Smartups

Lessons from Rob Ryan's Entrepreneur America Boot Camp for Start-Ups

Rob Ryan

• Publisher: Cornell University Press
• Year: 2012
• ISBN:
  9780801459597
• Topic: Business
• Subtopic: Entrepreneurship
• Index: Business

Building successful start-ups was never quite as easy as it seemed, and the changing economic climate has raised the stakes, reduced the margin of error. New entrepreneurs can't stumble into wealth on the power of half-formed ideas, or turn dreams into reality without doing a lot of homework. It's time to get smart. This book teaches would-be entrepreneurs the skills they need to get through the venture capital process with companies that will survive to grow and succeed.

Rob Ryan, a pioneer in the high-tech industry, founded Ascend Communications in 1989, and throughout the nineties provided firms with the infrastructure they needed to keep up with the rapid growth of the Internet. At the beginning of 1999, Ascend was sold to Lucent for $25 billion. Since retiring from Ascend and starting Entrepreneur America, Ryan has helped launch a string of successful companies, including Virtmed, RightNow, and Virtual Ink. All provide electronic solutions to real-world problems, meet existing—rather than manufactured—needs, and save their customers time and money.

In Smartu ps, Ryan focuses on methods he's developed over the years for building a sustainable business that makes money. He emphasizes the importance of testing ideas on customers and making sure that a product offers something new and important. Recognizing a team's key competencies is crucial, Ryan says. He also finds it necessary to take certain steps at the correct stages of a company's inception. Smartups will show you how to turn your idea into a real product, take it to investors, and get your start-up started right.

1 Which Wanna-be Are You?

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ROAD MAP:

Slow down! You’re not ready to talk to investors until you’ve got answers to the probing questions they’re going to ask. Take a deep breath and then take stock of where your company stands. You’ve got a lot of homework to do before shopping for money.

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One hot summer day a few years ago, Steve Hau and his start-up team arrived at my room in the Four Seasons hotel in Boston. Steve wore that hungry, desperate look that says “I need money now.”

After little introduction, Steve began his laptop presentation as I leaned back in my chair. Steve outlined the vision that he had dropped out of a Harvard Ph.D. program to pursue: “Clinicians don’t really have access to information. For example, doctors are still using index cards to capture inpatient billing charges, i.e., the hospital’s most precious financial information! A week or two later, those doctors submit the cards to accounting,” he explained. “Some 3 to 7 percent get lost, the rest are entered into a mainframe by a pool of error-prone clerks.”

Instead Steve wanted the doctors to carry handheld computers (like Palm Pilots) with his team’s enterprise-enabled software, enter the charge on the Palm, then place the handheld on an electronic synchronization cradle to automatically send the data to the mainframe.

Steve posed, “Why is it that the Avis guy can zap your rental car with a handheld device and have your life story at the point of sale…but your doctor cannot access the most basic information about his patient at the point of care?”

Breathless, Steve finished his presentation. The team’s eyes were on me as Steve pushed toward his finale, saying, “We need money. I am three weeks from closing our doors. Can you help my team?”

I sat up in my chair. “Do you have a customer?” I asked him. “Do you have a working prototype?” Steve mumbled, “Well, no, we don’t have the money to do all that.” “You wouldn’t get any, either,” I said. “Not from me or any top investment firm until you do.”

It’s the same advice I give to almost every start-up that pitches me. They usually think they’re ready for investors. In reality, they generally have months of hard work ahead of them. Over and over I tell them the same thing: “Until you have product and customers, you aren’t ready to raise money with top-tier venture capital firms, and those are the only ones I deal with.”

Steve looked deflated. His idea had promise, and I offered some advice.

“You need to get some friendly angels, like Mom or Dad or good friends,” I said. “Raise two hundred thousand dollars or so to finish your prototype and then get a beta customer, one that will test the product.”

Many start-ups just roll their eyes when I shell out this tough assignment. But Steve rose to the challenge. He asked, “If we do this, will you help us?”

“Yep, I’ll invite you to Entrepreneur America at my Montana ranch,” I said. “We’ll work on your business plan and polish your investor presentation.”

I wasn’t sure what to expect. I give the same advice to a lot of start-ups, and most I never see again. They just give up. But several months later, I was lecturing at MIT. After the talk, as I did the business card shuffle with audience members, I spotted Steve standing at the edge of the crowd.

“Do you remember me and my idea?” he asked. I did and asked him what progress he had made.

“I raised the money, built the prototype, grew the team to five engineers, and we are currently testing our product with a dozen doctors at a large Boston-area hospital,” he reported. “So, can my team and I come up to the ranch?”

You bet.

Diagnosing Wanna-he Madness

I’ve worked with dozens of start-ups at Entrepreneur America. That’s the mentoring program I began shortly after leaving Ascend, the Silicon Valley wide-area-networking company I founded in early 1989. In running Entrepreneur America, I’ve seen all types of company founders. Geniuses, bozos, wonder kids, tricksters, you name it. Lots of people have a germ of an idea kicking around in their heads and are convinced they can turn it into a gazilliondollar business. I call them “Wanna-bes.” I don’t use the term to be pejorative. Often Wanna-bes can transform themselves into successful entrepreneurs—but only if they’re willing to work hard.

The classic error that a lot of my Wanna-bes make is mistaking the idea of a business for the actual building of a business. By coming up with a good idea, they feel they have already done the hard part of building a company. In fact, what they have done is equivalent to finding their sneakers before running a marathon—they’re still not even at the starting line.

