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Thursday, May 31, 2012

Selling Your Soul, It May Be OK

I was asked to comment on a Quora question relating to partnering with a large company.  The question related to the fact that a single large company wanted to become the sole source sales and marketer of a product of a small company.  In addition, the small company was to turn over all current customers to the large company.  This can work, but great caution is required in the drafting and management of the deal and relationship.  As with any scenario, all of the aspects of the business require review before making such a business deal.

Entering a relationship with a single customer comes allows for both positive and negative issues that may arise in the future.  In drafting the deal, it is essential that the small company consider a wide range of issues that relate to the future of their business. This requires reading the tea leaves a bit since you are drafting agreements to cover potential future activities.  The two key goals must be to end up with the correct financial arrangement for the small company and protect as much as possible the future of the company.  You may derive some protection by ensuring:

1. The agreements making them the sole source agent carries the financial incentives you desire i.e, you make adequate money to make it worth your efforts,

2. You obtain guarantees on total annual sales or you get the product and all customers back i.e. claw-back arrangements,

3. You do not have restrictions on other possible products you can make in the future, and

4. Non-compete on products other than the one partnered are not forced on you.

These are not the only considerations there will certainly be conditions that are more specific you and your counsel require to protect your company.

On the negative side, the sole agent purchasing your product now controls all your business and potential future cash flow.  This assumes you do not have many other products in the pipeline.  Companies often will do a less than favorable deal to receive cash on product number 1 when many other opportunities are in the pipeline.  The cash flow you receive will help you fund the development of other products in a non-dilutive manner. 

The Quora question highlighted the fact that the small company did not have sales and marketing experience.  This is common in many small companies.  It is important to keep in mind that with cash coming in the door, the small company will be able to hire marketing and sales people and build better infrastructure.  One consideration is whether the small company can arrange in the deal with the large company, the ability to share the sales and marketing for a higher percentage of the profit as the small company grows.  The newly developed cash flow and developed infrastructure will allow the small company to become more independent in the future.

One issue to guard against is giving your only product to someone else.  Small company can become a slave to the larger company.  Many entrepreneurs strive to have ability to control their future.  This does not happen when the large company controls everything.  In fact, perhaps small company can structure the deal to force a acquisition of the small company.  In this case, getting liquid on your equity will allow you to start a totally new company.  Just a thought!

Wednesday, May 30, 2012

What Am I Doing HERE!

Have you ever decided to accept an invitation or been required to attend a meeting?  Most likely, you have.  There is a greater chance that you went to one of these meetings with the attitude, “What Am I Doing Here!”   You have ignored meeting with the individual or group in the past and had great reasons for ignoring them.  One day, you ended up accepting the invite to meet and as the meeting grew closer, you started looking for ways to avoid going.

Remember the article “Even a Blind Squirrel Can Find Nuts?”  This is the thought that has carried me through these types of meetings and turned some of them into potentially useful relationships.  It is always hard to determine what other people want or think without engaging them.  Making conclusions on future endeavors with zero data makes no sense.  The best way to approach these meetings is seeking a way to work together.  You do not have to bend over backward to end up with a positive relationship, but you certainly will not end up with one if you never try.  I believe it is OK to be firm in your expectations and direct in your approach.  The real goal is to explore how a relationship can be turned into a Win-Win.  This effort really requires care and thought on both sides. 

It is very easy to use that gut feeling to make decisions.  If this is one of your main assets, it likely works well for you.  However, I suggest you read the book “Thinking Fast and Slow”, by Daniel Kahneman. The book describes two systems of thinking. One highlights the gut feel or intuition approach for doing things.  The other utilizes a more analytic and thoughtful means of approaching problems.  Interestingly, most people make gut decisions regularly and end up well.  The book shows how this may not be the best way to approach problems and that carefully thought approaches have better outcomes.

In the last few months, I have made the purposeful decision to attend meetings that I wanted to avoid.  My days leading to the meetings and the travel caused me to ask, “Why am I going?  I had decided the meetings were not worth the time and I would regret them.  I almost canceled on a few of them.  I went anyway and the results were very different than my intuition had suggested, possibly because my discussions were more direct and that I planned what I wanted from the discussions.  It is still unclear whether the meetings will end up in a Win-Win, but I now see paths to that outcome.

