LLC vs C-Corp vs S-Corp

There was a good discussion around Icelandic Startups planning to establish a company structure in the US and which company structure is most appropriate. I believe that it depends on the investor group. I found a very interesting blog post that basically went into all the details that I wanted to go in this post... then I thought why am I trying to re-invent the wheel. Here is the link to the post. The biggest items while forming legal entities is related to ownership structure, how much effort you want to put into maintaing books and accounts and tax planning. LLC is the simplest, is best suited for a small ownership group, C-Corp is the preferred route if you want to build a company have stock option pool, many capital raises i.e Series A,B,C etc. C-Corp and S-Corp have statutory legal and accounting book keeping requirements and have more complicated (read more taxes) tax structure. My own personal suggestion is to setup a LLC while you are building the business and when you are ready to issue stock options, raise capital and or bring new investors on-board convert the LLC to a C-Corp.

Related articles

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• LLC vs. S Corp: Which Is Right for Your Startup? (mashable.com)

How to make your startup survive

[Original Post written @http://startupiceland.wordpress.com] 

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.

Related articles

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Incubators vs Accelerators

[Original Post Written here in WordPress] 
There is a fundamental difference between an Incubator and an Accelerator. Here is a video interview where Brad talks about the difference between Incubators and Accelerators. 

An Incubator gives you real estate i.e table, chair, meeting room and power socket, internet connection, a coffee machine and/or a foosball table in exchange for rent. This has been the traditional model, and I believe the economics of this model does not work. You are trying to get rent from an Entrepreneur who is struggling to get his economic engine going. Some incubators actually take Equity + Rent for providing the above, that is just wrong!

To make a point, Iceland has a bunch of Incubators but no Accelerators! Most Seed/Angel investors when they invest in a Startup fund for all the above. I think that increases the risk to the Entrepreneur and the Investor. Think about it, every Entrepreneur needs to build a network, tinker with the Product-Market fit and build a business when operating in an environment of extreme uncertainty. This is what I believe increases the chance of failure. When I bring this topic up in Iceland, everyone comes to the defense of all the support that exists for Entrepreneurs, I don't doubt that or challenge that but the help is in the wrong direction. I want to bring attention to the successful Accelerators of TechStars and Y-Combinator. Lets look at the numbers:

TechStar (here is the link to live numbers from Crunchbase):

Companies selected through the program: 104

Failed: 8

Acquired: 8

Total Capital Raised by Companies: $126,392,305

Number of jobs created: 645

Timeframe: 5 years

Y-Combinator is by far the most successful Seed Funded Accelerator out of Silicon Valley. Paul Graham the founder has blogged about the results. He looks at the result differently. The total value of the companies that have gone through Y-Combinator according to Paul is $4.7 Billion.

I think Iceland needs an Accelerator and we are working on establishing one!

Related articles

• Incubators, Accelerators, and Your Startup...Oh My! (growdetroit.com)
• Student entrepreneurs frustrated by lack of funding (guardian.co.uk)

