StartupNorth

Category: Startups

  • Surviving The Cash Crunch (Part 1)

    Photo by © 2008 Daniela Hartmann
    Photo by © 2008 Daniela Hartmann

    You are 3-6 months away from running out of cash.  Your current business model & strategy isn’t going to make it happen over that same period.  You are unable to raise a new round.

    This is another classic stage for mid-stage startups I’ve heard nicely referred to as “controlled burn”.  You either need to pivot onto something new or give your current strategy time to break-even, whatever it is you need to do, you don’t have the cash to do it without doing something about costs.  So you need to turn 3 months of money into 12 months of money or more.

    I’m speculating, but the number of start-ups who hit a cash crunch over all-time probably approaches infinity.  Annoyingly though it doesn’t get written about often and there isn’t a lot of useful advice I’ve found.  Having seen this a few times and talked to a many companies with this type of problem, I thought I’d try and touch the topic with some useful tactics.  One key note – all of this needs to be done in advance of running out of cash, not once you have run out of cash.

    Do NOT Raise Too Much Money, Too Early

    My first advice is preventative.  I’ve been part of teams that have raised $0, $80mm and $20mm as the initial round.  So I have some very real world experience with both ends of this argument.

    Photo by Stephen Poff
    Photo by Stephen Poff CC BY-NC-ND 2.0

    There are two problems.  The first is that if you raise a lot of money, your investors expect you to do something with it, not sit on it.  You are expected to get “fat”.  Hire a great mgmt team, hire middle mgmt, hire depth, have project managers, have tons of software firepower, big marketing plans, big markets, etc, etc.  This means that your burn will probably be stupidly high and you’ll probably hit cash flow problems marginally past that of a team that raised much less capital.  It means your cuts are more painful and the “paradigm-shift” is larger.

    On the other side, you eliminate options for handling cash flow issues by raising too much, too early.  Imagine each $5mm increment as chopping off a tier of the investing market for your company.  Somewhere past say $20-$30mm you need to have the financial results to match your valuation to enter into these new “investment markets”.  You can end up pigeon-holed into a tiny corner of the investment world – need lots of money, have a great team/idea, but don’t yet have the results to justify the results…. uh oh.

    This is where founder-killing down-rounds and inside-rounds happen and equity disappears.

    Layoffs

    For most startups, the biggest cost is people.  If you want to control burn, there’s probably no way to get around dealing with this.  So here’s a few ways to actually bring down people cost:

    1. Cross the board pay cuts – CEO goes to $1, mgmt team takes large cuts, staff take smaller cuts.  Keep the team together.  (Usually you talk yourself into this strategy because you have like a half a percent chance at having some big company who you’ve met once buying you)
    2. Big layoff day.
    3. Offer packages, options to furlough or take time off – “anybody want to take 6 months off to travel the world and want to come back to a full paying job?”

    Generally, I’m a fan of cut deep, fast and once.  If you try to be the “nice guy” and retain people for less money, etc – you are screwing everybody.  Many employees will get a new job before your notice period ends and it’ll probably pay more than they made now.   You are not being nice by offering them a chance to stick around at reduced pay.  Others have big enough bank rolls to live without income for a bit and will take time off and deliberate about jobs – e.g. senior mgmt.  For some, layoffs are common territories – for instance accounts and analysts, often the first to go as they are nice to haves, not must haves in a cash conscious company.  Other folks will use this as the impetus to do their own entrepreneurial adventure and will get rich because you laid them off.  So really, don’t get all teary and sad about laying folks off – many will be able to handle it and you aren’t doing them a favour by keeping them around.

    My “nice guy” layoff tactic would look something like this.  Do all your layoffs at once and give a reasonable notice period (4-8 weeks??).  Don’t spend much time deliberating and talking to folks – morale dies quickly and people stop working when waiting for a decision.  Do it and make sure to do it deep enough the first time.  Then, go out and help the people you laid off find new jobs.  Reach out to your vast startup network – for every startup laying off, you can probably find a new one hiring, especially folks with startup experience.  Then, give some time, say 4-6 weeks.  Then and only then, if some folks seem to be in trouble financially and unable to find work – offer them contract work to get them past the hump, a few grand a month, something like that.  Double down in helping them find them new roles.  Ask your VC for help in placing them.

