Will New "Excubator" Model Increase Startup Success Rates?

Over the last five years, Red Rocket has consulted or mentored over 500 startups. But, unfortunately, most of these companies have had the same problem. They are typically so focused on building their product (e.g., website, mobile app), that they do not raise enough capital to afford the sales and marketing activities that will be required to help them achieve their proof-of-concept”, which will allow them to better attract additional venture capital down the road. This means many startups run out of money soon after launch, with no interested investors, because they did not properly plan far enough ahead, stalling out before they reasonably had a fighting chance.

The root of the problem really comes down to better education of entrepreneurs. An education that should emphasize: (i) not launching a startup unless you have raised enough capital for both your product development and the required proof of concept period; (ii) having a clear understanding that proof-of-concept typically includes demonstrating to investors: (a) rapid user growth to prove demand for the product, and (b) proven customer acquisition metrics from previously tested sales and marketing channels; and (iii) knowing the best, most cost-effective sales and marketing tactics with which to start with to stretch their limited budgets.

Read the rest of this post in Forbes, which I guest authored this week.

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How to Design a Recurring Revenue Model That Will Attract Capital

One of the first things that a venture capitalist looks for in assessing an investment opportunity is the revenue model of the business. More specifically, they are looking for the frequency of that revenue stream, and whether or not it is recurring and easily predictable. The rationale being investors prefer businesses that maximize the lifetime value of their consumers, and get maximum leverage and returns on the initial marketing cost of customer acquisition (which they are funding).

Read the rest of this post in The Next Web, which I guest authored this week.

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Lesson #173: Corporate Venture Capital Funds, Accelerators & Incubators

With the explosion of corporate-backed venture capital funds, accelerators and incubators in the last couple years, I think the big companies are starting to realize: (i) how important innovation is to staying relevant in their future (watching rapid market share losses at companies like Blackberry, Nokia and Borders, who did not respond quick enough to competitive threats like Apple, Google and Amazon); and (ii) that they do have the right corporate personnel, speed or DNA to actually pull off innovation, like a startup would. 

CORPORATE VENTURE FUNDS

I was curious which corporations were at the forefront of venture capital investing, with formal funds already created and investing in the market.  Here were the corporations I quickly learned about from a few online searches:  Akamai, Amgen, AOL, BASF, Baxter, Bertelsmann, Bloomberg, Blue Cross, BP, Cisco, Citigroup, Coca-Cola, Comcast, Dell, Disney, Dow, Dupont, GE, GM, Google, IBM, Intel, Hearst, Hershey, Hitachi, Johnson & Johnson, Lilly, Lockheed, Merck, Microsoft, Motorola, Natl. Assn. of Realtors, Nike, Panasonic, Pfizer, P&G, Qualcomm, Salesforce, Samsung, SAP, Siemens, Telefonica, Tribune, UPS, Verizon and Walgreens.

What was interesting was the wide range of industries represented, with big corporate investor partners available for most any startup in most any industry.  What was also surprising, was how small this list is, without all other Fortune 500 companies doing the same thing here.  So, kudos to these early movers.

CORPORATE ACCELERATORS & BUSINESS INCUBATORS

Historically, startup accelerators or incubators were run by stand alone organizations like Techstars and Y Combinator, or in connection with venture capital funds, like Highland Capital and Lightbank, or in connection with the entrepreneurial programs at many of the leading business universities, like Stanford and Chicago.  Now, many corporations are entering the mix, with their own startup accelerators and incubators, most typically tied to helping drive innovation and startups in their industry (e.g., Blue Cross targeting healthcare startups). 

Here were the corporations I found from a few online searches:  AOL, AT&T, Barclays, Blue Cross, Budweiser, Cisco, Citi, Citrix, Coca-Cola, Deutsche Telecom, Disney, GE, Google, Hershey, IBM, Johnson & Johnson, Kaplan, Microsoft, Natl. Assn. of Realtors, Nike, P&G, Pearson, Samsung, Siemens, Sprint, Target, Turner/Warner Brothers, Volkswagen, Walgreens, Walmart and Well Fargo.

What was interesting here was whether the corporations built these efforts on their own, or partnered with some third party to run these efforts for them.  Keep your eye on Techstars, who is powering at least eight of these corporate accelerators, getting a strong foothold in each of the key industries (e.g., powering Barclays in finance, Disney in entertainment, Kaplan in education, Microsoft in technology, Target for retail, Sony (and others) in music, and Sprint in telecommunications).  Very clever moves by David Cohen, Brad Feld and rest of the Techstars team, as startups most likely want programs directly related to their industry, as compared to the more generic programs originally launched by Techstars and most others.

