Dave Parker's Blog

As we open the new semester at the Founder Institute Seattle I’m out meeting with different groups about the program and answering the questions for potential candidates about both the program and where we fit into the Seattle Entrepreneur Ecosystem…As we start our fourth semester in Seattle were very clear on our program goals and the niche we fill in the market (Part 2 to follow). Application Deadline for the Spring Semester is Feb 26, 2012.

The program is a 15-week pre-seed incubator program. Every week, three mentor/Founder/CEO’s come into the group to listen to Founders pitch their ideas, provide feedback and then teach on a topic from Ideation to Fundraising (curriculum here). I would make a distinction here that the Mentors start as speakers, provide feedback to the Founders and many become true Mentors later in the program. *Note to potential Founders – if you’re not full-time,  incorporated with the things you need done to launch your business, why will the Mentors take your idea more seriously then you do?

What is a Pre-Seed Incubator?

• The program will push you in 15 weeks what most people won’t get through in a year or two, to graduate from the program you will have to show
  • You have a Big Idea and you’re going after a big market – not a hobby
  • Customer validation – actually talk to the people who would buy your product
  • Financial model – your financial assumptions on a spreadsheet
  • Pitch Deck – 10 slides to explain your idea
  • Prototype or demo – if you’re a single non-technical founder it may only be “slideware”
  • Incorporation – C Corp, not a LLC
• Pre-seed means before you have outside funding – why don’t we provide funding? Typically, our Founders enter into the program with one or many ideas that they are trying to sift through and prioritize.
  • Just because you need money for your idea doesn’t mean it’s fundable (yet)

Who is this program right for?

• You’re working on your idea full-time, but not getting momentum
• Mostly Tech – if you’re doing a franchise or manufacturing, you’d benefit from the program, but it’s not the ideal fit.
• You have a day job, but you think you have a great idea. I compare us to TechStars for people with a Day Job – you may be a program or project manager, before you leave you day job make sure your idea doesn’t suck. We fit pre-TechStars in the Seattle market
  • TechStars takes teams – you’re not an exception
  • You need to have a solid idea (validated) and ready to build a product
• You need to find a co-founder

What else should I expect to get from the program?

• Peer Group/Working Group – you will be going through the program with a group of people working on the same projects at the same time. This will push you to make the deadline, you’ll have different perspectives in the group and different skills (tech, business, finance, design, etc.). Will you like everyone in the group? No, but we don’t have a Kumbayah circle. We have a goal to get your idea converted into a company.
• Office Hours – after the first cut you’ll have weekly office hours for feedback and goals for your company
• Access to Mentors – you’ll get to meet 30 mentors in your city. You still have to do the work of earning their respect, graduating from the program, etc. But you’ll start building your network more quickly.
• Deadlines – yes, you will have deadlines, and if you don’t do the work, you will get cut from the program.
• Post Graduation – introduction to the local Funding groups and VC, many of whom come to graduation, discounts on services, access to The Founder Showcase, an Alumni Group in Seattle and Internationally

What do you have to give to the program?

• The full details on the program costs are here-
  • $995 for the Course fee – this includes the cost of your dinner on Monday nights
  • 3.5% of your company stock into a pool
    • 1% goes to your peers that graduate (and launch) from your group
    • 1% goes to the mentors
    • 1.5% to the Institute
  • After you graduate and get funded, you’ll have a Tuition fee of $4,500
• Time. You can spend two years doing this slowly or 15 weeks doing it fast. It’s your choice
• Listen/Change – all of the mentors will share their mistakes with you in the hope you won’t make the same mistake – You will make your own mistakes. If you already know everything, don’t apply.

The program isn’t designed to be easy, it’s designed to compress your time between Ideation and Launching your Company. You will pivot your idea (most Founders more than once) between the start of the program and graduation. I know you just don’t believe that now, because your idea is so good.

I had the chance to participate in the final pitches last night at Startup Weekend Seattle (#SWSEA). There were 15 teams that pitched after working all weekend to build out their ideas and create products.

One to the changes they made at this event from previous events was the deliberate effort to recruit designers into the weekend program. Of the 15 ideas, only two didn’t have designers on their teams – only one didn’t have any developers. And 4-5 of the teams were led by designers.