    Partners & Creditors

    Before I write what I am about to write I want to make some things very clear.  Always do honest business and never screw your partners intentionally.  Your name is everything.  When you are starting to get short on cash talk to them and look for options, some will have experienced similar and will be helpful.

    So my first advice is preventative.  When you negotiate every contract, take it from the lens of “what happens if I run out of cash?”.  Can you terminate?  Can you adjust pricing?  Are the terms 30 days or 90 days?  Can they kill my business if I am short on cash?  Don’t bet on a long future and sign-up for 2-3 year deals.  Business flexibility is probably more important than scaling costs downwards off the bat.

    Once you are in the cash crunch situation, here is a golden rule I once heard “Pay your customers, not your creditors”.  I.e. in a world of limited money and limited choice of how to apply it, remember that paying creditors won’t result in your business generating cash,  it will result in your business dying and all your creditors getting $0.  You are helping your creditors by helping yourself (presuming you don’t spend it stupidly).

    The key date to remember when negotiating with any partner is their fiscal year end.  If you are past 90 days due on payments, you have to pay something otherwise your partner is basically forced to write you off as bad debts.  If you pay anything, they can keep it as revenue.  Also remember that if you have global partners that standards of non-payment are very different.  Payables past 90+ days may be more the norm than a “business faux pas” in certain countries.

    No matter what this is going to result in you hating your job for a while.  Negotiating and settling with partners is not fun.  Nor is stringing out payments.  People will not say very nice things to you.

     

    In part 2, I’ll look at customers & pricing, and operating your business once in the cash crunch.

  • StartupWeekend Toronto – Summer Edition

    StartupWeekend is coming back to Toronto this June 3-5. After an excellent kick-off event last September, Toronto is primed to bring it again. If you don’t believe that you can get started building real companies in a weekend then take a closer look. The Toronto community showed its stuff and did some amazing work last time around: TaskAve, RateHub, N20, Vuru.

    StartupWeekends are cropping up around the world, the movement is gaining momentum. Only a couple of months back, Zaarly was born at StartupWeekend LA – Zaarly has since raised $1M and was ready for launch at this year’s SXSW. More and more stories like this are emerging as these events gain traction and participants come ready to build. This June’s StartupWeekend is going to be held at the historic Burroughes Building at Queen and Bathurst and will provide an environment to promote true collaboration – not just within the teams but across teams as well.

    We will be working hard at creating an even better environment for all of you to learn, be inspired, and build great things. Just come ready to work hard and have fun. Start getting your pitches ready and watch space for more. Follow us online and via twitter (@startupwkndto) for updates.

    Tickets are on sale now, the first 20 StartupNorth readers to register receive a 20% discount – use the code: STARTUPNORTHSW


  • Startup’s Razor

    Here’s is a lesson I (almost) learnt the hard way.

    Back in 2006, I met a talented developer who had built a novelty web telephony product. We caught up for a tea and discussed applications for the technology. One ambitious idea was to create something akin to Yahoo Pipes with the Asterisk open source PBX. Pretty awesome, right?

    With one developer and one designer we got started with a simple proof of concept. Then he broke (and almost lost) his leg snowboarding – out of commission for months, the project got dropped. Had he not wrapped his leg around a tree, in retrospect I am fairly certain the project might still have been left in the dust… read on.

    There is a principle known as Occam’s Razor, which has been tabled by many great minds. It goes something like this:

    Frustra fit per plura quod potest fieri per pauciora. – William of Ockham

    Make things as simple as possible, but not simpler. – Albert Einstein

    Keep it simple stupid. – Kelly Johnson

    Fast forward to 2009, along came Twilio, an IP telephony platform exposed as a service via a simple API (it rocks, check it out). Fact: an API is far less complex than building a drag and drop pipes type solution.

    The simplest solution, all else being equal, wins.

    Why? The simplest solution is fastest to implement (aka Minimum Viable Product). The simplest solution addresses the broadest possible set of customer use cases. The simplest solution leaves the most capital to direct into the drivers of growth other than product development.

    Can your product be too simple? Can you cut too much? Sure. That said, I’d bet you need to keep shaving (we did).

