals are buying? Who has cool new features? A good VC will have legitimate answers to these questions. I’m not suggesting you “test” the venture capitalist – rather you try to take advantage of the conversation and learn something.

9) Finally, end the conversation with an agreement on next steps. An in person meeting should be your goal. If you can’t get that, then get the VC to agree to follow up at a specific date. You don’t want to be in fund raising purgatory, so get their contact info so you can follow up if they don’t.

Remember, most of the investors who cold call are growth investors who really can’t help your startup. Qualify them out of your funnel ASAP. Next, figure out who you are talking to. Make sure you are ready to pitch, then give it your best shot. End with an agreement on next steps.

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