So, you want to launch a startup?
Of course you’ve got a disruptive idea and a solid business plan that’s going to lead to success — and hopefully some money. But have you thought about what type of people you want to build a team with, where you’re going to base your operations, or how to pursue outside investment?
Where do you go to find all of these answers? You go to the experts.
Virginia Tech has displayed a dedication to startup success over the years, and VT KnowledgeWorks, a subsidiary of the Virginia Tech Corporate Research Center, is one of the many initiatives the university has put in place to promote entrepreneurship.
The incubator/accelerator combines innovative curriculum, local business resource centers, a global network of cooperating regions and expert business minds to help navigate ventures from a startup launch to ongoing growth.
With 40 years of experience as a senior executive and consultant for tech companies, Jim Flowers currently screens new companies for admission to the VT KnowledgeWorks program and is the principal counselor for member companies as they plan and execute their launch.
It’s safe to say he is a good authority on what it takes to build a company from the ground up.
DC Inno was able to catch up with Flowers and pick his brain regarding what it takes to launch a successful startup. The advice is so good we thought about keeping it to ourselves, but that wouldn’t be fair.
Here’s Flowers’ take on the importance of alignment, the benefits of becoming a member at an incubator/accelerator, and the pitfalls of putting on your “moxie goggles.”
Ethan Bukowiec: How does a potential startup recognize its market value and what can it do to capitalize on a business opportunity?
Jim Flowers: You need to start by asking, “What is a market?” A market is a population with a situation. And if you want something that is high value and easy to exploit, it’s really handy if the population is bounded (you know who’s in and who’s out), addressable (once you know who’s in you can talk to them somehow), and growing. Now on the other side of that, the situation that applies to a population is a big deal because you have been handed the “easy button” if the situation is compelling.
If you have to convince the population that they have a situation, then you have two sales to make. First, you have to convince them that they have a problem and then you have to solve it for them.
What you really want to do is find a place in the market where you can put your fist through the drywall. You can put your fist through the drywall and then rip away at it until you can fit through.
Once you have got a population, the next thing you need to do is come up with a magical way to make them choose you and make a profit out of it. You have to have a sustainable, profitable competitive advantage that you can then exploit.
EB: What should be taken into consideration when building your team in preparation for a launch?
JF: There are some really important things to consider here. One is you have to decide whether you are going to have partners or employees — or some combination — because they are radically different relationships. A partner is yours forever unless you pay them a whole lot of money to go away. You have to make that decision as part of the question, “Why am I doing this and what are my own personal aspirations?”
Once you’ve decided that, then the second thing is that you assemble a team of people with complementary skillsets and points of view. Having complementary skillsets and points of view are necessary to avoid silly mistakes, and you can leverage each person’s strengths.
The next thing you have got to do is look at your team’s alignment with your overall objectives. Everyone needs to be reasonably aligned as to your image of success so that anything done on an individual level benefits the whole team. Team chemistry is obviously also a big deal, but nonetheless people hire resumes instead of people and then they have to fire the person.
The idea is generally accepted that the odds of success go up as you add people to the startup team, up to about 5 people. After that they don’t go up because you really don’t have a small team anymore – you’ve got an organization. This brings organizational challenges right at the beginning, which is tough.
EB: What advice can you give to early-stage company executives as they pursue outside investment?
JF: As soon as you take one dollar of someone else’s money, your job is to sell the company. When you take out an investment, you are selling a part of the company at that moment and you need to understand that you are now positioning yourself and your shareholders for an exit. People who put any serious money in do not love you; they see you as a path to profits.
If your purposes for starting a company are not aligned with your investors’ desires, then you’re going to have big problems with each other along the way. A lot of startup execs think of investment as a donation to their own personal aspirations, rather than realizing their goal is to make the investors rich. It’s not necessarily a bad thing, but it’s something you need to be aware of.
EB: What are the key factors to consider when deciding where to base your company’s operations?
JF: The most interesting thing about this goes back to the founders’ aspirations for starting the company. You need to be able to answer the question, “Why are you doing this?” For example, if you’ve got a dream of living at the seashore and you think you will be involved with a venture for a long time; you better locate your company at the seashore. That may cause you some other problems. There may not be labor force at the seashore. Does your labor force need to be near you? From a pure geographic standpoint, if part of your personal aspiration is geographically constrained, that’s OK, but it means that some other constraints will be in place as a consequence, and you have to take that into consideration.