     

  • Hunting Elephants

    Recent news of the GoDaddy Elephant Hunt (warning graphic video) offers two lessons for startups. The first is obvious, as CEO your personal brand is inescapably linked to your company. The second is perhaps somewhat less obvious in the cloud of outrage… YOU SHOULD BE HUNTING ELEPHANTS.

    Allow me to explain:

    1. No one will care if you go on a mosquito hunt. If your startup is pursuing a tiny market, no one will notice, no one will invest, and no one will join the hunt.

    2. The elephant hunt will feed a village. Even if your startup is successful, if the market is minuscule you have failed.

    3. An elephant is easier to see than a mosquito. Finding customers for your startup is half the battle.

    4. Elephant hunts are more dangerous. There is nothing quite like the thrill of competing in a dynamic market.

    5. You will love telling the story about the elephant stampede through camp. Even if you don’t end up revolutionizing a market, you’ll learn an industry and build a strong network.

    Are you hunting elephants?

     

    In case you missed the point entirely, this post was about markets not mammals. Species and habitats are essential to a healthy planet. Please don’t go around shooting elephants with artillery for sport, there is nothing sportsmanlike about it. Instead consider making a donation to the World Wildlife Fund and become a partner in conservation.

  • Mid-Stage Startup Analytics (or when to pivot)

    I heart mid-stage startup life.  Its dirty, gritty, hard decision making where you really learn your business inside out.  You can turn yourself into a successful business or you can drive your business into a classic brain-eating, zombie company living out its life sucking on SRED claims.

    Its a constant mix of battling short vs long, trying to fundamentally answer two questions:

    1.  Is my initial business model/strategy succeeding?

    2.  Is there a better business model/strategy out there?

    Or… to pivot or not to pivot.  The non-chalance which pivot is thrown out by the startup blog-orati gets me a bit annoyed.  Its really damn hard to tell if you are succeeding or failing at any given point in time for most mid-stage companies.  Unless you are part of the super successful 1% or the super sucky 1%.  But for the rest of the world, you probably have sales & customers – but maybe not enough, or maybe not profitable customers.  Its actually quite challenging to stare at your data, disassociate yourself emotionally and come up with a clear rational answer on if your problem is execution (experiment & learn) or strategic (pivot)… and if its strategic, where do you go next?

    So I thought I’d shed some internal light as to how I’ve seen this process managed.  Lets pretend you have a product, and you’ve done a few releases and made it better.  You have some customers who pay for it.  You’re not yet break-even nor have you landed financing to let you pursue this indefinitely.  I.e. you are the normal typical startup 1-4 years into life.

    Dave McClure’s seminal startup metrics slide deck is a great start for figuring out which data & metrics you need as a company to judge oneself.  In the early days of Peek we coalesced around these metrics:

    -cost of acquisition.. how much do you spend to get a sub

    -customer satisfaction… Net Promoter Score is one of my favourites here (one question survey – would you recommend us to somebody else, lots of bechmarks to compare to)

    -churn… deep dive stats on reasons why people churn

    -segment data… cut this up by demographic, sociographic, psychographic (what needs were filled when they bought it), etc

    Then the basic approach was this.  Take your segments and look for over/under-indexers in each of the above.  Look for patterns:

    -does a certain segment churn faster?  i.e. are some segments better quality customers.  Does this align to a channel?

    -do you out index the standard demographics in a certain category?  For instance do you have 2x more mom’s than you should based on normal demographic distribution.  Are those mom’s also better users?  or do they churn fast?  The over-indexing may look small at first, a proverbial green shoot.  Water and fertilize it!  We over-indexed in some weird segments – like cost-conscious small business owners.

    -are some segments happier than others, do they have better usage patterns and higher customer satisfaction…

    -compare this with channel, you can gain big clues here.  For instance lets say you have partnerships with Yahoo & AOL and have ads on both their sites.  If Yahoo is outperforming AOL, try to understand the demographic, psychographic reason for it.  Cross compare to churn in these cohorts.  Maybe Yahoo is more small business oriented who have a need for your product while AOL is an older, consumer base who do not.