#BMD - Value Proposition II

This is the second of the posts related to defining the Value Proposition. The original post is here and the first post is here. I am using Startup Iceland as an example. Value proposition needs to address multiple stakeholders. The first post was the value we bring to the Entrepreneur, this post is going to focus on the Value to the Investors and Limited Partners (LPs) of Startup Iceland. We invest money on behalf of our investors and LP: What value do we deliver our Investors and Limited Partners? Traditional methods of measuring Return on Investment or Return on Capital Invested are good metrics, however the biggest value we bring is transparency. We plan to run the operations of the Venture Capital Fund in a transparent, inclusive and open manner. We clearly state our investment thesis, the timeline of investment, decision criteria for investing capital, our performance, time invested and effort in a team. Which one of our customers problems are we helping to solve? Mentoring, advising and creating an environment where the entrepreneurial teams get motivated to execute, win and be a world class company on a tough compressed timeline is a lot of work. We solve that problem for our limited partners and investors. Typical investors are passive and look at Venture Capital Asset class as risky, we asked the question ourselves why is that? the answer is it takes a lot of effort and handholding to make startups succeed. Eric Rise, the author of the Lean Startup defines Startups as an "Organization dedicated to creating something new under conditions of extreme Uncertainty". We strive to reduce the uncertainty through our disciplines approach, working harder and smarter, bringing the power of the network to increase the odds of success and following the time tested methods of building companies. We are entrepreneurs at heart, we have had experience building companies and we want to ensure that our experience gets translated into our portfolio companies. What bundle of products or services are we offering to each Customer Segment? Investors and LPs are always looking for avenues to invest their capital. We believe we provide a platform that is underserved. Venture based investments have outperformed typical asset classes over a 15 year period. A Venture Fund dedicated to creating valuable internet based companies out of Iceland is a unique value proposition. Our intention is to use Iceland as a good testing ground to validate the product quickly and help launch it in the global market place. We understand the world of Technology, being technologists, architects and geeks. We understand the direction the social networked world is moving to. A platform to invest in this new trend is the product and service we provide to the customer segment of Investors and LPs. Which customer needs are we satisfying? Diversification in capital allocation. High Return on Invested Capital and Being responsible stewards of capital. We want to earn the trust of our partners. We understand we do not exist without their trust. Our values of Integrated, open, transparent, fair and trusting relationships in building wealth and return to our Investors is our gospel. We don't just say it we live it every day. We will NEVER put our interest before that of our investors. We will measure ruthlessly our performance and we will be transparent about communicating our failures and wins. Transparent Governance is the core belief of our operation.

Related articles

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Innovation Clusters - Why they don't work

Here is an interesting article about "How to make a region innovative"  by Strategy+Business portal of Booz & Company. Why am I writing about this? well, because there is all this talk about Innovation Clusters in Iceland around Geothermal Energy, Seafood etc In My Humble Opinion (IMHO), it is a waste of time! this is old school thinking that never works. Don't take my word for it go and read the article. I am not the only one who thinks this way, there is a need for new thinking on innovation and entrepreneurship all around the world so how does not go about creating this new value i.e new equity. We are here because over indulgence in Debt has basically eaten away all the equity in the world. I am sure we all can agree that is the case in Iceland, but more and more countries are starting to feel the pain of this... hello! have you seen the news about Greece, Spain, Italy, Portugal... and the USA? So, here is a thought start hyper growth companies that can innovate at the speed of the internet and it can be done only by small teams because of chemistry, mechanics, change management etc. There is enough evidence to support Bigger a company gets the smaller is their rate of innovation, I am sure there are exceptions to this, but the majority of large companies fall into What Clay Christensen calls the Innovators Dilemma. If you have not read the book I highly recommend it. The only way to innovate out of crisis is to start small, start at the grass root and change the entire paradigm of thinking and radically make traditional businesses obsolete. There is only one sector that is good at this at the the Startup Nation! Actually I would go one step further and say... you better be thinking about a Startup Of You, no wait Reid Hoffman of LinkedIn just wrote a book with that title. People these days, always stealing ideas :) just kidding. Go and read that book it is fascinating to think about the fundamental changes that are happening right in front of our eyes, but you need to be aware to see or suddenly you become obsolete. Are you getting obsolete?

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#BMD - Value Proposition

[original post written @startupiceland.wordpress.com]
This is the first of the posts on Business Model Design. The topic this post will cover is Value Proposition, it is one of the boxes in the Business Model Canvas. In my opinion defining the Value Proposition is one of the fundamental blocks in building any business. The definition of value has to be clear. Lets consider the example of Auro Investment Partners aka Startup Iceland. When I embarked on this journey almost 3 years back the value I wanted to create was to enable entrepreneurs to achieve their highest potential and goals. Although the fundamental definition has not changed, what is valuable has changed depending on the lifecycle and stage an entrepreneur or the company that we work with is in. Alexander Osterwalder in the Canvas asks fundamental questions that we need to take the time to answer: What value do we deliver to our customers?

We deliver speed in capital decision, know-how, networking and physical presence into the US and Indian markets, mentoring and experience in starting, building and scaling companies in the technology and the hospitality business. Characteristic addressed: Speed, Performance, Risk Reduction, Customization, "Getting the job done",

Which one of our customers problems are we helping to solve?