If you are not geographically constrained, you obviously want to locate yourself where it’s easiest to get the resources you need to build the company or to get to the clients you are trying to sell to. We all need accessibility and strategic resources. If you need a whole bunch of programmers and you want to talk to them every day, then you better locate yourself somewhere you can hire programmers.
Make sure that you are not out of line with your personal aspirations. The largest single risk factor in small-scale startups is the startup team. If you don’t acknowledge what you want, you will do a lot of confusing things, and the same is true of your team. I like to say that self-awareness is a very big deal for startup teams. What are you really trying to do?
EB: How should startups approach an exit or acquisition?
JF: When you are trying to exit, the other guy has to see a value that he can extract downstream or he won’t pay you for it. You are probably going to get more money from someone who sees your company as a strategic building block to something larger than from somebody who just wants to milk it as a cash cow. Understanding why somebody would want to buy your product has a great deal to do with your valuation expectations and your ability to negotiate. It’s also really good to have more than one suitor.
Remember, there are also different things that happen to you when you exit. Some exits will lock you up for a while. Some exits want you to go away and never come by again. Some exits have to do with the acquirer just shutting down your company because you are a pain to his ventures.
It helps to broaden your network to include people with acquisition experience who can tell you their war stories. Smart people do smart stuff if they have the right information.
EB: What are the mistakes you see companies make as they expand after early success?
JF: The classic one is that the startup management team doesn’t know how to behave as a growth management team — they just don’t have the skillset. There’s really a difference between entrepreneurship and management. A whole lot of entrepreneurs get in trouble when they try to behave the same way they’ve been behaving even though the company is 10 times bigger. Some companies do a really good job of transitioning to growth, but most of them should really handoff management duties to somebody else. What often happens is that when you dilute the core team you end up with a quality drop-off. And you can only lose your reputation once.
EB: What are the benefits of becoming involved with a startup incubator/accelerator?
JF: There’s the old saying that, “It’s not what you know, it’s who you know.” But I read a blog one time that said, “Who you know IS what you know.” Your network gives you access to information that you would not otherwise have, and it’s filtered by a human and not by Google.
Google is a perfectly good way of getting a lot of information, but Google never had to perform in that market space the way a human did. And so you get filtered stories.
It’s not networking to find people to tell you what to do or not do; it’s networking to find people who have information that will permit you to make a better decision. You get perspective out of that network. The networks allow you to make better decisions and, particularly accelerators, often have access to a network that will help you sell your product. The ability to get beyond yourself with a well-structured network is a big, big deal.
Incubators in the classic sense were started out of economic development — a community incubator to help promote businesses in a town. Accelerators are specifically profit based. It’s different from an incubator trying to create jobs for XYZ, Va. There’s a different motivation. There’s a different mindset. There’s a different team on board. An incubator usually has a manager and they’ve got some local mentors around, but those people could be running tire stores. Some of the things that incubators used to cluster together in terms of logistics just don’t matter anymore.
EB: What is the one piece of advice all startups/early-stage businesses should live by?
JF: The market is always right. And the competition is not stupid. There are people who are so in love with what they’ve invented that they cannot be convinced that not everyone is going to want it. There are still people that think the market is stupid but will come around to their idea, and they think the competition won’t respond when they show up in the marketplace. They think, “We can beat these guys on price, so we’ll do that.” But when the competitor cuts the price, what are you going to do?
A common mistake is what I call “moxie goggles” — it’s kind of like tunnel vision. You’re so excited about your stuff that you refuse to see information that does not conform to your preferred view of the universe. The simple one is the market is always right. Never forget that.
Image via Jim Flowers
VT KnowledgeWorks encourages and enables creative entrepreneurship world-wide, through innovative curriculum, local business resource centers, and a global network of cooperating regions, all focused on three essential contributors to success: clear understanding of fundamental business principles; access to timely, relevant information; and meaningful personal and corporate relationships. It is a subsidiary of the Virginia Tech Corporate Research Center, supported by the continuing confidence and enthusiasm of its clients, sponsors and friends, both corporate and individual. Its world headquarters are in Blacksburg, Virginia, USA.
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