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.

The interesting thing about the history of technological innovation is that it happens in bursts. The era of Hardware was followed by tremendous innovation in Software, after which over a decade of tremendous advances on the Internet ensued. The reason for this is obvious; as a monumental technological breakthrough happens others are able to piggy back and drive it further, but this only happen about once a decade. As an example, when the internet was unleashed it was near impossible for the general population to use. It was only after Netscape tamed the beast by making it significantly more accessible where services created around it – thus beginning the Web 1.0 phenomenon that allowed consumers and businesses to access a mostly static internet. A few years later the major telecommunications companies began to lay the groundwork for high-speed internet connectivity, which enabled interactivity on the internet. This innovation paved the way for Software as a Service, Social Networking, streaming video and many of the other foundations of Web 2.0. 

So what is the next breakthrough that will unleash a wave of innovation around it?

It is pretty clear that mobile has tremendous potential to revolutionize both the consumer and business markets. However, this was true for several years and very few businesses or technologies in this space have emerged. There are many reasons for this, but I would like to highlight the three most important ones.

Cellular carriers act as gatekeepers:

Innovation requires openness and compatibility. It is difficult enough to build something, but when self-interested parties have the power to block innovation it is impossible. Take for instance mobile software: the carriers restrict 3^rd party applications on their networks and make it incredibly hard to create compelling products.  The same is true for handsets (see how long it is taking Android and its partners to launch) and auxiliary services.

Too many technologies, competitors, and options:

 For innovation to happen on a platform there must be mass adoption on behalf of both users and developers. However, because there are multiple carriers, developers, and device manufacturers the market is too fragmented for any one platform to gain enough of an audience to incentivize the necessary capital and talent to build cutting edge applications for it.

Monetization:

A critical juncture for all products is the monetization component. It’s not enough to build great software; you also need to figure out a way to make money from it. This just doesn’t happen in the mobile space because the screens are too small, the bandwidth too limited, and the carriers too greedy.

A Paradigm Shift in Mobile is Upon Us:

With the upcoming launch of the iPhone 3G, the stars have aligned perfectly to spearhead the next wave of revolutionary breakthroughs.  The sex appeal and price reduction of the iPhone, combined with a pretty rigorous taming of Cingular, and a commitment by Apple to improve on its record of openness have squashed the market barriers to a truly new mobile reality. The iPhone 3G is the one platform that will be popular enough to support the ecosystem needed in mobile and iTunes will allow for seamless distribution of software and provide for a preliminary vehicle for monetization.

Only time will tell what type of advances will follow the iPhone. However, I am certain that we are finally on the brink of a very exciting time in mobile as new business and consumer applications create the next era of innovation.

The greatest thing about being a part of Momentum Venture Management is the opportunity to meet and interact with entrepreneurs. Their passion is contagious and the sheer fact that they are building out their dream is inspirational. That is why this past Tuesday’s Entrepreneur Only event put together by Momentum and held at the Wilshire Grand Hotel was such an incredible experience. Over 60 entrepreneurs came to share their visions, meet each other, and have a couple of drinks.  

Entrepreneurs were out in full force, with businesses ranging from nanotechnology to internet media. It was an amazing display of the exploding startup scene in Southern California and a testament to the innovation happening in Los Angeles.

At one point towards the end of the evening I looked around and took in the scene; a room full of amazingly talented people helping each other build out the next wave of businesses. I couldn’t be more excited about what the future holds.

Based on the success of this past Tuesday, we are planning on having several more of these events. So if you are an entrepreneur who is interested in meeting other likeminded people,  getting free advice from the Momentum partners, and enjoying a relaxed evening of interesting conversation, then please leave a comment below and we will make sure to email you details about our next event.

After seeing the VC cycle up close, I have a few suggestions specifically for first-time entrepreneurs that will hopefully save you some of the heart-ache I had to endure.

