Wil Schroter

My BIGGER Blog Has Launched… And Moved.

 

My blog has been officially moved to http://wil.gobignetwork.com, and it’s BIGGER and better than ever!

I’ve began posting almost everyday, here’s what I’m covering:

• Answering questions – None of us really knows what we’re doing, so the only way we’re going to get through this is to ask – so ask me, Wil Schroter – wschroter@goBIGnetwork.com

• Complaining about Entrepreneurs and Investors – We’re both pretty clueless, so there will be a bottomless pit of ammunition for this topic!
• Telling the truth about how the startup game really works – What you read in textbooks and popular magazines is mostly b/s. I’m hoping to show some folks how the startup game works when you actually do it for a living, not just writing about it.
• Reviewing cool startup companies – There are so many cool startups on Go BIG that we need to start talking about some of these stories.
• Sharing War Stories – I’m going to talk about my successes/failures as well as share some stories of other entrepreneurs on Go BIG.

An entrepreneur’s blog only works if people shout back - so fire away. I’m ready for it.
Go to http://wil.gobignetwork.com, make comments, ask questions, and sign-up for updates via RSS or email.

Moved my blog...

My blog has been officially moved to http://wil.gobignetwork.com

You can’t teach motivation

We know that people can learn how to become better accountants, better salespeople, and better programmers.  But why can’t we teach people to become more motivated?

I had this discussion with a fellow entrepreneur as we tried to understand why the people around us didn’t seem to share our intense motivation.  We tried to inspire them, coach them, and advise them, but in the end what we couldn’t seem to teach them the most important aspect of entrepreneurship – motivation.

So why is it that motivation can’t be taught?  The simple answer is that motivation is something that comes from within.  While external influences (your childhood experiences, your parents, your basketball coach) certainly help shape your motivation, they are only pieces of the puzzle. 

There are fundamental motivating forces behind entrepreneurs that are hard-coded into their DNA, and no amount of training can instill them artificially.

Greed.  You can’t teach people to be greedy.  People either want to be gobble up life and its riches or they don’t.  You can try to inspire them to want more, but the people that are truly greedy never had to be told to be greedy.  Gorden Gekko said it best – when it comes to entrepreneurship, “Greed is Good.”

Fear.  You can’t teach fear.  Fear is an inherent reaction that is spawned by a composite set of events and experiences.  You either have stuff to fear or you don’t.  If you’ve never lost anything of significant importance you can’t truly appreciate the fear of loss.  Until you’ve had it all and lost it all you can’t truly appreciate what it means to fear a loss.

Hunger.  You can’t teach people to be hungry.  Hunger comes from having nothing and having to fight you way to eat.  Hunger is circumstantial, it’s not taught.  I grew up dirt poor and I was (literally) hungry all of my life.  It caused me to fight for everything I have.  You’re either in a position of hunger or you’re not.

Passion.  The love of something (a person, an ideal, a soccer team) can be an incredibly powerful motivating force.  Yet once again, love is a very individual taste that manifests completely based on personal preference.  Entrepreneurs become passionate about their companies and their goals from a complex set of experiences.  There’s no repeatable formula to guarantee anyone will be passionate about anything - unless we’re talking about Ohio State football.

I’m all for giving people as much education as possible.  I’m all for providing good advice and sound best practices.  But let’s be realistic and agree that the truly motivated entrepreneurs don’t need to be taught, they need to be discovered.

Investors are sharks, not lifeguards

I hear this a lot from entrepreneurs saddled with debt:

"I’m just looking for an investor to come in, bail us out of debt, and create some expansion capital to help grow the business."

I don’t want to freak you out, but I have to be straight with you - investors have no interest in bailing you out of debt. Investors are sharks, not lifeguards - they’ll eat you alive long before they’ll save your life.

Every startup is different, but the fact remains that no matter how sweet your opportunity is, no investor is interested in buying up someone else’s debt. There are enough great business opportunities that are debt-free for investors to spend time with. There’s no reason to go into the red right out of the gates with yours.

If you’re one of my fellow entrepreneurs in the unfortunate position of not being able to climb out of debt to attract an investor, let me offer some help.

1. Stop looking for investors to bail you out.

Entrepreneurs adopt this "save our ship" mentality that causes them to hope for an angel to come and save the day. It’s not going to happen. The more time you waste chasing this fantasy the more leveraged you’ll become.

2. Cut your losses - fast.

The best way to keep the ship from sinking is to lose some dead weight. It’s time to make some real hard decisions that probably won’t be fun - like letting people go, dropping your expensive office, or cutting every expense that doesn’t directly keep the business alive.

