I have been writing a lot about Entrepreneurship and Startups, but I am not a big fan of the Clusterconcept primarily because getting established companies to be Entrepreneurial is very hard because they look at different metrics and the incentive for the established companies to participate in Cluster building is a long term game, however established companies are relatively short term focused because they are trying to increase their yield on invested capital by getting more efficient on the operation, sales etc. On the other hand a startup in the same sector is more or less not too focused on efficiency, they are trying to exploit a weakness or a problem in the existing solutions, therein lies the challenge. It would take visionary leaders in established companies to harness, foster and encourage the building of a ecosystem around the sector that their companies are built in. This is exactly what Dr.Thor Sigfusson has done with his startup/project Seafood Cluster a.k.a Sjávarklasinn in Icelandic. It is fascinating to see how he has convinced established companies in the Seafood sector and new emerging companies to co-located in a building in harbor of Reykjavik. He has ambitious plans to expand the facility to allow more startups and established companies to have meetup spaces. It was exciting for me to watch this because Seafood is the sector that is as traditional as they come, we are talking about really established fishermen looking into working with young new startups, mentoring them and seeing if they can improve the established methods using new technology.
There is a wealth of information and reports around the concept, I have not read all the reports but I believe this is something that I believe can work. I like the idea and the execution of the fact that if you put new companies and established companies near each other and once they start talking magic usually happens. In addition, the same location has some support services like legal, marketing and publishing etc Think of this as an Accelerator for a startup in the Seafood Sector. I think the missing piece is what typical accelerators do which is a 3 month bootcamp like environment that basically focuses on the validation of the new startups and also getting investors to be part of the project. I think Dr.Thor Sigfusson has already done that because the Seafood sector or the Fishermen are the richest cohort in Iceland and they are starting to see the value of having such a place and are investing in this.
We have invited Dr.Thor Sigfusson to be a Speaker in Startup Iceland 2013, I think this concept needs to be communicated in the Startup Iceland platform, and he has agreed to do that. In addition, it would be interesting to learn from his talk what were the challenges, opportunities and road block that he had to cross to get this project off the ground. If you are interested you should definitely buy the tickets soon as they tend to run out fast.
I had planned to do a meetup this week and discuss the above topic. Never got around to it, but I thought the least I could do is write about it. Here is a Kauffman Sketchbook with the title “Where do Entrepreneurs get their money?”
Here are a couple of references on fund raising from some smart people who have done this before:
My 2 cents is that try to bootstrap as much as you can to eliminate most of the risks in your startup. Think of it this way, every risk you eliminate to build a business is value you are building into your company that is your equity. The equation becomes simpler when you don’t take money to eliminate or reduce the risk of starting a new venture. The biggest risk that startups have, I have said this many times and it is worth repeating, startups don’t fail because they have a bad idea… startups fail because they don’t have customers. Eliminate that risk first ie. go and get your customers first, solve their problem, get paid something for it then you have a product/service to market fit. Eliminating that risk really increases the value of your effort, even if you have to raise money the discussion is much different than when you talk to an investor when you have no customers and no revenue.
Obviously there are businesses that need capital to acquire customers or start out for example manufacturing businesses need machines, labor etc those cannot be bootstrapped, however software companies can be easily bootstrapped these days, all you need is a laptop a coffee shop that has WiFi and knowledge to use Cloud Computing infrastructure like GreenQloud or AWS or Rackspace or Azure. I encourage every entrepreneur to delay the fund raising exercise until the Product to Market fit has been achieved. Once you solve the Product/Service to market problem, raise capital if you are in the Land grab business. I wrote about organic growth vs grow fast a while back based on a talk by Joel Spolsky. The most important decision point for a startup to raise capital is based on deciding where is the business. If you are in a Ben&Jerry’s kind of business raising capital is a bad idea. If you are in Amazon Web Service kind of business then you need capital to do a land grab as fast as you can so not raising capital will spell certain doom.
