[Gringuito]

Here are a few thoughts about starting a growing business along with a bit of life-advice from someone that's been there.

- Look for a market that is too small for the VCs (venture capitalists) to be interested in. You don't want to be competing against the kind of money and expertise they can bring to your competitors. Once they notice that you are starting to succeed they will fund a startup to crush you. This would limit the market size of your new startup to somewhere less than $200M. VCs need large markets to make their business model work.

- Smaller boring markets can be some of the best opportunities. The guy that invented the little plastic dental floss holders, you know what he’s worth? Before he made it big I’m sure it sounded silly at parties saying what company he was starting. Sexy markets mean lots of competitors.

- Make sure you’re doing something you would do without being paid. If you don’t have a passion for your company, if you don’t believe that you’re making a real difference in the world, you will burn out.

- Don’t take any money from VCs. They have a business plan to invest in 10 companies, have 8 fail, and have the other 2 be outrageous successes. This is great from them, not so much for you. They want to push you to either fail or to grow to a billion dollar company. Once you take VC money you've sold your company whether you know it or not.

- Look for a market that is served by one main company and a few smaller competitors. Markets that have an entrenched number 1 and 2 are much harder to break into than a market that has no defined number 2 company. Your job is to become that number 2 company and make life hard for the number 1 until they either buy you out or make a mistake and you become the number 1 in that market.

- Give your employees skin in the game. This means giving them an ownership stake in the company. This does NOT mean giving them voting shares in the company. The more they feel they have a large payout at the end the harder and smarter they will work for you. Don’t be cheap! They will help you make your millions, as long as they get 7 figures as well. And they will be breaking down your door after you sell to start another company with you.

- Keep a majority voting block of the company for yourself. You can issue different types of shares in the company, voting and non-voting. Make sure you have 51% of the voting shares. You don’t want to create a company that is paralyzed by a few partners that cannot agree with each other. You need to be the final word.

- Even though you have the final control it’s important to learn how to delegate. None of your employees will ever be as good or dedicated as you will be at your company. But they will outnumber you and as a group will be able to do more than you ever could. I've seen many entrepreneurs fail at this stage as their companies grow. They try to maintain too much control and become a large bottleneck in the company. Learn to let other people do a worse job than you at the same task.

- You need to be aware that every entrepreneur has a company size that’s right for them. Some of the people I've mentored love being in the 10-20 employee “like a family” business. Others love the challenge of a larger company like I do. If you outgrow your comfort zone you will be miserable. That’s when it’s time to either hire a management team for your company and stay on the Board of Directors/consultant or just outright sell. You don’t want to be the owner that holds all the employees/shareholders back.

- Don’t get married. I just had to throw this one in here. You’ll be living and breathing your business for years. Unless you've found a unicorn you’ll be distracted from your business by your home obligations. You don’t need any distractions.

- Know when it's time to sell. This is an art form but one of the more important aspects of owning a business. You can either run it as a life style business and pocket the profits or sell the company and pocket X years of future profits all at once. So when you sell you get the future profits and the free time to start a new business and repeat the process. This is how you really grow your net worth. Be sure to use a large law firm to handle M & A work, it can get really tricky and people try to screw you often. Don’t agree to a long (more than 2 year) non-compete agreement.

- Learn investing early. I've seen too many entrepreneurs that are great businessmen but seem to think that they are just as good at other areas. This is a costly mistake. I've seen so many go into dodgy investments after they sell their business and end up broke. Remember that just because you've made money by running a business you are still likely inexperienced in all other areas of life. You never had the time to practice other skills.

- Don't listen to all the naysayers. You'll be inundated by people telling you how impossible it is. Use that as fuel to keep going forward.

[WestCoast]

1. How do you personally go about finding these fragmented markets?
2. When you are hiring a sales team/call center how are you able to distinguish between good ones/bad ones. Ie: how do you track the right one down for your product/market?
3. Do you recommend selling a service or product first?

That's all for now and thank you for any responses my man!

