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Startups Need More Than Money to Succeed — They Need Smart Money
Ask any startup what the single most important element to success is and — more often than not — the answer will be money. Financing always ranks as a high priority for the small fish trying to make it happen in the big pond of business — but often discussed with less fanfare is where this cash comes from and what will come with it. These are actually the most important details to a startup.
That is not to say that money is not important. In fact, the second most common reason for startup failure is lack of funding, according to CB Insights. Although, perhaps ironically enough, the top reason for startup failure is lack of market need — a problem which could have been identified and avoided by investors who bring money with direction and money with experience.
Startups don’t just need money, they need smart money.
Startups need investors who bring not only cash to the table, but also their networks and business acumen. Essentially, they bring experience and direction to outfits that are usually inexperienced or directionless. So, let’s talk smart money and the startup.
What is smart money?
“Smart money” refers to investors who are simply more intuitive and aware of market movements and business health. The Financial Times describes “smart money” as “sophisticated investors who tend to pick the right moment to buy or sell assets because they can identify trends and opportunities before others do.” These investors calculate based on history and profit and invest accordingly. Where they go, other investors follow.
These business heavyweights are invaluable to a startup because they put more than simply their money where their mouth is; they also invest their expertise. A startup could have all the money in the world but it will fail more without the proper business direction and market placement.
Smart money works best for startups when nascent businesses pair with investors who provide a holistic approach to business. They can help in hiring the best talent, attracting interest from the most relevant stakeholders, securing a continuous presence in the press, avoiding pitfalls and, ultimately, fulfilling ambitions.
There are more than a few ways that money can be termed as smart. Perhaps the cash infusion also comes with experts in thought leadership and strategy, or executional capacity, or the ability to increase sales and raise funds. Whatever the method, smart money brings something more to the table than dollars. This becomes abundantly clear when conducting post-mortems of the startups which have failed.
Why do startups fail?
Startups fail all the time — and it is important to understand why. As mentioned above, the top reason startups fail is simply the lack of market need. Tackling problems that are interesting to solve rather than those that serve a market need is the most common issue startups cite for their downfall. The next most common reason for startup failure, as likely predicted, is money. Smart or not, money does need to flow into any startup to make it possible. Meanwhile, the third most common reason for startup collapse was team composition. More to the point: Startups need to comprise a diverse team with different skill sets.
These top three reasons for startup failure could be solved with the right management approach from the top down. Each of these reasons can be addressed with smart money. The right business and management structure will allow the right hires to be made and course to be charted. Smart investors can identify the right people for your team and help you to hire staff who will take the business to the next level.
While startups think money is the key, it is not the end-all and be-all for their potential success. They need skills and networks. Business and innovation expert Rosemarie Truman explained this misunderstanding best: “A common mistake entrepreneurs make in their struggle to find funding is focusing too much on getting the money under specific terms and not paying enough attention to who is providing the funds.”
Show me the (smart) money.
Savvy entrepreneurs recognize their businesses need more than cash to be successful — especially those at the top. Alibaba chief executive officer Jack Ma, who ranks as one of the richest people in the world, described the need for smart hires and smart staff as thus: “At first, I knew nothing about technology. I knew nothing about management. But, the thing is, you don’t have to know a lot of things. You have to find the people who are smarter than you are.”
Smart business owners want to work with investors who provide not just money but also their expertise, time and access to networks — and this is especially important for businesses looking to scale. The proof is in the research: Take for example a paper by Morten Sorensen, professor of finance at Copenhagen Business School, about venture capital and its impact on an overall business. Sorensen found that companies funded by more experienced venture capital funds were more likely to go public, and also that more experienced venture capital funds invest in better companies, leading to better long-term business health.
So, the question then becomes: Where does one access smart money? The answer will depend on whom is asked, but startups that have survived and later grown into viable businesses are a good place to start. The founders of collaborative blogging platform Niume, Daniel Gennaoui and Francesco Facca, have this advice for startups who are on the hunt for smart money: “First, you need a strong founding team with complementary skills that can actually deliver on their promises. Second, you need a working minimum viable product (MVP), showing that there is traction and interest for the product and people willing to use and pay for it,” the founders said. “The actual amount they invest is far less important than the value they bring to your company.”