3. Get back on track.

The only way you are going to survive is to get the business back on track and in the black. If that means cutting down to just you and one customer, so be it. It’s a lot easier to build back up than it is to manage yourself through destruction.

4. Look for investors when you have something to invest in.

Until your story changes and you have something that investors can see a clear path to profits on, you don’t have a story to tell, so don’t waste your time telling it. Focus all of your efforts on getting the business on a positive growth curve, even if that means starting from scratch.

If you’re reading this article and you’re in this position I know it sucks (I’ve been there.) I know that being in a load of debt feels like you just OD’d on a bottle of anxiety pills. But instead of sitting around waiting to be saved, you need to make some hard decisions and do what it takes to put things back on course. It’s the only way to attract an investor.

You're Already Ready

Entrepreneurs often ask themselves when the right time to start a company might be.  They hang around waiting for the stars to align, for their moment of inspiration to hit, and for their career to prepare them for something big.

Well I have some bad news for you.  The stars will never align.  The brilliant flash will probably never come, and nothing you will learn or do working for someone else will make you more ready to start your own company.

Now here’s the good news – none of that matters.  The truth is that you’re already ready.  There’s absolutely nothing to hold out for in order to start your company.  You really just need to get off your butt and get started.  If you still aren’t convinced, and think you’ve got a few more excuses under your belt, let’s get rid of those right here and now.

You don’t need more education

No matter what you’re about to learn in school (short of becoming a surgeon) it’s not going to make a lick of difference in starting your company.  Sure, you may learn how basic accounting and bookkeeping works, but who cares? 

You’re not going to do so much revenue in your first year that your bookkeeping skills are going to make or break you.  Even if you do, you can hire a professional bookkeeper for peanuts and never think about it again.

Anything you don’t know now you can either figure out when you need to or find someone else that knows the answer.  More importantly, there isn’t a class in any school’s catalog that will teach you how to take huge risks and always succeed.  You’ll learn more in your first year of running a business than you will in your undergraduate and MBA tenure combined.

You don’t need more money

Over 500,000 companies are started every month in the U.S. alone.  Only a small fraction of those start off with significant funding, like the kind you read about in popular business magazines.  In fact, professional investors like venture capitalists and angel investors fund fewer than 1% of those companies! 

So how do you think the other 99% of the world gets started without these guys?  The answer – they bootstrap it and figure it out as they go.

You don’t need that big infusion of cash to get going.  You need to get started with what you have right in front of you and push the limits of your resources today.  Excess cash breeds sloth, and a tight belt encourages resourcefulness. The majority of entrepreneurs figure it out without a check from someone else, and you’re no exception.

You don’t need more time

There really is a right time to start your company, and it’s called “today”. 

Waiting around a few more months for some imaginary milestone to pass is not going to help.  No matter when you start your company, it’s going to be really hard.  It doesn’t matter if your kids are still in school, if your day job is particularly hectic right now, or if you think it will just be a little longer for the “market to be ready”. 

Once you get started, your world is going to be completely overcommitted and loaded with anxiety.  That’s how a startup works.  Trying to avoid this is like trying to decide where you want someone to shoot you: the head or the chest?

It’s going to suck no matter what. Don’t burn up valuable time pretending like you can soften the blow.

You don’t need more experience

I won’t mislead you here – experience certainly helps, but it’s not a requirement.  I’ve started nine companies, and certainly each experience makes the next one work better and faster.  But I wouldn’t have gotten through the first one if I had waited around to be more experienced.

You also need to realize that the experience you get by starting a company compared to just working for one are worlds apart.  Learning how to run a company by working at a company is like trying to become a chef by ordering meals at fancy restaurants.

By contrast, the experience you get by starting a company yourself is like going from short order cook to Wolfgang Puck with a case of Red Bull in your system! 

While experience can help, it often takes too long to get useful experience working in an existing structure.  The best and fastest way to get relevant experience is to actually start your company and figure it out as you go. 

There’s no money in excuses

If you want to spend the next few years coming up with more elaborate excuses to convince yourself you’re not ready, then by all means have at it.  That path will most certainly resemble the one you’re already on.

But if you truly understand that nothing you can wait for will prepare you for being an entrepreneur, then it’s time to put this column down and get started.  You’re already ready, and it’s time to go kick some butt.

