How to become an entrepreneur - facing the top 25 challenges


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Answers to everything from "Deciding When to Ditch the Steady Job" to facing challenging client requirements...a must read for all budding entrepreneurs

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How to become an entrepreneur - facing the top 25 challenges

  1. 1. SOLUTIONS PLAYBOOK Top 25 Small-Business Challenges
  2. 2. CONTENTS GETTING STARTED 4 Challenge 1: Deciding When to Ditch the Steady Job 5 Challenge 2: Finding the Time to Write a Business Plan 6 Challenge 3: Sharpening Your Elevator Pitch­ And Your Business Plan — 7 Challenge 4: Choosing Between an Incubator and an Accelerator 8 Challenge 5: Quitting Work for the Day When You’re the Boss 9 BRANDING/MARKETING 10 Challenge 6: Marketing a Product or Service That’s Ahead of its Time 11 Challenge 7: Making Social Media Tactical 12 Challenge 8: Deciding Whether to Embrace Mobile 13 Challenge 9: Calculating the Value of Media Placements 14 MONEY MATTERS 15 Challenge 10: Securing a Line of Credit 16 Challenge 11: Working with Investors 17 Challenge 12: Using Debt Financing to Build a Business 18 Challenge 13: Making the Most of Crowdfunding 19 Challenge 14: Deciding When to Start and Stop Fundraising 20
  3. 3. CONTENTS MANAGEMENT 21 Challenge 15: Protecting Intellectual Property 22 Challenge 16: Tackling Legal Paperwork 23 Challenge 17: Deciding Whether to Outsource IT 24 Challenge 18: Building a Product as You Build an Organization 25 STAFFING 26 Challenge 19: Choosing to Hire Employees or Contractors 27 Challenge 20: Competing for Top Talent Without Paying Top Dollar 28 Challenge 21: Creating a Culture of Excellence 29 Challenge 22: Building an Organization That People Are Excited to Join 30 Challenge 23: Weighing the Telecommuting/Team Building Tradeoffs 31 CLIENT RELATIONS 32 Challenge 24: Raising Prices Without Alienating Clients 33 Challenge 25: Sizing Up What to Invest in Client Face-Time 34
  4. 4. GETTING STARTED Challenge 1: Deciding When to Ditch the Steady Job Challenge 2: Finding the Time to Write a Business Plan Challenge 3: Sharpening Your Elevator Pitch­ And Your Business Plan — Challenge 4: Choosing Between an Incubator and an Accelerator Challenge 5: Quitting Work for the Day When You’re the Boss GETTING STARTED | 4
  5. 5. CHALLENGE 1: Deciding When to Ditch the Steady Job To some extent, leaving a steady job (and steady paychecks) for the life of an entrepreneur is a leap of faith. Though you intend to make your startup succeed, nothing is certain. Like any leap of faith, the process takes patience, confidence and a positive attitude. It also requires a good idea of how you plan to manage expenses and support yourself (or your family) until the new gig takes off. That last question often proves to be the hardest to ask and answer. If you’ve got money in the bank or a spouse who’s still working, you probably are covered. If you recently won a jackpot in Vegas, you probably are good. If none of these scenarios is real for you, you need a bulletproof strategy for leveraging debt and investor money long enough to sustain the company and your own personal finances, too. We’re not going to lie: This process can be hairy at times. It also can be rife with uncertainty. “You need to weigh whether the freedom of successfully working for yourself outweighs the short-term instability or anxiety [you might have],” he says. The flipside of these question marks is, of course, the possibility of a smash hit. Yes, your current job may be steady, cushy and familiar. But when your startup succeeds, when you’re the one at the helm of a multimillion-dollar business, it isn’t going to matter where you were before the current project. All that will matter is what you have accomplished. SOLUTION: Besides getting yourself mentally ready for this adventure, consider thinking about what you need to have in place to prevent unnecessary hardship for yourself and your family. Travis Ness, co-founder of Renton, Wash.-based design agency Crossroads Creative, suggests that every foray into entrepreneurship should be prefaced with some serious self-reflection in which business leaders ask themselves exactly what they’re comfortable handling on the road to independence. GETTING STARTED | 5
  6. 6. CHALLENGE 2: Finding the Time to Write a Business Plan We’ve all heard legends about entrepreneurs writing the crux of their business plans on cocktail napkins at local watering holes. (See Related: Five Businesses Born at a Bar) While the backdrops and the implements may differ in real life, the spontaneity usually doesn’t. Once you have that critical idea, however, business plans take lots of time and painstaking effort. Some entrepreneurs have tackled the process solo. That was the case for Amy Norman and Stella Ma, co-founders of Little Passports, an educational products company based in San Francisco. The duo wrote the bulk of their plan while working for other companies, according to Norman. So they churned out most of the document on laptop computers at their respective kitchen tables, on weekends and after everyone in their families had gone to sleep. the Internet, record pertinent information about similar sports businesses, and imbue the document with context. “His involvement was bringing the industry expertise,” says Platt, whose company has 30 locations nationwide and is based in Los Angeles. “We knew that if we wanted to do this [plan] the right way, we wouldn’t have time to tackle that ourselves.” Even with the additional help, Platt says the plan ultimately took about 1,500 hours to complete. SOLUTION: However you approach writing your business plan, be prepared to put just about anything on hold to do it right. “You find time to write it whenever you can,” says Norman, looking back. “Whatever it takes.” Other entrepreneurs, such as Jeff Platt, CEO and cofounder of the Sky Zone indoor entertainment venues, have brought in help. When Platt and his father, his co-founder, realized that their business plan needed to incorporate a hefty amount of market research, the duo hired a consultant to scour GETTING STARTED | 6