It is also worth noting that crowdfunding can be considered a form of smart money, as it brings an ecosystem of partners who will help to scale and countless brandambassadors who have invested their hard-earned cash.
It’s simply more than capital.
Gaining startup finance is not only venture capital or crowdfunding — it should also provide an ecosystem of business management and be viewed as such. It’s simply wrong to think funding is only funding. Startups can have all the money in the world but will fail more often than not without the proper business direction and market placement. Those who want to make a lasting impression in their given field need the guidance and support smart money brings.
Ways of Valuing Pre-Revenue Start-ups
2 Ways of Valuing Pre-Revenue Start-ups
It’s always an interesting discussion when valuing early stage start-ups without existing revenue. Fundamentally, valuing a start-up is very different than valuing an established company. Quantitative analysis and financial projections don’t always predict the future success of the early stage start-up which is why some potential investors put greater value in the entrepreneur and management team. No matter the region, product or industry, investors must reduce risk as much as possible.
There is no one way to determine the pre-money valuation (the start-up’s value before receiving outside investment) so it’s wise to gain insights on valuation methodologies from other entrepreneurs and potential investors. Being aware of every method could only help you leverage and negotiate your own valuation with investors. Below are three pre-money valuation methodologies that are often used by investors:
Scorecard Valuation Method
The Scorecard Valuation, also known as the Bill Payne valuation method, is one of the most preferred methodologies used by investors. This method compares the start-up (raising investment) to other funded start-ups modifying the average valuation based on factors such as region, market and stage.
The first step is to determine the average pre-money valuation for pre-revenue start-ups. Investor groups tend to examine pre-money valuations across regions as a good baseline.
The next step is to compare the start-up to the perception of other start-ups within the same region using factors such as:
• Strength of the Management Team (0–30%)
• Size of the Opportunity (0–25%)
• Product/Technology (0–15%)
• Competitive Environment (0–10%)
• Marketing/Sales Channels/Partnerships (0–10%)
• Need for Additional Investment (0–5%)
• Other (0–5%)
The ranking of these factors is highly subjective, but the main emphasis besides scalability is on the team. Payne states, “In building a business, the quality of the team
is paramount to success. A great team will fix early product flaws, but the reverse is not true.”
Venture Capital (VC) Method
The VC Method, first made popular by Harvard Business School Professor Bill Sahlman, works its way to pre-money valuation after first determining the post-money valuation using industry metrics. By applying the VC Method to solve for the pre-money valuation of a start-up it’s important to know the following equations:
• Post-money valuation = Terminal value ÷ Expected Return on Investment (ROI)
• Pre-money valuation = Post-money valuation — Investment
The terminal value is the anticipated value of an asset on a certain date in the future. The typical projection period is between four to seven years. Due to the time value of money the terminal value must be translated into present value to be meaningful.
By researching the average sales of established companies within the same industry (at the end of the projection period) and multiplying the figure by a multiple of two, we can calculate the terminal value. For example, let’s assume your start-up is raising $500K and expecting to be generating $20M when you sell the company in five years.
Terminal Value = $20M x 2 = $40M
The statistical fail rate for investments is over 50% so investors typically target 10x-30x ROI on each individual investment. To be conventional, we’ll set the anticipated ROI at 20x for the pre-revenue start-up. Knowing you’re raising $500K, we’ll then work the math backwards to calculate the pre-money valuation.
• Post-money valuation = $40M ÷ 20x = $2M
• Pre-money valuation = $2M — $500K = $1.5M
The More A Person Can Do, The More You Can Motivate Them – Is Money The Motivator?
If you were paid more, would you work harder? The answer is probably partly yes, and partly no. Higher pay might encourage you to move to a new job or to work a little faster or harder, but this focus is soon eroded—or equally, magnified—by other factors, such as job satisfaction, respect from managers, and the challenge presented by the work itself.
