Julie Meyer On the Mistakes That Entrepreneurs Make

Adopted Brit VC and ex-California girl Julie Meyer is a big favourite of ours at *particular (although I didn’t rate her book “Welcome to Entrepreneur Country” especially). Yesterday’s Good Morning Silicon Valley led with an interview with her in which she describes the biggest mistakes that entrepreneurs make. There are a number of gems there, but the one that really strikes a chord is something that drives my business partner, corporate finance specialist Deb McGargle crazy. So-called “loyalty” or “reward” equity:

Julie Meyer, CEO of Ariadne Capital

Julie Meyer, CEO of Ariadne Capital

“There are many [mistakes] I’ve seen in the 15 years I’ve been doing this. These are some that can be deadly:

“Making all your friends co-founders with founding equity, when only two of you are doing the work. Once you’ve given the founding equity away, you can’t get it back.”

She also mentions another that is of relevance to us:

“Not reading the investment documents thoroughly. I once had to break the bad news to a (not stupid) guy who hadn’t realized when he signed with his Series A investors that if he missed some milestones, a massive amount of his firm was going to be transferred to the venture capitalists.”

Last year, we were asked to put together a series of videos to take the teams participating in Searchcamp through their invest. Unfortunately they were never used, but we had made similar suggestions to both Rivers Capital Partners and North Star (both of whom have invested in many of our clients) and were rebuffed.

The other mistake that she mentions that jumps out at me is this:

“Outsourcing the development of the product to an agency of some sort. If the product is not built in-house, don’t invest.”

Advice to investors as much as entrepreneurs perhaps, but proof (were it needed) that the old ONE North East funded investment model has no place in the real world.  It’s not the role of an equity investor to fund a third party’s profit margin on the creation of the key asset.  If you can’t develop the product in-house, you either have to bootstrap or raise debt finance.  Or find a fund that is based on public money and that doesn’t really care so much about where the money goes…

Read the whole piece here:
http://www.siliconbeat.com/2014/03/17/elevator-pitch-julie-meyer-of-ariadne-capital-on-how-to-crush-it-in-europe/

“I’m From The Government and I’m Here to Help… Finance Your Business”

A piece in this morning’s Guardian gives voice to the criticisms of businesses and commentators over the use of funds by the Technology Strategy Board.  It’s slow, it’s bureaucratic, it’s unaccountable. Yada-yada-yada.  Oh, where to start…

The Guardian reports “entrepreneurs are complaining that the significant amount of time it takes to apply for [a TSB grant] is an investment they can’t afford”.

There are 3 ways to raise money to finance your business, people.  Three ways.  Debt finance (people lend you money), equity finance (you sell some of your business in return for money) or grants.  They each have benefits.  They each have drawbacks.  If you want to raise money through grants, yippee, it’s free money.

Well, no, it’s not free money.  It’s not free at all.  You have to jump through hoops to get it and when you’ve got it, you have to account for how it’s spent.  Sometimes you spend days preparing the paperwork and you get knocked back by some bureaucrat who hasn’t bothered to get to grips with your business and your needs and there’s no right of appeal.  What do you want? A medal? Stop your whinging and get on with finding an alternative to fulfil your plans.  Jeesh…

The Guardian reports the words of Andrew Carroll (founder of Paperless Receipts, who, and we’ll take this one step at a time, it quotes as saying:

“We went to the Government for our first round of funding…”.

Er, hello?  Grants should never be seen as a first round of funding.  NEVER.  You simply cannot build a business plan for a growth-oriented enterprise that is based on the availability of a grant.  If the only way you can get your business moving is with a grant, it’s not a business.  I don’t mean that it’s not worth doing.  It’s just not a business.  Not yet, anyway.

Grants are subject to the whims of politicians and the career ambitions of civil servants.  They are used as a power play by the grey sector – that sphere of business that exists somewhere between the public and private sectors, notionally private or at least independent of government but entirely dependent on the flow of public sector capital.  NONE OF THIS SHOULD BE NEWS TO YOU.  If it is, go back to your lab or your studio and leave the business to the grown-ups.

Andrew Carroll continues:

“… and found the process of doing it laborious and lengthy, to the point that it’s just impossible to actually get [eek split infinitive] anywhere in any reasonable timescale.”