[Dr. Howard]

Quote:

- You need to be aware that every entrepreneur has a company size that’s right for them. Some of the people I've mentored love being in the 10-20 employee “like a family” business. Others love the challenge of a larger company like I do. If you outgrow your comfort zone you will be miserable. That’s when it’s time to either hire a management team for your company and stay on the Board of Directors/consultant or just outright sell. You don’t want to be the owner that holds all the employees/shareholders back.

I like this advice the best. I have one client that knows which size they work best at and they buy a new business from the size smaller than them and then grow it to sell it to the next size larger.

It helps you know when to let go/get out.

[Hotwheels]

Quote:

- Look for a market that is served by one main company and a few smaller competitors. Markets that have an entrenched number 1 and 2 are much harder to break into than a market that has no defined number 2 company. Your job is to become that number 2 company and make life hard for the number 1 until they either buy you out or make a mistake and you become the number 1 in that market.

This is basically where I am right now.


Good read Gringuito. Lot's of stuff to think about.

[Gringuito]

(02-24-2014 10:16 AM)WestCoast Wrote:  

1. How do you personally go about finding these fragmented markets?

That's the magic isn't it. I have a knack for seeing markets that way. I know the markets that I sell into like the back of my hand. I know the decision makers in the large companies. That's where the passion comes in. You should already be interested in the market and know who the players are. Have you never been frustrated being forced to use a product that doesn't fit your needs?

(02-24-2014 10:16 AM)WestCoast Wrote:  

2. When you are hiring a sales team/call center how are you able to distinguish between good ones/bad ones. Ie: how do you track the right one down for your product/market?

I've had mixed luck with finding good sales managers. A sales director can cost you 5% of your company if they have a good track record in addition to base salary. Often the best indicator is if they've sold into your target market and have a thick Rolodex of previous clients with good relationships. They should be providing you quite a few sales leads as good personal references before you hire them.

As you're developing your product you should be in contact with a couple of the companies that you would sell it to. You need to talk to your contact inside the company about the sales people that are selling other products to them. They will let you know who the good sales people are. And they are a good first personal reference.

(02-24-2014 10:16 AM)WestCoast Wrote:  

3. Do you recommend selling a service or product first?

A product first, the services should ideally come from the product itself. That helps you charge more for your services since the client is locked in. Services are easier to start with but much harder to scale up since they are very labor intensive. You should always be thinking about how to scale your products/services.

[WestCoast]

Thanks man very insightful and helpful esp the sales force part.

One more which you likely won't give me to not blow your ID you said this:

" I know the markets that I sell into like the back of my hand."

In that case is there any company/product that you think is misunderstood? Ideally public or near a bridge loan process.

No need for an explanation just curious on a company or two I can do the research myself.

Really appreciate the time in responding to a peasant like myself ha!

[TopPanda]

Good stuff!

I started my small business in 2002. I got the idea from my previous employer. They wrote some custom software that they used in house. It wouldn't have been viable for them to have sold it as a product, but it WAS viable for me to clone it from my kitchen table and turn it into a micro-niche business.

I did really well with it, but in retrospect I'd say to sell any business after 7 years, after that you lose interest in it and you're less likely to sell out at the peak.

[DVY]

I am in the process of establishing a niche dental/surgical 1-time use product. (1-time per surgery).

Only 1 major dental company currently makes this product. Their product is wonderful, but the prices are sky-high (10 dollars/unit) (they were even higher 2-3 years ago). Theres a few fringe companies that make this product but mostly for sale in the EU.

I ran the raw #s, and the product itself has huge markups (think 5-10x).

Theres a ton of steps and massive complexity navigating the FDA rules (for medical/dental goods), sterilization, packaging, etc etc. which limit cheap entry into the market.

Potential dental market size is 1-5M /year.

My strategy would be to undercut the major company's price by 30-40% and market it direct to doctors (w/free samples to 1st time potential customers).

Any other thoughts or wisdom you can offer? Any similar experiences/anecdotes dealing w/a market like this?

[Gringuito]

(02-24-2014 04:31 PM)DVY Wrote:  

I am in the process of establishing a niche dental/surgical 1-time use product. (1-time per surgery).

Only 1 major dental company currently makes this product. Their product is wonderful, but the prices are sky-high (10 dollars/unit) (they were even higher 2-3 years ago). Theres a few fringe companies that make this product but mostly for sale in the EU.