At the initial phase it is providing the seed and angel funding, followed up with mentoring, advising and help in building  the team, a network and large markets of US, Europe and India. Characteristic addressed: Performance, Risk Reduction, Customization, "Getting the job done", Cost Reduction

What bundle of products or services are we offering to each Customer Segment?

Our customer segment is broken down into Entrepreneurs in the technology space and Entrepreneurs in the hospitality space. For the customers in the technology space, we provide validation of the business model hypothesis, marketing and sales strategy, operational know how, team building know how and developing the market and customer know how. In the hospitality sector we bring vast experience in developing, managing and running hotels. In addition, we bring experience in advising investors in investing in hospitality business. Characteristic addressed: Customization, Risk Reduction, Performance, "Getting the job done", Cost Reduction

Which customer needs are we satisfying?

We satisfy the need for early stage capital, mentoring and network development to validate product market fit. We try very hard to build relationships and partnerships that are driven by the principle of win-win. We want to understand and provide value for Entrepreneurs in the entire gamut of business development. We understand it is our previlage to have the opportunity to work with Entrepreneurs and not the other way around.  We want the entrepreneurs who work with us to see the value we bring to the table, if we are unable to justify the value we simply don't waste the entrepreneurs time. We believe we need to be evaluated the same way as we evaluate the teams and entrepreneurs we work with.

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Business Model Design

[original post written in WordPress] 

Alexander Osterwalder's book Business Model Design is an excellent workbook for all businesses, especially those that are already established and want to look for ways to transform, amend or update their existing business model. Of course for those of us who have been in the Consulting industry it all feels like deja vu but I have been impressed with the approach of the book. I have written about this before, what works for me in this book is the concise way in which to view, capture and focus on the elements that a business can strategize, prioritize and execute on. When I work with companies and try to help them through their trasformation the biggest challenge is identifying the most impact for the resources that is at our disposal. And when I talk about resource, I mean Time, Money and Teams. Time is by far the most important because that is the only thing that we cannot create. We can strategize about raising money or organizing teams. I want to run a series of blogs on breaking the Business Model Canvas into each component and explain. I believe that this work by Alexander is more important if not the most important work compared to the Lean Startup by Eric Rise. The Lean Startup sets the overall goals of embarking on either building a business or transforming an existing business or fixing a broken business, Business Model Design gives you the roadmap of how to do it. We are trying to put together a workshop during the Startup Iceland Conference, were we are working on bringing both Eric Rise and Alexander Osterwalder to run workshops in Iceland. If you have not signed up, please do me a favor and sign up. I guarantee it is going to be an awesome event.

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Marorka: A Startup Profile

Marorka (Photo credit: Finnur)

It is not fair to do a Startup Profile on Marorka as it is technically not a startup because the company has sailed the rough waters of the Valley of Death and it is well on the way of becoming one of the stars of the Icelandic startup story. The company was formed in 2002 so it has been a 10 year journey... However, there is a story behind the story, it took the company a while to break into the Shipping industry I am told. It is only in the last 3 years  that the company has really taken off and I believe the reason is because of their focus on the software side of the data that they gather from the ships and opening access to that data through the internet. In their own words "Marorka offers onboard and onshore Fuel Management and Energy Management solutions equipped with real time monitoring and decision support, an essential part of operational optimization. With Marorka’s energy management solutions for voyage tracking, inventory recording, reporting and data analysis, your business will be well on its way to maximized efficiency." 
I was rather surprised to hear that Ship builders do not provide the necessary information to optimize energy usage in the vehicles, it actually makes sense, no car manufacturer tells you how best to drive your car i.e when to step on the gas and when to step on the brakes. It is quite interesting that the founders of this company saw the opportunity and built a business. What was very interesting for me to understand was the sheer volume of time series data that they capture transport to a central server process it and make it available on a portal for the Fleet or Ship manager on shore to see. There are a number of challenges one has to factor, connectivity to the Internet is not continuous and the amount of data that can be transmitted is limited so I see algorithms that were used in the early days of the internet data transfer protocol should serve them well. I don't know their software architecture but it should be an interesting problem to solve or improve on.