Entrepreneurship (Photo credit: Michael Lewkowitz)
Truth is reality. Reality can be distorted when we have wrong maps in front of us. To be part of a startup or running your own business there is nothing more detrimental than not dedicating everything about what is done in the company to truth. I believe Entrepreneurship is a Truth Game. You cannot lie to yourself that your product or service is great when your users don’t want to pay for it. The reality of running out of money hits you like a ton of bricks. Obviously it is hard, building something that is not yet there but getting someone to pay for it with all its limitations and crashes and bugs, but as long as you are honest about the status of things and are continually making progress you are doing the right thing. There is a reason why all investors want to see metrics, because metrics shows the reality of the performance of the team. So what are these metrics? Sarah Pervette, one of the speakers in Startup Iceland had this slide that she stole from Bessemer Venture Partners:
Source: Startup Iceland 2012, Sarah Prevette
These 6 metrics should be in front of every Entrepreneur, you need to measure this, monitor this and make sure that you are tracking progress on all of this. It is very easy to get caught up in the mix of things when you are doing a startup, there are million things you need to do and things are not working, people don’t show up because they are sick, whatever but being honest about the measurement of your business is the most important thing that you cannot take your eyes off from.
I was very impressed with the blog post by Ben Kaufman titled “What Raising Money Means to Me“. I believe personal stories tied to the ups and downs of building a business are always fascinating to read. Ben is young, went through the Paul Graham’s Startup Curve and I believe has had his awakening. You can see it in his passion and language
quirky.com About Team
My grandfather called me to congratulate me on building a successful company. We still hadn’t done shit. We just got some dude to write a check.
Things I have learned from closing rounds & announcing funding:
Be bigger than your round: If the press is only writing about how much money you raised, it’s because you haven’t done anything bigger. That’s on you and your team. Work your ass off to make sure the money is not the news. You should be really fucking uncomfortable if the money you raised overshadows the work you’ve done. It scares the shit out of me every night. Still does. Don’t rest on your round. Fight your round, be bigger than it. Make people forget that time you raised money.
Lead through it: The way you carry yourself through the announcement of a financing has a huge effect on your team and community. If you pretend it’s the coolest biggest deal in the world- they will too. Suddenly, all the hard work they are putting into launching a new product is out-shined by the fact that you got someone to write a check. As some illusion of success is felt, the collective level of hustle will naturally wane.
Be insecure: When I sign a term-sheet, I get angry and uncomfortable. “Shit, ok no excuses anymore–I gotta do this.” There is an immense sense of responsibility. Let your team feel your stress, your angst, your hunger. The passion of all around you will go through the roof. People won’t just throw money at problems, they’ll work with the same scrappiness and drive that got you this far. You don’t have to pretend you’re a big fucking deal. You’re not (yet). Be insecure.
Congratulations: Don’t congratulate people for raising money. That was never the goal. The goal is building a successful and meaningful business. When people raise money, instead of congratulating them, wish them luck. Their work is just getting started.Congratulating people for financing perpetuates a problem that has plagued the startup world. The problem is that that it’s easy to focus on the hype surrounding a company, and lose sight of the fundamentals. This is why our industry is flooded with what I call “startup fuckers.” These are people whose only ambition in life is to raise money, and then sell their company. They have no real interest in building a meaningful and enduring business. If we let startup fuckers dominate, we all lose. Read TechCrunch and any other “deal blog” and you’ll see countless companies boasting about how much money they’ve raised and how great they are as a result. It’s bullshit. They’ve done nothing (yet). Don’t fall into the trap of congratulating them. This is my favorite startup quote of all time (although I don’t know who said it): “Congratulating an entrepreneur for raising money is like congratulating a chef for buying the ingredients.” That says it all.
Put your ass on the line. Lay out clear goals for your users and staff as to what you hope to achieve with this round of funding: why you’ve raised the money, what you’ll do with it, and how the collective performance of everyone involved can be measured. Even if the money is news in the short term, you’ll have something to point to. “Judge me on this.” Some say under-promise / over-deliver. That’s fine. But do promise something, otherwise everyone will make up their own mind about how much your round should let you accomplish.
The above 5 points says it all. I have written a lot about not putting emphasis on raising money, it is distracting and gives a wrong sense of accomplishment. I think every startup should be focused on building something of value, solving a tough problem, don’t give into the hype of TechCruch or the Media although I think the Media and everything else comes to you when you are able to really Execute on the solution to the problem that your startup was founded on. Being an Entrepreneur is always about juggling priorities and ensuring that you are making slow progress but one cannot take the eye from the ball about Executing on the promise to your customer, your partner or your investors. That is what I saw in the post by Ben. Having the discipline to Be Bigger than Raising Money is hard when you are 25, I really take my hat off to Ben Kaufman. I wish all entrepreneurs to learn the same wisdom.