The point is that while your time is limited, your startup needs all the thinking you can provide.  Acting on intuition is fine, but there are those times you need to put more strategic thinking in place.   A saying we used during financings was “I am kissing a lot of frogs to find that prince or princess.”  This is true in developing partnerships or new business directions.  Sometimes, doing things you want to avoid may eliminate a possible benefit you had previously ignored.

Next time you think of meetings as something to avoid, think about what an ideal outcome of the meeting would be.  Do the required planning to prepare for the meeting so you can direct the discussions along the lines to achieve the benefits you wish to obtain.  You will have an advantage because you can just walk away if you feel results are less than satisfactory.  The ability to walk away is a powerful advantage in these situations.  Next time, rather than miss an opportunity, try extract the Win-Win to benefit for your startup.  Why not!
Taffy Williams is the author of:  Think Agile:  How Smart Entrepreneurs Adapt in Order to Succeed to via Amazon

Tuesday, May 29, 2012

It Takes Longer and Costs More

You are planning the development of your technology and your budgets.  You carefully outline the timelines milestones and key inflections for your company growth.   In all of the planning, you consulted with your team and advisors.  Now you are preparing to present the business strategy to raise capital or find a partner for the technology.  In the practice sessions, one of your advisors tells you that the plans are great but be cautious, programs always take longer and cost more.  This fact is generally true. 

There are often issues that are not predictable that influence your costs and timelines.  Depending on the field of your business, the differences from projections and actual costs and timings can vary widely.  In the medical field, the ranges can be as much as 2-3 times longer and greater in costs.  One would think that with practice, the predictions are much closer, but it is not possible to figure in the unknown events that effect your business.

You still need to plan and be able to defend the budgets, timings, and milestones.  Investors will scrutinize your knowledge of the numbers and timings along with your abilities to defend the numbers.  The information shared really help the investors become more confident in your understanding of the business and ability to run the company.  The investors use the information to determine how much investment is needed.  Their goal is to get the company to some reasonable inflection so the company can be profitable or raise capital at a higher valuation. 

No investor wants to give funds to a company and see it run out of money before reaching a key event.  In fact, they would rather the company have extra funds in the bank on reaching the event.  They know that raising capital in the next round can result in a down round when the company has no money left and is negotiating the terms.

When you prepare your budgets, always consider the timings and costs carefully.  Remember that you are likely to have issues that will slow the projects down and/or make them costs more.  Try to plan conservatory and add a bit of a buffer.  The planning to the next big event is most critical.   Try to ensure there is a window of money left to operate while you try to close on the next round.  In some cases, this window may need to be between 6 to 12 months of cash.  Likewise, negotiating with potential partners goes better when there is adequate cash on hand.  Well-informed people will find out when you will run out of money and drag out the negotiations until you have to give in to their demands. 

Remember, that things always take longer and cost more than your plans would indicate.  Showing you can operate on a lean budget is good, but running out too soon is not.  You will be better off with the extra cash in the bank rather than raising it with nothing left.  Plan for higher costs and longer time, then run the company to save money and move quickly.  You will win in the end.
Taffy Williams is the author of:  Think Agile:  How Smart Entrepreneurs Adapt in Order to Succeed to via Amazon

Friday, May 18, 2012

Even a Blind Squirrel Can Find Nuts

There was a time of transition where I was seeking to find a company to run.  I was eager to obtain an opportunity where I could make a difference and get involved in a startup.  The search was exhausting and took extensive time to seek and review opportunities.  I was on the phone and sending email every day for several months.  It was during this time that I began to think the opportunity did not exist or that no one would allow me to have one.  I was speaking with a trusted advisor and he offered me the following advice; “Even a Blind Squirrel Can Find Nuts.”  At the time, all I could do was laugh.  It was funny and did not seem to relate to my situation.  What he was really saying was that there are so many opportunities available that I must keep looking to obtain the one that I wanted.  This is true for a startup or a job search. 

The advice turned out to be more appropriate than I realized.  It was not until if found what I was looking for and built the company that I began to really see all the opportunities available.  They come from so many different sources I now have more problems screening them than finding them.  Opportunities can come from Universities, Company spinouts, Friends, and other places.  I see them at competitions where entrepreneurs are seeking help and money.  University faculty may have an idea but not know what to do next.  Startups are stalled and the entrepreneur has no idea of next steps.

