NOW IS THE BEST TIME TO START A COMPANY … NOW WHAT ?

DAVID CORCORAN

THIRD RAIL GROUP / DIGITAL COWBOY VENTURES

WE’VE COME ALONG WAY IN 20 YEARS

20 Years Ago• Plan in months• Launch in years• Data centers• Extensive direct sales• Lots of travel• Much more staff

Today• Plan in weeks• Launch in months• AWS / Azure• Indirect sales• Web meetings• Staff minimally

Instagram (2012)• 13 Employees• 30 Million Users• $60M Investment• $1B Exit

MASS DISRUPTION: MEGA TRENDS

Some Broad Mega Trends*

• AI/ML: data insights/decisions

• Devices and screens everywhere

• Everything streams in real time

• We own nothing, can access everything

• Everything is tracked

• Everything is filtered and personalized

• Mass scale collaboration

• Human interface devices will become human

The Inevitable: Kevin Kelly (2016)

Some Hot Industries to Apply Them To

• Mobility/Transportation

• Cybersecurity

• Manufacturing-Tech

• Digital Health

• Wearables

• Consumer iOT / Smart Home

• …

PASSION PROJECTS AND THE SIDE GIG

• Great companies many times start as a passion project where you are solving a problem.

• These passion projects can evolve into side gigs and sometimes the side gig ends up paying more than the regular job.

• Many entrepreneurs don’t realize they’ve found their company until they are well underway.

• Rarely are great companies formed when people go into a room and say “Lets start a company and brainstorm what they want to do”

• Paul Singh (Results Junkies) goes to a community and looks for 50 people with a side gig making $1,000 a month or more. Chances are a couple of them have growth potential and are investible.

A TYPICAL SAAS SOFTWARE STARTUP PATH

• IPO ?Founders Sweat EquityInitial FundingMarket Validation

$250k-$1M Angel $1M-$3M Series A Early Exit orVC: $5M+

Our Focus Today: Early

WHAT IS MY EXIT STRATEGY ?

• Every investor will ask you this question – be prepared to answer it.

• It sounds crazy - how can you decide that now when the business hasn’t even begun ?

Choices• Lifestyle company• Long-term income generating company

• Angel or bootstrapped Early exit• VC funded larger exit

• IPO

• Each of these has life and financial implications. All the founders and investors must be aligned on goals here for the relationship to remain healthy.

HOW TO SELECT YOUR MARKET

• You’re Beachhead Market is the first market you will attempt to dominate. Focus is key here. Don’t worry about being too narrow these days as long as tangential markets exist.

• Three Conditions to look for:• The customers in the market all buy similar products• The customers in the market all have the same sales cycle• There is word of mouth between customers in the market

• Example: MIE EHR product for enterprise clinics.

Disciplined Entrepreneurship: Bill Aulet (2013)

THE MINIMALLY VIABLE PRODUCT (MVP)

• An MVP serves one main purpose: validate that your customers actually want this product and are willing to pay for it.

• The MVP must provide enough value to your customers that they want to use it even if it is not full featured or as polished as you’d like it. Even better you want MVP customers that will provide you that feedback loop.

• Secondarily, once the above is achieved an MVP can be used as a starting point when raising your seed round of capital.

• Minimally is very important. Time is not on your side these days. Most software startups try to get their MVP out within 3 months (6 months tops)

• Don’t expect investors to invest in an idea if you have not already done a lot of work validating the product and market.

THINK LIKE YOUR CUSTOMERS

Image: Samuel Hulick: useronboard.comQuote: Pragmatic Marketing

• Instead of thinking about features and benefits – think about how you’re customer is solving problems.

• How you solve the problem is less interesting to the customer.

• Communication and product positioning should reflect this.

• “Focus on one or two critical benefits your product delivers and no other can match”

Be able to answer the following:

• For {Target Customer}, {Brand} is the {Category} that delivers {Key Benefit} with {Key Points of Difference}

WHAT IF I CANNOT WRITE SOFTWARE MYSELF ?