Muhammad Yunus in Houston (Photo credit: Wikipedia)
It is not law yet, but yesterday the Senate voted 73-26 in favor a bill that loosens SEC regulations in order to permit small businesses easier access to capital. I am not sure if “easier” is the term that I want to use, I think SEC rules were made a long time ago and we need to constantly review them and see if the underlying problems are being resolved through regulation. The capital raising rules as stipulated by SEC are draconian and demanding and is biased towards those with lots of resources and financial institutions (read money and BIG BANKS!). It is counter intuitive because those with money don’t really need to raise money, but the system is so biased towards those with resources that it is unbelievable. It was similar to the discussion Muhamed Yunus the founder of Grameen Bank in Bangladesh had when he approached a bank to request them to lend money to the poor people. The bank manager said poor people were not credit worthy, it sparked a fuse in Muhamed Yunus and he got the approval to start his own Micro Lending Bank. He found out that poor people are credit worthy and today that bank serves many million customers. If you want to read the story of transformation go read the story of Mohamed Yunus. If you make it harder then you just prevent those without resources to raise capital, i.e small business owners and entrepreneurs.
Forbes has an article that I thought was interesting, the article refers to Carl Esposti, founder of a consulting and market research firm Crowdsourcing.org, who is part of a group that has created a Crowdfunding Accreditation for Platform Standards (CAPS) program “to ensure a secure and reliable experience” for investors. I think the thought of something like this is important but I believe they are jumping the gun. I think more credible sources need to do the auditing of the platforms, should be interesting for the Big 4 Accounting Firms as this what they do, gives them a new product line, market and revenue stream. I need to reach out to my Partner friends in Deloitte, E&Y and PWC, if they have not already started thinking about this.
I am not even sure if we know all the challenges of CrowdFunding Platforms, I wrote about 3 big challenges, but I a pretty sure there are many. In my perspective are there going to be challenges ABSOLUTELY! will there be fraudsters? CLEARLY will people loose money? WITHOUT A DOUBT. These things should not stop us from trying to solve a problem and enable real, sincere and hardworking entrepreneurs from raising money. We don’t follow the rule of Napolean, we say everyone is Innocent until proven Guilty, should that not apply to Entrepreneurs too? No Entrepreneur I know wants to cheat and take money, well 1 maybe I digress… I think this is very interesting and precisely the reason I want to devote my energy towards solving this. If it was easy everyone would do it. I will be pushing the team at KarolinaFund.com to align with the movement and make sure they are trying this out in the local market and scale it globally.
The post is motivated by the answer I saw in Quora to a question that went like this “Where is this startup hype going to end?” The author went on to describe why he wants answers to the above question. His premise was that everyone and their mother is starting a startup and that is a clear indication of a boom and even people who know nothing about Internet are working on something. He was more interested to learn about How is this trend going to evolve, how is it affecting our society and where will it end up? All valid and relevant questions but these should be the least of the worries of any startup. The biggest worry should be how well you are iterating the Build-Measure-Learn cycle to improve your Product-Market fit and how quickly are you scaling up your customer base, market share and revenue, in addition, how efficient are you with the cash in the bank so that you can continue to extend you runway. Remember the biggest challenge a startup faces is Running Out of Money! the usual stuff.
I really like the top answer on the topic as well. If you have time go read it, it is insightful but I don’t really agree fully with the assessment that Interest Rates drives the engine of the startup world, sure it helps a lot when the cost of capital is low to be able to raise money but the biggest value while building a company is how cheaply you are able to run the business. The author to the answer refers to Paul Graham‘s Cockroach Essay. It is one of the classic essays from Paul Graham. I could not agree more to that essay, the reason a startup succeeds or fails is 99.99% dependent on the quality of the founders. This means “what matters is who you are, not when you do it. If you are the right sort of person, you’ll win even in a bad economy. And if you’re not, a good economy won’t save you.” The second point that Paul makes is how to make your startup recession-proof, it is “exactly what you have to do anyway: run it as cheaply as possible“. The most important lesson in building a startup is getting into the discipline of bootstrapping and Paul puts it “be the cockroaches of the corporate world. The immediate cause of death in a startup is always RUNNING OUT OF MONEY. So the cheaper your company is to operate, the harder it is to kill. And fortunately it has gotten very cheap to run a startup. A recession will if anything make it cheaper still”. Paul wrote this in October 2008, It is even cheaper today to run a company.