    -also cross compare this to product versions, do things get better as new product changes are introduced?  We always noted that faster performing UI led to happier customers (and so has basically every study out there – see the seminal Microsoft/Google search research on how shaving even 50ms is a big differentiator).

    Use this data to keep aligning product/market/channel fit.  At some point (I’d argue you need to follow a process like this for 12 months +), you’ll have either exhausted a lot of opportunities and improved, or you’ll have not.  I personally like really leaning on cost of acquisition as the telltale signals that strategy is wrong and you’re not going anywhere.  At some point you’ll get product/market fit and word of mouth, virality and referals start to happen and you don’t need to spend as much time, energy, and/or money on marketing to a specific segment.  If this doesn’t happen, if the only way for you to move your product is to always be juicing marketing in a way that is not affordable, then you probably need a new product/business model.

    And at that point, after working tactics for a good period of time and tracking how it impacts metrics, then I’d “pivot”.

    One last note, this is far more art than science.  Picking metrics, finding tactics to improve them, reading trends, and moving on them – this is where the team (esp the CEO & marketing folks) earns its money as relentless executioners of the day to day business.

    One last, last note, pivoting is really expensive & hard.  Depending on how big your pivot is, you probably have to lay off staff (e.g. if you have expert consumer marketing staff and you are pivoting to enterprise… wooops), get board members and advisory board members who understand this space, re-brand yourself to the market, go get introduced to a whole new set of strategic potential partners, discover the industrial eco-system around your new pivot, maybe find new investors who invest in the space, and so on and so forth.  And thats why you need to fight like mad to make your current strategy work.

  • Startup Festival coming to Montreal – Why it’s important

    I know that David just posted about the upcoming Startup Festival, but I thought I would add my own thoughts:

    I have definitely been getting the feeling that the whole “startup conference” format is getting a little stale. The same formats in the same cities with most of the same speakers. The real benefit of any conference, the ability to spend time with smart people, is still enough of an incentive to keep us coming back.

    So when Philippe told me about what he is working on for the Startup Festival in Montreal, I needed a minute to re-set my thinking. When I did that however, it was clear that this would be something new.

    The announced lineup is looking great so far, but that is not the really exciting part. The entire format of the event will be much more fluid and engaging than a typical 1-2 track conference agenda.

    Philippe is engaging with the community and opening up the event as a platform for other groups to throw in and create their own events and activities during that time. We (the royal We – Startupnorth) are looking in to doing our own event one evening.

    I am excited about an event that is focused on openness and a shared sense of purpose with the community.

     

  • A Startup Festival

    Our friends Philippe Telio (@ptelio), JS Cournoyer (@jscournoyer) and Alistair Croll (@acroll) have pulled together a spectacular festival in Montreal for startups. They launced today at AccelerateMTL and the speaker list includes great folks:

    This is just the tip of the iceberg. A fantastic group of entrepreneurs, marketers, advisors and investors converging on Montreal at the very beginning of the Just for Laughs comedy festival (which looks to be happening July 14-31, 2011).

    It is great to see the availability of capital being deployed by Jacques Bernier and the Teralys Capital team start to propagate out into the culture building events. The creation of YearOneLabs, Real Ventures, AccelerateMTL, NextMontreal, Notman House are all directly or indirectly beneficiaries of the capital available in Montreal. It might feel like these changes, conferences and programs happen overnight, but it has been a 5-7 year campaign from a dedicated group beginning with Montreal Startup, John Stokes and Austin Hill. This group has been laser focused on building a culture of high tech entrepreneurship and the necessary infrastructure from education, funding, investment, talent, culture, media and events to support the current and next generation of entrepreneurs. It is really a feat and accomplishment that has made Montreal a hotbed for new companies.

  • Year One Labs — The Perfect “Incubator”?

    I abhor the term “incubator”. I remember in fifth grade when our teacher brought in a chicken incubator to show us how chickens are born.

    We waited and waited and waited a while longer still.

    All the little Chickens were dead, it turned out. We weren’t quite sure why but most of us thought that one of the guys in our class with “anger issues” was somehow responsible.

    So to this day when I hear the term incubator, I think of a sea of dead chickens and the broken dreams of little boys and girls.

