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I’m working with an established business in which the large majority of their income comes from technology consulting and services, however they have developed a software which they use in conjunction with their service.

They are considering shifting their business model from 80%/20% service/product, to the opposite. This is a major decision, which requires a deep level of analysis to consider.

After a recent work session with them, I decided to map out the “problem space”: a series of questions looking at all the different aspects to consider in determining the transition strategy. It’s not complete but it is a good start to exploring the problem.

20150222 Transitioning from service to product business v2.mm

 

(link to PDF: 20150222 Transitioning from service to product business v2.mm )

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What’s The Hurry?

6738872293_e3782f1306_bI often meet startup entrepreneurs who passionately believe they’ve found THE billion-dollar idea and who are anxious to launch their web site NOW!

The problem is that although they think the value they offer is obvious and people will be lining up as soon as their site goes live, they have not done the hard work to figure out what will get people to not just look, but to buy.

Take the time it takes to explore the customer space. Launch only when you’ve nailed down the purchase decision trigger: the right fit, the right place and the right time when the right people recognize you have the right solution to a critical issue they’re experiencing in the moment, and who decide to buy right here and right now.

It’s not first to market, it’s first to profit.

For more information

Image credit: Chrlster via Flickr
Direct link: https://flic.kr/p/bgutXk
Used under Creative Commons licence

 

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The Funding Dilemma: Bootstrap or VC?

3298287657_a296897cba_bFinding the funding to launch and grow a startup keeps many an entrepreneur awake at night: do you bootstrap or do you attract external investors? The path you choose has a big impact on the kind of business you will build.

Many choose the self-financing approach, using savings and generating cash flow on the side by selling services or other products. Earn during the day, develop at night. It is a lot of work, and it takes monster project management skills to keep on track.

The other option is to go “fat” by seeking and closing venture capital rounds as early as possible. Cash in the bank gives you the runway to more fully explore your market potential and build out more of your product.

The advantage of the bootstrap approach is that your limited resources require you to run smart. You need to become very good at validating assumptions before acting. Bootstrapping forces you to listen closely to the market and build only what your customers are willing to pay for, now. You can freely iterate or pivot as you discover bigger and better opportunities. This is the essence of the Lean Startup approach.

Running Lean allows you to gain real traction in your market as evidenced by recurring cash flow. This is the essence of being in business. Bootstrapping also prepares you to avoid much of the “Death Valley” syndrome where funding is necessarily scarce. Jason Fried of 37Signals (Basecamp, “Rework“) is a big proponent of bootstrapping.

There are a couple of traps hidden in the bootstrap approach:

– Transitioning from a service business to a product business: If you generate most of your income from services and develop a product at night on the side, it is very difficult to pivot your business or your team to become mainly a product business. You may be locked into a long-term (and lucrative) consulting gig. The mindset and team culture needed to succeed in a product business is different than that of a service business.

– Undercapitalization: A bootstrapped business rarely has reserves to take full advantage of a sudden opportunity, or to survive economic hiccups. The longer you bootstrap, the harder it is to raise substantial capital when you need to scale, because VCs like to get in early, before the business has a significant validation.

– Trying to do it all alone: Bootstrapped entrepreneurs don’t have the same access to outside mentoring. You absolutely need to invest time, effort and money to get a mentor-coach and establish an advisory committee. This ensures you are seeing all options around you as you otherwise bury your head in the day-to-day of keeping your business afloat.

Professional money has a lot of advantages, too. The biggest is that the money comes with a support system of experienced mentors to help you focus on the big picture. They have been there, done that, and can steer you around the potholes before you see them.

The downside is that getting outside capital is expensive. Expect to spend 10% to 20% of the capital you want to raise. Expenses include the roadshow and the professional legal, accounting and marketing help you’ll need to be successful.

Professional capital makes your startup less agile, so the more market validation work you accomplish before the investment, the better.

There are other options appearing also. Consider crowdfunding (product or equity, if available) to get cash and gain valuable market insight before moving to the production stage. Angel capital can help at the validation stage, but is less able to help you as you grow because the angels get priced out of subsequent funding rounds.

One approach is not better or worse than the other – it always depends on your particular situation, the maturity of your idea and your offer, your market and your goals. Whatever path you choose, it is a good idea to always be visible to investors, in order to build relationships, validate your idea and demonstrate your ability to perform. In this way, you can quickly shift strategies to access the appropriate financial resources at the right time.

But remember, whatever your financing strategy, the ultimate goal remains the same: get customers who recognize the value you offer them, and who are willing to pay you more than it costs you to make your product. A healthy profit margin is always the best source of cash.

 

For more information

“Rework” by Jason Fried: https://37signals.com/rework/

“The Bootstrappers Manifesto” by Seth Godin:  http://www.sethgodin.com/sg/docs/bootstrap.pdf

“Bootstrap Finance” by Amar Bhide  https://hbr.org/1992/11/bootstrap-finance-the-art-of-start-ups/ar/1
– A 1992 article in Harvard Business Review which is still highly relevant, and explores this topic even deeper

Image credit: Thomas Hawk via Flickr.
Direct link: https://flic.kr/p/62sA1z
Used under Creative Commons

Article adapted from an original text on my French-language blog:
http://blogue.davender.com/2012/01/le-dilemme-du-financement-bootstrapping-ou-vc/

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Think-of-the-childrenBrad Feld’s book “Startup Communities: Building An Entrepreneurial Ecosystem In Your City” (Wiley, 2012) is recognized by many as the manual on how to launch a startup community.