I ran the raw #s, and the product itself has huge markups (think 5-10x).

Theres a ton of steps and massive complexity navigating the FDA rules (for medical/dental goods), sterilization, packaging, etc etc. which limit cheap entry into the market.

Potential dental market size is 1-5M /year.

My strategy would be to undercut the major company's price by 30-40% and market it direct to doctors (w/free samples to 1st time potential customers).

Any other thoughts or wisdom you can offer? Any similar experiences/anecdotes dealing w/a market like this?

How large is the dental company that currently sells the product? Are they public or private and how are they funded (VC, owned by a parent company, etc). The market size is small enough to stay off the radar of most competitors which is good.

How long would it take you to get past all the FDA compliance? Would the existing company get wind that you have applied?

[Gringuito]

(02-24-2014 03:19 PM)WestCoast Wrote:  

One more which you likely won't give me to not blow your ID you said this:

" I know the markets that I sell into like the back of my hand."

In that case is there any company/product that you think is misunderstood? Ideally public or near a bridge loan process.

That would be a bit telling since I'm in a very specific market. There are some things best left to PM. A better question is what kind of markets or products are you interested in?

[WestCoast]

^ I tried! PM sent no worries if you don't want to give out/respond much respect/appreciation as always.

[anonymous123]

Great post. I agree with pretty much everything. I'm on a different page with "give your employees skin in the game". I think this only works for tech companies. Otherwise, pay the top people well. Link a big payday to the next big deal. Or, call your lawyer and set aside a Net Profits Interest (NPI) if you truly want to incentivize the big pay day above and beyond the promise of a bonus.

Lugging around additional owners is a big PITA, often without a real reward.

Again, my note doesn't apply if you are in tech. Getting a "piece of the action" has become standard in tech. If you aren't in tech, avoid this headache.

Oh, and don't get married. Nothing worse than feeling like you have to chop your leg off to save the body if some bitch has the idea that you she is a "business owner" just because she married you and is really good at going to the gym. Trying to convince a business valuation retard that your business isn't worth nearly as much as your stbxw thinks is not a fun experience...(just sayin'!).

[Gringuito]

(02-26-2014 12:33 AM)anonymous123 Wrote:  

Great post. I agree with pretty much everything. I'm on a different page with "give your employees skin in the game". I think this only works for tech companies. Otherwise, pay the top people well. Link a big payday to the next big deal. Or, call your lawyer and set aside a Net Profits Interest (NPI) if you truly want to incentivize the big pay day above and beyond the promise of a bonus.

Lugging around additional owners is a big PITA, often without a real reward.

Again, my note doesn't apply if you are in tech. Getting a "piece of the action" has become standard in tech. If you aren't in tech, avoid this headache.

Oh, and don't get married. Nothing worse than feeling like you have to chop your leg off to save the body if some bitch has the idea that you she is a "business owner" just because she married you and is really good at going to the gym. Trying to convince a business valuation retard that your business isn't worth nearly as much as your stbxw thinks is not a fun experience...(just sayin'!).

Never underestimate the intelligence of your audience. Yes, I'm in the tech area. That's interesting that giving ownership stakes doesn't help in other types of businesses. I normally avoid having partners like the plague, it creates nothing but problems. Getting good people on your board of directors is a different matter. You want the best you can entice there.

The don't get married advice again can't be stressed enough. I'm sure you've seen divorces with closely held private companies that can bring the company down or severely hurt it.

[WestCoast]

^ ha another solid post.

"Yes, I'm in the tech area"

I figured that which is exactly why I asked if there were any management teams/companies you like.

I am surprised people don't have a billion questions. This is a top 3 thread of all time already in my head.

Resent a PM but I will go with this broader queston "what products/markets do you like".

Maybe I can throw a few ideas there: Data analytics like Marketo? Hybrid or all flash storage like pure Storage or Nutanix? Network virtualization software? Virtual secure software like Fireeye?

Trying to talk in broad strokes, but the issue as always is there is only 1-2 best of breed companies. You only have to look at VMware and Citrix to see the point I am trying to make.

So maybe something broad like "I think this space is good and I would filter out good and bad companies by looking at XX?"

