July 2009

There were 8 posts published in July 2009 (this is page 2 of 3).

One small step for startup kind

“I believe this Nation should commitment itself to achieving the goal, before this decade is out, of landing a man on the moon and returning him safely to earth. No single space project in this period will be more impressive to mankind, or more important for the long-range exploration of space; and none will be so difficult or expensive to accomplish." – John F. Kennedy

Yesterday was the 40th Anniversary of the lunar landing. The Apollo program is an interesting concept for early-stage startups. It was a self-imposed race to beat the Soviets. A lot of startups need to feel the pressure to succeed, and having timelines, constraints and competition often helps amp up the sense of impending doom.

For the Apollo program there was competition. There were extreme timelines. There were budget constraints. All of these were much bigger and longer than the plans for startups. But there was a clear goal (“landing a man on the moon and returning him safely”), and constraints (“before this decade is out”). And most importantly the money wasn’t the end, it was a necessary means to accomplish the larger goal.

Clear Goals

Beating the Soviets. Recovering national pride after the failed Bay of Pigs invasion. It was an effect of the Cold War. But there was competition. The historical analysis of the program looked at a variety of success factors including Big Hairy Audacious Goals that included:

  • “a chance of beating the Soviets by putting a laboratory in space”
  • “a sporting chance of sending a 3-man crew around the moon ahead of the Soviets”
  • “an excellent chance of beating the Soviets to the first landing of a crew on the moon (including return capability, of course)”

The definition of goals included both the engineering constraints but also a prediction of the potential of the competition. Startups need to set big goals. The goal should specify the desired outcome, not the path/method for achievement. 

Competition

The goals need to be in context of their operating environment including that of their competitors. I really hate when an entrepreneur tells me they have no competitors. The number of times that this is true is rare. Most companies and products have competition. Stop being afraid to talk about your competition. Understanding where you fit in the competitive landscape can help you figure out your product offering, your time to market, potential marketing events. It makes it a lot easier to know who is the bad guy? Trust me, you should be diligent and honest about who you are competing against. Having a clear competition makes it easier to see where you should spend marketing dollars, what conferences to attend or avoid, and build strategies that either embrace or ignore the competition.

Constraints

Money is one of the easiest constraints to understand. Unfortunately, when you’re working part-time out of your basement/garage/spare room, you don’t have the impending sense of doom that money is a constraint. The runway for side projects is a long. I think this leads to thinking that raising money is the end goal.  “We’ve raised a million dollars”. This is meant to be the beginning of the journey. The money is for a purpose, it’s meant to help you grow, build, market, acquire, etc. Raising money enables you to do the real work. It allows you to either increase the rate of acceleration or lengthen the runway. But it’s just the beginning. Equally said, SR&ED is a great benefit to companies, however, when you decide to focus on SR&ED credits to keep the company afloat instead of finding new customers you’re doing the wrong thing.

Money in the bank/Monthly expenses = How long until we are dead – Phil Morle

The change over the past 20 years is that the monthly expenses have decreased. It no longer costs hundreds of thousands of dollars for hardware, development environments, net access, etc. The price of servers continues to fall, and with the advent of cloud computing and dynamic loads it is becoming variable with the load on your site or application. Development environments are free. Usually the single biggest cost for a startup is talent. Oh wait, you’re not paying yourself and you don’t have any employees. This has 2 side effects, it reduces the monthly expenses thus lengthening the runway, but it can also have adverse side effects like not forcing entrepreneurs to be self critical of their ideas and their progress. 

Figure 1: The Startup Runway 
Figure 1: The Startup Runway from Phil Morle on Pollenizer

I like Phil Morle’s method for using the runway:

Pick a date in the future (this is point D on Figure 1). Let’s say 18 months from now because that’s roughly what John Doerr of Kleiner says is good runway. And then begin working backwards, determine the point where you will need raise more money or find a paying customer (this is point C). This point needs to be a few months before the end of the runway to allow you a margin of error and the time necessary to close financing or the deal. Continuing backwards in time, you need to be at feature complete (point B on Figure 1). Yes, there is a long time between points B & C but this is to allow you to drive adoption, build press and momentum and refine your existing product and pricing. It brings us to right now, what is the minimum feature set that you can plan, design, build, test and deploy between now and 6-12 months from now.