In the early time of entrepreneurial development, seeking the technology becomes the sole activity and it is time consuming.  Opportunities exist everywhere, but it is important to set your expectations such that you keep seeking until you find what you want.  More importantly is that you search using better-defined parameters. That is, to finding something that is a real fit with your knowledge and skills.  This means setting appropriate filtering in your search.  Start by determining what you really want and try to limit the search.  You can always expand it later.  I find limiting first helps me stay focused.

On finding that special opportunity, make sure you do your own diligence.  With so much to choose from, your goal must be to select the best possible business opportunity you can find.  Keep in mind you have to live with the business for a long time. 

I will always remember the advice “A Blind Squirrel Can Find Nuts”  for two reasons; 1) the person that said it was a very close friend and advisor, 2) it is true and says stick to your search there are things out there for you.  Learn to review the technologies after you find them and you will always end up in a much better position.

Oh yes, the squirrel in the photo was unharmed in during his/her involvement in this endeavor!

Wednesday, May 16, 2012

Angel Education is Sometimes Required

Angels are qualified investors willing to take a risk and invest their money in an early stage company or startup.  They may have made money in the field of the investment but this is not necessary.  They may or may not even know about the space they are investing.  Angels may wish invest but they can be very unfamiliar with investing in private companies.  Thus, some Angels require help in understanding the business and investment criteria.

Educating any investor on the business is customary.  The company is the expert in the space and has done all of the work to identify the market, placement in the market, and development of the products.  They have developed budgets, timings and milestones reflected in their business plan.  Helping sophisticated investors to see the vision of the company is expected, especially if the company wants the investor to share the vision.  Remember, investors are like partners and will be around for a long while.  An excited and motivated investor is more likely to assist in other ways to help the company progress; including investing more money.

Angels are not professional investors.  They need to be educated on the business just as the professional investor, but sometimes they need help with investment choices.   Take for example a PRIVATE PLACEMENT OF CONVERTIBLE PROMISSORY NOTES.  Typical terms on a convertible note include such things as: interest, discount, conversion definition, ties to future round of financing, and possibly liquidation preferences.  Even if the note does not have all these, the investor may be entitled to all the terms of the investor to follow the Angel round. 

One common place to use a convertible note is when the valuation is difficult to define and agree on; e.g., at startup.  The note allows the Angel to make an investment and gain the financial benefits associated with a future investment round by a professional investor that defines a company valuation.  The Angel would get all the benefits of negotiated by the future investor plus the benefit defined by discount and accrued interest.  For example, if the discount rate is 20% the Angel gets an additional 20% of the original investment in equity when the note converts to common stock.  An investment of $100K would be worth $120K of stock for example.  In addition, if interest were 6% for 2 years, the Angel would receive stock based on $120K plus around $12K for a total of around $138K at the time of conversion.

Liquidation preferences over the last several years have been as high as 3x the invested funds.  This is rather high and 1x is more likely these days.  A 1x liquidation preference would mean the Angel would receive their original money plus accruals returned to them on the sale of the company.  This happens before any of the common shareholders receive any funds.    Then they will participate in the distribution of remaining funds from the company sale.  The participation is proportional to the percentage of the company they own.  Assume the company is sold for $1.138M and the investor owns 10%.  First the investor receives the $138K for the preferences then 10% of the remaining $1M.  The net for the investor would be $238k for the 2 years.

The terms in financial offerings are not always clearly understandable.  In a few cases, it has taken extended explanations to help the investor understand the upside.  They also, may not understand the downside.  In many cases, there are no tangible assets in startup companies.  The downside is loss of all invested funds.

Terms and structures of financings vary.  Entrepreneurs having never raised capital will first have to learn what the financing vehicles are and then understand them.  They may have to help educate the Angel investors that are unfamiliar as well.  In short, “Angel Education is Sometimes Required” but this may also be the case for the Entrepreneur as well.

OutSourcing Clinical Trial Presentation

Monday, May 7, 2012

Words and Experiences Are Important to Communication - Who Is On First?

Words are not the only part of communication and their interpretation depends on prior leaning experiences.  It is amazing that some people and cultures are able to relay exact messages but with some degree of effort, it is possible.  Communication between investors, partners, or staff is complex.  Even the most experienced managers, negotiators, or diplomats have problems at times.  Your goals in a startup must always be to provide clear communication and understanding with all those around you.

One way to show differences in interpretations comes from a discussion I had with a scientist on my research team a number of years ago.  He relayed the following statement from a news article:  Americans strive to succeed while Europeans strive to not fail.  To some, the comparisons are the same while to others Americans are risk takers, while Europeans are conservative in their approach.  The end goals are the same, but the approach to success is different.  Yet, the language sounds like the same description if provided using different words.