I can go to the product demos etc I don't mind doing the work.

Note IDGAF about the valuation I just want to know how to mess with the product to see if it is really best of breed.

---

Note: again not trying to out you at all I just want to see/gain any insight into a space. IE: everyone knows the "group" of high flying tech companies but it is certainly very difficult to filter the good from the bad.

[Bad Hussar]

Nice post Gringuita.

Do you have any advice for start-ups that need money to either build a site, or create a prototype? Say they need around $100,000. Without VC money how would they go about it if the owners(s) either didn't have the money, or were unwilling to pump this much in themselves.

Following on: If VC money is taken, say through an incubator like YCombinator (Ja, I know how impossible it is to be accepted on that program), or other less prestigious program, what would you say the owners need to look out for when talking to VC's?

[Gringuito]

(02-26-2014 11:53 AM)Bad Hussar Wrote:  

Do you have any advice for start-ups that need money to either build a site, or create a prototype? Say they need around $100,000. Without VC money how would they go about it if the owners(s) either didn't have the money, or were unwilling to pump this much in themselves.

If you only need 100k you'll have a problem getting VCs interested. There are angel investors that work better in that range. If the 100k is part of a much larger investment needed later on then VCs may be whats needed. If you have to go that way try to get as far along as possible, and profitable if can, before you start talking to outside investors. You'll be in a much better position to negociate. If you just have an idea or you are bleeding money you don't have much to bargain with.

(02-26-2014 11:53 AM)Bad Hussar Wrote:  

Following on: If VC money is taken, say through an incubator like YCombinator (Ja, I know how impossible it is to be accepted on that program), or other less prestigious program, what would you say the owners need to look out for when talking to VC's?

I could fill a book with ways they can screw you. The bottom line is that they have done this before and you most likely have not. The standard way of squeezing you is giving you good terms for the first round of financing and making sure you have to use them for the subsequent rounds. At the point the second or third round of funding comes around you've put in a ton of time into your company and are unwilling to walk away even if the new terms are not very good for you.

There are times when VCs are useful. It works if you have a company that needs both large amounts of cash infusions and contacts that the VC has. Some of the better VCs have access to really good executives that can help you grow quickly.

[Bad Hussar]

(02-26-2014 03:26 PM)Gringuito Wrote:  

(02-26-2014 11:53 AM)Bad Hussar Wrote:  

Do you have any advice for start-ups that need money to either build a site, or create a prototype? Say they need around $100,000. Without VC money how would they go about it if the owners(s) either didn't have the money, or were unwilling to pump this much in themselves.

If you only need 100k you'll have a problem getting VCs interested. There are angel investors that work better in that range. If the 100k is part of a much larger investment needed later on then VCs may be whats needed. If you have to go that way try to get as far along as possible, and profitable if can, before you start talking to outside investors. You'll be in a much better position to negociate. If you just have an idea or you are bleeding money you don't have much to bargain with.

(02-26-2014 11:53 AM)Bad Hussar Wrote:  

Following on: If VC money is taken, say through an incubator like YCombinator (Ja, I know how impossible it is to be accepted on that program), or other less prestigious program, what would you say the owners need to look out for when talking to VC's?

I could fill a book with ways they can screw you. The bottom line is that they have done this before and you most likely have not. The standard way of squeezing you is giving you good terms for the first round of financing and making sure you have to use them for the subsequent rounds. At the point the second or third round of funding comes around you've put in a ton of time into your company and are unwilling to walk away even if the new terms are not very good for you.

There are times when VCs are useful. It works if you have a company that needs both large amounts of cash infusions and contacts that the VC has. Some of the better VCs have access to really good executives that can help you grow quickly.

Thanks Gringuito

Yes, $100,000 would indeed jut be a start.

With the incubators it's usually the contacts they have that they use to sell themselves to start-ups. A couple I've looked into typically offer around $17,000 for a 6% stake in the company. And since $17,000 obviously isn't going to get you far maybe some additional convertible loans (at least in the case of YCom, not the other one). To my mind valuing an idea and small team @ more than $280,000 when there is typically no product near ready to launch is not bad terms.