  7. 7. CHALLENGE 3: Sharpening Your Elevator Pitch—And Your Business Plan Think of an elevator pitch as your executive summary. It’s the quick-and-dirty version of exactly what you want potential investors (and maybe even customers) to know about the business you’re trying to build. O’Leary thinks most entrepreneurs spend so much time harping on the business itself that they ignore the need to explain and enumerate their qualifications to make that business come to life. With this in mind, it’s critically important to draw upon components of the elevator pitch to inform and round out a formal business plan. “At some point along the way, you need to answer the whole question of ‘Why you?’ ” he notes. “You need to give people a very obvious reason to trust that you are the right person to run this business over time.” Chris O’Leary wrote the book Elevator Pitch Essentials (The Limb Press, 2008). He says a well-honed elevator pitch should provide a business plan with a one-sentence summary of what the business does, followed by statements that explain » What the business does differently » How it adds value for customers » How it will make money » How it can scale over time To this end, O’Leary adds that developing a solid elevator pitch usually prompts entrepreneurs to start thinking about sales and marketing campaigns. SOLUTION: Try out the above exercise in brevity. It can not only lead to a sharper and more credible business plan, but also pave the way for overall business success. “The point of an elevator pitch is to get conversations started about your company,” says O’Leary, who is in St. Louis. “While the elevator pitch provides quick hits on a number of topics, the business plan should be designed to go more in-depth.” Credibility is another key part of an elevator pitch that belongs in a business plan. GETTING STARTED | 7
  8. 8. CHALLENGE 4: Choosing Between an Incubator and an Accelerator Both incubator and accelerator models are designed to help entrepreneurs bring ideas to market. But depending on what kind of help you want—and at what stage your company sits currently—one choice may make more sense for you. As the name suggests, incubators are more nurturing environments, complete with advice from industry experts, structured introductions to potential funders and longer-term trajectories for idea development. Accelerators, on the other hand, offer quick pushes to help companies get over final hurdles and deliver their products to market. Some popular accelerators include Y Combinator and TechStars. Some popular incubators include Idealab and YouWeb. “Accelerators are set up to bring companies to market, while incubators offer entrepreneurs more room to fail,” explains Peter Relan, CEO and co-founder of YouWeb, which has California incubation locations. “We make investments in entrepreneurs,[accelerators] make investments in business plans.” (See Related Article: Meet the Entrepreneurs Behind the Booming Business of Games.) Another difference between the two is that incubators generally offer more resources. to Carnegie Mellon University. Perks included unlimited use of critical instrumentation that ultimately saved the firm about $500,000. “To build a high-tech company, you have to be able to analyze and characterize your chemicals,” McCarthy explains. “We could have invested the money on our own, but as part of the incubator we were able to use the school’s stuff and save our money for other things.” In exchange for all of this help, incubators and accelerators alike usually require entrepreneurs to fork over a certain amount of equity. (In the case of ATRP, the university’s Technology Transfer Office holds a stake in the firm.) Some might think these additional fees are exorbitant. Others say they are small prices to pay for a chance to hit it big. SOLUTION: Consider whether you need a nurturing environment to better form a business idea­ or a place that will boost you — to the next level. If you require the former, you likely will be more successful going with the incubator. If you need the latter, an accelerator might be better. Patrick McCarthy experienced this first-hand when he co-founded ATRP Solutions, a specialty polymer company based in Pittsburgh. McCarthy and his colleagues took the company through the Mellon Institute, an incubator tied GETTING STARTED | 8
  9. 9. CHALLENGE 5: Quitting Work for the Day When You’re the Boss It’s dangerously easy for entrepreneurs to view their jobs as never-ending. So much to do! So little time! With seemingly infinite demands, you might be tempted to work on your startup nonstop. And while this strategy usually works for the first 72 hours, it almost always leads to burnout pretty quickly after that. Naturally, the key to managing your startup and your life is finding out how the two fit together. “You need to put up boundaries,” says Cali Yost, CEO and founder of Work+Life Fit, a Madison, N.J.-based leadership-consulting firm. “Take deliberate action in the areas that sustain your health, personal relationships, career networks, job skills and life maintenance, or they won’t happen.” In describing the ultimate goal, Yost is careful not to use the word “balance,” because she says, “A 50-50 split between work and life is never going to happen.” Instead, she notes, entrepreneurs must realize that the interplay between work and life is a constant ebb and flow. interminable days. Mehta says the work was invigorating. But after a while, he started to see it have an impact his relationships with friends and family. “Sooner or later, I realized something was missing,” he remembers. Applying structure to his days reversed this trend. Currently, Mehta splits his days at lunch. He handles all phone calls before the break, and all meetings after. Another strategy, as simple as it might seem, is making lists. No matter how diligent you are, working until you’ve crossed off five items from your list is a great way to quantify your efforts. It’s also a good method to get stuff done. SOLUTION: As exciting as it is to start a company, adopt some rules for yourself to prevent it from consuming your entire life. Figure out what works best for you. Jigar Mehta, director of operations at Matter, a fledgling media accelerator based in San Francisco, experienced this first-hand in 2012. When Mehta joined the company, it was in major bootstrap mode, and most of the executives logged GETTING STARTED | 9
  10. 10. BRANDING/ MARKETING Challenge 6: Marketing a Product or Service That’s Ahead of its Time Challenge 7: Making Social Media Tactical Challenge 8: Deciding Whether to Embrace Mobile Challenge 9: Calculating the Value of Media Placements BRANDING/MARKETING | 10