Related articles

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Social Media is Not Done! It is just getting started

There is a lot of discussion that Social Media is done, what with Facebook, Twitter, Google+ and your Mom wanting to start a social media company. I don't think so, I think like everything else there are leaders and followers. Here is a Techcrunch article titled "Beyond Facebook: Rise of Interest-Based Social Networks" Where the main idea is that there are interest groups forming around specific areas that define the new depth in social networking. I see this possibility with many things. In my view, this is the play of the Long Tail on social media networks. There is going to be a long tail whether we like it or not, will these special interest social networks be as valuable? Not so much but they will derive value for the network that it is defined by and for new members to find them and become part of it. We have already seen this form in Photo Sharing (Instagram.com) Fitness (RunKeeper.com) Finance (StockTwists.com), Gaming (GameHub.com), etc It used to be called User Groups but then again the idea of sharing rich media has made each of these networks more value and the ability to bring the value propositions from the main stream into special interest has also made the margins more valuble. We are starting to understand how all these connection really drive value to traditional businesses as well as new businesses. We can actually measure and validate all our business hypothesis without having to spend tons of money in building things. I have written about this learning before as Validated Learning, Business as a Hypothesis, it is probably the most fascinating time to be an entrepreneur and start a new business because you have so much data to learn from. We never had that! thats why I believe we are not done yet! we are just getting started. Just think about how long it would have taken a new Media company like Techcruch to get started?

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Business as a Hypothesis - 5th Meetup

We had a very good turn out for the 5th meetup to discuss the book the Lean Startup. We had a new interesting idea that was tried out, where one of the participant takes 5 minutes to talk about something that he/she found interesting and wanted to share with the group. Sverrir took the first stab at it and outlined a check list for making a business case for your product or service. His posting is here on Facebook, for those who don't want to go there and find the post I have reproduced it:
22 Power techniques to show that your product or service has characteristics and benefits to secure a unique position for your product and sell it (From Formula Five)
The core things need to be present (all products and services have these), how can you show that you have strength in each of these attributes?

1. The specific product or service, describe it
2. Any associated service or product
3. Bonuses coming along
4. Pricing
5. Quality
6. How is it used, how easy is it to use it? 
7. Perceived value and status element
8. Your delivery
9. Your deliverability
10. Is it readily available? How is it available, when?
11. Your customer and technical support
12. Your selection 
13. Your convenience 
14. Any warranty 
15. Your policies
16. Terms 
17. Your guarantee or risk revearsal proposition, how do you minimize the risk for the buyer?
18. Your reputation 
19. Reputation of people that own product
20. Joining the club 
21. Ownership
22. Experience
23. (more, not mentioned here?)

Set up your Super Value Proposition (SVP)

1. Find and show the financial value of the element that will positively effect the buyer. - Calculate and show the better value. - If you are giving bonuses, say what they are worth.
2. Free focus factor, if the product has lower cost, calculate when the lower cost has added up so that the product is really free after that point. Tell it. Show it. „Pays itself up/free in ten months.“
3. Instead of value, when pays itself up, show how much extra profit customer will make. Do the math for customers (most won‘t do it themselves).
4. If not cost and money, show how things are quicker, easier, simpler, better environmentally.

The discussion centered around the notes that I had shared from the previous blog post. There was a number of discussion around how validating and hypothesis testing is critical to learn whether what we are trying sell has a customer. There was also a lot of discussion around why traditional businesses do not try this method with their current customers. Overall fun evening and I learnt a lot listening to the group.

Related articles

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Hustle, Bootstrap do what it takes!