First, see above re. the cost of using grants to finance your business.  Second, just what is a reasonable timescale?  If the development of your project depends upon the availability of grant funding, you had better build the requisite timescales into your planning.  Those timescales are the timescales that an organisation like the TSB works to.  That could easily mean a year passing before you get the green light to proceed with a really adventurous project.  You, supposedly being in business, might consider that “unreasonable”.  In reality, it is neither reasonable nor is it unreasonable.  It is what it is.  Stop whinging and get on with it.

“I have a number of friends who have had to turn to venture capitalists because they’ve found the TSB process impossible.”

Really, venture capitalists?  Surely it’s not that bad?

Are you serious?  This guy needs a reality check.  If a VC (or a private investor) is prepared to invest in a project, it’s because s/he sees a return.  Here’s the rub.  You may not yet see the project as a business, but the VC/investor does.  Ergo, it is a business.  And if somebody is prepared to give you money because they see a return, then that’s the appropriate source of money for you, not the Government.  Grants from the likes of the TSB should only ever be for instances where no private sector finance (by which I mean equity finance, since debt finance will not be appropriate at this stage).

Why wouldn’t a VC invest in this situation?  Usually because the prospect of a return is too distant or the technical risk is too great.  Or maybe because the market is too small and does not justify the investment, in which case there could easily be merit in public sector finance provision.  But if this doesn’t apply and you still can’t raise the money, guess what.  You’re on your own.  Or you would be, were it not for the curious notion that the welfare state should extend to business-building.

Now, you might think that these things are pulled out of the Guardian in isolation, given it’s particular reputation for views on these things.  But the Huff Post carried a story this afternoon headlined “British Science Faces ‘Valley of Death’ say MPs”.  The piece reviews the publication of a report by the House of Commons Science and Technoloy Committee.  The Huff Post summarises the report as saying:

“it was “troubling” that so many British technology start-ups have to be acquired by foreign companies before they can grown into thriving businesses”.

Committee chairman Andrew Miller is reported as saying:

“British entrepreneurs are being badly let down by a lack of access to financial support and a system that often forces them to sell out to private equity investors or larger foreign companies to get ideas off the ground.”

Curse those private equity investors and larger foreign companies with their pots of money and willingness to finance our ideas.

And the TSB is criticised for having a lousy record in backing winners.  Good, I say.  I WANT the TSB to give money to things that only have a remote chance of success.  Because that’s the best way of making sure that the person whose ideas are being financed really doesn’t have a more appropriate option for raising money.  So, it’s the best way to guarantee that when there’s a success, it is something that would never have seen the light of the day were it not for the funding.

I have spent a lot of time listening to the Entrepreneurial Thought Leaders podcast series, which is part of the Stanford Technology Ventures Program. (I think that should be “Programme”. Tsk, colonials…).  It is very interesting to compare the approaches taken by businesses growing out of Stanford’s enterprise programme and the contrast with our own approach.  There are grants available in the USA in order to encourage beneficial research for which no equity finance is yet ready to support.  But you would NEVER hear a Stanford graduate describe grant funding as their “first round of funding”.  If equity finance is not available, a Stanford entrepreneur might be encouraged to seek finance from a ‘foundation’, that being an organisation set up by philanthropists to support certain ideals.  But grant funding would never be the first option.  Apart from anything else, life is too short.  Especially life in Silicon Valley.

I am no apologist for the Technology Strategy Board.  But if you think they are there to be a conventional source of finance because you don’t want to give away any ownership or you’re not prepared to bootstrap or not willing to keep schlepping the finance trail, it’s you that’s wrong, not them.

The #CafeClinic

First published as a guest post by Vicki Stone Marketing, it was writing this that led me to write “Six Myths…“.

In Seth Godin’s ‘StartUp School’, the great man is asked about his experience of using lawyers whilst starting a business.  He tells how, in his last year at Stanford, he started a business with a couple of friends and they managed to scrape together $5000 to invest in it.  The university pushed them into taking legal advice – this was long before the days of Eric Ries and the ‘lean’ theory that dominates start-up culture these days.

Seth describes how the lawyer charged him $3000 of the $5000 he had in order to incorporate the company and put everything in order.  Remember, this was in the mid-80s, when $3000 was a lot of money.  Unsurprisingly, the business folded a year or two later and the only person really to benefit was the lawyer.