Financial gain can move usto do things, but motivation is more complex than money alone. US psychologist Professor Frederick Herzberg began to study workplace motivation in the 1950s while teaching at Case Western Reserve University, OH. In 1959 he proposed the “two-factor theory”—that a series of “motivators” encourage job satisfaction, while aspects of work termed “hygiene factors” contribute to dissatisfaction in the workplace if they are poorly managed.
Removing dissatisfaction
Hygiene factors include working conditions, job security, relationships with other workers and salary.
Motivators include recognition, responsibility, the opportunity for advancement, a sense of personal achievement, and potential for growth—as Herzberg put it “the more a person can do,” the more easily they can be motivated.
Herzberg argued that job dissatisfaction is as important as satisfaction. He believed that unless hygiene factors were well managed, no matter how good the motivators, staff would not be inclined to work hard. They would, he suggested, be so dissatisfied as to be demotivated. He also believed that hygiene factors do not, in themselves, motivate; but when fulfilled, they reduce dissatisfaction and provide a foundation for motivation. On the other hand, motivators have great potential to increase job satisfaction, but when lacking, actually only result in low levels of employee dissatisfaction.
Motivators in practice
Herzberg’s findings are significant for business leaders. The two-factor theory proposes that job design is crucial—it must create conditions in which employees can feel a sense of achievement, enjoy responsibility, and gain recognition for their work. Levels of pay may be important for recruitment and retention, but it is less important in encouraging staff to work effectively.
Every day, thousands of people around the world apply for jobs at fast-food outlet McDonald’s. Frequently rated at the top of “best employer” lists, the chain is popular because of a friendly working environment and flexible working policies. Initiatives such as the “friends and family contract”—in which employees from the same family or friendship group can cover each other’s shifts—give staff a sense of shared responsibility, and enhance loyalty to the company.
The top-paying companies are rarely ranked as the best employers. Money matters, but job satisfaction, career advancement, management attitude, and personal relations are the workplace factors that most motivate us to work harder.
MAKE THE MOST Of YOUR TALENT – The man who does not work for the love of work, but only for money, is likely to neither make money nor find much fun in life!
Leader Allow Great People To Do The Work They Were Born To Do
Staff in many organizations reports feeling undervalued, overstretched, and forced to work in areas beyond its competence. Because of this they feel ineffective —they want to work better, but feel that the organization is constraining them. The best companies allow staff to build careers around what they excel at—in leadership expert Warren Bennis’s words “to do the work they were born to do.”
Contemporary organizations, faced with dynamic, fast-moving markets, favor employees who are flexible and multiskilled. Yet in a 2012 Global Work force Study only 35 percent of employees reported engagement with their jobs, revealing a disconnect with what employers want and what employees are willing to give. Studies have found engaged employees—those devoted to their jobs and committed to the company’s values—are significantly more productive, provide better customer service, and outperform those who are less engaged. But many companies treat staff as little more than pieces on an organizational chessboard that can be moved around at will.
Google’s innovative, dynamic culture, in which staff are encouraged to work to their strengths and explore projects that they are passionate about, is one of the reasons for the company’s success.
In his two-factor theory, US psychologist and management thinker Frederick Herzberg identified a sense of achievement as being closely linked to motivation to work. Effectiveness is intrinsically rewarding; even the most generous salary cannot, over the long term, replace the satisfaction of a job well done. The same generous salary will not offset the dissatisfaction of underachievement. Consequently, equipping employees with the tools to develop effective habits can lead to more effective performance, happier, more productive staff, and, in turn, improve a company’s results.
Working better, not harder
Google, borrowing from a practice introduced by US conglomerate 3M in 1948, encourages staff to spend 20 percent of their time on projects of their own choosing. Rather than distract from directed projects, Google found that their staff works better on all tasks—when people are passionate about their work, it does not feel like work. Such discretionary effort, the willingness of employees to “go the extra mile,” can be the difference between good and great. Great businesses focus on getting the best out of people, not the most out of them. Gmail, one of Google’s most popular products, is a result of the company’s 20-percent time. Enabling staff to work better, not harder, requires an enlightened leadership approach that looks down to the factory floor as well as up to the shareholders. Companies that value effectiveness over volume, and performance over presenteeism (when staff works despite illness, instead of taking sick leave) often find themselves at the top of best-employer lists. Leaders of these companies realize that shareholder value is driven by staff performance; allowing staff to build careers around what they excel at is good for employees and the bottom line.