I love teams that hustle and never give up. Gunnar Holmstein, the CEO of Clara wrote a blog post about Bootstrapping. That is the fun part of being an entrepreneur, it is easy spending money believe me I know! but making money without spending money for that you need to hustle and have a broader vision and purpose of why you are doing what you are doing. If you are not willing to sacrifice it all for that one burning goal, that vision, Entrepreneurship will beat you down to the ground and leave you as pulp. Here is the video of Sara Blakely, founder of Spanx, talking about how she took $5,000 and an idea for footless pantyhose, and turned it into a multi-million dollar women's undergarment business. She talks about a number of things related to building a business, being an entrepreneur and hustling with the Purchasing department of Nieman Marcus. What I took out of her journey was that she did not give up, it took her 2 years to go from idea, product design to selling but she hustled her way through the whole process even landing on the Oprah Winfrey. She has grown the company through bootstrapping and word of mouth marketing. I am thinking could she have validated her idea by buying some Facebook Ads? or Google Adwords? had a landing page with the picture of her product sample? with a buy button? Sure it could have worked. That is what we talked about in the session yesterday. I have written about how the Internet based commerce has changed. Now, you don't need even $5000 to make a sustainable business but the journey is hard, it has a lot of curves and bumps if you are not willing to do what it takes to make it, you will be left with bruises and bump marks. Check out the part where Sara is talking about how she hustled to get a Crotch Machine! it is funny! and she is a natural sales person, you can tell. Goes back to the book Tipping Point. You need the right person telling the story, you need stickness and context for any idea or product to become a social epidemic or as they say these days to Viral!

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Business as a Hypothesis - Notes for 5th Lean Startup Session

Today we will be discussing the concept "Business as a Hypothesis" in our weekly Ministry of Ideas meeting. The details of the meeting are here. I wrote about our first meeting and I have been really encouraged to see the swell of participation. We started with maybe 15 to 20 people, but last week we had over 40 participating. Sharing and learning from each other is fun. I thought Gunni was going to lead the meeting but he has asked me to do it, so I am going to give it a try. This blog post is more like my notes for the meeting. I was curious whether the two words "Business" and "Hypothesis" are linked together, so I did what any respectable researcher would do... I Googled it and guess what there is absolutely nothing out there in Google land explaining this concept so I think it should be a good discussion. Eric Ries talks about breaking any business vision into its component parts, he talks about two assumptions in business are "Value Hypothesis" and "Growth Hypothesis" in his book The Lean Startup, which is by the way the book we are using during these discussions.
"Value Hypothesis: This tests whether a product or service really delivers value to customers once they are using it. The traditional way would be survey or ask your customers to get their opinion, but that would not be very accurate because most people have a hard time assessing their feelings objectively. Eric tries to emphasize, experiments provide a more accurate gauge. 
Growth Hypothesis: This tests how new customers will discover a product or service." (pp 61)
Zappos is the world's largest online shoe store which was acquired by Amazon for $1.2billion, yes with  "b".  Here is a excerpt from the book "The founder Nick Swinmurn according to the book was frustrated because there was no central online site with a great selection of shoes. He envisioned a new and superior retail experience. Swinmurn could have waited a long time, insisting on testing his complete vision complete with warehouses, distribution partners, and the promise of significant sales. Many early e-commerce pioneers did just that, including infamous dot-com failures such as Webvan and Pets.com.
Instead, he started by running an experiment. His hypothesis was that customers were ready and willing to buy shoes online. To test it, he began by asking local shoe stores if he could take pictures of their inventory. In exchange for permission to take the pictures, he would post the pictures online and come back to buy the shoes at full price if a customer bought them online."(pp 57)
What is interesting in this experiment is that while running his experiments, Swinmurn tested various other  assumptions as well like interacting with customers, taking payment, handling returns, and dealing with customer support. What they learnt in that has become the stuff of legends i.e Customer Support made their online shoe store sticky therefore they spent considerable amount of time making that their main priority. Their CEO Tony Hsieh, wrote the book "Delivering Happiness" based on that premise. I also like the following excerpt from the Lean Startup book - "Even the seasoned managers and executives at the world's best-run companies struggle to consistently develop and launch innovative new products.
Their challenge is to overcome the prevailing management thinking that puts its faith in well-researched plans. Remember, planning is a tool that only works in the presence of a long and stable operating history. And yet, do any of us feel that the world around us is getting more and more stable every day? Changing such a mind-set is hard but critical to startup success." (pp 72)

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Revolution against Finance

I saw the interview of Steve Keen on Silfur Egils and I am sure if not all many of the Icelanders did too.