Most haven’t done their homework on the business model. They haven’t built a prototype or gotten feedback from potential customers. Frankly, very few are ready to raise money. My main mission with these entrepreneurs is to slow them down and get them to start asking (and answering) fundamental questions about their business.

Not only do I teach the entrepreneurs, but I learn from them. One thing I’ve noticed after four years of working with start-ups is that there are a few distinct types of teams. The philosophies and approaches the founders take toward building companies tend to place their companies in one of seven categories.

Quickie

Wonderful Wacky MBA

Send Money

Dreamers

One-Stripe Zebra

Technoid

Guts and Brains (the Dream Team)

All these categories, except Guts and Brains, have one thing in common. They have not done their homework on their business model. They are not ready to raise money. My main mission with these entrepreneurs is to slow them down, strengthen the team, and get them to start asking and answering fundamental questions about their business.

THE QUICKIE WANNA-BE

In the Internet economy of the late 1990s, Quickies have been popping up like jackrabbits. Quickies are identified by a get-rich-quick business model that has no clear-cut application and no value proposition. These money-losing business models just don’t make sense for building stability, for growing a sustainable company that will last for ten or twenty years.

One classic profile I’ve seen over a dozen times (but don’t mentor) is the “Eyeballs.com Ponzi scheme.” The founders either talk about amassing consumer “eyeballs” to look at a set of content or use a marginally helpful product. Making money is not a concern. In fact, it usually costs more to attract the eyeballs than the company earns from getting it. Or, in many cases, the company just gives away content or product. The idea is to amass the eyeballs, go public at the earliest opportunity, manage the stock for maximum valuation, then sell the company before the six-month holding period for stocks of insiders has expired. Voilà! Magic wealth for the founders, VCs, and insiders.

Whether the market condones this or not, it’s not okay in my book. This approach doesn’t build anything of value and benefits only a small number of people. Quickies who actually want to build a company need to focus more on growing the business and less on managing a stock. Real companies build predictable revenues and large, profitable earnings. Wealth creation follows real companies. I can’t tell you how many people have told me that profits from Ascend stock sent their kid through college or paid for a new addition on their house. That feels good because not only am I benefiting, but they are, too. Who benefits from a Ponzi scheme except the guy who starts it?

THE WONDERFUL WACKY MBA WANNA-BE

I know I have budding MBA Wanna-bes when the “wacky attack” starts. They dance around the conference room, whipping out tons of charts and quotes to prove that the market is humongous. I call it proof of the “zero-billiondollar market.”

Most MBA Wanna-bes are like the team I met a few years ago back east. They were led by a very enthusiastic entrepreneur whose dream was to create a Web site for alumni of major universities. The idea was to create a “place for people who shared something in common” that would offer news, health, and shopping.

The team came to see me and went into a complete wacky attack. They started off with marketing charts that demonstrated things like how many alumni were floating around (millions!) and how much money they spend (zillions!). Like most wacky attacks, this one never got around to important data like exactly who the customer was, what he was buying from them, and what the value proposition was.

Here’s what’s wrong with marketing reports: Either the industry is immature, in which case nobody knows what the hell they’re talking about, or the industry is mature, which means that there are entrenched leaders.

THE SEND MONEY WANNA-BE

Frankly, lots of entrepreneurs start off in this category. You’d be amazed at how many people ask me—a complete stranger!—to give them a few million dollars. They think: Mentor equals money.

These Wanna-bes think that once they get a big VC check in the bank, everything else will fall into place. In fact, it’s the other way around. You need to get everything in place, or at least a lot of things in place, before you can start asking for money. Money follows those who do the right things.

For me, the Send Money alarm goes off when I ask, “What’s your financial status?” and the answer is, “We’re broke, but we just need $250,000 to get over the next hump.” Hah. When I ask a few more questions I usually find out they shot their business plan at every VC guy within range, but because they hadn’t done their homework, everybody dodged their presentation and turned them down.

Just last week, for example, I got a classic Send Money letter from someone I didn’t know. The letter wasn’t even addressed to me, it was “To Whom It May Concern.” Here’s the first paragraph:

I have a wonderful project with plenty of long-term earning potential. My dilemma is that I lack the initial funding to really make this project go. I am asking you to guide me in the proper direction to fulfill my dream. I am providing some baseline information regarding the business for which I am interested in acquiring financial assistance and guidance.

Classic. After a few more paragraphs outlining a vague business plan, a shaky management team, and a few potential distribution relationships, the letter wraps up like this:

What we are seeking is seed money to create a comfort level so that all the critical elements needed for the success of this venture are able to run smoothly without having to function at so lean a position during start-up of the business in 2000.

I guess it never occurred to this company to bootstrap during the start-up phase. When I get a letter like this, I don’t even bother reading the whole thing. This team isn’t ready until they demonstrate that their focus is on running around talking to customers instead of investors.

THE DREAMER WANNA-BE

These Wanna-bes are “Visionaries” with a capital V, rarely blessed with detailed information or management know-how. They’re grand thinkers and schemers who tend to slip easily into Send Money mode. If you’re in this category, you could admittedly be the next Michael Dell or Bill Gates. But it’s...

Table of contents

• FOREWORD
• PREFACE TO THE CORNELL PAPERBACKS EDITION
• ACKNOWLEDGMENTS
• INTRODUCTION
• 1 Which Wanna-be Are You?
• 2 Do the Dogs Like the Dog Food?
• 3 The Sunflower Model
• 4 The Keys to the Gold Mine
• 5 Peeing in the Wells
• 6 Sucking the Air out of the Room
• 7 So You’ve Got the Money, Now What?
• Epilogue: Companies That Make It