As you say it is probably in later rounds that you get screwed. Start-ups will have to look at the initial agreements carefully. In your experience how much would a competent lawyer charge to look over a VC agreement and advise the start-up's founders?

[anonymous123]

WestCoast - it sounds like you are currently looking for some good business ideas. Not to state the obvious, but the easiest place to start (and best) is to look at what you know based on what you are doing now and see if you can spot an opportunity to actually makes some sales.

For me, I don't have the stomach for tech. I have huge props for those that do, it just isn't me. I just can't get my arms around the mentality of owning a business that is either worth close to zero or $100million. You are either just burning cash and keeping the faith or the next groupon. (crazier yet when people pull off a sale at, like, 15x revenue...I will never understand).

There are plenty of businesses out there that follow a more block and tackle approach. Unless you are already a tech guy, it wouldn't hurt to sniff around at some of these opportunities.

[paninaro]

(02-26-2014 11:53 AM)Bad Hussar Wrote:  

Do you have any advice for start-ups that need money to either build a site, or create a prototype? Say they need around $100,000. Without VC money how would they go about it if the owners(s) either didn't have the money, or were unwilling to pump this much in themselves.

Following on: If VC money is taken, say through an incubator like YCombinator (Ja, I know how impossible it is to be accepted on that program), or other less prestigious program, what would you say the owners need to look out for when talking to VC's?

Gringuito's right that VCs don't usually put in $100k -- too low. At that rate, try the FFF funding plan (friends, family, fools). Whatever industry it's targeting, find people who really get it and have some money to toss in. $10k here and there can add up.

If you can't even raise that, then you should also question how viable your business really is.

As for incubators, tread carefully. The money they give isn't great, and often you end up spending half of it on living expenses as you need to move to the city where they are based. I think a lot of the real star companies to come out of incubators would have done equally well without the incubator -- they had a strong team, idea, etc.

Ahh, and then there are a few companies I see that are incubator sluts. They jump from incubator to incubator just living off that money. This is more common with government-funded incubators (see Startup Chile for example), since they aren't run as well and don't do a great job selecting companies to join.

[anonymous123]

(02-26-2014 08:26 AM)Gringuito Wrote:  

The don't get married advice again can't be stressed enough. I'm sure you've seen divorces with closely held private companies that can bring the company down or severely hurt it.

Ummm...hate to admit it, but this was a personal experience (and very expensive!)

[Gringuito]

(02-26-2014 04:09 PM)Bad Hussar Wrote:  

In your experience how much would a competent lawyer charge to look over a VC agreement and advise the start-up's founders?

Keep in mind that I don't use VCs, I'm on the other side of the deal now. But good lawyers cost $450-600 per hour. Depending on where you're located I can PM you a good law firm that I've used with good success.

When working with lawyers don't let them control the process or costs will get out of hand. Also, make sure you tell them to use a paralegal for all of the boiler plate preparation. It's an easy way to save money but not affect the quality of the work.

[ColSpanker]

I would say: "Do it right from launch".
I could right a book about the mistakes I made starting my own company 8 years ago. It was supposed to be the key to my financial independence, instead it just barely chugs along, forcing me to take a series of jobs outside my field just to make ends meet.
Things not to do:
1) Partner up with someone who doesn't like to hustle. My business partner has plenty of money from his family connections and doesn't really need to work. Fine and dandy until you're sweating because you can't pay your utility bill and he won't be back for a week since he's off to another vacation.
2) Get a bad domain name. I'm sure riffraff.org sounds good to some people, but not potential customers.
3) Piss off a competitor with deep pockets. Lawyers are expensive. Some companies think nothing of unleashing their shysters on you just to make a point. This is called "spending out of court".

[Valhalla]

Great advice

Do you own any businesses op?

[GyopoPlayboy]

Im also curious about what you do, OP. You wrote in your post that you are giving some of your own thoughts plus advice from "someone that's been there." Is this "someone" you? Or are you just listing what you've observed?

[WestCoast]

^ he is rich if you can't tell from typing style alone you guys need to work on your game.

The best thing you can do from reading people like this is to try to raise your level of consciousness. No one with real wealth is going to hand you their cards.

Best to try and triangulate themes to change the way you think.