    So I was surprised when I walked in to Year One Labs today and, rather than chickens, I saw a lot of people. Not just any people either, but some of the best entrepreneurs I have met in years.

    We wrote about the launch of Year One Labs back in September 2010

    The current portfolio of Montreal based Year One Labs includes:

    High Score House

    HighScoreHouse was founded by Kyle Seaman and Theo Ephraim. The company is building a fun, entertaining solution to help parents use positive reinforcement to motivate their children.

    They have yet to launch but you can learn more at highscorehouse.com.

    Localmind

    Localmind was founded by Lenny Rachitsky and Beau Haugh. Localmind allows people (from the web or their mobile phone) to ask questions of people checked in at locations. Questions can be in real-time or not. The big vision is to empower people to know anything they need to know about any place at any time.

    Localmind is currently available online at localmind.com.

    Please Stay Calm

    Please Stay Calm was founded by Garry Seto andKen Seto. The company is building a massively co-operative location based social game with a zombie theme. They have not yet released the game, but you can sign up for news at pleasestaycalm.com.

    And you can learn more about the game and their progress on their blog.

    as well as Assemblio and one other as of yet unnamed startup.

    There are some things to love about Year One Labs:

    • The founders of Year One Labs have their own money invested
    • The founders of Year One Labs are experienced founders with good operational backgrounds. It seems clear to me that they know how to gradually disengage as the founders of resident companies get their feet under them. They aren’t constrained by awkward incubator contracts or “client service agreements” where a lot of resources go more and more unused as a startup outgrows them. That flexibility is important.
    • They have a bar built right in to the lobby

    It’s not all ice cream and pie for these guys though, from the outside it is clear to me that follow-on financing relationships are always going to be tough for groups like this and keeping the lights on does become a heavy expense over time.

    This sort of activity, much like Extreme Venture Partners in Toronto and the work that BootupLabs had been doing in Vancouver is the lifeblood of an early stage startup community. Whenever politicians give speeches and talk about things like the “IT Sector” and “knowledge workers” — this is what they are talking about. We have to find careful ways to support efforts like Year One Labs but also keep the market competitive enough that the best ones may rise to the top. In the current model of massive infusions of cash for real-estate and bureaucrats does not let the market pick the winners.

    The entrepreneurs are the ultimate customers here and they will be the ones who make or break Year One Labs and every other similar effort in Canada.

  • Salesforce acquires Radian6 for $326 Million

    This will be all over the news today so I won’t try to keep pace with the commentary, but the news that Salesforce has agreed to acquire Radian6 a Fredericton, New Brunswick company founded in 2006 ,is out.

    I won’t try to keep pace with then endless coverage that will be happening, but here are some thoughts on what is cool about this:

    • Ride the Winners: There is no doubt that Radian6 has had a lot of offers over the years. Competitors such as Techrigy, ScoutLabs and Sysomos likely sold out WAY too early. This is something Roger Chabra has been saying to me for a while: When something is working, stick with it.
    • Canadian made: Radian6 was built and financed entirely in Canada by Summerhill, BDC and Brightspark. They funded Radian6 early and they stuck with it. That’s a great and all too rare story.
    • New Brunswick made: When I tell many of you that I have moved to Halifax I sometimes get questions like “is there any startup community there?” or “Is there any talent there?” — Now I have an easy answer to what I have already found out: This region is brimming with talent and with the right leadership great things can be accomplished.

    Congrats to the entire Radian6 team as well as Summerhill, BDC and Brightspark. This is big news and a great story.

  • Ted Livingston is insane in the best sort of way

    A lot of people talked shit about the recent valuation of Kik. It all seemed a bit insane and I admit the numbers I heard seemed wild. That was until word dropped that Union Square Ventures has joined the deal alongside RRE.

    Today Techcrunch is reporting that Ted Livingston is using a chunk of the money that he took off the table in the recent financing in order to further back UWs Velocity dorm/program.

    Say what you want to but Ted Livingston gets it and the moment he had the chance to do it: he gave back. That is all too rare a thing. He obviously did well in the transaction that generated the extra $1million, but not THAT well. He is obviously just an incredibly generous person. I am totally inspired.

    If we can continue to back and inspire entrepreneurs as passionate as Ted then we just might get somewhere.