By looking at the audience, there was a greater range of ages in the audience as well as more women participating. All great outcomes!

By looking at the demo you could see the results on the outcome of the mobile apps and websites. Take WhichBus, as an example. they had used the public map and transit information to help public transit commuters find the right bus.An honorable mention for winners as “Best Design”.

Or Seat with a View, that created a mobile app for sharing the photos you take from your window seat on the plane.

Finally, congrats to the Founder Institute Scholarship winners:

• ChickenCheckIn – a robot technology product and software
• Surpr!se – a mobile app to surprise your friends

Both of these companies have received a scholarship for one team member of the Spring Semester (they still have to apply for the semester)

I recently did a mentor session for the Founder Institute San Diego (thanks to Jeanine Jacobson for asking me to participate).

The session was on Revenue, Costs and Profits is here on Scribd.com.

First, as always, I want to give a shout out here to Steven Carpenter and his Blog, The World According to Carp for his TechCrunch Teardown of 13 Consumer Internet Business Models.This two part series will give Entrepreneurs some benchmark comparison data for doing your initial pro-forma for B2C products and services. Specifically, what type of numbers will it take to get to a $10M revenue based on the different models.

I discussed with the group the importance of having your hypothesis as ONE revenue model. This is in contrast to the early entrepreneur mistake that multiple business models must be better. Remember, more isn’t better, more is just more.

From that hypothesis, select your key metrics for the business and the financial model, as an example:

• Traffic sources and cost
• Registrations
• Uniques
• Conversion to Paid
• Pricing assumptions – average spend, subscription, etc
• Gross margin

Remember, you goal is to choose a business model that scales. You have to pick some pricing, you have to pick conversions… This effort will force you to get the numbers out of your head and get them down onto a spreadsheet. Use Excel to bring your feet back to earth…

As I reminded the group – and nearly every group I talk with on the topic. Steven Carpenter outlines 13 models. YOURS is not the 14th – so pick one!.

This is a Part 2 for the First Revenue Employee Hire – What’s realistic for Startup. You’ve raised some convertible debt or a small angel round…

First, let’s talk about what do you need from your first Revenue Employee?

1. Revenue (duh!)
2. Customer Feedback by selling – not survey
   • You can have an intern survey perspective customers, you need this person out selling the product even if it’s “vaporware” to start
   • Asking for the order – to pay for the product is different
   • NOTE – as the founder your “closing ratio” in front of a prospects will likely be twice as effective then a sales person simply based on passion, knowledge of the product, etc. You need to close the first deals yourself – if you think that is beneath you – get over it!
3. Short Sales Cycle <6 Months to close
   • New subscribers
   • Subscription Products – feedback will be gained through the product itself: how often to customers login, how long are they on the site, do they refer people to it (use the idea of Net Promoter Score as a model, do not try to implement it… )
4. Long Sales Cycle >6months to close
   • They need to start building a sales pipeline
   • Are there services you can sell in the meantime?

The net-net here is that you need to know your sales process. What are the steps and the time-line required to make the sale.

Base Salary

If you can’t hire someone that really believes in your company enough to work for stock options, beverages and ramon, you may need to sharpen your sales skills as a founder.

This sounds obvious, but you’re in a startup not an established corporation. Base salary can’t be $100k a year and hope that the experienced sales person will shorten that sales cycle by half, the sales cycle is most often determined by the product not the sales person. You should start at $3-5K in base salary per month. You need them to be hungry not happy with their base. If they need a path to how they make $150k or more a year watch out. You don’t know the answer and your forecast is going to be wrong. So set the expectation correctly…

What do you get for the salary? You better get activity:

• Work with them to identify the “ideal customer profile” based on the current product – they need to ask for the order now
• How many prospects have they talked to weekly – Prospects – not “customers”. They are customers after they write a check or provide a credit card
• not planning… not strategizing… not working on adwords… sales activity, calls or appointments

Commissions

To start, it’s OK to do a percentage of sales as a measure for Commissions. Ideally, you need to move to a higher percentage of profit. What should the percentage be? In general you’re going to commit 10% or more of your budget to sales.

For a subscription business – you can pay 100% of the service fee, over the first 2-3 months – NOT THE LIFE OF THE CUSTOMER. You don’t know enough about your business yet to make that commitment.