Some Options

• Find someone who can and make them your technical co-founder. Pay them with equity in the company

• Pay a team. Depending on the scope of your MVP expect this to cost $50k-$150k. If it’s more than that it’s probably not an MVP.

• Pay someone. This could be an individual that “moonlights” on the side as long as you have strong product management experience. You’ll save money but it’s not turn key.

• Expect rates from $75-$140 per hour depending on the developer / team.

• Make sure you own the code contractually and there’s no required 3rd party code to run it and they hand you over the keys when finished (or ideally continually deploy to your environment)

• Ask for a rough estimate of the project and then pay them per sprint. Make sure they track their effort as it relates to their estimate so you know early if it’s going to be more expensive.

THERE’S SO MUCH NOISE OUT THERE

Example: CRM Software511 Products !237 Ranked 4 stars and upYikes.

Messaging/Positioning is Everything These Days. Spend considerable time here and think benefits not features and make it uniform across your product, collateral, pitches, and online marketing.

Image: Capterra

CREATE A GREAT GO TO MARKET STRATEGY

How do you penetrate a market ?• Dominate a niche market ? farmersonly.com

• Cannibalize status quo business model ? gusto.com

How will you acquire customers ?• Sales: Retail, wholesale, dealer, broker, sales reps, strategic partners, VAR’s, distributors, agents.

• Demand Generation: pay-per-click, events, PR, retargeting, organic (content)

• Budget for these activities/personnel – create a bottoms up sales forecast.

UNDERSTAND YOUR COMPETITION

• Don’t be ignorant – investors and customers will expect you to position yourself versus competitors.

But don’t obsess over it• Don’t let your competition drive your roadmap.• Don’t let competition create fear to enter a market.• Believe in your ability to out-innovate and faster.• Communicate with your competitors.

PLAN A BUDGET AND MONITOR CASH FLOWS

Key Points

• Investors want to see 3 years+ projections• Projections are always wrong : )

• Nice Goal: $100K ARR within 6 months after launch• Payroll, Marketing & Sales are highest expenses• Don’t underestimate your legal costs

• Accumulated losses + buffer should reflect your raise

• Plan for success – be prepared for failure.

• Track your cash flows minimally weekly. Don’t be ”that guy*” that cannot make payroll.

Year 1 Year 2 Year 3

Product Revenue $245,740 $1,184,412 $3,615,905

Total Revenue $245,740 $1,184,412 $3,615,905

Cost of Goods $20,285 $257,641 $1,093,342

Total Cost of Goods $20,285 $257,641 $1,093,342

Marketing & Sales

Commissions $8,040 $34,266 $85,979

Marketing $45,500 $66,000 $102,000

Total Marketing & Sales $53,540 $100,266 $187,979

General and Administrative

Payroll $242,083 $702,945 $1,282,216

Payroll Taxes/Benefits $36,647 $112,315 $211,957

Facilities/Equipment $8,640 $14,640 $72,480

Maintenance $- $1,200 $2,500

Utilities/Phone $- $1,200 $4,800

Insurance $6,000 $18,000 $32,400

Supplies $3,600 $3,600 $6,000

Travel/Entertainment $21,000 $48,000 $96,000

Legal/Accounting $22,000 $31,000 $45,000

Other Services $79,000 $81,000 $84,000

Total General and Administrative $418,970 $1,013,900 $1,837,353

Profit before Income Tax $(247,055) $(187,395) $497,231

* or girl

HOW THE TEAM TYPICALLY BUILDS OUT

• Founders Dream Team: Hipster, Hacker, Hustler• Hustler: Sales, Business Development

• Hipster: UI/UX, Creative Director

• Hacker: Software R&D

• More Developers

• Dedicated Quality Assurance

• Dedicated DevOps

• Product Management

• Marketing

• Sales (Preferably someone hands on that can grow into the lead)• Outside

• Inside

• Customer Success & Support

• C-suite management

This team will perform all duties until measurable

success in financing or product sales

WHAT ANGEL INVESTORS ARE LOOKING FOR *

• Strong, trustworthy management team – the single most important evaluation criteria.