• · For every great idea, there are 500 others exactly like it

Yes, I had heard this a few hundred times too, but I really didn’t believe it because MY idea was not just another social network. It was a Hispanic based telephone recruiting platform. But now that I see the type of deal flow VC’s see, I am surprised that anything can be considered unique. There are thousands upon thousands of businesses floating around. Having a great idea just isn’t enough.

• · Nothing gets a “no” faster than a bad fit

VC’s have criteria for the investments they make and very rarely will they deviate. The odds for success are pretty low in the start-up game, so if a VC is going to invest they are going to have clear guidelines about their areas of expertise. So save yourself some time and make sure you filter who you send your executive summary to.

• · You absolutely must have traction

Before you start a business, make sure you can get it to a point where you have some form of traction before you need VC funding. There is no way you will get money from institutional investors unless you can show that someone, anyone, likes your product. This is due-diligence step number one. Secondly, without traction there are no numbers to crunch, which is what MBA bearing VC’s love to do.

• · Get solid people excited about your company

At the end of the day, being a startup founder means your number one mission in life will be to persuade others. You will need to find employees who will be willing to work for less. You will need to convince customers to try your product/service. You will need to persuade partners to work with you. And of course, you will need to find investors to fund your company. If you can’t get your friends/family/accountant/lawyer to get excited about what you are doing, then you will have a tough time building a successful company. So show the VC’s how persuasive you are and find a few people who truly love what you are doing and who will introduce you to VC’s or people who know VC’s.

• Think about other sources of funding

At the end of the day, getting VC funding as a young first time entrepreneur is very hard. This is compounded if your father in law isn’t Jim Clark and you don’t know any VC’s personally. So while you might be the next Zuckerburg, it would be a prudent move to hedge your bets and build a company that can survive without institutional money.

• Keep the business plan, send the executive summary

This goes back to the deal-flow issue I mentioned above, so many plans come across a VC’s desk on a given day that he/she has to filter them quickly. It just takes too long to go over a full-business plan and even an executive summary, so make sure you put all of the most important information on a one or two page summary and highlight the very key points in your email.

So if you have an executive summary for a business with some traction in an industry that fits Momentum’s criteria, please send it our way.

Profiles of Start Up Players

Since that panel, I’ve constantly been thinking about how to improve teamwork.  A half-dozen management personalities, in a high-stress, rapidly changing, high-cash burn environment can result in unusual team chemistry.  Emotional reactions, heated debates, passive-aggressiveness are all too common among early stage management teams.  However, this isn’t necessarily bad if such dynamics are channeled into startup energy, and thus the team is able to become a more productive group.

I recently came across a post by Will Price of Hummer Winblad Venture Partners, who offers some excellent advice.

In managing start-ups and in building a culture open to change and to iteration, it really helps to arm the team to recognize that under stress we tend to react badly, and in the negative reaction we hamper the ability to maintain cohesion and our credibility.

It is  important to ask people to be self-aware of their coping mechanisms and yours, to be aware of what triggers a negative reaction, and to develop good tools for effectively processing stress and defusing tension.

Some well known tools involve, listening, asking questions and for clarification, remembering not to take things personally, patience, acknowledgment of others, being dependable and trustworthy.

I think we can all recall instances where we could have used those tools to improve teamwork, and perhaps as many instances where we noticed others who could have done the same.  Next time we find ourselves in a high-stress, conflict ridden situations, be sure to take a second to think about the situation, the consequences of reactions and what can be done to resolve.

So… we have designed this to be a fun event in an upscale, “hip” environment. And, most important, we are asking guests to pre-register so that we can set up a small ratio of entrepreneurs to mentors / advisers. We’ll have our partners at the event and typically we’ll add a few other guests such as a successful entrepreneur, venture capitalist, deal attorney, etc. There will be no program - just a casual event w/ cocktails and chat. We hope it works!

If you are interested in joining us, please follow the link above for information or contact:   katie@mvmpartners.com.

Attached is a revised version of the presentation I’ll be giving.

I hope you find it helpful!

Business Plans and Fundraising