Emotional Intelligence(EQ) is the Intersection of Head & Heart
The most effective leaders are alike in one crucial way: they all have a high degree of Emotional Intelligence(EQ)
Emotional Intelligence(commonly abbreviated as “EQ”, for emotional quotient) is the ability to perceive, control, and evaluate emotions, both in oneself and in others. The concept emerged from research into social intelligence in the 1930s, and from work in the 1970s on different forms of intelligence. In the 1990s, US psychologist Daniel Goleman published the highly influential Emotional Intelligence: Why it Can Matter More Than IQ. In the book he identified the five “domains” of emotional intelligence: knowing your emotions; managing your emotions; motivating yourself; recognizing and understanding other people’s emotions; and managing relationships.
Goleman pinpoints high EQ as a common trait among effective business leaders. Without emotional intelligence, he argues, a leader can have limitless energy and ideas, a perceptive and logical mind, and impressive qualifications, but still be ineffective and uninspiring.
Goleman cites Bob Mulholland, head of client relations at Merrill Lynch during the 9/11 attacks, as a leader with high EQ. After his staff saw a plane hit the twin building opposite their own, they began to panic—some ran from window to window, and others were paralyzed with fear. His first response was to “unfreeze” their panic by addressing each of their concerns individually. He then calmly told them that they were all going to leave the building, via the stairs, and that they all had time to get out. He remained calm and decisive, but did not minimize people’s emotional responses. All his staff escaped without injury. This was a rare and unusual context, but Mulholland’s approach shows the value of EQ in managing staff in any form of volatile situation suggests that high EQ facilitates other essential leadership traits. For example, the ability to recognize accurately what another person is feeling (empathy) enables one to manage that feeling and any behaviors that arise from it.
What makes a good leader?
One persistent debate within the business world is whether leaders are born or made. Goleman suggests that the answer is both: inherent personality traits are important in leadership, but EQ—which grows with age, experience, and self- reflectiveness—is just as important.
Today, the development of EQ lies at the heart of leadership coaching. New and aspiring leaders are mentored by experienced ones; together, they discuss past and future scenarios, various possible responses, and what the emotional trigger points might be. This procedure seeks to increase emotional maturity. A 1999 study showed that partners in a multinational consulting company who scored highly on EQ delivered $1.2 million more profit than other partners. Other studies have shown similar correlations between EQ and effectiveness. Emotional balance, it seems, is a key factor in commercial success
A Leader is One Who Knows The Way, Goes The Way, And Shows The Way
Effective Leadership!
For centuries scholars have attempted to determine the definitive styles, characteristics, and personality traits of great leaders. Yet, despite thousands of studies, effective leadership remains a subject of debate. However, one common theme is that effective leadership requires action, not just intellect.
Leaders cannot simply rely on charisma. While charismatic leadership has its place—for example, Henry Ford was renowned for his charismatic leadership style—there is a danger that rhetoric can exceed reality. Rather than empowering their employees, charismatic leaders often micromanage tasks and prevent their staff from gaining a sense of achievement from their work. Charismatic leaders are often heralded as champions of organizational success, but that charm can be a blessing and Actively participating in business life, from the boardroom to the factory floor, is vital for effective leadership. Carlos Ghosn visited car assembly lines to build integrity and trust with staff.
A curse—the void created by the departure of a charismatic leader can be hard to fill. It may flatter the ego to be proclaimed a hero, but great leaders know that success involves building long-term organizational capacity that will outlast their own tenure.
Keys to effectiveness
To be effective, a leader must be confident and secure, and at the same time open and empathetic. Effective leadership involves the ability to create capacity in others through the process of interacting, informing, listening, developing, and trust-forming. Credibility of the leader is achieved through collaboration, not domination. Central to effective leadership is empowerment—the art of enabling other people to get things done.
