Lowered Expectations

Lowered Expectations on MadTV featuring Keanu Reeves

I keep wondering about some entrepreneurs living in a bubble.

Not the usual doom and gloom startup bubble or a Incubator Accelerator Bubble but a reality distorting bubble that causes them to completely forget about why people (VCs, angels, banks, others) make investments in early stage companies. They seem to read TechCrunch and think that raising capital is easy. Investors are tripping over each other to make angel and seed investments in any Tom, Dick, or Harriet that can use Keynote and string together enough words to make buzzword bingo. And, of course, with nothing more than a PowerPoint presentation and hired developer these entrepreneurs figure that they should get a $4MM pre-money valuation and be able to raise $500-$1MM, just like any of the companies coming out of YC or Techstars.

I get emails with quotes like:

“I am tour de force, the type of person people want to invest in. Driven, smart, visionary, able to build a tech team and an excellent communicator.”

All I can say is, you need to wake up and smell the sweat. It’s time for me to be the harbinger of brutal honesty. The wrecker of unfettered dreams. The resetter of expectations.

  1. Ideas require execution.
  2. Your track record may not allow you to raise any capital without demonstrating traction.

Ideas are a Multiplier of Execution

“Same exact idea. Better execution. Big winner.” Fred Wilson.

The section is borrowed from Derek Sivers post. Ideas are part of it, but it’s execution that differentiates. It’s execution that is the massive multiplier. Stop thinking that ideas alone will differentiate. You need to demonstrate your ability to execute on the idea as a scalable business.

Execution = Demonstrate Traction

Before raising money, entrepreneurs must read The Capital Raising Ladder. This article is more than 2 years old but the key principles have not changed. Make a good guess which rung you are at? Do not pass go, do not collect $1MM on a pre of $4MM. You need to figure out where on the proverbial Ladder you fall and then figure out how to demonstrate traction. Just because you observe high tech startups and you think you can do better, this isn’t a reason that anyone should give you capital. You actually need to DO better. Go do the smallest thing to get the most bang for the buck. Call it lean. Call it customer development. Call it something. It doesn’t matter. You need to go do it.

What is traction?

It depends (go read Getting Traction). It can be revenue growth. But since many startups are too early for revenue, or are working on Dave McClure’s Startup Metrics for Pirates gives examples of consumer web applications metrics that can be measure to show growth and serve as a proxy for future revenue. Not building a consumer facing web application? Look at David Skok’s SaaS Metrics or Designing Startup Metrics to drive Successful Behaviour. It is your job to figure out how to demonstrate traction. These are starting points.

It might be as simple as demonstrating that you’re able to hire/build a team of committed developers. If you can’t convince a developer to work for sweaty equity, then you might have a hard time convincing others you are the right person to invest. If your expertise is unique and critical to the success of the venture but you can’t design the product and you can’t write code. And you can’t convince a technical cofounder or others that they should be able to work for sweat equity on the idea. Hmmm, it doesn’t lead me to think that you can convince a sophisticated (probably even an unsophisticated) investor that they should invest in you.

Start kicking butts and taking names

The goal is not to stop entrepreneurs from trying. The goal is to reset expectations about fundraising and to build world-class market changing companies. You want a $4MM pre-money valuation, go earn it! Get users! Get customers! Get big numbers on $0. What are big numbers? In true wishy washy manner, it depends. But I’ll tell you a for a startup aimed at cracking mobile for neighbourhoods in Toronto, the number of users better not be in the 100s. I’ll be impressed if the numbers are in the 10,000s, knocked over in the 100,000s and blown away in the millions. Are these number high? Are they outrageous? Maybe. But if you want a spectacular valuation, go prove to me that you deserve it.

Want to get $150,000 from Yuri Milner? Maybe you should figure out how apply to YCombinator. If you think it is so easy, prove me wrong and go do it. Maybe I’ll start a StartupNorth Fund, that all it does is bet against entrepreneurs. If you loose the bet you owe me a token amount of money, $100-500. If you win we’d invest in the next round at the negotiated price (we don’t actually have a fund to do this, but I’d be willing to stake $10-25k for matching).

