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12.09
Is it your
time to be an entrepreneur?
By Cynthia
Kocialski
You’ve reached a crossroad in
your career. Maybe you want to reap greater
rewards for your hard work, or you’re tired of
working for someone else, or you’ve been laid
off and now you want to determine your own
destiny. Whatever the reason, you’ve decided to
start your own company and become an entrepreneur.
How do you get started and what does it take to
be successful? The good news is you are not
breaking new ground. Many people have done it
before you and, best of all, many of them are
willing to help people like you realize your
dreams.
The first step is to define a
product or service that can generate revenue — and
lots of it. This may seem basic, but one of the
lessons from the dotcom era is there is
unlimited demand for anything free. Next, it’s
time to write a business plan. You may be asking
yourself why you should bother with a business
plan. This exercise will consolidate and clarify
your product concept and company vision. Many
questions need to be answered — how long will it
take to develop your product, will it require
outside funding and how much, who do you need on
your team, who are the competitors, how will you
market and sell your product, how big is the
market, what is your pricing strategy, how do
you plan on providing customer support, are
there any regulatory hurdles to overcome, and so
on. While there are many crucial elements of a
business plan, at the early stages of a company,
product vision and credibility of the team are
of utmost importance. Above all else, the first
investors are investing in the people. I’ve seen
many technical people who have written their
business plans later, only to find out after
months or even years of effort that there was no
viable business model for their product. It’s
far more likely that a business fails due to a
poor business strategy than the execution of
one.
So you’ve spent time developing
a business plan, now what? The question of how
to fund a company is on most entrepreneurs’
minds these days. Attend any meeting of the
investment community, angels or venture capital,
and you’ll hear how entrepreneurs should focus
more on bootstrapping their companies and not
approach the investment community until they
have a proven product concept with customers.
The current landscape to attract
investors is tough, but not impossible. It was
not long ago when start-ups were getting $3M in
seed funding. The average today is $650K. With
the recession continuing, the venture
capitalists say they are getting a plethora of
companies and ideas being presented to them.
I’ve talked to VCs who have filtered through 400
proposals to find one investments and many spend
18 to 24 months to find one investment in a
specific market space. So what are investors
looking for in a company seeking seed capital —
$5M lifetime investment, market validation (i.e.
customers, letters of intent) within a year of
funding, potential to reach $50M in revenue
within 3-5 years, possibility of breaking out
and soaring to revenues of $500M, and market
sizes in the billions. Angel investors are
looking for expansion or scale up propositions.
Angels invest from $10K to $100K. I’ve seen
startups with 25, 60, and even more angel
investors. Angels do not have pressure to yield
the quick returns that VCs have and are more
willing to work with companies in much smaller
markets. The latest funding approach is social
financing, which amounts to mining the trend in
social networks to find funding. I sit through
dozens of start-up presentations each month and
about half of the start-ups looking for their
first round of funding are those with a working
prototypes and/or with initial customers.
Strategic partners provide yet
another avenue for funding. Often established
companies will invest in start-up companies.
They may want to explore new market segments
with capital efficiency or they may be looking
for innovations to expand their existing product
lines. There is always the traditional network
of friends and families as well. No matter what
path you chose, locating capital is like looking
for a needle in a haystack.
Even if you bootstrap or fund
the company yourself, it’s a good idea to
present your business plan to those who might be
able to offer insight. You need to develop your
elevator pitch, a short commercial-like
presentation on the product concept and the
business strategy. Much to the disappointment of
the technical founders, it’s not about the
gizmo. Investors want to understand what the
product is, but 90% of their attention will be
focused on the business strategy. There are many
organizations where start-ups can present their
companies to audiences of investors. These
presentation opportunities give the entrepreneur
valuable feedback on their businesses. My advice
is to find groups where you can present for free
or a small nominal fee, steer clear of the
pay-to-play groups asking up to $25,000 to
present to investors.
This is a process where
persistence matters. Cisco Systems had to meet
with 77 venture capital firms to secure its
first round of funding from Sequoia and the
company already had hundreds of thousands of
dollars of revenue per month. The story of
Colonel Sanders and Kentucky Fried Chicken is a
legendary story of perseverance. Colonel Sanders
endured more than a thousand rejections before
he obtained his first deal.
No business plan survives
confrontation with market, customers,
competitors, and investors. Given the length
time it takes to develop almost any technical
product or service, it’s unlikely your original
idea will materialize as it was first
envisioned. You need to listen, to keep an open
mind, and to be receptive to change. This is
sometimes difficult for most first time
entrepreneurs to do.
Starting a company is like
embarking on the adventure of a lifetime. It’s
not important to know how to get from A to Z.
When starting out, you only need to know how get
from A to D. You just have to do it and enjoy
the journey along the way to success.
Cynthia Kocialski has been a
member of the IEEE for 25 years. She founded
three companies and has been involved in more
than 20 hi-tech start-ups. Her recent role was
as COO for a medical consumer technology
start-up. She is active in several start-up
focused organization such as the Venture Capital
Task Force, Silicon Valley Association of
Start-Up Entrepreneurs, and the Churchill Club.
Comments may be submitted to
todaysengineer@ieee.org.
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