Lessons for Startups

“Startups fail from a lack of customers, not product development failure” – Steve Blank

You’re goal is to prove your business before time runs out!

  1. Define the end of the runway
  2. Set clear goals and metrics that will prove your business
  3. Identify the constraints – financial, talent, technological, etc.
  4. Focus on customers and markets from day one

Additional Reading

Startup funding sources – Investment Accelerator Fund

My previous article on start-up funding sources covered the Maple Leaf Angels. For the next article in this series, I will cover the Investment Accelerator Fund (IAF).

What is the IAF?
The IAF is a fund that was established by the Ontario government Ministry of Research and Innovation and is managed by the Ontario Centers of Excellence. It was put in place to help early stage companies that may be too risky for traditional funding sources to get funding and allow them to make progress to the next level where they can tap into angel/VC funding sources. In addition to providing capital to investee companies, the IAF also helps companies via its extensive connections and networks to help companies in areas such as opening sales doors, developing alliances, finding management talent, and recruiting board members.

The fund was founded in 2007 and has done 20 deals since inception. The fund is on track to do an additional 9-10 deals this year. Some companies the fund has invested in include: Regen Energy, Echologics, Nulogy, Bering Media, and Skymeter

How does this fit into Ontario’s commercialization strategy?
The IAF is one of 3 programs the Ontario government has in place to support innovation and commercialization in Ontario. The first program is the business mentorship and entrepreneurship program (BMEP) led by MaRS. This helps companies get started and provides guidance for entrepreneurs to launch their companies through mentorship and access to market research. The IAF would be the second leg in helping provide funding for early stage companies. The third leg is the angel network program administered by the National Angel Capital Organization. This helps establish angel groups in Ontario that will fund early stage companies and provides a network for access to follow-on capital.

What companies are eligible and how much investment can a company get?
To be eligible for the IAF, companies must reside in Ontario. Investment can be up to $500k and is usually done in tranches.

What are the deal terms?
Investment is made via convertible debt with a nominal equity kicker. A board observer seat will be granted to the IAF as part of the deal. The IAF is open to syndicating a deal with other investors.

How should a company go about applying?
Initial contact should be made through Trish Barrow. Once the application is received Trish will have an initial conference call with the company to review the application.

What happens after an application is submitted?
The company executive summary is reviewed internally and/or externally to assess the opportunity. Companies then submit a full business plan which undergoes detailed due diligence into the market, market strategy, intellectual property, technology, and management. Based on this, a recommendation is made by the IAF management team on investment.

Companies must then do an investment pitch to the IAF investment committee. This committee is made up of IAF management, VCs, and angels. The committee guides the IAF management committee on the investment and any conditions for investment. This process also provides the investment committee with a window into quality deal flow for potentially follow-on funding.

How long does the process take?
The process takes between 3 to 6 months until the company receives a cheque. Timeframes will be dependent on what stage the company is at, if they have materials readily on hand required for the due diligence process, etc.

What criteria are used to select which companies receive investment?
As the IAF was established by the Ontario Ministry of Innovation, it is not purely ROI and profit driven like a VC fund would be. Companies successful in receiving funding typically:

  • Have a viable addressable market of at least $20m that the company can add unique value
  • Have strong, defensible intellectual property
  • Are in a position where investment by IAF can be meaningful in terms of helping the company progress and get to a stage where they will be attractive to next round angel/VC funding
  • Have high risk, disruptive technologies that will advance innovation in Ontario
  • Will create jobs in Ontario

The focus of the fund is on innovation and commercialization so companies with potentially disruptive technology that have strong intellectual property are the best candidates. The fund is looking to help companies develop their technology to the next level (i.e. could be a beta product, could be a pilot project) so the technology is further proven and subsequent angel/VC investors can look to continue funding the company. In other words, the fund is looking to bridge the gap between early R&D and angel/VC fundable companies.

Although the fund is not purely ROI driven, just like any fund it as limited resources and the fund’s management needs to ensure the companies they invest in will be the ones that succeed and become successful companies. As such, companies must be able to show a clear plan of progression with concrete milestones as to the progress they will make after investment in advancing the company to the next stage.

craig at mapleleafangels.com