I retired from personal blogging in July 2008 but you can find me over at blog.xero.com
Follow @roddrury
Here is a story I wrote for the current Start Up magazine:
As part of strategic planning, start-up companies look at their target customer acquisition, costs and revenue. These are of primary importance, but it is also important work on less tangible work streams, such as media strategy and profile.
Creating a profile is important for attracting early customers and investment.
Many start-ups report that advertising is ineffective. The cost to broadcast your message widely can be prohibitive, so building an effective media strategy will be a key part of getting noticed.
Working effectively with the media is not something you can turn on immediately. It takes a while to build relationships and get experience. For start-ups without media experience, it is a good idea to work with a communications consultant. For a few thousand dollars each month they’ll help you shape your message and help get it out there.
There are newspapers, trade publications, lifestyle magazines, radio and television, blogs, podcasts and conferences. So take a broad view of what works for you and where you can start.
Learn to crawl before you run. Start with local media and build your way up to national media. Handling an interview is something you need to learn – your communications consultant can help you with media training. You will make mistakes but over time you will get better and better.
Some simple things you’ll learn quickly – stick to your key messages, nothing is off the record, controversy sells, don’t bullshit, don’t ask to see what goes out before publication. No matter what is written you still wake up the next morning.
The benefit of profile can be hard to measure but what you can measure is that you are executing on your plan. Setting media goals is absolutely measurable. For example you may set a goal of a positive article in the national print media each month.
Leaders of start-up companies need to be able to communicate. Often this does not come naturally for technical people. But practice, practice, practice and you will get better.
As a stretch you could include in your plan some radio goals. Speaking live to radio is frightening to many people so it is a good skill to work on. Radio is all about finding expert commentary, so you can get started by being an industry expert, rather than talking about your own company. They are always looking for credible people so don’t be scared to make contact.
In New Zealand the morning business television programmes are the premium exposure points for your start-up. So make that a goal 12 months out and work towards it. Local stars Ponoko have been features in the Wall Street Journal and Wired.
Each time you appear in the media you should review it with someone who is strong enough to tell you truthfully how you went. This will accelerate your experience.
As well as gaining experience from your 12-month media plan, the execution will toughen you up. When you step in the spotlight to promote your business people will fire arrows. It comes with the territory so you need to get used to it.
So set a media plan with measurable activities every month. After 12 months the benefits will be obvious.
I did a session last night at an AngelHQ event on the subject of DD. I’ve been through a few of those. Phil from Movac spoke and gave a great perspective of DD from an Angels perspective. I’m usually the DD’ee not the DD’or.
Andrew Simmonds from SimmondsStewart had some great practical advice during the sessions. Andrew and Victoria have done lots of Angel investment work and really understand all the issues around startups so I recommend you talk with them when you get set up. They can work you through Shareholders agreements and all the other legal things you need to get sorted.
DD is a fact of life for small companies so my advice is to understand it from day one and always be ready for DD. Having all of your information to hand is a good discipline for business owners to get into.
I’ve used John Horner from Quigg Partners as well on a number of DD projects. John was happy for me to post this DD checklist so you can see the sort of things you need to think about.
Quigg Partners sample DD checklist
For me the main things an early stage tech company should keep on file are:
- All material contracts
- Shareholders agreement and constitution
- Employment contracts
- A register of all 3rd party components you use and their licenses
- Any NDA’s (you are dumb enough to sign)
- Board minutes
- Financials for each month (easy in Xero)
In my final NZHerald article a few things to think about when selling your business.
What to do when it’s time to sell a company
There are lots of good reasons to sell your business. Hopefully you’ll use a portion of the money to fund the next one and build something even bigger.
But selling is a huge distraction because it places your business at risk. There is uncertainty with staff and even family can put the wrong sort of pressure on you, as they mentally start to spend the money.
A normal sale process might include an offer being made in principal, followed by the development of a detailed contract and a period of due diligence. Then the purchaser tends to cool off a bit and look to discount the original offer based on what they found during due diligence. Because of the distraction, the monthly numbers have headed south, deal costs put costs up, and if a deal is transacted, it can end up well south of the original number. Often no deal is done and the vendor is left picking up the pieces.
Often you are selling out to a competitor - and now they have been right through your business, learned how it works, and left you struggling at the end of the process.
Deals get tougher and less likely to close the more they drag on. An alternative to the process above is to flip it around and bake certainty into the deal right at the beginning.