It was also interesting to see that a few of these corporations were also opening accelerators or incubators in multiple locations around the world, to help solve their problems globally, and to better tap into local entrepreneurs by country.  Very smart!!

KEY TAKEAWAYS

In the limited research I have done, it appears that corporations are investing approximately $8BN a year (across 560 companies) in venture capital related efforts (extrapolating out the 3Q2013 data I found).  This is a big pool of money for startups to be tapping into, and most likely, didn't even know existed.  But, in addition to simply writing cash checks, the corporations are also bringing their industry experience and potential "first customer" contracts to many of these startups.  And, what do most venture capital firms like to invest in?  Companies that have achieved proof-of-concept with contracts in hand and big strategic partnerships in place.  So, taking money from corporations, may also open up to the door to other venture capital partners, as well.  Not a bad deal!!

But, practically, if you go down this route, it is best for you to open up a business partnership with these corporations first, so some internal business champion can sing your praises to the venture and innovation teams.  As, opposed to trying to raise capital first, without a business deal in place, which will be a much harder road to plow.

Hopefully, more corporations will jump on the band wagon here, as I think it will really help their own innovation efforts, the odds of success for the benefitting startups and the overall long-term global economy.

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Comparing Equity vs. Debt vs. Convertibles for Startup Financings

Entrepreneurs are not always aware of the various financing structures that may be available to them when raising new capital to finance their growth. And, even if they are, they are not always sure what fair terms look like when receiving term sheets from investors. Let’s explore the plusses and minuses of equity vs. convertible debt vs. venture debt, understanding there are many subtleties to each of the securities below, that may not be addressed in this high level overview.

Read the rest of this post in Forbes, which I guest authored this week.

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Lesson #172: Don't Finalize Your Tech Development Plan, Until You Involve Marketing

Most startups get a great new idea, and their immediate instinct to start coding away on building that product with their very limited budgets.  They put on the hat of a consumer using their technology and do their best to build a functional user experience in line with their original vision (which is a perfectly reasonable and expected part of launching a startup).  But, then they launch their product and realize no new customers are showing up. 

I have previously written about how most entrepreneurs do not set aside an upfront marketing budget to help acheive proof-of-concept, as part of the problem.  Another part of the problem is, the founder started building out their technology, without first consulting with any marketers to figure out what they need to build a virally-engaging experience, to easily assist with acquiring new users in a low-cost kind of way from the core technology product.

As an example, let's say you are building a new mobile app.  Have you thought through a responsive web design or mobile web versions, vs. native iOS or Android apps, and which will reach the most users with the best consumer experience?  Did you build social sharing tools within the application, so users can easily share content with their friends?   Are there ways to gamify the product to make it more engaging and help spread word of mouth?  Is there anything in the product that limits its appeal to prospective users?  Are there ways to experiment with Groupon's highly successful 24-hour ticking clock or 500 person tipping points, which helped with rapid viral customer acquisition?  Is there any "fear" built into the purchase process, you can quell with a few well-placed "learn more" links?  Are there ways to build in user incentives for desired user behaviors?  Does the UX create any confusion or friction impeding a user from completing a transaction?

All of the above types of questions should be tackled upfront as part of the initial technology build planning discussions.  As these types of marketing-related technology improvements, will help you more quickly and affordably acquire new consumers, vs. traditional higher-cost, media-related marketing efforts.  And, hence, will most likely result in you pushing off certain user features or functionality to version 2.0, in order to create budget for these much needed marketing related technologies that will help with customer acquisition.

The best technology in the world is useless if new users can't easily find it.  So plan ahead from day one, and incorporate marketing-driven technology needs into your product right from the start.

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Growth vs. Profit? What Should Rising Startups Focus on First?

This really is not a simple question to answer. There are so many nuances that go into assessing the right answer:

• What is going on with the economy?
• How liquid is the fundraising climate?
• Are you B2B or B2C?
• Are you the first mover?
• How defensible is your business, with patents, product complexity or otherwise?
• What are your competitors doing?
• How big is the market opportunity?
• How quickly is it emerging?
• Are you trying to dominate the world, or build a nice lifestyle business?
• Are you venture-backed, or privately owned?

So, in light of all these moving pieces, I will do my best to layout some high level guidance.

Read the rest of this post in The Next Web, which I guest authored this week.

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