Communication between cultures often relies on how the experiences and relationships structured the lives of those in different countries.  In some cultures, nodding one’s head means they hear you, while in others it means yes.  The same can come from the use of the words yes in some cultures; i.e. they heard you but they may not agree.  I spent some time working with a scientific team in a foreign country transitioning to a more democratic style of government.  The scientists were trying to become entrepreneurs and creating a company.  My messages on being aggressive in the work place and other goals did not translate the same to them because they had never experienced the American actions related to the words.  Translation: “They thought they were doing as instructed, but they had no basis to understand the instructions.  The words were there, the underlying understanding of those words were different.

In a recent discussion with an administrator about an employee, the administrator thought the employee was not communicating effectively due to language.  The administrator did not understand that the employee’s life in a different country did not translate into the employee understanding the words and actions in the way that the administrator did.  Both were excellent at their jobs, but the communication gap existed because the administration in general and the employee failed to understand each other.  Understanding takes extra effort when one is adding the cultural differences into the mix of the communication.

When I am asked questions and I answer them directly.  My tendency is to take the questions in a literal meaning.  Sometimes the questions are not literal but relate to a different question.  This failure to see the real issues and answer a question that is not what was intended creates confusion.  The ultimate goal is to communicate and, at times, it takes listening and interpreting the individuals to do so.  It is hard to see the real questions when not asked directly.  It is hard to interpret the answers when seeking an answer to a different question; i.e.  communication at its worse.

One of my favorite comedy skits came from Bud Abbott and Lou Costello:  Who is on First .  This skit highlights the inability to convey the meaning of words and the literal but incorrect interpretation of them.  If you elect to watch this on YouTube, keep in mind that from time to time, your conversations may come across just as confusing.  Take the time to understand and communicate so you are not asked “Who is on First?”  

Tuesday, May 1, 2012

Working with Dr. NO

You may have seen the James Bond movie with Dr. No.  Well, Dr. No is real and you will likely have one affiliated with your company or at least in a prospective partnering company.  Dr. No as the name implies is always the one that finds ways to complicate everything and finds it easier to say NO.  It is difficult to deal with these types of negative people and in many cases the best way to handle them is to just go around them.

Gus Levy recently was quoted as saying “Don't Tell Me What I Can't Do; Tell Me What I Can Do.”  This is not the first time I have heard this quote.  I first heard the quote from a Board Member about 10 years ago.  He was quoting a billionaire dealing with his legal counsel.   The quote stuck and has always been something I consider when finding situations reaching an impasse.

Another way of looking at the situation is what alternatives will allow for getting past the Dr. No in your crowd.  How many routes can you find to get over the hurdle that is blocking your path?  There are usually alternate paths that will lead you to achieving goals that seem to be out of reach.    There has to be a way to convince any Dr. No in order to make progress or you must learn how to go around them.

The stick-to-it attitude and innovative approaches generally help to move past the barriers.  Barriers always exist, but finding ways around or over them is not always so easy.  A few ideas of seeking your resolutions are below:

Change the question - You just showed legal counsel something and were told you cannot do what was anticipated. This happens many times.  Have them innovate to solve the problem. Change the question to “HOW CAN I MAKE THIS HAPPEN? “   

Collaborating - The other side has a negative person on the team that never sees anything but the bad.  Try to get others on the other side involved in the discussions.  Ask what it may take to help convince Dr. No to be an advocate of collaborating. Perhaps, you can convince Dr. No to identify ways to improve the deal and become a Dr. Yes. 

Team Members - There will most likely be someone on your team that believes an idea is not going to work.  Perhaps that member will even try to kill the project.  Working closely with the negative person and getting them engaged might help to change the project to one that everyone will support.  An alternative is to assign that person to a different project and eliminate them from the team.

Remember, your job is to develop unity and enthusiasm needed to accomplish what needs to be done.  Meeting Dr. No is almost a certainty.  Make sure there are no real reasons that make Dr. No correct for being negative.  Try to develop skills that will help you turn Dr. No into a Dr. Yes.  You will find your life to be much more pleasurable and more successful. 

Taffy Williams is the author of:  Think Agile:  How Smart Entrepreneurs Adapt in Order to Succeed to via Amazon