If you have been through the process of starting your own business, you’ll be aware of just how precious cash is.  It is difficult to justify setting a lot of money aside for professional fees when you’re worried about paying the electricity bill and the rent.  But when you can no longer resist that nagging voice you hear in the middle of the night and do pluck up the courage to make an appointment with Big Law LLP, it doesn’t help when the lawyer you see gives you a list as long as your arm of tasks you need him (or her) to carry out RIGHT NOW!  You know the sort of thing:

  • incorporation
  • shareholders’ agreement
  • director’s service contracts
  • employment terms
  • freelancer agreements
  • privacy policy
  • terms of use for your website
  • terms and conditions of sale
  • review of bank documents
  • procurement terms
  • trade mark registration
  • data protection notification
  • distribution agreements
  • blah blah blah

And before you know it, all your money has been spent on the legals.  In the event that the business is a sustainable success immediately with little further need of cash, you’re sorted.  For everyone else though, the £1000s you’ve just spent is likely to be a significant overspend at best, or a complete waste of money at worst.  But at least you’re keeping the law firm’s equity partners in cushy new Mercedes leather seats, so that’s something at least.

Because we specialise in the commercialisation process, we deal with a lot of start-ups.  I mean A LOT of start-ups.  That’s because most innovation is done by early stage companies, so it’s not surprising.  We try to put time into those start-ups because most of them will become clients eventually, if not right away.  Not having much in the way of spare cash ourselves, you could say that this time is our marketing spend.  But the key with start-ups is to work out what they really definitely absolutely have to do with a lawyer right now.  And the honest answer for most of them is… well, not a whole lot.

So you’re average growth-oriented start-up will already have incorporated. It won’t want a shareholders’ agreement because it will be looking for equity investment and the investment agreement will stand as the shareholders’ agreement going forward. Yes, it’ll need some help with the employment terms for directors and workers, but this probably doesn’t have to be bespoke at this stage.  It’s likely to be some way off being market ready, so terms and conditions etc are not a big issue.  And brand protection is something that you need to worry about in the immediate run up to your launch, but it’s probably a risk you can afford to run until then.  And if you don’t want to risk it, you can do it yourself, with a bit of guidance.

The question is, how do you access that kind of advice.  How do we find you?  Back in the money-laden days of ONE Northeast, programmes were plentiful, allowing us to earn a modest living delivering workshops and clinics with rooms, projectors, tea and coffee all supplied.  Nine times out of ten, these programmes were entirely free to attend, which meant that on average, about 20% of those who registered didn’t attend and about another 20% failed to make it through to the end.

But nobody is paying us to deliver workshops these days.  In fact, one well-known local QUANGO recently asked us to pay them for the privilege of delivering further workshops for them.  We politely refused.

We still need to find you.  You still need to find us.

Fortunately for us all, most people who are starting a business don’t stand on ceremony.  The marble halls of Dickinson Dees are one of our best marketing tools.  If you want the biggest law firm in the region, use them not us.  If you don’t, why pay their rates?  And if you don’t want to pay their rates, you probably aren’t fussed about their conference suites and cocktails on tap.  Well, they don’t have cocktails on tap. I made that bit up.

Being officeless (and paperless and secretaryless), we spend a lot of time meeting clients and colleagues in the cafés of the north of England.  And we spend a lot of time engaged in social media.  So I thought, why not have a crack at staging a clinic ourselves.  In a café that everyone knows, marketing it via Twitter, LinkedIn, Facebook and Google+.  I asked people to get in touch and make free half hour appointments, even last minute if necessary.  But I knew that even if nobody did, I’d still have to go and sit in the café for the day.  That’s not such a chore, really, is it?

But they did come.  Six of them.  All start-ups or early stage businesses.  None of them existing clients and only one of them properly known to me (a certain Vicki Stone Marketing).  They came.  They bought cake, They talked.  And we started the process of building a relationship.

I called it The #CafeClinic.  And I’m going to do more of them, with the next being on Wednesday 13th March at Whites at Boho One in Middlesbrough.  So if you see a tweet mentioning a future #CafeClinic or a LinkedIn status confirming where and when, could you do us and the nation’s start-up community a favour and just pass it on?  We might even buy you a coffee…