I have written about the Asset Bubble that is possible in Iceland and I have started to see green shoots of it already. Check out the housing prices to see the asset bubble formation. It really bothers me that nobody wants to bell the cat, I speak to my banking friends and they are all waiting for the good old times to come back. It is not going to happen, maybe it will for a small group of people... much smaller than the last time and that is what casuses social rifts. I think the most important statement made in the interview was that we have moved away from Finance for Industrial and Productive things to Finance of Financial things. The double leverage that is possible with financial instruments that make $1 get multiplied by 10 and 10 again in the short term produces $100 but in the long term does not produce anything. In the meanwhile that $1 carries the risk of destroying $100 in value. No wonder Warren Buffet called derivatives Weapons of Mass Destruction. Should we worry about this problem?  absolutely! You think Iceland is different because Iceland allowed the banks to fail? think again, look at the balance sheet of Icelandic Government, a majority of the liabilities have been allocated to re-capitalize the banks... guess who has to pay those liabilities? the tax payer.

I agree that we need to re-think financial economics, but lets not throw the baby with the bath water. The original premise that financial capital was created to make productive things has been lost in this debate. I am sure there are many ways to solve the current debt problem and Steve Keen gives some suggestions but there are other ways as well.

Lets take the case of Iceland, everyone wants to speculate on Real Estate once again... I mean really? concrete is more valuable than solutions to problems the future generation is going to face? Top 10 companies in the market capitalization are not in Real Estate the last time I looked. We need to focus on what creates value in Iceland. I have had many discussions with the executives in the banking sector, believe me there is absolutely no learning in terms of changing the ways of doing things. Every bank wants to clean up their balance sheet so they can go on building up the asset bubble on real estate. No-one is thinking about which sector or industry should they be investing in. I have written about my vision for Iceland and why we should be investing in Entrepreneurship, the sector that I wrote about is highly scalable, employs high technology and highly skilled labor force, is environmentally clean and things made in this sector actually can be sold anywhere in the world. How much capital is deployed in this sector by the Iceland you ask... Nothing, Nada, Zilch! The classic reason that I get is it is risky, what is risky? speculating on real estate or investing in Entrepreneurs who work tirelessly to really solve a nagging problem.

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• Iceland Tells The Banks Where To Go... (genuinewitty.wordpress.com)

Metrics that matter

Building a business is hard, running one while you are building it is harder. No wonder there are all these metrics on the failure rate of startups. Try juggling 5 balls while you are on a mono-cycle on the freeway, that is what it feels like when you are in the early stage of a startup. So, how does one navigate this mine field? Well, if we go back to basics, we absolutely need to have defined metrics that matter to building the business. Eric Ries in his book Lean Startup talks a lot about this but none of the stuff that he his talking about is new, just like what Warren Buffet says he does in the investment process is simple, but doing what he does is very hard. I want to make one small change to Eric's method of Build-Measure-Learn, I want to change the order a bit Measure-Build-Learn. This idea goes back to the times when I was in software development, I actually got pretty good at it when I started writing Test Code before I actually wrote the Code for the Use Case, I saw that I was making rapid progress in how well I could write the actual functionality in the system. For all those people writing software, read the Refactoring, Test Driven Development method and Continuous Integration by Martin Fowler, Kent Beck and others. The Lean Startup book refers to this as well. 

Lets define some metrics that matter, this also depends on which stage of the development the startup is:

Idea: You have a brilliant idea that you have shared with your friends and family and they think that this could be the next best thing to sliced bread. The things that you absolutely need to instrument at this stage are:

• Is your potential customer really hurting so bad that they are willing to pay you to solve it? how do you know?
• How will you find your customer? or more importantly how will they find your solution?
• What is the size of the market? how do you know?
• Is the market growing? how do you know?
• Will the customer continue to buy from you? how do you know?

