Tim's Four Pillars of Early Stage Success
Building a solid foundation for your startup
The Four Pillars of Early Stage Success
In Startupland, we have many disparate interests and skills that it is easy to forget the value of domain expertise. I know what I don't know, while a lot of things about a lot of things. I’m only an expert in a few, and the broadest area of expertise is around early stage finance / accounting / back office mgmt. And the most effective way I can help Founders is by sharing my pattern recognition and what I know about finance.
The following is what I consider to be the foundational four pillars required for early stage success, again financially speaking. There are other important factors too, while I have not spent my professional career focused on those domains. Very important areas include product and marketing - but those are not areas of my domain expertise. In my professional opinion, the following are the four most important things given my domain blinders.
If you are a Founder with a recent start-up, as a finance guy, the Four Pillars I consider requisite are as follows:
1. Financial Integrity: your financial books, past and present
The way you keep track of your finances from the beginning of your business is crucial to what financial opportunities you’ll have later. It’s vital that you have consistent, reliable systems in place, that your bookkeeping is up to date, registrations are paid, transactions are reconciled, your balance sheet is clear and understandable, and your categories (COA) are standard and transparent (think 10-K).
"If you have an hour to spend with a prospective investor and you spend more than 10 minute on the model, you have already lost -
the conversation became an intellectual exercise for the investor."
When you’re ready to raise capital or make financial deals, the model with actual and projected #s is the first place people will look. And if, for example, you have a huge number in a category called “other” or “miscellaneous,” you’ll lose credibility with your peers, your investors, and your employees.
"The only time folks care about accounting is when it's wrong."
You need your books to be clean, so that if someone asks you a question about them, you can answer it and then move forward to more important topics: like how much money they’re going to invest in you.
2. Financial Projections: your forward-looking business model, in numbers
Investors want to know that you are managing your company responsibly, you have a clear mission, and that you know your market.
What is your plan for using future proceeds? When you get a dollar in the front, whether investor or revenue, how are you going to spend it? what are you going to prioritize? do you understand the industry that you think you’re targeting? because you might not be targeting the thing that you think you’re targeting. and do you understand what that target is? How big is it? 100 people? Billion? $100 dollars? Million? There is no such things as a bad answer (while it may not be exciting or compelling). 100 people who want to spent $1 million, that’s great - but you also need to show that in a standardized format so folks don't have to figure it out.
This is what projections are for. And those projections have to be realistic and well-researched. You can’t have a plan to make millions of dollars but only have 5 employees. You can’t commit to having 15,000 enterprise-level clients if there are only 6,000 in the world.
You need to have clarity, be honest with yourself, and then outline your plans in a clear, concise document. You have to have a plan, and you have to be able to tell the story of that plan – in the language that financial professionals use.
3. Core Team: the right people
If location is everything in real estate, the Founder and Team is everything in start-ups.
“I would rather have an A-level Team with a C -level product, than a great product and a C-level team.”
So what’s the perfect team? That’s the million dollar question. But there are certain things that a team cannot succeed without.
- You have to have a Founding Team with vision, passion, and conviction. It doesn’t all have to be the same person, but you need people with those qualities.
- You need someone with domain expertise. If you’re a marketing or sales expert and you’re launching a website without using a web designer, your company has failed before you launch. Not only are investors going to wonder who’s building your product, but you won’t have anyone who can talk effectively to other web professionals. Someone in your company needs to be a guru in your field, preferably someone who has killed it in your business.
- You need to do a realistic gap analysis. You need to know your weaknesses, and source resources to make up for them. If you don’t know anything about cancer, but you’re passionate about a certain treatment, then you can use your passion to bring the right scientist on board. You don’t have to know everything, as long as you are honest about what you don’t know and recruit team members who do. But if you keep your blinders on, whatever you’re ignoring will be the first thing potential investors and collaborators will see.
"Investors need to know you’re a rational individual, and that investing in you is a rational decision."
- Respect the multiplier effect. The ideal team tends to be 3-5 people, with 2 cofounders, and initially, everyone will share responsibilities. It’s assumed that in the early phase, you’ll all still be moonlighting, so you may only be devoting 10 or 20 hours a week to your new business. But if you have the right team, those people will be highly effective with those 10 or 20 hours. Their efforts will multiply (rather than simply add to) each other’s, and the combined effort will produce more than 200 hours worth of output.
- Find the right chemistry. The most elusive, and maybe most important, quality of the right team is its chemistry. That’s the personality, intelligence, empathy, and problem-solving skills of the individuals - the little spark that makes us work well together.
4. Access to Capital: your business’s lifeblood
It might sound obvious, but having the “right” amount of capital, at the right time, from the right people, and on the right terms is absolutely critical.
Even on the most basic level, if you don’t have enough money to pay people, or a strategy to raise that money, sooner or later (and it’s usually sooner), your business will fail.
The first step is investing in your business yourself. Whether it’s $10k from your personal savings or 10,000 hours of personal time, you and your Team have to be the first to put faith and resources into your business. Next you can reach out to friends and family, and then you’ll be positioned to raise money from strangers (hopefully referrals!).
Once you get to strangers, you’re at a transition point. Up until then, people are investing in your idea primarily because they believe in you. They trust you already, and trust that you’ll make good on their investment.
But strangers don’t know you. They’re not your mom or your uncle or your best friend from college. They’re not interested in helping you grow as a person. They’re interested in the return on their investment. A beer drinking buddy might give you some capital based on your passion and your idea, but an angel investor or venture capitalist is going to want actual information, prepared in the traditional financial language they understand.
This is when you’ll want to seek the council of folks with financial experience. Sounding naive when talking to a major investor could mean the difference between seeding your company and losing it entirely. Can you talk about why their investment is a rational decision? Can you explain the hurdle for the level of deliverable required, and have you met it? Have you worked for one month, or 18 months, to prove that you’ve figured out how to make your ideal viable, and more importantly, profitable?
What’s your burn rate like? What’s your hiring road map? How much money do you need, and what’s your plan for raising it?
And do you know who to approach for what you need? For example, if you’re raising less than a $1 million, you can seek out angel investors via an online platform such as Crowdfunder / Gust, or do a crowdfunding effort via Kickstarter / Indiegogo. If you need a few $million, you may want to talk to VCs. If you’re seeking $5 million or more, then you’re getting into the realm of "institutional numbers". At all of these levels require different expectations of how you present your business, and you need to know which is which.
If you have the right presentation and you’re talking to the right people, everything can be "easy". For example, if you can show a VC that wants to invest with you that they’ll get a 30+ times their investment return, that’s what they want to see and assuming they like / trust / respect you and the idea - conversation’s over, and your company is funded.
If you can do this yourself, you’re ahead of the game. But if you can’t, it’s worth investing some time and capital to find a trusted advisor to help you.