Under this model you provide key metrics about your business up front to give the intending purchaser enough information to submit an unconditional offer containing all deal terms. You warrant that there is nothing they will discover during due diligence that will have a material impact on the transaction. The materiality threshold is set as part of the deal - of course you set that materiality threshold as high as you can.
This offer needs to be binding as soon as you sign it. Then the due diligence process can commence and, as soon as the period is complete, the deal can close. This might be time limited to one month.
This means they have all board approvals, financing in place, and are 100 per cent committed at the time the offer is finally presented.
This restricts a competitor to only headline information before they are committed so is a good way to protect your intellectual property.
A key aspect of the deal will be if the founder stays in the business or not. It can be very frustrating staying in a business that you no longer control. For this reason it is important that as part of getting a business ready to sell, you put good management in place and spend more time working on the business rather than in it.
The purchaser should want to put their stamp on the business, and should see that you are no longer critical on a daily basis. You should set the expectation you will stay around only long enough for a graceful handover. This may be as short as 1-3 months.
Finally, it’s important to have good advisers. Find a lawyer with a good track record of business sale transactions - they will create and preserve value in the deal. When your life’s work is being sold, you need someone who is objective on your side.
The deal is never done until the cheque is in the bank. When it is, make sure you take a holiday - something I keep forgetting to do.
Hopefully some useful tidbits to help you get some runs on the board in overseas markets. We had a lot of fun and met some great people doing the UK road miles with AfterMail.
You’ve got a great product but how do you sell it overseas?
Text of the article …
All New Zealand business people should be looking at how they contribute to exporting. It is so important for us as a country that we earn foreign currency.
In the online world you can put up a website and you’re immediately global, but many businesses rely on people selling to people. So how do you go global?
The normal path is seeking distributors in overseas markets who can provide you with a low cost way of getting coverage internationally.
The United Kingdom, for example, is full of people selling things. There are thousands of people looking for new opportunities to monetise their relationships. This selling industry is added to every year by displaced executives with extensive networks looking for products to represent.
Conferences and industry events are common ways to meet people and you can often find these people online. In the UK, business networking site Ecademy (ecademy.com) is popular.
There are often two tiers - distributors, and resellers. Distributors may hold a master distribution relationship for the country and have access to a network of resellers.
Some distributors - many at it for their first time - will work on a 100 per cent commission basis and cover their own costs. If there are two tiers, expect to give 50 per cent of your sale price away as margin. Normally the distributor will get 40-60 per cent of a sale and the reseller 20-40 per cent.
In a single-tier model just think of it as the distributor.
While they will want you to be exclusive with them, often they will represent several other opportunities as well. Therefore, you will be competing for shelf space - attention - with the distributor, so you want to make sure you are paying a good margin. They will focus on whatever makes them the money, and you want to make sure that whatever else they are selling is complimentary.
Experienced distributors can point to a track record of success. In the UK, they will probably seek a few thousand pounds each month to cover expenses. New distributors will be more desperate to represent your product, but they may be unproven.
It is important to put a performance clause in any contract, which can become your way out if the distributor does not perform. Put a schedule of low sales numbers in for the first few months so it looks comfortably achievable. This should ensure that you get some mutual quick wins and if they fail to fire you have an out for later.
You must treat the distributor as another type of customer. Give them all the sales aides they need and concise information, so with minimum effort they can appear knowledgeable about your product.
You might want to plan a two-week trip with them in a month and have them fill the diary with appointments. This is a good early test and allows you to get to know them and show them how to sell your product. You’ll also learn a lot about the market.
A useful practice is deal registration. You give the distributor another 5 per cent of margin if they register each deal. This avoids channel conflicts and gives you a basis for measuring effectiveness of conversion and pipeline.
Selling overseas can be a lot of fun. Getting the right engagement of place will allow you to minimise costs and risk, while providing opportunities to be wildly successful.
Always ask around for advice - Kiwis are always willing to share overseas selling war stories.
Are everywhere, they just don’t know it yet.
The predominant form of investment funding in New Zealand comes from angel investors.
Angels are typically more early stage investors than venture capitalists, with the biggest difference being that angels are spending their own money.
Angels are normally successful people in their own right. They like doing business and are often looking for something interesting to be involved with.