The important thing in instrumenting your idea is to automate it, i.e just like a dashboard in your car build some gauges. The age of the Internet has bought all this to your doorsteps. There are many resources that are available that provide you with a wealth of data that you can read and make an instrument out of.

Startup: You have validated the above 4 things and you have also build a Minimum Viable Product (MVP), you have your first customer and you are excited that this thing is actually going to make you afford a cafe latte. Great! so what are the metrics that you absolutely need to have here?

• All of the above +
• What feature of the solution that you have sold to the customer that the customer absolutely cannot do without? how do you know?
• How do you plan to scale your business? i.e. how are you going to sell more stuff? how are you going to support the customers?
• How do you collect your payment? have you automated it?
• What is your Average Revenue Per User? (ARPU)
• What is your turn around time for customer issues?
• How many "features" read "bugs" that need to be addressed right away?
• How many people visit your website? (although the above ideas can be for any type of business, this metric is critical, if you are not being found you are not going to scale the business... Period)
• What is your conversion rate? i.e % of those visiting your site want to try your product/service
• What in your website attracts the visitors? this is nothing but which links they click on.
• How is your bookkeeping? are you accounts in order? have you automated it? again no excuse for not using tools that are available today to automate this important metric.

Once again measuring all of this is trivial in the age of internet. There are many tools available to do that Google Analytics, KISSmetrics, etc so no excuses for not having built instruments into your solution.

Related articles

• Why do Startups Fail? (startupiceland.com)
• Leaner Ries' Pieces and Minimum Viable Product (MVP) (jamesbayley.com)
• Signs You Aren't Really Building a Minimum Viable Product (22ideastreet.com)

Valuation of a startup - the holy grail?

I have been getting a lot of questions related to How does one value Startups. The best reference for valuation goes all the way to Warren Buffet's teacher Benjamin Graham and his classic book Security Analysis, I believe the principles taught in those books are timeless ie. they don't fundamentally change what does change is our perception of value. More recently, Aswath Damodaran's work on Valuation is quite impressive and it is used by many professionals. He actually has most of his work available online. Value is such a fluid word, what is valuable to a startup when it is getting out of the door is not as valuable when it is looking into the abyss of the valley of death. I have written about the challenges in valuing startups and the uncertainty that always stares at you when you want to do this exercise. I personally think this is the reason Banks or Warren Buffet do not want to even look at startups because they don't understand the challenges of running a company that is creating value in an uncertain market climate. In some cases they actually create a market, it hard to calculate the size, market penetration etc.


I have been a student of looking at many of the prominent Venture Capital Investors like Fred Wilson, Brad Feld and Mark Suster, who share their thoughts and methods since I have become interested in investing in startups. Here is a list of blog posts that Fred wrote on Valuation, I have listed them in the order that I thought was relevant to me:

1. AVC.com : The Present Value of Future Cash Flows To all those Python hackers out there here is a link to code that was shared with everyone on this post by Chris Dixon. The code actually simulates equity payout values with anti-dilution preference etc, I have gone back to my roots of looking at code to learn a concept. I don't prescribe it to everyone but works for me. If you have Python installed give it a twirl, I love this way of looking at valuation.
2. AVC.com: Determining Valuation Multiples, there is a link in the article that goes back to a Internet Market place business valuation. I recommend that as well to be considered. In the comments section there is a reference to the baseline data published by Damodaran is also very useful. Check it out here
3. Brad Feld's post on valuation
4. Mark Suster's post on Want to know How VC's Calculate Valuation Differently than the founders

Considering the above 4 posts and the links they refer to and using the basis of valuing any asset from the classic method one can develop a model. We have developed that model, no it is not in a shape that I can share, when I have time will make it available in this blog.

Related articles

• Facebook IPO: Company May File on Wednesday at $100 Billion Valuation (wire.kapitall.com)
• 4 Quick Factors in Startup Valuations (davidcummings.org)
• Damodaran on Valuation: Security Analysis for Investment and Corporate Finance (Wiley Finance) (pro2sell.com)
• A Business Paradox: What's Your Brand Really Worth? by @TeaSilvestre (smallbusinessfinanceforum.com)
• Why The End is Near for Angels (inc.com)