Go Find a Crappy Web Site to Improve

I hear endless pitches from entrepreneurs about their next BIG Web site idea.  They take a look at all of the sites that are out there and decide that they have the one feature on their site that no one else has thought of.  They think that the market must need a new idea if all of the existing ideas have already been thought of.

This all makes sense until you look at one simple fact – most Web sites are failed attempts at what might otherwise be a good idea. 

Instead of trying to create a new Web site (or Internet-based business) why not just find a crappy Web site that’s doing an awful job of executing a good idea?  There are no lack of opportunities to choose from!

That was the opportunity at Swapalease.com, a company that I joined in the formative stages in 2003.  It wasn’t that Swapalease (an on-line leasing marketplace for cars) didn’t have competition – there was plenty.  But the competition pretty much sucked.

It didn’t matter that I didn’t invent the concept.  The opportunity was not in the innovation, it was in the improvement in an otherwise half-assed attempt by competitors to bring this concept to market.

If I simply looked at the dozen competitors that were on-line and assumed the space was “taken up” I would have overlooked a great opportunity.  We quickly took Swapalease to be the #1 player in its market, larger than all of its competitors (combined) by just about any metric.

After reviewing thousands of Web sites over the past 10+ years, I can tell you that most Web sites either aren’t making any money or aren’t making any progress.  That doesn’t mean the idea is a failure, it means that the efforts by the company were a failure.

Before you start working on the newest Web solution to a problem no one even has, first consider the solutions that others have thought through and executed poorly.  There are a LOT of diamonds in the rough right now and a lot of markets that are dying for some good execution.  Go find one.

The Good Ol’ Days were never that Great

I was spending some time with a few friends from the first company that I started back in 1994.  We started reminiscing about how great our “glory years” of being a startup were.  It got me thinking about what those days were actually like (versus how we recalled them.)

So I went back through some of my old business documents and took a look at what types of emails, letters (yeah, we used to send letters) and spreadsheets we had created back then.  You know what I found?

The “Good Ol’ Days” really sucked.

We look back and remember all of the great things that we did.  The big client wins, the crazy trips to pitch business, and the camaraderie of being a bunch of smart guys in a room building something for the first time.

What we apparently left out of those great memories were how broke we were, how frustrated we were at having no idea what we were doing, and how everyone was perpetually updating their resume for a better job.

Here’s a quick idea of what my reality was really like back then:

1. Being so overloaded in personal debt that I could barely sleep.  Having no idea how I was ever going to recover if things blew up.

2. We couldn’t afford a working heater of AC unit, so we would go to work in our office when it was 30 degrees in the Winter and 80 degrees in the Summer.  Sometimes it got so hot in the office that our PC’s would shut off.  I sometimes wore swim trunks and sandals to work like I was at the beach (we live in Ohio, and there is no water here, so it sure as heck wasn’t the beach).

3. Getting told “no” so many times by our prospective clients that it was a shock to me when someone actually wanted to do business with us.

4. Rollerblading to work 15 blocks because I couldn’t afford a car – in snow – uphill both ways. 

5. Expecting people to quit on a daily basis because none of us had been paid in months.  Hoping people would show up for work just one more day.

Although I love being “startup guy”, I haven’t lost sight of the fact that when it came right down to it, the glory days were filled with a lot less glory than strife.  Now I just need to figure out why I’m always dying to do it again.  Somehow I think this makes me an entrepreneurial masochist!

The fastest way to make more money is to raise the price

Entrepreneurs are constantly looking for new ways to increase revenues.  They develop more products, expand their operations, and hire new salespeople in hopes of adding a few more dollars to the bottom line. 

Yet the fastest way to really make more money is much simpler – just raise the price of the product.

Nothing creates more profit, more revenue and fewer headaches than an upward adjustment of your product price.  While this seems incredibly intuitive, it’s amazing how little energy companies spend trying to elevate their price points.

Know your ceiling

Most companies assume they know the maximum amount of money their customers are willing to pay for their product, but in reality they don’t.  It’s not because they don’t have a good feel for their customer, it’s because they haven’t tried charging too much.

You should never be afraid of asking for too much from your customer.  You should be deathly afraid of asking for too little.  Asking for too much gives you the opportunity to provide a “discount” and reduce the price.  Asking for too little often relegates you to running at the thinnest margins possible.

The compounding effect of price

If you’re still not convinced about raising the price, let’s talk about the compounding effect of a price increase.  An increase of just 10% in your price points will obviously increase revenues.  Additionally, you’ll create a nice bonus in profit.  But that’s just the beginning.