For Services – you can pay a 10-15% of the services contract. Just make sure you have the final approval over the price and price it accordingly. You should be able to price it up to cover the commission and the delivery.

Make sure that the document you use to capture the compensation guidelines states that Compensation can be changed from time to time. You don’t need to give such a high percentage of sales as the sales process improves and you have customer acceptance.

Titles

Start generic with Sales and Marketing. Don’t “over title”. They are not the VP of Sales and Marketing because they were your roommate in college. If they have done that job before, fine. Describe the role on the card.

What about Stock/Options?

One of the questions I received was that a senior sales guy wanted 20% of the stock pre-dilution, $5k a month to start. If your taking a salary your stock participation goes down, not up… 2-5% with a one year cliff and three year vesting is fine for someone that is expecting to take cash out… That % goes down with the greater traction your get in the market.  If they want to get a greater percent, have them work for free like any other founder.

Have more specific questions? ask away…

So, you’re hiring your first Revenue Employee for your new startup, Congrats!

I’ve called in revenue because sometimes it’s called called Sales, or Business Development (Biz Dev) or Sales and Marketing. But make no mistake, this first hire is about revenue and getting revenue traction. It’s not about “strategizing” about getting revenue.

This isn’t about bringing in a Co-Founder to drive Revenue. This is about committing cash, monthly to a hired gun.

Starting with the timing of the hire: 

• Do you have a product your ready to go sell? TODAY? This is often discussed as the Minimum Viable Product (MVP) that I have noted in the past or a more complete explanation is covered in the Lean Startup. If you don’t have a MVP in site you should NOT hire this person yet.
• Before you hire this person, have you made the first sales? As the Founder you are the your own best sales person – if your a technical person, I know that was a low blow… but it’s true. Also, if you can’t sell the product/services/offering then a Biz Dev person won’t be able to sell it, no matter how slick you think they are…

Credibility with your investors is not based on your ability to hire (or overpay) a person that used to work at Oracle or Sun, it’s based on actual revenue and sales traction.

Role of the hire:

• What skill set and role do you need at this point in your company? Let me give you two ends of the continuum:
• A Senior Sales Executive with Enterprise Sales experience who has built large sales teams?
• A Junior sales person that can follow a sales script and go bang away on the phones for cold calls?
• What type of product are you selling?
• Enterprise sale? For a complex and long sales cycle, this is likely an outside sales person, someone with a Rolodex (does anyone even use these anymore?)
• Services sale? This will require the ability to crank out proposals. You’ll need someone that has good writing skills and has done it before.
• Recurring monthly subscription? This is likely an inside sales person driving leads through AdWords and marketing.

Make no mistake here… someone has to sell the first 10, 50 or 100 customers. Setting up a Google AdWords campaign doesn’t replace a sales effort. Go meet with prospects, cold call them, do a trade show – as one of my mentors used to have posted on his desk “Nothing happens until somebody sells something”.

This is why you as a Founder need to go sell the first customer (or 5). Because your going to get the direct product feedback you need to adjust and pivot your idea.

What are the salary expectations?

“Dave, I have a Senior Sales person (who we really need) that is willing to come to work for us for $5k a month to start with a rapid ramp to $180k”. OK, if this is the starting point in your salary discussion or if you are bringing on a friend who has been making $160k a year in their current corporate job, watch out.

First, as a startup you are going to have conflicting needs for cash over the next few years. If someone has an expectation of making $160+ at a startup and you agree, both of you are delusional.

• Delusion 1 Founder – But my forecast shows we’ll have a huge hockey stick, we can pay that… as 1% of gross sales
• Delusion 2 Sales Executive – I can make the same amount I’m making at my current company and get 20% of the stock in NewCo!

Next up… Base Salary, Commissions, Titles  and Stock Options.

I was asked a question last week about co-founders compensation, specifically around guidance around splitting equity and salary requirements for the early contributors for a new start-up. The person was asking for the benchmark data for percentages to validate the right thing to do between two co-founders and one early employee that had more demanding salary needs. Let me start by saying I think the only wrong answer in the how to split equity is 50/50.