  11. 11. CHALLENGE 6: Marketing a Product or Service That’s Ahead of its Time Entrepreneurs find this one of the most difficult challenges in the current economic environment. The first step in this process is to convince yourself. It’s important to find small, achievable steps you can take to prove the concept -- then run with them to build momentum as you sharpen the idea, says Matt Mickiewicz, founder of, a developer-recruiting web service based in San Francisco. “Trying to jump all the way to the final product is like trying to build the Golden Gate Bridge from one end while running across it,” he says. “Instead, start with a pier, then build some pontoons out from the edges, then cobble together some wooden bridges across parts of the river.” Finally, there’s the art of timing. If an idea truly is “ahead of its time,” then, by definition, it’s not “viable” yet. What’s more, current technology and penetration have to be in line with how your product or service is going to be used. “Imagine trying to launch YouTube when everyone was still on dial-up,” Mickiewicz says. Sometimes a little context goes a long way. SOLUTION: When it comes to convincing others about your idea, consider approaching it as a four-step process: Convince yourself. Gather proof it works. Stay flexible about the idea. And think about the timing. The next step is to gather proof of concept. According to Mickiewicz, this step involves collecting realworld data from real-world users about the product (or scaled-down versions of the product). What works? What doesn’t work? What features reign supreme? Getting answers to these questions will help demonstrate that the idea has merit. The third step in persuading others your idea is viable is to remain flexible. Be willing to tweak product specifications per feedback from focus-group users, or to rethink sales and distribution models based upon changes in the marketplace. It also means being open-minded to failure and recognizing that sometimes even the best ideas may not work. BRANDING/MARKETING | 11
  12. 12. CHALLENGE 7: Making Social Media Tactical Experts and entrepreneurs alike will tell you that social media is all about the “conversation.” That means the key to leveraging Facebook, Twitter and Instagram to your advantage is controlling what people—customers, usually —are saying about you in virtual-but-public forums. Content must be at the center of this effort, according to John Andrews, CEO and co-founder of Collective Bias, a Bentonville, Ark.-based social shopper marketing company. Andrews has found that companies can use keywords to “game” search engines into ranking certain pages higher than others. Experts call the practice “organic” search engine optimization (SEO). “If you’re producing more content than anybody else, it’s pretty straightforward: You’ll dominate the conversation every time,” Andrews says. to run two or three back-to-back to see which works best. Social media involves “constant switch testing.” When it comes to leveraging social media into a weapon against competitors, the third and final key is to simply stay flexible. If one particular campaign isn’t achieving the desired number of followers or buzz, cut it off and try something new. Media such as Facebook, Twitter and Instagram give businesses the opportunity to interact with customers in real time; how businesses choose to wield that power is entirely up to them. SOLUTION: To make your social media efforts more tactical, create content regularly and run promotions but stay flexible. Promotions are another great way to make social media tactical (As we learned in our “Secret Sauce” exercise in 2011. See Related Articles: The Secret Sauce Project, The Social Media Challenge: The Results). Here, the caveat is simple: You’ve to have a plan for what you’re going to do with all the people you gain from running a promotion. Andrews says that because promotions in the world of social media get instantaneous traction, it’s a good idea BRANDING/MARKETING | 12
  13. 13. CHALLENGE 8: Deciding Whether to Embrace Mobile CTIA-The Wireless Association reports there are more than 320 million mobile-phone subscribers in the U.S alone. So just about every business on earth needs to master and incorporate mobile technology if it is to succeed. “Business development is about finding ways to help people find ways to spend time with your product or service,” says Greg Duffy, CEO and co-founder of Dropcam, a San Francisco-based company that makes Wi-Fi video monitoring cameras. “If people can’t spend time with your product or service on their phones, you’re missing out.” In the olden days—you know, the 1990s—the assumption was that companies had two opportunities to get customers to spend time with their products: at work or at home. Duffy thinks that mobile technologies have changed the equation because they facilitate interactions any time. overwhelmingly positive word-of-mouth chatter, while those that handle mobile poorly usually suffer from negative buzz. This, adds Duffy, is reason enough to embrace mobile the right way. “People expect certain levels of service,” he notes. “It’s not just about doing it, but instead about doing it right.” All told, a good mobile strategy won’t come cheap. Some entrepreneurs say it’s hard to build a good user experience with design and programming for less than $100,000. Ultimately, such investments should pay huge returns, especially if the mobile market continues to grow. SOLUTION: Pursue a mobile strategy, when you can afford to do it right. And in the world of mobile technology, quality trumps quantity—every time. Regardless of whether mobile technology companies specialize in software (read: apps) or hardware, businesses that excel in the field usually experience BRANDING/MARKETING | 13
  14. 14. CHALLENGE 9: Calculating the Value of Media Placements When applied tactically, media placements— advertisements, advertorials and feature articles—can be successful components of a startup’s marketing strategy. But it’s often difficult to quantify value and return on investment of these efforts. One strategy is to survey customers on how they heard about you. If customers are willing to respond to brief questions after conducting business, they might reveal that they spotted your ad on their favorite website, or read about your product or service in a magazine. Another strategy is to offer special promotions available only in local media. At the end of each promotion, you should be able to get a sense of revenue driven through each specific channel. “The first thing is to be as small as you can until you find what works for you,” says Jim McCarthy, CEO of Goldstar, a ticket service based in Altadena, Calif. “The second thing is to do everything you can to get results, even when it’s difficult to find out what happens.“ that a handful of newspaper and magazine articles played a “critical” role in Seattle-based A la Mode Pies’s successful launch. Without them, he notes, the four-yearold company likely would have stumbled disastrously out of the gate. Overall, Porter warns that whichever media placements entrepreneurs decide to adopt, the process of gaining value from these efforts usually takes time. “It starts slowly,” he says, noting that a little patience goes a long way. “Every placement gets you more visibility until you become established and [the collective coverage] legitimizes your business.” SOLUTION: Startups should consider more unique strategies when it comes to media placements. Survey customers to find out what’s working, perhaps stick to local, and maybe even avoid paid advertising. Some entrepreneurs have opted to eschew paid advertisements almost completely, instead focusing their efforts on public relations. Take pie bake shop founder Chris Porter as an example. Porter thinks “advertising is a ripoff.” Instead, he found BRANDING/MARKETING | 14