The incremental cash you create without any incremental costs means you now have more free cash flow to re-invest in your business expansion.  This means more free cash to roll into marketing which in turn drives more sales (which are now more profitable).  You can also hire more people to develop more products that you couldn’t afford to work on before.

Collectively, the effects of a price increase go well beyond the top line.  In some cases they may create market opportunities that give you a substantial lead on your competitors.

Determine what drives price

Until you charge way too much for your product (and your customer falls over laughing at your price) you really don’t know what “too much” is.  Even then, when they are rolling on the ground in complete mockery of you, you still don’t know for certain whether the higher price is really the issue.  There are lots of factors that contribute to a price being “too high,” and the dollars behind the figure are only one of them.

If I try to charge you $100 for a bottle of water right now, you’re going to laugh at me.  The price certainly doesn’t justify the value of the water to you at this moment.  Yet it if you were stranded for a week in the desert and I made the same offer to you, the $100 bill would fly out of your wallet. 

In both cases I’m offering you a bottle of water for $100.  The only difference is the value of that bottle of water to you at that moment.  Until you understand the value of your product to a customer, you really can’t judge that the price is too high.

Change up the packaging

Sometimes the best way to increase the price is to simply change the way it is packaged.  If British Petroleum were to sell you an annual “gasoline membership” for $2,500 per year, they probably wouldn’t get many takers.  But for someone paying in excess of $50 per weekly fill-up, the adoption rate is a lot higher.

Breaking your price into smaller chunks (albeit at a higher overall cost) is one great way to affect a price increase. 

Another great way to increase the price is to tie the price to recognized value.  Consider charging a higher price tied to the true value of a transaction.  Realtors, for example, can charge a 3% commission on a million dollar home sale because the value of that sale is so high.  But if they were to charge $30,000 simply to market the product without the guarantee of success, the price point would fall flat.

Many people are willing to pay a premium if you can guarantee that their value will be recognized in full.  Charging too much for the opportunity to realize value (without providing the value up front) can keep you from commanding a higher price point.

Just do it and see what happens

The hardest part about implementing a price change is often pulling the trigger.  You can spend countless hours arguing among managers and advisors about what the effects of a price increase will yield.  But the only way you’re going to know for sure is to just do it and see what happens.  The greatest risk of failure is holding on to a price that’s too low!

You’re either writing a check or skipping one

Most people have no idea what it takes to own a piece of a startup. They think that simply showing up for work entitles them to an ownership stake in the business, just because it’s a startup company. Others think they should be handed stock options like candy because they seem to have no cost.

I’m here to put a stop to all the madness. In a startup company there are only two ways to get a piece of the company – you either write a big check or you forgo your paycheck! The only other way anyone should be able to get a piece of a company for nothing involves dirty pictures and blackmail.

If you’re a company owner or entrepreneur, you may need some advice on how to deal with overzealous employees looking to bleed your stock dry. If you’re an employee or potential business partner that’s looking to get a piece of the action, allow me to give you some serious pointers on what it takes to get it.

Nothing is free

The first step to understanding why it takes real cash contributions to own a stake of a business is to realize that ownership has a real cash value. That can be tough to grasp in the formative years of a business because it’s either not making any money or there’s no market to sell your stock.

While the stock may not have a liquid value today, the whole point of starting this crazy company is so that it will have value, and for this very reason owning a piece of that stock has real potential value that needs to be appreciated.

As an employer, if you don’t think your options have value, you shouldn’t be giving them out. If you’re an employee and don’t believe that options have value, you shouldn’t be asking for them. Until everyone understands and agrees that the company’s stock has value, you can’t discuss how much anyone gets.

You only get what you earn

Stock options and equity shouldn’t be treated like a trick-or-treat offering handed out to anyone that shows up at your doorstep. If someone is doing $50,000 worth of work they shouldn’t be getting $500,000 worth of stock. That doesn’t make any sense.

If someone is getting paid $50,000 in cash (and that’s their market value), there’s no reason they should get any additional compensation in stock.

Try showing up at Proctor and Gamble and telling the CEO that you want a big stock grant in addition to your market wages. Explain how you think stock is just an intangible asset that he should start handing out freely. I would bet by the time you finish your first sentence he’ll be calling for security to have you tossed out on your head!

In order to make a fair assessment of what someone earns versus what the company is worth, you need to settle on a valuation of the company as early as possible. If you set a valuation of $2 million, then someone doing $50,000 worth of work could earn 2.5% of the company, not 50%.