Stop trying to get people to lower their expectations. Set you goals high. Figure out ways to hustle and be relentlessly resourceful, and make the metrics happen. I know we can build world-class companies (it was a busy funding week last week for Canadian startups). But we need to stop the charade that funding is flippant, easy, etc. Raising money is hard. Building a great company is hard. But it’s worth the effort.  Let’s go show the world that we can build bigger, better, badder startups.

Let’s remove “entrepreneur” from the dictionary

Editors Note: This is a guest post by Brian Sharwood (LinkedIn, @bsharwood). Brian is the President of Homestars (@homestars), the leading online free listing and rating company for Home Improvement specialists. Prior to HomeStars, he was a research analyst and principal of SeaBoard Group. Brian holds an MBA from Babson College in Boston and a bachelor of Arts from the University of British Columbia.

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I hate the word entrepreneur. It is overused. It has lost all meaning. Everyone is an entrepreneur these days. From the increasing attendance at DemoCampStartup Drinks, and Sprouter events around Toronto and across Canada you can find “entrepreneurs” that are people with ideas, corporate PR folks, lawyers, wedding businesses, etc. It ranges from founders of tech ventures to people looking for get rich quick schemes. In short who is an entrepreneur? Well just about everyone.

The term entrepreneur is meaningless.

I propose we split the people who live under the current word “entrepreneur” into three new words (which I won’t attempt to coin) which help us understand who these so-called “entrepreneurs” really are.

The Entrepreneur as Artist

These are the people with the great ideas. They are ones that are trying to change the world with something that’s never been done or seen before. In the tech world, they are often the hackers, who build a new web application with a vague idea of how they might make money for it. They might be the business person who sees a better process and sets it up, either on their own or within an existing enterprise. They are building something not for the money because it’s satisfying for them to create something that others love.  I constantly run across great ideas and great web apps that I say ‘that’s great, but I wouldn’t pay for it’, or I might just appreciate it for the sheer ingenuity of it, or it might be something to purchase to incorporate into another larger product. These are the creators of the ideas for the new economy.

The Entrepreneur as Small Business Owner

This is probably the group of people that encompass most of the people we encounter who label themselves entrepreneurs. They build businesses and run from from the consultants like April Dunford, bringing marketing insights and analysis to growing tech companies, to Jarrett Jastal, one of our clients, who runs StoneCote, a stone flooring company out of Hamilton. Running a small business is tough, and these people deserve to be lauded for taking risks and building companies. Often scrambling to meet payroll, watching a bank account dwindle, and trying to solve the many problems of operations. But many, if not most of these businesses are relatively small and non-scalable. They often rely on the skills and expertise of the founders and operators of the company rather than a product or brand. Another key ingredient to growth is risk, and these are our risk-takers.

The Entrepreneur as Visionary Executor.

The last group are the visionary executors. These are the people that the venture capitalists are looking for. The people who see the great idea, and know how to turn that idea into a business. They don’t necessarily need to be the founders, or even the people with the idea, although they often are. They are the ones who take that idea and make it into a business. Ted Rogers didn’t invent the products he sells, but he is the business visionary and executor who took a lot of great products and made them into a business through vision, foresight and understanding the market. Our innovation economy is driven by these people who take ideas, see opportunities and make businesses.

It’s the visionary executor that we want in this country, building world leading businesses, taking great products and building businesses out of them. The small business people, and the artists are the required support. They provide the ingredients for the visionary to work with.

So let’s forget the word entrepreneur or even founder, and define the term so we can understand who really changes the economy of this country.

Editors Note: This is a guest post by Brian Sharwood (LinkedIn, @bsharwood). Brian is the President of Homestars (@homestars), the leading online free listing and rating company for Home Improvement specialists. Prior to HomeStars, he was a research analyst and principal of SeaBoard Group. Brian holds an MBA from Babson College in Boston and a bachelor of Arts from the University of British Columbia.