The New Zealand angel scene seems to be splitting into two tiers - formal angel groups and individuals. Angel groups provide deal syndication, where the risk is shared between angels. They have more formal processes and they are continuing to mature, so they have administration support and over the past year have started to fund deals.
These groups can be quite social, and the members enjoy the contact with each other. It is important to determine whether the angel group has actually done any deals. It might be that the process of looking at companies is satisfying their need for an interest. The total numbers of deals funded by formal angel groups is still very small, perhaps in the tens. Stephen Tindall, who has funded scores of companies, is an exception.
In my experience as an angel investor and watching companies that have been angel funded, I believe angel investing is hard. The companies often take much more time than the angel initially planned for and need more cash than forecast to get to further funding or liquidity. The vast majority of angel deals do not proceed well.
Angels often only do one deal before being scared off. The ones that have done it a few times are battle-scarred and experienced.
The other side of this coin is that most angel investors are first-time business investors. Therefore, the person you approach for funding may not even know they are an angel investor yet - anyone moderately wealthy could potentially be your angel.
So where do you find these people? Well, you need to look for where the wealthy people are. They may be at boating clubs, golf clubs, or they are parents of kids in your children’s sports teams. Potential angels are everywhere.
As well as cash, the best angel investors will bring with them experience relevant to your business, and access to networks. This might help narrow your focus on wealthy individuals from your industry. Angel investing is often more emotional than analytical so building a relationship where the angel wants to give you the resources and support to succeed will give you a good chance of success.
My third NZ Herald article series is around preparing your pitch document.
How to make an impression on potential investors
Having started your business - shareholders are in place, and you have a few runs on the board - you now need to think about how to present your business for funding.
You need to put yourself in the position of the person you’re approaching. What do they want?
If they are financially motivated, then they want the biggest return in the shortest possible time. Your business is a vehicle to do that, so a large part of your pitch needs to be about how you will give them a return. Many business plans I see are all about what a great idea it is - but an investor will be looking for return, so focus on that.
Many ideas get shot down because someone knows another business in that space. Positioning yourself against competitors shows that you understand your market. An ecosystem diagram, showing where you sit, is a great way to add interest to your presentation and pack a lot of information in a small space. And it gives you a platform to talk to.
Investors will judge you on your ability to concisely present your idea. They have a very short attention span. Having the discipline and skill to pare your life’s work down to a three or four page document that gives the investor the ability to understand your concept quickly speaks volumes. It demonstrates you understand the process and have thought about their needs and it gives you a much better chance moving to the next stage in the discussion.
It is worth investing in a designer to lay out your document, preferably with a few diagrams because the format and presentation of the document has a disproportionate impact on your first impression. The investor’s default expectation is that it will be stunning. Anything less and you already have a few points dropped from your scorecard.
Never send a document in Word format. You do not have control of how it will open on the recipient’s computer, and what’s worse, you may have forgotten to clear your document changes. Documents should be sent as an Adobe PDF so you have complete control of the format - it looks more professional, and makes you appear more professional also.
Before approaching investors, you should have your document ready to go. You must be ready to strike while the iron is hot. So many times an investor will hear from someone at a function that they have a great idea, and there is no follow-up.
New Zealand is a very small place and the investment community is very connected. Once your document goes out, it’s likely to be forwarded around for comment and advice. Quite often I see the same deal from four or five different parties over the course of a few months. Deals get tarnished. It’s obvious that earlier investors have passed.
Therefore, it is important to polish your pitch because you have to be successful in your first few approaches or you won’t get it funded at all.
Preparing your pitch document is one of the most important things you can do. You need to work on it to get to the essence of your idea in a way that is attractive for investors. Test, pare back, clarify, and test. The process may take as long as a month.
When you think it is ready, you’re ready to start looking for investors.
In the second of my NZ Herald articles I talk though some of things I’ve learned around shareholding, the importance of a shareholder agreement and some things to think about in the agreement.
Why it’s crucial to get shareholding decisions right from the word go.
Hopefully these points are as applicable for non-tech businesses.
Text of the article …
People who have built and sold businesses will tell you that the biggest factor in the money they receive on exit is usually determined by shareholding decisions made in the beginning.
Initial shareholder allocations are very difficult to change once a business is up and running. Founding shareholders always believe that the steepest part of the value creation curve occurred when they were inside the business.
