Your product and company vision need to match your appetite for funding.
And know that just because a venture failed doesn't mean that you're a failure.
Funding challenges and other issues founders face in the early days of starting up were the focus of interviews with the latest guests on Entrepreneurs are Everywhere, my radio show on SiriusXM Channel 111 (airing weekly Thursdays at 1 p.m. Pacific, 4 p.m. Eastern).
The show follows the journeys of founders who share what it takes to build a startup -- from restaurants to rocket scientists, to online gifts to online groceries and more. The program examines the DNA of entrepreneurs: what makes them tick, how they came up with their ideas; and explores the habits that make them successful, and the highs and lows that pushed them forward.
(And download any of the past shows here.)
Clips from their interviews are below.
Prior to founding Keen Home, Nayeem Hussain spent his career focusing on M&A, corporate development/strategy, and ﬁnancial analysist, ﬁrst at Prudential Financial and then at Loral Space & Communications. He previously founded N&N Investments LLC, a real estate investment holding company; and is a program leader and fellow of the Startup Leadership Program.
He stressed that your product and company vision need to match your appetite for funding:
One thing that we learned very early on was, have a plan for fund-raising. ... We had a lot of inbound interest from investors, but to be painfully honest ... we were not ready to engage with professional investors (because) we weren't able to coherently communicate a broad vision.
We were portraying the company as a vent company.
Steve: And they wanted a bigger business than just a vent company.
Nayeem: (Nods.) If you're a venture capitalist ... you have limited partners that give you money to invest on their behalf, and you're responsible for giving them outsize returns. The limited partners could put their money in the stock market, but instead, they give it to you, the venture capitalist, which is much more risky, but you're promising them huge returns. Therefore a venture capitalist needs to invest in startups that can turn into billion dollar companies.
Steve: And a vent company wasn't that?
Nayeem: A vent company might have been a hundred million, or a couple hundred million (dollar company), which to most people, including myself at the time, sounded great. That's a huge company. I'm coming out of business school building a three hundred million dollar company. Slam-dunk. (But) go in to pitch to a venture capitalist, and ... I'm off by a zero. They need to return the value of their whole fund.
Steve: They want Nest, not the vent, right?
Nayeem: That's correct. We quickly understood that we needed to really understand what our brand was going to be. ... Everyone needs to ask themselves that question. Is your ... company venture-scalable and venture back-able?
... For a lot of people, the answer is no, but they refuse to see that, and they end up pitching the wrong type of investor.
Will Zell started his first company, a real estate business, at age 22. Over the past decade, he has launched multiple businesses, including three technology companies. Will was honored at the White House as part of the 2011 Empact 100 list, for his work as a young entrepreneur.
Here's how Will copes with the inevitable failure founders face:
I think that's one of the biggest challenges is to not let failure define you. ... You really have to separate the pursuit that you're on, the business pursuit that you were taking, from you as a person. It's hard, because you're emotionally invested, financially invested, and it's tough when something doesn't work ...
One of the most important things that I do, when I have something that doesn't work is separate the journey ...from me as an individual, and then learn as much as I can.
Literally take a significant amount of time to think back, to look back, to analyze what happened, what went wrong, what could I have done better, what could I do better in the future, and be brutally honest with yourself.
Also know that because this particular venture failed doesn't mean that you're a failure.
To hear the clip, click here.
Getting Keen Home's smart vent to market was no small task. Nayeem explained why:
Building a hardware product standalone is very, very difficult because you have to deal with supply chain, you have to deal with customer service, you have to deal with fulfillment.
...our product is manufactured in Shenzhen, China ... along with most of the high-tech electronics in the world, so we had to locate a factory, we had to find the right partner to build this product and work with us ...
Steve: Did you personally know about any of this?
Nayeem: I didn't, no. Thankfully we were able to hire our ... Chief Technology Officer, who did this his entire career.
... (Still) we had no idea the complexity that would be involved from sourcing the manufacturer and how long it would take once you found that manufacturer to be able to engineer the product... It's very different when you're engineering a product to make 100 of parts. ...
You can start by using all sorts of off-the-shelf components, etc. ...(But) when you're going to scale, you have to source components oftentimes from all around the world with different lead times. For example, our product has more than 300 discrete components ... just for the vent. ... oftentimes if you buy the parts in advance they can be as much as 50 percent cheaper. So there's what called spot market, and a futures market (for parts). Imagine a chart that's 300 lines long for each component and you have to strategize when you're going to buy this component and how far in advance you need to purchase it in order to get the price you need to get your cost of goods sold low enough that you're going to make money on this thing.
Steve: Wow, and those are some pretty big unknowns because (the price of) those parts could swing back and forth.
Nayeem: That's correct.
A strong founding team will help a startup weather the chaotic early days, Nayeem said:
The key thing that I would tell people is really know yourself, know what you're good at, and know where your holes are. Hire around you to fill those weak spots. ...