  15. 15. MONEY MATTERS Challenge 10: Securing a Line of Credit Challenge 11: Working with Investors Challenge 12: Using Debt Financing to Build a Business Challenge 13: Making the Most of Crowdfunding Challenge 14: Deciding When to Start and Stop Fundraising MONEY MATTERS | 15
  16. 16. CHALLENGE 10: Securing a Line of Credit Different types of banks dole out different lines of credit to different kinds of companies for a host of different reasons. Among big banks, the name of the game is minimizing risk. and try to flesh out specifics of their company’s financial story. Some of the questions they might ask include: » How did you get to where you are? » What struggles did you have to overcome? »What are you going to do with the money? This means bankers generally shy away from early-stage companies that haven’t yet tested ideas, and gravitate more toward middle- and later-stage companies that have been toiling for years to make a profit. “Smaller banks might know the people you’re doing business with,” says Ross. In rare cases, these banks may even volunteer to act as liaisons or provide other services to help out. Corey Ross, co-founder of BBC Easy, a Seattle-based company that automates borrowing, says a bank will usually consider lending to a company if it is at least three years old. Whichever approach you take, note that all banks that dispense credit require extensive applications, as well as financial statements and tax returns for the duration of the company’s history. Consider this due diligence. It’s the least you can do for a little money to help get things rolling. “If you have three years of losses but can present a clear path to success and how you’re going to accomplish it, that’s the kind of situation a big bank will take,” says Ross, who also spent part of his career working inside a bank. “You need to demonstrate financial awareness.” Among smaller banks, there’s more leeway for interpretation. SOLUTION: No matter what, be prepared to demonstrate a business track record—as well as a persuasive case that the money you’re seeking will allow you to produce profits to pay the bank back. Ross notes that bankers at many smaller and community banks will take the time to sit down with entrepreneurs MONEY MATTERS | 16
  17. 17. CHALLENGE 11: Working with Investors Building a company with the help of investors can be a double-edged sword. On one hand, a broad and diverse investment group can act as a brain trust that can help you and your cofounders navigate critical junctures (or even day-to-day hurdles). Their passion, input and expertise can be just as valuable as their money. On the other hand corralling investors can be a bit like herding cats -- especially if the investors are frustrated or aren’t clear about the company’s direction and want answers, stat. With this in mind, perhaps communication is the best secret to working with investment teams. “If your investors feel like you’re giving them information on the progress of the business—the good progress and the not-so-good progress—then they find themselves in a position where they can help,” says Jeff Miller, CEO of Wheelz, a San Francisco-based peer-to-peer car-sharing company. “Money is money. Your relationships with these people are the things that are going to translate into a competitive advantage down the road.” Still, there is such a thing as too much communicating. Miller, whose company has worked with about 25 different investors over the years, says that when entrepreneurs look to investors for input on every move, problems usually arise. One definite no-no: kowtowing to investors who want status reports once or twice a month. “You have to make sure that the cart is not driving the horse,” Miller says. “As CEO, it’s your responsibility to take inputs and decide which course of action is best for the business.” SOLUTION: Agree on ground rules upfront about the frequency and content of communications. MONEY MATTERS | 17
  18. 18. CHALLENGE 12: Using Debt Financing to Build a Business Growing debt to build a business, also known as “debt financing,” is a valid counterpoint to the more traditional route of funding a startup with angel investors or venture capital. Entrepreneurs who go this route say they do so as a way to retain equity and minimize new personalities on the management team. When you borrow on credit, you don’t have to worry about giving up portions of the company. That said, playing with debt is always a risky proposition, especially when you’ve got to put up personal assets as security for the loan. If you must grow debt to build the business, shy away from credit cards (which often charge exorbitant rates after one year) and target banks that work with the Small Business Administration. That’s because large portions of SBA loans are guaranteed. Here’s another alternative: Seek debt financing from current investors. “This guy who ended up lending to us already had a vested interest in our success and had bought into the promise of the company,” explains Meader. “For him, it was lowrisk. For us, it was an infusion that enabled us not to dilute the interests of other shareholders.” Meader offered some other general tips for growing debt wisely: » Don’t take out more money than you’ll need to finance the company » Don’t take on more debt than the available equity in the company; aim for a ratio of somewhere between half and 1-to-1 of equity to debt » Don’t stray from fixed-interest loans SOLUTION: When financing growth with debt, look to minimize risks when it comes to your lenders and loan terms to the greatest extent possible. This was the right strategy for Dan Meader, CEO and cofounder of San Diego-based Allowance Manager, which makes allowance-tracking software for parents. In 2011, almost two years after the company launched, Meader saw cash flow sagging. He went to certain investors for a little boost. MONEY MATTERS | 18
