Building a startup is like conducting a large scale experiment. There are many unknowns and lots of variables. Every step of a new venture has to be figured out and conquered as it comes. It is for this very reason that so many early stage companies perish soon after they are started.

However, after building my own company and being involved in countless others, I am pretty certain that there are frameworks that can be applied to most startups that will help reduce some of the inherent risk.

If you take the experiment analogy I used above, you can start to think of a startup as an exercise in mastering the unknown. Instead of focusing on what you think you know, which is how most entrepreneurs approach their business, concentrate on what you don’t know. Find the key issues that you need to understand and scrap out all of the variables around them. Then test your hypothesis with as few resources as possible. If you are diligent you will be able to eliminate a lot of the inherent risk of a startup and make better decisions.

Let me give you a theoretical example that I think will illuminate the point I am trying to make. Suppose you were trying to introduce a revolutionary new consumer oriented venture. Instead of taking a wild guess as to which marketing mediums will be most effective, you could set-up limited trial runs with the most promising options. Perhaps you would dedicate one thousand dollars to Adwords, postcards, flyers, and tradeshow exhibits each, and track the results diligently. In little time and with few resources spent you would have a pretty good idea of what works and what doesn’t, only then does a large scale expenditure make sense.  This might sound obvious and intuitive, but you would be surprised as to how many times I have seen entrepreneurs (myself included) make quick intuitive assumptions and pour tremendous resources behind those hunches. Another quick example is the building of a website, most entrepreneurs get fixated on getting their site perfect before they launch and spend tens of thousands of dollars doing so. Instead, I propose that they get a quick and dirty site up that lets them get real customer feedback as to their idea. Once they have an idea of what their customers really want and do, they can more wisely spend their resources building out the perfect site.

Spend as few resources as possible proving out as much as you can, because your resources are much more valuable when applied in the right places.

Entrepreneurs are generally frustrated with how difficult it is to raise funds. Much of this frustration is directed toward Venture Capitalists; they seem to fund so few opportunities, their criteria for investment is somewhat mysterious, they have a reputation for tough negotiation and low valuations, etc.The purpose of this note is to give you insight into how a venture capital company works, how its partners are compensated and why they operate the way they do. Continue Reading »

There is a good article by Al Schneider, a senior person at both Pasadena Angels and TCA, that was recently posted on SoCalTech.com.   Check it out:    How To Value Your Startup.

When you start your company you need to decide what form of corporate structure you want to use.  Depending on what you are trying to achieve, you might operate as a sole proprietor, form an LLC or C corporation. In the interest of brevity, I’ll divide corporate structure alternatives into those that, for tax purposes, are “pass through” or not. “Pass through” entitities include sole proprietorships, partnerships and LLCs.  Essentially, if an entity is “pass through” it means that any losses or profits will be passed directly to the owners of the entity on a pro-rata basis or as defined in the organizing documents.   In a C corporation, all of the gains and losses are dealt with within the corporation and the corporation either pays taxes or accumulates losses with no effect on the ownership until there is some distribution.   This is how we can categorize these organizations, but this is not what is important for you to know as an entrepreneur.

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