As an entrepreneur, you're always fighting that external war whether that's with partners or with investors. ... Make sure that the team you build around you are those that share your passion, share your vision, and really fill the holes from a skill set perspective. ....
Steve: ...was there any time a crisis of faith?
Nayeem: There wasn't. I can honestly say there wasn't. There was very many times when we were almost running out of money. Very, very many times. ... That's a crisis of bank account but ..., to my team's credit ... when one person's down the other person picks them up.
...That's how you know you have a good team because some people are going to have bad days inevitably and you trust your team members to pick you up. Thankfully my team members always have.
Keen Home appeared on the TV show, Shark Tank, in 2012, landing one of the highest valuations in the show's history. Here's how being on the show affected the company:
The process for getting onto the show is pretty grueling. You have a lot of weekly touch points with producers for months on end. When you're trying to build a company, any commitment like that eats up a lot of your time, so you have to think very carefully about it, because it's an opportunity cost to do other things that might directly benefit your business. We asked ourselves that all the time and the producer was very honest telling us almost every week, "You may not get on a show." There's no guarantee that after all this time investment you're even going to get on television.
We rolled the dice ... Certainly, for us, it was worth it because we were on prime-time television for 10 minutes talking about our product.
... It really exploded our perception and visibility in the United States. ... Orders increased. Inbound interest for partnerships, for employment, for investment (increased) -- you name it from small companies, small HVAC contractors to large companies like AT&T. Certain big brands and large companies that would never return my phone calls were all of a sudden emailing us saying, "Hi. We're big fans of the show. We saw you were on it. Wonder if you'd be willing to tell us a little bit more about Keen Home." It really opened a lot of doors for us.
To hear the clip, click here.
Will learned one of the most important founder skills while working as an insurance salesman during college:
Insurance is a commodity, right? You can go anywhere and buy insurance, and you're going to get a competitive price in most places. You really have to be able to differentiate yourself when you're sitting across the table selling someone an insurance policy. That ultimately boils down to the personal relationship that you can build with them in a short period of time.
Steve: Do you think learning how to sell is an integral part of learning how to be an entrepreneur?
Will: Absolutely, 100 percent.
Steve: Why is that?
Will: Because you're always selling ... You have constituencies, right? When you're an entrepreneur or when you're going to start a company... you have groups of people that you have to influence. ... You have investors ... or directors and advisors. You have your team. ... whether that's partners or employees that you bring on. And most importantly, you have your customers that you want to sell your product or service to.
It's different types of selling. But it's sales that really drive your progress with those three groups of people.
Being in Ohio, which lacks the startup ecosystem of an entrepreneurial cluster like Silicon Valley, made it difficult for Will to get funding for his first startup, Huddlewoo:
The type of business that we were building needed an investment of capital ahead of revenue.
Steve: So you needed to raise money to actually build the business?
Will: Yes, and that was my first brutal intro into the difficulties of raising venture capital where I lived.
Steve: There is probably is no venture capital for 50 miles, if not 500 miles.
Will: Yes, (although)... Columbus, Ohio, has come a long ways, frankly, from a venture perspective.
Steve: Seed round to maybe an A round?
Will: Ironically, you can get an A (funding round) a lot easier than you can get a seed round right now. ...Drive Capital came in (to Columbus). Mark Kvamme, who was with Sequoia Capital, launched a $250 million fund. (But) that didn't exist (when Will was first starting up) ... and even getting a seed round is still pretty difficult. There are some angel investment groups, but the pool of investment capital and number of investors at the earliest stages is very, very small.
Will also shared the hardest part about being a founder:
Being misunderstood, just completely misunderstood.
Steve: You mean in the community you're in where the founder is an outlier, rather than at the core where you go to New York or you to go Silicon Valley and everybody's a founder, including the waiters?
Will: Absolutely. Every time I go to Silicon Valley I'm like, "Oh, this place is great."
Steve: And so why do you stay?
Will: ... I want to focus on impacting my community and region as much as I possibly can. That's important me. Because of that I believe, and am even more convinced now, that there is opportunity and there is ability to build great tech companies in Central Ohio, so I stay because I'm committed.
Next on Entrepreneurs are Everywhere: Orin Herskowitz, executive director of Columbia Technology Ventures, Kathy Ku, executive director of Stanford University's Office of Technology Licensing and Grant Warner, director of innovation and entrepreneurship at Howard University's College of Engineering Architecture and Computer Science, and co-founder of ConnectYard.
Tune in Thursday at 1 pm PT, 4 pm ET on Sirius XM Channel 111.
Want to be a guest on the show? Entrepreneurship stretches from Main Street to Silicon Valley, from startups to big companies. Send an email to firstname.lastname@example.org describing your entrepreneurial journey.
Steve Blank's blog: www.steveblank.com