All that 50/50 decision shows about you is that in the first significant company decision you’ve faced as co-founders you have bailed out and taken what looks to be the easy path. Except that both you and your co-founder have entered into an agreement that most first time entrepreneurs have no idea about. Now, let me clear here, there are exceptions to this advice where 50/50 worked… but those exceptions are similar to having a “Billion dollar pre-revenue company” to use a start up exception.

At the front end of the process here are some things you need to consider:

• Who’s idea is it?
• Who’s putting in the start-up cash?
• Who has the passion for the idea?
• Do you have the same work ethic?
• Will you work for the same salary?
• Will you have the same duties?
• Will both of you sign personal guarantees?

Doing a start-up is hard. It’s easy to gloss over these things when all you see is upside. But hard when your getting asked to sign a personal guarantee. Make sure you talk through the above items before you decide how to split equity.

Now, you’ve got through round one. It’s time to work through round two of the dialog. Compensation and outcomes.

• Do you have the same compensation needs/expectations? e.g. can one of you work for free, but the other one needs to be paid. Does one person have a family and is used to making $180K a year while the other can work for $90K.
• Exit outcomes – One person may define success as a Billion dollars while the other would be happy to pay off their house and pay for kids college.This will influence your risk tolerance (all in vs. taking cash off the table).

All of these things impact how equity is split and how you get paid in cash. Let’s be clear both of you have expectations for compensation. And each of you have higher expectations then you have voiced to your co-founder. Voice those expectations now vs. later… it will never get easier. Complete these items by writing them down separately and then walk though them over a beer with your co-founder. After you’ve had a couple of days to process the information, then decide how you should split the stock…

We completed our integration with Constant Contact (CTCT) last week.

Now Constant Contact users can simply use there existing credentials, the same ones they use to log in to CTCT, to connect their Email Service Provider Account with the Bundled list management platform.

Why does it matter?

• Your Dashboard data will no include your CTCT list count, you can see how your list is growing from month to month and how it grows with social media
• You can edit and append data in Bundled that will synch to CTCT
• When a customer changes an email in CTCT it sync’s to you Bundled list
• You can now filter and create new lists without having to create an excel spreadsheet
• Finally, you can now add new data fields to your email list, Birthdays, Facebook photos…

One customer list… including your Constant Contact data.

Constant Contact users, give Bundled a try for free!

Recently, I had a chance to judge a business plan competition for one of the universities in Seattle. One of the contestants at the event was a services company that wanted to be the “Best (services type) firm in Seattle.” But they also wanted to offer cheap services to showcase their capabilities…

(Before I’m perceived as dissing all services companies, let me start by saying that I co-founded a services company, OneAccord Partners, a Revenue Consulting Firm that helps mid-market companies grow profitable topline revenue. I am still on the Board of that company.)

During the pitch at the contest, the services firm stated that they wanted to be both the “Best Design Firm in Seattle” and a cheap solution, comparing themselves to 99Designs. 99Designs provides crowd-sourced design service. It’s a great site – you can create a contest to build a logo for $99 (and up). The request is sent out to a list of designers who compete for the contest dollars. The result is you get a logo quickly for a bargain price.

In the pitch, the design firm showcased some of their work that ranged from simple to quite terrific. Because they positioned their offering as both the Best Design and a cheap alternative, I challenged them to pick either one or the other, and not try to do both! The rebuttal (and by that I mean minor argument) was that they were using the “cheap services” as the way to introduce their services into bigger clients to get the long term relationship.

I didn’t do a great job of explaining the differences between cheap and free at the time, so I thought I’d do so here.

So, you’re trying to offer your service to a new client and you’re concerned about your price point. What are your options?

• Sell the value – know what your competitors are billing and how you compete. Then sell the value of your service compared to the competitor. This is all about your conviction level. If you truly believe you’re at market and you’re worth it, have confidence, stick to your guns and lead with the value.
• Provide a guarantee – if you really believe in your service and your client is a big company taking a risk on a little company, you can provide a “risk reversal” where you have the risk based on a guarantee.
• Offer a limited project for free – this will showcase the talent, but LIMIT the scope to a number of hours.
• Discount the offer – this, as you may guess from the title of this post, is the least favorable option. You’ve shown the client that you’re willing to discount and you will not be able to significantly raise your pricing back to a competitive rate.