Often, a year or two in, a founding shareholder will decide they want to exit the business, which can be very traumatic. They may take important skills with them, and more often than not, the business doesn’t have the cash flow to pay out their shareholding.
Then you have the dreaded valuation issue - friendships are often destroyed during this process.
My advice when starting a business is to capture as much value as you possibly can before bringing on shareholders. Say you take a mate to the pub to discuss your idea; is the default share split 50/50?
What if you invite them down and start the conversation by tabling your business plan, then invite them to come on board to be the vital sales person. What is the split then, 70/30?
What if you had the name, brand, domain and a foundation customer, before you invite your smooth-talking buddy to the table. 90/10?
That first discussion is where significant value is gained or given away. And it might equate to big money a few years on into the business.
Next - make sure your shareholders’ agreement deals with what happens if there is an early exiting partner. I believe there should be a penalty for giving up and leaving early. This can be handled by including a valuation formula.
A simple formula might be total revenue of the preceding 12 months, which will naturally be low for a start-up. You might also agree on payment terms. This takes the valuation fight off the table and puts certainty into the exit process.
Often in the early stages there will be disparity between the ability of shareholders to fund the business and capital will be included as sweat equity. It is important that the basis of adding sweat equity to the business is clearly defined.
What is the rate? What is the maximum per month? Is it just incurring time, or is it tagged to deliverables?
Sweat equity should be accounted for each month and loaded onto the balance sheet, so all shareholders can see its effect. Otherwise it tends to all get loaded in before an external funding round when the books are being cleaned up, an exercise which can scare off investors.
When starting a business ask others who have been there before. They will enjoy the opportunity to have you learn from their mistakes.
I’m doing a 6 article series in the NZ Herald on various aspects of starting a business. Rather than the normal text book stuff I’ve tried to get through a few street smart things I’ve picked up over the years.
The first one was out today and was originally called I have an idea, but how do I know it’s a business.
Rod Drury: How to start a business
Almost all ideas I get pitched fall into the categories mentioned and almost all of them are fundementally flawed for one of the reasons mentioned below. I’m sure there are lots of exceptions but comment away.
Here is the full text …
People pitch business ideas at me all the time.
Unfortunately, almost all are fundamentally flawed, and almost all in obvious ways.
With a few exceptions, there are natural laws of technology businesses that you should take note of, so you don’t find yourself repeating the mistakes made in previous start up businesses. There are a number of business ideas that are just too hard and not worth putting your energy into.
- Anything that involves text messaging or mobile data is unlikely to be a success. That’s because mobile carriers just don’t leave enough on the table to make a buck from. It’s hard to think of anyone who has built a successful business based on text messaging.
- Taking on Trade Me will not work. They already have the customers and therefore they own the market, and only one player wins.
- Anything aimed at taking bricks and mortar retailers online will not work. History tells us that.
- Anything to do with document or content management will not work because that has been done 10,000 times before.
- A start up involving retail point of sale will not work because the cost of sales and support will be too high.
- An export-focused business where the founders are not willing to travel abroad will not work because you need to be in the market to understand it.
- Any business where the founder is not happy to step aside and letanother person be the CEO will not work.
- Any business that only wants to give up 10 per cent for $1 million in its first investment round will not get funded and will not work.
- Any business depending on low-cost Google AdWords will not work, because the price of those AdWords becomes valuable, and then it blows your business model.
- Any software business where the software development is outsourced to a consulting company will not work because you need to be nimble to close the feedback loop between your customers and your product strategy.
- Any business without a business plan will not work.
This might sound like a grim reality, but almost all of the hundred or so businesses I’ve looked at over the past couple of years are flawed because of one or more of the reasons above.
You only need to look at the very few angel or venture capital deals done in New Zealand during 2007 to see that very few ideas are actually valid business ideas.
As a first step before presenting your idea, you need to be able to write a high-level summary of what the business is and why it will be successful, in not more than three pages.
Then you need to test that idea. Try out your idea on friends first.
Make sure you check with someone who will tell you honestly, and not just what you want to hear. Make sure you check with someone with industry expertise. A “fast fail”, where you quickly discover that your idea is flawed, will save you time and money.
My ideas usually come from problems that I have experienced personally. In areas where I have significant base knowledge, I can intuitively know where there is an opportunity. Once you’ve tested your big idea, you need to back yourself and go. One of the first activities is building a team.
Next up, we’ll look at setting up a business with multiple shareholders.
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