  19. 19. CHALLENGE 13: Making the Most of Crowdfunding President Barack Obama formally welcomed in crowdfunding as a startup-company revenue source when he signed the Jumpstart Our Business Startups Act in 2012. This means it’s now legal for entrepreneurs to finance endeavors by pulling together donations from a multitude of customers. The U.S. Securities and Exchange Commission is cautioning companies not to offer equity in return for cash to the general public, but upcoming rules from the agency will open the door for companies to seek investments from just about anyone. At the time of this writing, rules were expected to be issued some time in 2013. Leveraging this platform to your advantage, however, takes gumption. For starters, it’s important to take advantage of the speed with which crowdfunding can deliver cash. While traditional fundraising avenues such as angel investment and venture capital can take months, crowdfunding can work in a matter of weeks, says Zach DeAngelo, vice president of sales at Little Duck Organics, a New York-based company that got most of its first round of funding through the San Francisco-based crowdfunding platform CircleUp. “You need money to survive,” DeAngelo says. “If that means taking money from friends and family and here and there, [you] do what it takes to allow your company to not die.” Entrepreneurs can leverage crowdfunding platforms for other benefits, too. First on the list is validation. If an entrepreneur isn’t sure how big or popular his or her particular market might be, gauging the market size by interactions through crowdfunding could provide some valuable insight. Next, there’s the virtual focus group effect. In many cases, entrepreneurs will leverage a crowdfunding platform as a way to test product design and marketing campaigns. “People spend thousands of dollars to go and get people’s opinions in focus groups. You can do that for free with crowdfunding,” says Danae Ringelmann, co-founder of Indiegogo, a crowdfunding platform also based in San Francisco. “Opinions shared during a focus group are just that— opinions,” Ringelmann says. Crowdfunding offers a window to understanding actual behaviors. SOLUTION: To do crowdfunding right, entrepreneurs must spend time crafting a pitch and selling to their potential donor base. It isn’t a perfect product-testing ground but, in an environment where options previously were limited, this new approach is a welcome addition. MONEY MATTERS | 19
  20. 20. CHALLENGE 14: Deciding When to Start and Stop Fundraising Considering the open-ended nature of entrepreneurship, it’s perfectly normal to view fundraising as a Sisyphean task. “Obviously there’s a risk that you’ll get nobody to give you a term sheet by that date, but if you’ve set your timeframe realistically, chances are you’ll do well,” Budman says. Still, it pays to be specific when you’re raising money to finance a company with specific goals. One last piece of advice: When it comes to fund raising, more isn’t always better. “You need to go into VCs and say, ‘With this amount of money, we will build a product,’” says Gleb Budman, CEO of Backblaze, a data -backup service based in San Mateo, Calif. Or maybe the money is needed to secure a first customer—or prove customer acquisition. Some entrepreneurs often think if the money is “cheap”— that is, if investors are falling over themselves to fork it over—the smart play is taking whatever you can get. Don’t get caught in this trap. The more money you raise from outside sources, the more you dilute ownership of the concept. Yes, you want to make your vision a reality. But you also want to keep it yours. “There’s something wonderful about setting goals, meeting them and coming back with specific data on why they should give you more,” Budman says. It also means being realistic about timetables. Budman thinks it generally takes entrepreneurs an average of three months from the time they start seeking funding until an idea is funded. SOLUTION: The best strategy involves establishing a very modest series of funding goals, recognizing when you have achieved those goals to the best of your ability, and then pulling back on fundraising efforts to execute the plan. To maintain control of the fundraising process, most entrepreneurs first nurture relationships with venture capitalists and other investors. Then they give the suitors a deadline for submitting term sheets. MONEY MATTERS | 20
  21. 21. MANAGEMENT Challenge 15: Protecting Intellectual Property Challenge 16: Tackling Legal Paperwork Challenge 17: Deciding Whether to Outsource IT Challenge 18: Building a Product as You Build an Organization MANAGEMENT | 21
  22. 22. CHALLENGE 15: Protecting Intellectual Property Technically speaking, there are three main ways to protect intellectual property (IP) in today’s business environment: trademarks, copyrights and patents. in front of the European Union parliament on IP and has written extensively about the subject over the past few years. The first two are important but not overwhelmingly so. Common law in most states affords entrepreneurs a certain degree of trademark and copyright protection just from using their brands. (Entrepreneurs, though, cannot recoup money beyond damages under case law.) Masnick offers an alternative approach to protecting IP: building something successful. Patents, on the other hand, can be critical -- especially in industries where products are based on proprietary research. Patents legally protect you from competitors swooping in and stealing ideas. In order to get a patent, you must register specific ideas with the U.S. Patent Office. The process is tedious, involves many hours of lawyer time and can often stretch out over four or five years, says Mike Masnick, CEO and founder of Floor64, a Sunnyvale, Calif.-based media and consulting company. “Entrepreneurs need to ask themselves if the protection offered by patents is worth all of the time and money you need to protect them,” says Masnick, who has presented His advice: Even if you’re not protecting IP under the law, being first or being best in the market is often the best protection entrepreneurs have against copycats. “If you offer the best solution in the marketplace, even if someone copies you, people will recognize that you led the way and follow you for that,” he says. “In this way, the business world operates no differently from the way individuals do. Leaders, not followers, are the ones who drive everything.” SOLUTION: If you lack the time and money to apply for patents, as most startups do, your best protection against IP theft is to stay ahead of the competition. MANAGEMENT | 22
