Entrepreneurs Unpluggd – The Founding Team Edition

This week I attended the Entrepreneurs Unpluggd event in person and found it to be a really great experience with a good crowd. If you haven’t heard of Entrepreneurs Unpluggd, check them out here.

They post all the videos of the entrepreneurs that speak at their events on the website so if you ever miss an event you still have the opportunity to hear the advice and stories from the speakers afterwards. Each of the speakers at this month’s event brought a different perspective on whether to start your company as a single founder or co-founder. The key takeaways that I learned from the event were:

1)      If you’re going to start your business as a single founder, you almost have to be very personable because you should realize that people will really only buy from you if they like you. You also have to do just about everything yourself from selling, hiring, firing, operations, etc. until you build out the rest of your team, which can take a while if you’re looking for high-quality employees. So overall, going at it alone takes the most discipline, but, of course, the upside is that you don’t have to worry about giving up any of your equity to another co-founder.

2)      The benefits of having a co-founder include increased chance of upside through an exit (you both can brainstorm and find different/creative ways to grow and expand the business), decreased risk (you can both spot each other’s blind spots), and differentiated responsibilities (you each can focus on specific aspects of the business).

3)      Why take venture funding vs. creating a lifestyle business? Take a look at your unit model and if you think you can take outside funding and see explosive growth by scaling that unit model very quickly then it just might make sense to take a smaller piece of a larger pie vs. bootstrapping all the way which can slow down the growth potential.

4)      Good entrepreneurs make mistakes and learn from them quickly. They’re able to figure out how to have more of a growth mindset vs. fixed mindset (check out book “Mindset” for more on this concept).

5)      The last speaker was a VC and he was asked what makes a good investment for him during the Q&A. His answer was hands down it’s always going to be the team. They have to be humble enough to listen and learn, have determination/desire, and strong relationships that can help them persevere through tough times. This seems to be a reoccurring theme, since Y Combinator also recently announced that they are accepting applications from teams even if they don’t have an idea. Investing in people/the team is usually the smarter investment strategy. I’ve only been on the PE investing side for less than a year now, but it’s very clear how important management and leadership is for a successful investment.

Keep a look out for the next Entrepreneurs Unpluggd event - The Startup Law Summit on April 14^th at the new 1871 working space.

Entrepreneur’s Clinics

I recently discovered a new organization called Startup Trebuchet, which is a great resource for entrepreneurs, since it provides mentoring and legal assistance to startups at little to no costs.  They recently started a series of discussions and classes called Entrepreneur’s Clinics, which typically take place in River North on Saturdays from 11am to 1pm. These are open sessions which are meant to be more of a discussion format and are limited to 10 or 20 participants. This past weekend, the topics were entity formation, establishing co-founder agreements and protecting intellectual property. I had a chance to sit in on the first part of the discussion and it provided a great review of some of the key considerations entrepreneurs need to take into account when starting a new business venture.

The main highlights of the discussion revolved around the fact the VC firms will require your startup to be a C corporation incorporated in Delaware, so if you know you will want to tap into VC funding within a two year period you should form your startup as a C corporation, but if you are planning to bootstrap the company and don’t think you will need outside funding, then many people might choose to form as an LLC for the tax benefits. Just be prepared that if you choose to form an LLC, VCs will ask you to convert the entity when you are getting prepared for fundraising rounds.

Another important consideration for VCs is the relationship between the founders of the startup. They will try to gain a good understanding of how stable the relationship is between the founders and often VCs will shy away from single founder entities because in the event that there is a distraction or illness in their life, the whole venture may stumble. That’s why when you are initially getting started with your business, it’s very important to have open discussions about who is contributing what to the venture and you may want to have exit mechanisms in place in case there is a disagreement between founders.

By the time you are ready to approach VCs, they will expect all your founders to be full-time employees so that they know you and your team are dedicating most of your time and energy to the venture. They may also look to supplement the talent of your founding team by suggesting additional people you will need to hire in order for them to consider investing in your startup (i.e. a technical co-founder or developers). It will be very important for the VCs to understand the ownership and control over the source code for your startup, so if one of the founders leave they want to make sure that the business won’t crumble.  

VCs will also look to set up a vesting structure for the founders in the term sheet of their investment. The reason the VCs will make you vest is so that they can tie you back to the company and make sure you continue to be dedicated to it. They will also want to check all your employment contracts and make sure you have vesting in place for your employees as well as “work for hire” clauses (the employer owns whatever the employee develops), non-disclosure and non-competes.

Keep a look out for the next Entrepreneur Clinic!

Hosting Ohours Sessions

This past weekend I had the opportunity to host my first Ohours session (http://ohours.org/). In my Ohours profile, I mention that I'm willing to talk about a range of topics, which include: startups, finance, private equity, venture capital, investing, tech trends, non-profits and healthcare. Anyone can log onto the site and sign up to meet and chat about any topic, which provides a great way to meet new people who share the same interests.

This week I had the founder of an online fantasy sports league website sign up to go through his business plan as he is getting ready to pitch to angel investors. I was impressed with his story and how he got started and came up with the idea for his startup. As a corporate lawyer, he had followed and read about the new online gambling regulations that started to come out in 2006 and he noticed that one of the loop-holes in the law was related to Fantasy Sports leagues online. He waited a few years to see if the government would come in and add any new regulations after a few of the initial sites started to pop up. Today there are about a dozen websites that let you bet on fantast sports, but he has come out with a platform to extend fantasy sports leagues online to just about every type of sport including tennis and golf as well as college sports. The most interesting part of the platform will be its ability to extend betting between people outside of sports to reality television as well. This way people can also start to bet on events such as who will make it to the next round of American Idol or Dancing with the Stars and they will also be able to capture a target audience outside of just the adult male population.  The one thing to look out for will be the potential for the government to see how profitable these companies will become and then they may start to tax the revenue these companies are making, since right now there is really nothing in place for this industry. The other potential concern I would have as an investor would be the acquisition cost for each customer. Since there are several competitor sites, these companies may have to spend more and more on advertising online in order to capture additional active members. It's also still unclear how long active members remain members of these sites since the oldest site is still only two years old. Overall, it still seems to be a pretty convincing business model with a very scalable platform and low operating costs, so hopefully his idea will get some traction with the Chicago angel investors in the coming weeks.