I distinctly remember those days in October when the whole financial system in Iceland had just collapsed and I got fired, one of the most liberating and conflicting experiences of my life. I need to thank the one who decided that I am not worth being part of the “team”. I did not do the conventional wisdom thing of either going back to school or trying to get another job. I did what Paul recommends that is be an Investor when the times of tough. I had no money, but found ways to raise the money convinced my partners that we should be building equity when the times are bad. The jury is still out on whether the decision was right or not. But we run a very tight ship with our operations, our partnership in my opinion has the lowest cost to run, it is about 0.6% of the capital we have invested. I know that we are cheaper in running our investment company than even Vanguard. This last couple of years has been a humbling lesson in building my discipline to endure the pain and sacrifice. I don’t have any sympathy for anyone who wants to do a startup but does not want to sacrifice. Like they say it is like running a Marathon, there is no short cut.
I saw this post on Business Insider with the title “Don’t do a startup, You WILL fail!” based on a presentation by Dave McClure. Dave is a colorful Super Angel and invests with an interesting investment thesis. But what Dave says is spot on and he is one of those who don’t Bull S#$%. Of course Dave goes on rant about all the wrong reasons that entrepreneurs start companies and then they complain that they were not successful. Go an flip through his presentation and ask yourself if you are doing your startup for any of those reasons. I like some of the tips that he has on the presentation, I like this one:
Doing a startup is a lesson in Pain & Sacrifice. If you are not ready to sacrifice and don’t like pain, just don’t bother because there will be times when you feel like you are scratching your fingernails against a rough sand paper. You need to have the persistence to ride those phases with optimism and positive energy.
You have not instrumented your market or your product, i.e you don’t know or have any metrics about how your solutions is changing market behavior. You don’t know what is a Lean Startup or Steve Blank‘s work on Customer Development. Dave has what he calls the AARRR Metrics. Which stands for:
Acquisition: How are users coming to your site from various channels? Do you know the channels?
Activation: Are users happy with their first experience?
Retention: Are users coming back?
Referral: Are users telling others?
Revenue: Are users spending money or allowing you to monetize in some way? The most important of all is whether you are measuring all of the above and what do they tell you.
You focus too much on the solution and not on the problem, better still you are really not solving a problem at all. It is not about the idea, it is always about the problem, the bigger, the bolder, the world changing the problem the better are you chances of building a business around that problem. I have written about it.
Your team sucks. There is no way out of that problem! You just need A players to go win the world. As I always say you cannot make a Donkey run the Kentucky Derby… it would get the sympathy but it will never win! The under dog stories are great but they rarely come true in real life. You better have a strong team that knows what it is doing otherwise you are lost period.
You have no knowledge of how to market or sell your product. You have this view that if you build it they will come. It is just not going to happen.
You have no idea of how to address any of the above topics but you have a fantastic idea! I say good luck, but I am sure Dave would say something much less nicer.
established companies to be Entrepreneurial is very hard because they look at different metrics and the incentive for the established companies to participate in Cluster building is a long term game, however established companies are relatively short term focused because they are trying to increase their yield on invested capital by getting more efficient on the operation, sales etc. On the other hand a startup in the same sector is more or less not too focused on efficiency, they are trying to exploit a weakness or a problem in the existing solutions, therein lies the challenge. It would take visionary leaders in established companies to harness, foster and encourage the building of a ecosystem around the sector that their companies are built in. This is exactly what Dr.Thor Sigfusson has done with his startup/project Seafood Cluster a.k.a Sjávarklasinn in Icelandic. 
It is fascinating to see how he has convinced established companies in the Seafood sector and new emerging companies to co-located in a building in harbor of Reykjavik. He has ambitious plans to expand the facility to allow more startups and established companies to have meetup spaces. It was exciting for me to watch this because Seafood is the sector that is as traditional as they come, we are talking about really established fishermen looking into working with young new startups, mentoring them and seeing if they can improve the established methods using new technology.
I digress… I think this is very interesting and precisely the reason I want to devote my energy towards solving this. If it was easy everyone would do it. I will be pushing the team at 