  23. 23. CHALLENGE 16: Tackling Legal Paperwork Depending on whom you ask, there are literally dozens of legal documents that entrepreneurs should line up before they jump head-first into a new venture. Some, however, are more important than others. First, it’s critical to consult a lawyer about properly documenting the business’s formation. This process involves choosing an optimal corporate entity, then forming and registering that entity. It also requires drafting an operating agreement and constitutional documents to clarify the structure, function and operation of the venture. Next, lawyers can help startups protect intellectual property with customized licensing and technology transfer agreements for third parties and vendors. It’s also necessary to have an airtight nondisclosure agreement to ensure protection when disclosing ideas to angel investors, venture capital funds, employees—and even programmers and vendors. Then, of course, there’s the issue of equity structure. Sai Pidatala, a corporate-law attorney in Washington, D.C., notes that companies usually need lawyers to draft vesting clauses to ensure that company stock is vested only after a certain amount of time or after certain benchmarks. “This ensures that a founder doesn’t leave immediately— and can’t retain ownership in a company for which he is no longer toiling,” Pidatala says. If you think you can’t afford all of this legal work, think again. The law firm Orrick offers a set of templates for startups to follow to tackle some of these forms on their own. (Though, it’s generally a good idea to retain the services of an attorney to make sure the forms are filled out properly.) What’s more, a number of business law firms, including Orrick and Gunderson Dettmer, are open to compensation models through which startups can postpone payment for up to one year. SOLUTION: Time and money may be tight, but skip your getting your legal documents in order only at your own risk. MANAGEMENT | 23
  24. 24. CHALLENGE 17: Deciding Whether to Outsource IT Fighting simply to survive, many startup owners find it daunting to manage hardware, software and other aspects of information technology. Sure, small companies can tackle these issues in-house, but finding the right person for the job can be both time-consuming and expensive, especially in competitive markets such as Silicon Valley. For this reason, entrepreneurs may want to outsource their IT needs. We’re not talking here about farming work overseas. Instead, we’re talking about hiring a technology services company to come in and manage certain aspects of a startup’s computing environment. Depending on the business segment—and the size of the company itself— this approach generally is less expensive than hiring a dedicated IT pro. The strategy usually works best for companies with less than 50 employees, says Bill Cox, president of Sonoma Computer Products, a Santa Rosa, Calif.-based ITconsulting company. When a company surpasses 50 workers, the scenario typically requires too much desktop support. Cox also notes that most outsourcing arrangements deliver a broader range of expertise than in-house hires. “Startups may rely on an in-house programmer or engineer to manage their network part time while also juggling the skills they were actually hired for,” he says. “Outside firms often have multiple engineers on staff to supply experienced support across a range of IT skills: server management, networking equipment, mobile device integration and things like this.” Of course there are exceptions to this approach. If a business uses specialized equipment to interface with the network, or employs unique applications, or operates in high-security computing environments, “insourcing” might be a better option long-term. Whichever option you select, remember this: It’s easier to move from in-house to outsourced, than the other way around. SOLUTION: Most business owners may want to consider hiring a technology-services company once they meet the 50-employee mark. MANAGEMENT | 24
  25. 25. CHALLENGE 18: Building a Product as You Build an Organization Even the most skilled entrepreneurs can juggle only a finite number of responsibilities at one time. That’s why the ability to delegate is critical when grappling with the Herculean tasks of building a product and organization simultaneously. Put differently, you need to know what you’re bad at. “Maybe you’re technically excellent but you’re not a marketer, or [you’re] a showman and a visionary but commercially lacking. Maybe your product marketing instincts are great, but your people management skills aren’t that strong,” says Dave Slutzkin, founding CEO of San Francisco-based website-auction service “You need to know yourself honestly so you can best shape the organization to fill the gaps,” Slutzkin says. The way Slutzkin sees it, a product always is shaped by the organization that creates it. “You need to get the right balance across the team,” Slutzkin says. “This balance is the key to everything.” There’s one responsibility that entrepreneurs never should delegate when starting out: product quality. Because every product your organization puts out will bear your name, it’s important that you single-handedly make sure quality stays consistent throughout the process. Ultimately, you can delegate quality control to the team— but only after your company has leveraged product success to establish a reputation. Until then, consider it one of your most critical tasks—both for the company’s immediate success and for continued success down the road. SOLUTION: The overall goal here is use organization-building to create a better product—as well as a better entrepreneur. So if you’ve hired 15 developers but no user experts, you’re going to end up with something technically genius that users dislike. On the other hand, if you’ve got a strong designer but weak developers, you’ll end up with a pretty product that fails to work consistently. MANAGEMENT | 25
  26. 26. STAFFING Challenge 19: Choosing to Hire Employees or Contractors Challenge 20: Competing for Top Talent Without Paying Top Dollar Challenge 21: Creating a Culture of Excellence Challenge 22: Building an Organization That People Are Excited to Join Challenge 23: Weighing the Telecommuting/Team Building Tradeoffs STAFFING | 26
  27. 27. CHALLENGE 19: Choosing to Hire Employees or Contractors Building a business of independent contractors—aka “1099s,” after the IRS form you send them—certainly has its benefits. The 1099 tax form reports the amount paid for services to noncorporate independent contractors. For starters, hiring these workers translates into lower overhead, since freelancers don’t require office space, benefit packages or other perks associated with fulltime employment. Employers who hire these workers also aren’t required to withhold income taxes, Medicare and Social Security on the workers’ behalf—realities that translate into operational savings across the board. When it comes to 1099s, they’re even are more scalable: You hire more of them during a high tide of work and hire fewer of them when business is slow. But there are downsides to hiring these types of workers, too. Kevin Hartz, CEO and co-founder of San Francisco-based event-promotion service Eventbrite, says that many entrepreneurs are looking to develop a corporate culture at their startups, and this culture starts with employees who are invested emotionally and financially in the company’s success. “To 1099 people means you don’t value them as owners and partners in the business. You just seem them as hired guns,” he says. “You 1099 a service provider like a consulting shop, not the team members you want to work hard for you and help you build the next great thing.” Another downside to independent contractors is that they put their own interests above those of the company as a whole. It’s their very nature. Finally, of course, there’s the risk of misclassification in the eyes of the IRS. Ward Ozaeta, president and CEO at San Diego-based 6 Degrees Realty Capital, suspects companies could be on the hook if they erroneously label independent contractors as employees. The contractor might seek unemployment insurance after his or her contract ends. This would open up the company to scrutiny from the tax court, including “unnecessary investigations, tax audits and even lawsuits,” Ozaeta said. SOLUTION: The bottom line is: when opting to staff your startup, choose wisely. STAFFING | 27