• Total addressable market must be sufficiently large. (A $2M market cap isn’t interesting)

• Product needs to be a must-have, not a nice-to-have. (AKA urgency to buy)

• SaaS revenue model and a renewal rate of > 90%

• Realistic valuation and terms

* Bill Godfrey: Angel Investor / Founder of Aprimo

DC: There’s a lot of liquidity out there. There’s lots of money chasing very few good deals. Pick your investors wisely.

WHAT ABOUT OWNERSHIP ?

• Founders can start with 100% ownership or they can accrue over time especially if multiple founders are in the mix. (The non-involved founder …)

• Reward your earliest employees and key management heavily• Employee option pool: 10-20% is norm and required for the best talent.

• Depending on the stage: • 10%+ co-founders

• 1-5% for strategic hires (Example: Marketing manager: $77k, 1-2.4% equity *)

• < 1% early non-strategic hires.

• Model out dilution and valuations (will show an example in the next slide)

• Be aware of preferences in preferred stock

* angel.co: midwest salary/comps

MODELING OWNERSHIP: EXAMPLE CAP TABLE

Notable items• Pre-Money + Raise = Post Money Valuation of the Company• Higher risk in the seed and pre-seed rounds means lower valuations• Founder gives up majority interest after Series A which is not uncommon• Once you have a valuation you can show how the “values” are part of a compensation package• Late stage investors tend to make out well which is why private equity keeps moving up the value chain

WHAT’S MY COMPANY WORTH ?

Generally your company is worth what someone is willing to give you for it. However there are some things that help provide ”bookends” to the valuation:

• Revenue: 3x-10x depending on industry

• Comparable

• Intellectual property

• Brand recognition

• Customer base

• Others …

• Minus debts/liensangel.co: closed startup deals post 2010

THE IMPORTANCE OF MEASUREMENT

• Having a North Star to indicate performance and health is extremely important.

• Pick a few Key Performance Indicators (KPIs) to track early on. Make them easy (hopefully automatic) to track and completely objective (no subjectivity here, please)

Examples

• Monthly Recurring Revenue (MRR)

• Average Revenue per Customer

• Cost per Acquisition

• Lifetime Value per Customer

• Churn

Kissmetrics dashboard

PICK GREAT INVESTORS AND COMMUNICATE

• Pick the right investors – not just money but strategic.

• Always tell the truth – chances are they’ve been there.

• Disclose everything pertinent to the investors.

• Have a plan for recourse when you don’t meet projections.

• Monthly report via email KPIs and high points – 60 second read.

• Have quarterly board meetings/presentations.

• Ask for guidance/support – they are there to help you.

WHEN IS THE RIGHT TIME TO SELL ?

Confluence of …

• Goals of the founders, board, investors

• Maximized the business potential

• Multiple offers are available

• Market growth trajectory

• Competitive influences

Early Exit

• Usually in Years 3-5

• 3-5x return on Angel Money

• <$30M valuation

VC Backed Exit

• Looking for 10x-30x returns

• Can add many more years

Early Exits: Basil Peters

THERE ARE PLENTY OF PLACES TO GET HELP

• Accelerators, Incubators, Business Plan Competitions, Startup Weekends, etc.

• Local Places to Get Help• Elevate Ventures: Investor deck feedback, strategy, early investments

• Northeast Indiana Innovation Center: Flexible space, coaching, early investments

• Start Fort Wayne: Downtown flexible space, coaching

• SCORE: Coaching

• SBDC: Coaching, some grants

• Brightpoint: Some grants

CONCLUSION

David Corcorandc@thirdrail.cowww.thirdrail.co