Feld’s model is based on the Boulder Thesis, four principles distilled from his own experience with building an ecosystem in Boulder, Colorado:

1. Entrepreneurs must lead the startup community.
2. The leaders must have a long-term commitment.
3. The startup community must be inclusive of anyone who wants to participate in it.
4. The startup community must have continual activities that engage the full entrepreneurial stack.

His model goes on to group the various actors in the ecosystem into “Leaders” (entrepreneurs) and “Feeders” (everyone else who feeds the ecosystem and supports the entrepreneurs).

I’ve been very active since 2010 in encouraging the development of a startup community in Québec City. After five years, it is starting to show some signs of life, as entrepreneurs themselves are getting involved in creating and leading various activities. I am proud of how our community is evolving.

However, as our startup community gains momentum, and the Leaders are starting to see the benefits of a stronger ecosystem, I am left with a nagging question:

What about the Feeders?

The working hypothesis behind the desire to contribute in building a Startup Community is that as the ecosystem matures and more entrepreneurs start to generate investments and revenues, there will be more money circulating, benefitting the Leader entrepreneurs and the Feeders who support these entrepreneurs.

Larger players such as law firms and accountants have the resources to invest in providing low-cost support to startups, in the hopes that these proto-businesses will grow to become profitable clients.

Investors want to tap into early deal flow, so they are also motivated to invest time, money and effort to build the ecosystem.

Government gets involved with money and resources, to encourage local economic development and job creation.

However there is a whole network of individual service providers, professionals who have a lot to bring to the community, who willingly invest a lot of sweat equity because they believe in their community. The problem is that there is no near-term or long-term business model to sustain our efforts. Entrepreneurs at the pre-funding startup stage don’t have the means to pay for our help at the level we deserve to be paid, so we have to cut our fees or find other sources of revenue to stay in the game.

Setting aside a potential long-term benefit, what is the short-to-medium term win for us independent professionals to get involved as Feeders? I’ve asked this question directly to Brad Feld a couple of times, and his answers have left me unsatisfied. My impression is that he wants us to “build it and the money will come”. The problem is that as the ecosystem matures, the money goes around us.

In my experience, a startup community eventually aligns along a “Founders and Funders” axis. Independent service providers are seen as “parasites” by entrepreneurs, who eventually disinvite us from activities. Government agencies use our tax dollars to compete directly against us. Investors want access to our deal flow, but are not able to pay us for it because of securities regulations. Or even if they could they wouldn’t want to pay us for it anyways. Startup entrepreneurs, hungry for launch capital, gravitate to whomever can give them cash.

The larger Feeders condition the startup entrepreneurs to get a lot for free or at highly discounted rates. As the local startup community gathers steam, competition to gain the best entrepreneurs as clients becomes more and more fierce, squeezing independents out of the game.

As an independent professional, I don’t have the resources to work for free. Nor is it a prudent business decision for me to accept equity, even if the startup had any to offer, because equity does not pay my bills. There is also the conflict of interest when professionals accept equity, between helping the entrepreneur or maximizing the short-term value of the equity stake (two elements which are not always compatible).

So I am left scrambling to be funded by various government programs. With it, I can keep my head above water, but I cannot get ahead.

I suppose I could start a fund and get involved managing other people’s money. But that is not a role which I choose to play, because it is not my strength nor my passion. I’m not interested in joining a VC fund.

On the other hand, I know that I bring a lot of value to our startup community, to the entrepreneurs in it, and especially to the Funders who benefit from the higher quality of deal flow that results from my efforts. I am proud when I see startups I have coached go on to get funding, find traction and take off. My passion is to help entrepreneurs succeed. Which is why I feel strongly about the success of our Startup Community.

Brad Feld’s Startup Communities model is incomplete. There needs to be a better business model to enable passion-driven, independent Feeders, like me, to bring our expertise and our experience to the table.

We want our startups to succeed. But if only well-funded Feeders can afford to dedicate the time, effort and money to supporting an emerging startup community, the risk is that the ecosystem becomes a “Chamber of commerce” for startups.

At this time, I don’t know what a sustainable business model for us independent Feeders looks like, but I know it has to go beyond relying on the diminishing largesse of government. Maybe it starts with the Funders, who are the ecosystem players with the most to gain financially?

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Thoughts on a sudden passing

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A colleague suddenly passed away yesterday, from a heart attack during his morning treadmill workout. He was 61, only a few years older than me.

I didn’t know him well, having only met once, at a barbeque at his house. But I was preparing to start a closer collaboration with him.

He was active, engaged, influential.

It was like the switch went from “on” to “off”. C’est fini.

Which made me wonder…

First, this is how I want to go. Fast, not a long, lingering illness. Although I want a few more years than he had.

Second, if I were to go suddenly, what would I do with all this experience, all these ideas, all these lessons and messages that I have been holding back? Would they disappear with me?

If my life were to suddenly end, what would I leave unfinished?

 

For more information

Image credit: Priyambada Nath via Flickr
Image link: https://flic.kr/p/dtfTeM
Used under Creative Commons licence

#YourTurnChallenge #day2

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