  28. 28. CHALLENGE 20: Competing for Top Talent Without Paying Top Dollar Dollar-for-dollar, there’s almost no way small startups can compete with huge companies for talent in the nation’s hottest job markets. Finally, a number of startups across the U.S. have been known to sweeten job offers with peripheral perks that larger companies simply can’t match. For this reason, it’s important to supplement competitive salaries with a host of other perks. For instance, crowdsourcing design service 99designs in San Francisco gives most employees the opportunity to spend time in the company’s Australia office. Employees receive four weeks of vacation time annually as opposed to the standard going rate of two. Stock compensation usually is a huge part of these packages, giving employees more and more equity in the company the longer they work. It’s an additional nonmonetary benefit that can truly provide one-of-a-kind opportunities for employees. “If you go to a smaller company you’re much more likely to be working on a critical product or key campaign,” says Andy Kurtzig, CEO and founder of San Franciscobased online professional-services company “Knowing that you’re really making a huge impact on your employer and its ability to be successful makes it fun to come to work every day.” Many smaller companies also compete against the big boys for talent by offering flexibility. “We are trying to keep parity between the perks for our Australian and European employees and the perks for our employees here,” says CEO Patrick Llewellyn. “Add these perks to a good salary, fun culture, and coffee and beer in the office at all times, and this is a pretty great place to work.” SOLUTION: Consider stock compensation, flexible schedules and work environments and unique perks as you try to hire hard-tosecure talent. Kurtzig notes that one of the senior execs at is a single mom with two young children and says the company has worked with her to create a flexible schedule in which she drives in early and leaves early enough to skip most of the evening traffic and be home in time for dinner. STAFFING | 28
  29. 29. CHALLENGE 21: Creating a Culture of Excellence It’s one thing for your business to be successful. It’s entirely different to approach day-to-day operations with a culture of excellence. In the former scenario, satisfaction is achieved through profitability and growth. In the latter one, satisfaction is more of an elusive ideal, something you (and your employees) are chasing inexorably. Laura DePasquale knows all about the commitment required to achieve excellence. She’s one of only 18 female master sommeliers in North America. She’s vice president and general manager for the Florida division of Stacole Fine Wines -- a wine wholesaler and importer that’s part of Ashland, Virginia-based The Vintner Group. DePasquale spent the better part of a decade studying to become an expert in her craft. Over the years she has tried to instill in employees an appreciation for the work. “I’m never satisfied,” DePasquale says. She notes that after every big project, “it’s important to have a postmortem to discuss what we did well and what the opportunities for improvement are which includes the goal setting, direction and execution of the project.” They even make an effort to educate customers. “By providing the highest level of wine education, we ultimately shine a spotlight on the excellence of our wine and spirits portfolio,” DePasquale says. In general, other strategies for creating a culture of excellence include regular powwows to share best practices, intermittent performance exams, regular job reviews (with suggestions for the future) and clear career trajectories so employees have promotions for which to strive. Amid all of this intense focus, it’s also a good idea to institutionalize levity. Group retreats, free meals and seasonal parties help employees stay motivated. They also guarantee fun. SOLUTION: Consider asking yourself how driven you are with your business, and whether you are promoting a culture of excellence. What’s more, DePasquale notes that she and her team continue to push education, requiring all salespeople to bone up on fine wines and wine regions of opportunity. STAFFING | 29
  30. 30. CHALLENGE 22: Building an Organization That People Are Excited to Join Great places to work are built on a triumvirate of challenging work, generous benefits and day-to-day relationships that employees experience while on the job. Assuming that the all-hands-on-deck approach to work at a startup is inherently challenging, this means entrepreneurs must focus on the latter two if they wish to create an organization that people are excited to join. Engineering extraordinary programs is relatively straightforward. Anything that goes beyond the baseline in a company’s home market will stand out. While most startups don’t have money for free meal programs like those at Google, they might be able to afford one free meal a week, or similar perks such as good coffee and free beer. Stellar benefit packages also go above and beyond the current norms. Medical, dental and vision coverage is standard. Additional days off and on-site childcare are an obvious upgrade. Arguably the toughest of these tasks involves fostering fulfilling day-to-day relationships. “Short communication channels that enable issues to be addressed quickly are a must,” she says. “The less bureaucratic an organization is, the more excited people are to work there.” Of course there are other ways to create an organization people are excited to join. Curran notes that a pleasant visual workspace is important, since employees spend anywhere from eight to 12 hours working each day. Another key factor is salary. While employees may prioritize non-monetary benefits as important reasons for taking a new job, competitive compensation is important from a practical perspective, and should not be overlooked. SOLUTION: Consider asking yourself whether your own business is a place you would want to work at—even if you didn’t own it—and improve the workplace perks and communication environment accordingly. Such a “perk” pertains to employees feeling that they are being treated fairly and that they own responsibility at work, says Barbara Curran, chief financial officer at Seattle-based online furniture retailer Curran Online. STAFFING | 30