One of the most effective contemporary business leaders is Carlos Ghosn, CEO of car makers Renault and Nissan. Within a year of his appointment in 1999, Ghosn returned Nissan to profitability and was credited with saving the company from collapse. This proved to be one of the most dramatic turnarounds in modern business history.
Among the leadership traits that contribute to Ghosn’s effectiveness is his belief that leadership is learned “by doing.”
On joining Nissan as CEO he walked around every factory, meeting and shaking hands with every employee. To this day he remains a common sight on factory floors. Integrity and trust, Ghosn believes, are built when leaders are seen to be willing to “get their hands dirty” and remain in touch with the factory floor of the business.
Empowering staff
Leaders must communicate a strong vision but, above all, they must empower staff to make decisions themselves. In large, diverse organizations a leader cannot, and should not, make all the decisions— helping others to understand the necessity for change, and giving them the tools to manage that change is key to the leader’s role. The success of Nissan is also attributed to Ghosn’s ability to manage cross-cultural teams. Leaders, Ghosn suggests, require the ability to listen and to empathize, not just with employees from their own countries, but also with people from different countries and cultures.
Ghosn’s insights illustrate that effective leadership requires putting vision into action. Achieving this requires more than just rhetoric: effective leaders must “talk the talk” and “walk the walk”
None Of Us Is As Smart As All Of Us
The Value of Teams!!
We might complain about routine and familiarity, but research shows that human beings have an innate need for some degree of stability. Without rules, norms, values, and expectations, people begin to feel anxious, rootless, and confused. This is termed “anomie,” and it is the reason that humans often self- organize into groups. The routine and familiarity of belonging to a group helps people to avoid anomie, and find security and purpose.
The existence of groups serves two purposes. Organizations, and the groups within them, can be seen as an expression of the human desire to belong. As psychologist Abraham Maslow identified in his 1943 paper “A Theory of Human Motivation”, groups give us a sense of belonging. Maslow believed that there is a hierarchy of human needs; once we have met the most basic of needs—the physiological ones, such as hunger and thirst— we progress to the next: security. When these needs are satisfied, we move to the third basic need: a sense of belonging. Once this is met, we will proceed toward increasing self-esteem through achievement, and ultimately toward self-actualization, by using our inner talents with creativity.
When Maslow’s theory is applied to the workplace, working in groups and gaining a sense of belonging make employees more effective. With the need to belong already addressed, individuals are able to focus on other things, such as a desire for achievement and the practicing of inner talents. In this way, the movement through the stages of satisfying needs can benefit a company. Free from anomie, groups are places where human beings, and therefore ideas, can flourish. Teams that are carefully chosen and supervised encourage collaborative, creative, work—as US management expert Ken Blanchard said, “none of us is as smart as all of us.” In turn, commitment toward a project creates ties that strengthen the bond between individuals and, ultimately, the company’s communal purpose.
Places to belong
Great organizations recognize the value of teams and the importance of the working environment. Cisco Systems, the Internet infrastructure company, has created what it calls Cisco Systems uses workspaces that can be transformed from small groups of work pods to large open spaces for conferences. Cisco aims to be flexible for connectivity and a sense of community, the “Connected Workplace”, which offers employees great flexibility in working practice and environment, while ensuring that they always feel part of the Cisco community.
Business success is rarely achieved through individual genius, and the greatest leaders are those who recognize the value of maximizing talent through teams.
Working with a Vision – Learning from Failure
Turn Every Disaster Into An Opportunity
There are many stories of success built on failure: the US inventor Thomas Edison failed to register patents for his ticker tape machine so felt compelled to continue inventing, eventually perfecting the incandescent light bulb.
British inventor James Dyson produced more than 5,000 prototypes before he came up with a successful bagless vacuum cleaner. Success for entrepreneurs always involves trial and error, and resilience. US industrialist J. D. Rockefeller, the world’s first dollar-billionaire, looked to “turn every disaster into an opportunity.” As the world turned to electric lighting from kerosene oil lamps, his business was threatened. However, he quickly saw the potential of Ford’s automobile and realized that oil could just as easily be converted to gasoline as kerosene. His fortune rocketed.