You earn nothing for showing up

For those of you that plan on getting into a new business as a partner, you had better show up with a check in hand. Partners don’t get stock for agreeing to be a partner, they get stock for agreeing to share in the financial liabilities of the business.

Anyone would agree to taking on 50% of the business when it comes time to split the profits. But young companies are rarely splitting the profits. The more likely case is that they will be splitting the costs for the foreseeable future.

When you miss payroll for the first time and you need to come up with 50% of the liability, are you still excited about being an equal partner? How about when the business runs out of money and you need to mortgage your house and drain your savings to keep it alive? That’s what being a partner really means.

And that’s what business ownership is – sharing the liabilities as well as the successes. If you plan on becoming a partner in a business, you need to be able to share all sides of the business, not just the upside.

The saga continues

Getting two parties to agree on the value of a stock, or the value of someone’s time and efforts to earn stock, is never an easy proposition. Inevitably the business owner will always think the stock is worth more, and the partner or employee will always think they should get more of it.

Setting expectations early in the game is the best way to make this discussion easier for everyone. As long as employees and partners don’t expect more than they have earned, and owners don’t expect to get something for nothing, everyone should be on the same page -- or at least reading from the same book anyway.

You’ve got to look way past tomorrow

When I was a kid I thought I had it all figured out.  All of the big decisions in life -- what I wanted to do for a living, who I was going to marry, and where I was going to live -- were easy to make.  I was going to become a fireman, marry my next door neighbor, and live in my tree house. 

As it turned out I never got excited about running into a burning building, my next door neighbor grew up to look like Kathy Bates, and aside from a more promising mortgage payment, my tree house never became the sweet bachelor pad I had hoped it would.

That’s the problem with making big decisions when you’re too young – you don’t have enough perspective to know how your choices will play out.

Startup companies are the same way. They tend to make their big decisions too early in their formative years thinking that life will never change.  Well, unless you plan on living in your tree house, there are few things you should consider.

The reality is that you won’t be here a year from now.  Your vision will change, the needs of your staff will change, and once you’re up and running, you may not need that capital after all.  The biggest mistake you can make right now is committing to a path that doesn’t accommodate your inevitable change in the coming months and years.

Write a Vision Without Restrictions

Imagine if Bill Gates were to have set the vision of Microsoft based on the condition of the company in its first few years.  Sitting with a handful of people in the room, the biggest vision they could possibly imagine with that team may have been to service their valuable partner IBM by writing some great code.

Gates didn’t think that way.  He didn’t let his present condition dictate the vision of the company.  He recognized that Microsoft was capable of being a dominant player in the PC market, regardless of the fact that their present reality was much more modest. 

Your vision should be set based upon what you want to become, not what you are today.  Every major company starts with just a few people in a room (sometimes less) before it goes on to become a powerhouse. 

Keep Big Titles out of Infant Hands

Another problem is creating executive team members long before you have any reason to have executives. If you have five people in a room and one of them took a few computer programming courses in college, you may be inclined to make them the Chief Technology Officer of your company.  At the time it makes plenty of sense, since no one else could possibly fill that role.

After a few years, your small band of five turns into fifty, and now all of your technology decisions rest in the hands of the CTO, who’s about as qualified as a help desk operator at Dell Computer. 

Instead of just handing out big executive titles in your first year, try calling people what they really are. Focus on the role they fulfill. It’s goofy to call a guy the “Chief Technology Officer” if he could never handle those responsibilities in another established company.  Let duty dictate title, and assign peoples’ roles accordingly over time, not in the first year!

Starve First, Raise Capital Second

Making gluttonous decisions about capital in your formative years can be one of the biggest mistakes you will make, and it’s one that you can never make up for.  The first few years of a startup are incredibly capital intensive.  You’ve got to make payroll, cover rent, pay for marketing and hopefully find enough left over to feed yourself.

Naturally entrepreneurs run to investors to help solve this problem. They offer big chunks of their company in exchange for enough cash to keep them alive.  Inevitably entrepreneurs end up asking for way too little cash while offering far too much equity in exchange.

Instead of putting your hand out at the first sign of a cash crunch, wait a while and consider other options. Getting creative can save you from giving up your precious equity too quickly.  Remember that the longer you hold out and grow without capital, the less equity you’ll have to give up in the future when you need the big checks to be written.

You’ll be all “Growz’d” up One Day

One day you’ll actually become the company that can execute on a huge vision, hire big executives and raise massive amounts of capital without giving up much in return.  Until then, some present-day sensibility will help propel your startup past its current limitations.  If you’re going to think big, you’ve got to look way past tomorrow.