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Wednesday, March 5, 2008

Five Things An Early Stage Company Can Do To Ensure Success

from Ken Deemer, co-founder and former chairman of Tech Coast Angels





Building a great company requires a combination of talent, persistence and luck. This article will discuss the five things that I believe will ultimately have the most impact on your chances for success.

1. People, People, People
Borrowing an adage from real estate, the three most important success factors for any business are 'people, people, and people'. Foremost among these, of course, is the management team. In an early stage company, every position is critical and must be filled with an 'A' player. Successful entrepreneurs don't settle for anything less. They don't hire their friends or cut corners simply because it is expedient or less costly. It is far better to have a hole in your team than to fill it with a weak player who will need to be weeded out down the road. The other team members will pull together to pick up the slack until the right individuals can be located and brought on board.

I am amazed by the difference that one key hire can make in the success of a company and, equally, by how much damage can be done by the wrong one. Recently, I was an investor in a company that made a disastrous choice for a new CFO. He was abrasive, not a team player and so antagonized the lead investors that they pulled the plug on additional funding and the company was ultimately sold for a substantial loss.

Compensation and affordability are always issues. But early stage companies find creative ways to use stock as compensation and key team members will often work through the start up phase for little or no current income. If they aren't willing to do so, that could be an important clue.

Other important resources for companies are their service providers - especially attorneys and accountants. Again, this is no place to skimp. I encourage all entrepreneurs to seek out and retain the highest caliber firms that they can find, even if they don't believe that they are ready for such high-powered advice and services. It's critical to establish strategies and processes that will become the foundation of a larger, more complex business: IP strategies; corporate documents and policies; stock ownership, options, vesting, and investment agreements; supplier, partner, and employment agreements to name only a few. And the connections and introductions to potential suppliers, partners, investors, directors, and even employees that service providers bring can be invaluable.

Most firms take a long term view and charge a reduced rate or take equity as compensation from startups. And don't forget, it's not just the name above the door but the individuals actually working with you that matter. Check them out carefully.

Finally, entrepreneurs should take great care in assembling their boards of directors. This is an opportunity for seasoned, strategic direction from beyond your circle of friends, founders or other company managers. In general, I believe that the CEO is the only company employee who should be on the board. Every seat taken by an insider is a wasted opportunity for advice and perspective that isn't already available on a daily basis.

Your board is an ally, not an adversary. Yet I see so many entrepreneurs who are constantly computing the balance of power on his or her board, populating it with friends or company insiders to be sure that they won't be outvoted. This is so short sided. The best advice that an entrepreneur can find will come from other entrepreneurs, investors or professionals who have themselves built successful businesses. Seek out and approach one who has built a company with similar characteristics and ask him or her for advice. Most will be delighted to share their wisdom and experience. Cultivate these relationships and they may become mentors, board members or even investors.

2. Fuel in the Tank
I have yet to meet an entrepreneur whose projections aren't 'extremely conservative.' Yet, at least eight out of ten times, projects take longer, they cost more money, and revenue grows more slowly than anticipated. Experienced investors are not surprised by this (a good reason to have one on your board) and they encourage or insist that companies raise enough capital to weather these inevitable delays.

One of the worst things that can happen to a company is to run out of cash. Development can grind to a halt, employees may be let go, opportunities are missed, and raising additional capital in such circumstances can be difficult and costly. On the other hand, entrepreneurs tend to be obsessed with ownership and dilution. They want just-in-time financings, in minimum amounts, to preserve their percentage ownership. They fail to realize that more capital is not just an insurance policy, it can accelerate their business and significantly increase their personal long term wealth. My advice: 'Take the money!' I haven't met an entrepreneur who regrets having taken too much money when it was offered.

Just as important as the color of money is its source. The right investors can bring advice, resources, connections, and value well beyond their dollar investment, and the converse is equally true. Make sure to do the same level of diligence on a prospective investor as you would a key employee. Talk with CEOs of other companies they have backed. Find out how they react to bad news, how patient they are and what value they can bring. You'll be 'partners' with them for a long time!

And what's the best source of capital? Your customers. Successful companies get to revenue as quickly as possible. They are often able to get customers to share in the cost of development or even to pre-pay for preferential delivery or terms.

3. Don't Reinvent the Wheel
When Henry Ford finished his enormous factory at River Rouge, rail cars of iron ore rolled in one end and Model T's rolled out the other. Every component of the vehicle was designed and built by Ford. Up until about 20 years ago, most companies still operated in essentially the same manner. Products were designed, manufactured, marketed, distributed, and serviced in house. Those days are gone. Today, companies can design, produce, market and service their customers without a single employee! Instant communications and world-wide distribution of resources have made this possible. Successful companies today focus on their core competencies - design, service, marketing, technology, or logistics - and they outsource the rest. They manage risks and resources, not people. They're nimble and able to adapt or scale to changing conditions.

4. If You Build It They Will Come
Completing a financing, being acquired, or even going public are milestones, not end games. Entrepreneurs often concentrate on 'positioning' their companies to be attractive to investors or partners. Instead, they should be creating long-term value that will naturally attract them. That means staying focused on the business model, finding ways to test it relatively cheaply, getting to revenues quickly, developing the team, and emphasizing profitability. If you build a profitable, high growth company with defensible competitive barriers, investors will be calling you, and you will set the terms!

5. Focus
Entrepreneurs are amazingly creative. They often have more ideas in a week that the rest of us have in a year. The problem is that a company's limited resources and talent can only accomplish a few things well. Constantly piling on new projects or changing priorities is unproductive and even demoralizing to a team. Successful companies have a clear sense of mission and they focus obsessively on their key priorities. Opportunities that fall outside - even great ones - are shelved until time and resources permit. At the same time, these companies continuously scan for changes in their environment or assumptions and react accordingly. Here is another area where a seasoned board can play a key role; bringing a broad perspective, and keeping resources directed to the highest priorities.

Summary
Successful entrepreneurs assemble the most talented and experienced people they can find for their team, their service providers, their board and their investors. They make sure that their companies are well capitalized, emphasizing long term value creation over percentage ownership. they identify core competencies and outsource other functions to best-of-breed suppliers. And they focus relentlessly on their mission and key priorities. Sounds easy, right? If it were, we'd all be doing it!

Ken Deemer is co-founder and former chairman of Tech Coast Angels, and a current member of the TCA LA executive committee. Tech Coast Angels, www.techcoastangels.com, is the largest angel investment group in the United States and the leading source of first-time funding to Southern California companies.

This article originally appeared in SCribe, a publication of the Technology Council of Southern California which is focused on making the regions technology companies more successful. SCribe archives are available online at www.tcosc.org/news.archives.html or join the mailing list at www.tcosc.org/joinourlist.html.


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