Constant learning
Personal experience is recognized as the way individuals learn, and it is much the same for organizations; they gain knowledge and capability from corporate experience. The pace of change in the global market means that constant improvement has become the norm. The greatest challenge, however, is for companies to recognize failure and learn from it. In order to do this, an organization needs to build a culture in which people are not criticized or penalized for mistakes, but are actively encouraged to gain useful insights from them.
Some companies recognize that it is only through failure that success can be found, and build this principle into their culture. US corporation 3M, for example, allows technical staff to allocate 15 percent of their time to experimenting with ideas, understanding that there will be occasional winners (such as the Post-it Note) along with the repeated failures.
Recognizing error, cutting losses, spotting new opportunities, and changing course is a test of leadership and also sends out a positive message to those who work in the organization. It requires rational, unemotional thought that focuses on the costs and benefits of changing direction.
In the mid-1980s, the Coca-Cola Company decided to replace its original formula with a sweeter product: New Coke. In the US, this prompted consumer protests. The company learned that US consumers were protective of Coca-Cola and felt unhappy about any tampering with the recipe. The CEO quickly reintroduced the original formula as Coke Classic. By responding quickly, he grasped an opportunity for significant publicity; sales soared. The world’s third-largest retailer, Tesco, opened its Fresh & Easy stores in the US in 2007. After six years and $2.27 billion in costs, it admitted failure and pulled out. The stores were unsuccessful because Tesco misjudged the shopping habits of its target customers.
Flexibility, feedback, and fast response are key to finding a new path via failure.
From Entrepreneur To A Leader – The Role Of A CEO In Enabling People To Excel
The function of leadership is to produce more leaders, not more followers.
In the early days of a new business the most valuable skill a founder can have is entrepreneurship—the vision to identify opportunities, and the willingness to take risks. But as the business grows, demands change. Disciplined management skills and corporate expertise are required to co-ordinate a growing enterprise. Some entrepreneurs are able to make the transition to leadership successfully, while others struggle.
An Ernst & Young report in 2011 identified entrepreneurs as people who are nonconformist, driven and tenacious, passionate and focused, with an opportunist mind-set. Other studies report entrepreneurs as mavericks, unafraid of failure and driven by a passion for success. While there is some overlap, absent from these findings are the traits that define good leaders and managers: organization, an eye for detail, communication, emotional intelligence, and the ability to delegate. Effective leadership involves encouraging others within the company to realize their potential, and excel.
Making the transition
Management can be broadly broken down into three categories: managing by information, through people, and through action. Many entrepreneurs have difficulty managing through information—they often lack the skills to build the systems and communication networks on which large businesses are built.
Stelios Haji- Ioannou, entrepreneur and founder of easyGroup, is known for rarely staying still. His company launched in 1998 with a low-cost airline, easyJet, and now includes more than 20 “easy” businesses that operate on a similar low-cost model. Haji-Ioannou has shown an aptitude for strategy, and an eye for detail; but he has also been criticized for lacking leadership skills, for micromanaging, and, common to entrepreneurs, for an inability to delegate and let managers manage.
US professor Larry Greiner identified leadership—the ability of a start-up founder to transition from entrepreneur to leader—as one of the major crises that businesses face as they grow. Greiner suggests that successful growth often requires the employment of professional managers who bring to the business an understanding of the requirements of financial markets, banks, and—most importantly—have the leadership skills needed to manage complex organizations. Entrepreneurs may possess bountiful ideas, but it takes management discipline to turn those ideas into successful ventures, and leadership skills to move the start-up beyond its entrepreneurial roots.
Start-ups require the spark of entrepreneurship; but growth requires a different set of skills: a founder must transition from being sole decision maker to being a disciplined manager and a successful leader. Those who are unable to make this transition often need to step aside and let the professionals take over. But this is often easier said than done.
jigsdave 