  31. 31. CHALLENGE 23: Weighing the Telecommuting/Team Building Tradeoffs There’s no question that a work force of remote workers translates into lower overhead for the mother ship. the place could become a bugaboo when it’s time to crunch numbers. Nearly a third of roughly 7.4 million businesses across the U.S. already allow telecommuting, according to the nonprofit Connected Nation. And a study sponsored by online meetings company Citrix Online suggests nearly half of the jobs in the U.S. could be suitable for full-time or part-time telecommuting. Jay Levy, a founding partner of New York-based Zelkova Ventures, says acquiring companies typically want acquisition targets to have employees in one place because it makes it easier to absorb them. Still, just because working remotely is an economical option in general doesn’t mean it’s a strategy worth implementing across the board. For startups, the challenges with this approach are twofold. First, having workers spread across disparate work sites can impact creativity in a bad way. While technologies such as Google Hangout and Skype have helped bridge these gaps, there’s no substitute for the creativity that emerges spontaneously from face-to-face brainstorming sessions and other physical get-togethers. (Some allege that body language is a big part of that creativity, and this kind of nonverbal communication is lost when peering through a webcam.) “Some firms won’t do a deal until all of the employees for the acquisition company are centralized,” says Levy, who also co-founded a Napa, Calif.-based startup named Uproot Wine. Levy adds that perhaps the best approach is a hybrid, with a bulk of workers in a headquarters location and a handful of contractors who work remotely and come in for meetings from time to time. “Above all else,” he notes, “flexibility is key.” SOLUTION: While telecommuting has advantages, it also makes sense to have many of your workers operating out of the same location -- at least some of the time. Second, if you’re looking to build a company that is viable for acquisition, having workers spread all over STAFFING | 31
  32. 32. CLIENT RELATIONS Challenge 24: Raising Prices Without Alienating Clients Challenge 25: Sizing Up What to Invest in Client Face-Time CLIENT RELATIONS | 32
  33. 33. CHALLENGE 24: Raising Prices Without Alienating Clients There’s no way to sugarcoat it: Raising rates is one of the biggest challenges for a business owner. You don’t want to cut off the proverbial hand that’s feeding you. At the same time, you need to maintain a positive cash flow and grow for the future. “That’s a key part of delivery—no surprises,” says Morse. For Mark Morse, CEO of Minneapolis-based branding agency Morsekode, the best strategy is to communicate about impending changes, and be as transparent as possible. “As there is a need to elevate prices, you go to key customers and let them know,” he says. Some companies do this with regular newsletters that subtly (and sometimes not so subtly) explain the overhead and processes that drive the retail price of products and services. Others utilize social media to let customers know why the company is growing, how the company is doing it, and what rate increases truly mean for them. Transparency could mean explaining to the client that health premiums are creating heavy cost pressures. Or maybe the price of video equipment the company uses is going up. “So many people forget that financial discussions are normal part of a relationship,” Morse says. Customers don’t have to be happy about price bump-ups. They just have to accept them. Openness and honesty can make this process easier for everyone involved. Another strategy for communicating with clients about pricing is to show them what’s “under the hood” of current pricing structure at every step of the way. SOLUTION: One of the ways that Morse communicates with his customers is by inviting them to individual and independent quarterly review sessions. During these meetings, Morse and his colleagues share information about everything from new technologies and new hires to potential price increases on the horizon. Morsekode usually gives clients ample warning about these price hikes, if for no other reason than to make sure they’re in the know. CLIENT RELATIONS | 33
  34. 34. CHALLENGE 25: Sizing Up What to Invest in Client Face-Time Face-to-face meetings aren’t mission-critical, but they certainly can make a big difference in client relations. Just ask Heather Stouffer, founder of Alexandria, Va.based organic-foods company Mom Made Foods. Stouffer once flew 10 hours round trip to have eight minutes in front of a prospective client -- the very same client who agreed to sign with Mom Made because she trusted them. “I think [success is] just about really being sincere, trying to be yourself and telling your story,” she says. “Storytelling in person is really important. We are passionate and sincere [about our story] and we [tell] it best when we are face-to-face.” According to Stouffer, in-person meetings are even more important early in the relationship with a new client. Because your clients have no experience working with you, she says, the face-to-face becomes an important part of making those clients comfortable. “Even though you’re selling a product, they’re really buying you,” Stouffer says. The key is to choose your client meetings wisely. When deciding, always weigh the potential monetary and nonmonetary expenses of engineering a face-to-face visit with the potential monetary and non-monetary rewards. On those occasions when you figure it isn’t important to meet clients in person, embrace technology-driven options such as videoconferencing, Google Hangouts and Skype. “Anything that makes the experience more personal is going to end up benefiting you in the end,” says Jay Levy, a founding partner of New York-based Zelkova Ventures. “Convenience is important, but business relationships are still about personal connections.” SOLUTION: Figure out a way to get at least some kind of face-toface interaction with clients, especially when you’re just starting to work with them. Of course in-person get-togethers aren’t always practical. Especially when money is tight, investing hundreds of dollars for every eight minute meeting isn’t sustainable over time. CLIENT RELATIONS | 34
  35. 35. M att Villano is a freelance writer and editor in Healdsburg, Calif. He is a regular contributor to Entrepreneur, and has covered startups and entrepreneurship for The New York Times, TIME and CIO. He also covers a variety of other topics, including travel, parenting, education and— seriously— gambling. He can be found on his personal website,, and on Twitter @mattvillano. GETTING STARTED | 35