Book Review – Web Startup Success Guide

I just bought a copy of The Web Startup Success Guide by Bob Walsh. It was an impulse purchase – I was actually looking for a book on PHP and MySQL and the cover caught my eye. I never heard of Bob Walsh, but I had heard of the guy who wrote the foreword – Joel Spolsky, CEO of Fog Creek Software, and author of the blog Joel on Software, among other things.

The book, according to its back cover, claimed to provide all the answers to build a successful web startup. Joel Spolsky, in his foreword, claimed he learned something new on every page (there are over 400 pages in the book, which works out to about 5 cents per lesson. Considering I’m in the middle of developing two ideas into potential businesses, I figured this was the book for me.

I’m now reaching the end of the first quarter of the book, and already I’ve learned enough to write a review. The book was worth the money spent, even were I to read no further. So far, I’ve learned something about the history of creating software companies, the various ways there are to start a company, and what the pros and cons of each are. I’ve learned some questions to ask myself when looking at a potential idea. I’ve learned to be critical of my own initiatives, and to separate emotion from keeping ideas alive long after they should have died.

Bob mixes his lessons with interviews with various people. Don Dodge, Director of Business Development at Microsoft, discusses the differences between starting a company now versus starting one ten or twenty years ago. Rick Chapman of Softletter discusses the business model of Software as a Service and various billing systems used. These are just a few of the many (I counted 36, but I might be off by a few) interviews and e-mail exchanges recounted throughout the book.

The book is divided into 10 chapters, each of which focuses on another idea crucial to the success of a web startup. The first chapter looks at the history, which has shaped how such companies are built today. The next chapter focuses on the ideas that build your company – filling a need (and where those needs come from), having a new way to solve an old problem. The third chapter looks at platforms, and the various places you can put your idea (SaaS, PaaS, Mobile, and so on).

The fourth chapter discusses support groups and tools for founders. The fifth looks at money and financing. The sixth looks at how social media impacts your business (and it does, whether you realize it or not). The seventh chapter discusses the importance of clarity in your business. Chapter eight is about how to get all the pieces in place, and how to turn an idea into a business.

Chapter nine suggests several people you should listen to, who provide advice that can be invaluable to a new business. Chapter ten is all about where to go from here, now that you’ve read the book.

I’m not done the book, as I pointed out above. But Bob manages to deliver his points about starting a business in simple language, with relevant examples scattered throughout the book.

If you are thinking about starting a company, or already have, which has as its business model the sale or distribution of software, whether you’re a site that facilitates the use of a service, or selling desktop software directly, this book is for you.

Oh, and I did find a book on PHP – it was called PHP, MySQL, and JavaScript by Robin Nixon, and seems to be quite a good book as well. So now I’m two for two on Friday’s book purchases.

Dragons’ Den – Episode 6 Review

Apparently I’m not very good at predicting deals. My last article in which I predicted who would get a deal went flat with me guessing wrong on both counts. However, I can still review an episode, so here we go. Note, if you have not yet watched the episode, do that now, and then come back here.

To start, there was the disaster of the first pitch. While I am not an expert in copyright and trademark law, what the first entrepreneur did was foolish. Branding herself with a name similar to a franchise empire owned by one of the Dragons, and then stressing that point, is a way to increase the risk of investing for any of the Dragons. First rule of pitching to potential investors – don’t piss them off. While I think she has a viable business model, she may be forced to re-brand her business to prevent a lawsuit.

The first deal that was made was pitching to the fact that the Dragons would like the product (which they did) and that there would be a solid business plan behind it, reflecting an accurate understanding of the product and the market (which there was). Schmotoboard is essentially an electronic skateboard or snowboard, and there is definitely some appeal there. Entrepreneur Trevor Bielby worked hard to develop his idea and bring it to market, working part-time on the project with a few other people.

This idea appealed to the Dragons on multiple levels. First, Trevor knew where he stood, why he needed the money, and exactly how much he needed. Second, the product demo sold several of the Dragons to make a purchase even before they heard what the deal was. This immediate interest and ability to make quick sales, coupled with the fact that he already has stores willing to carry his product, makes this a viable business. Brett Wilson was sold on this, and gave him a rounded up amount (by $0.65, to be exact) for 50% of the company, which was accepted, and Jim Treliving joined the deal at the last minute. This was a fast deal, and will likely be successful for all parties.

The second deal was something more along the lines of what I spend much of my time doing – working online on a variety of sites. Scribble Live allows people to create a linear feed of information from a variety of sources, and has already been marketed to various large companies. Their business model is not built on ad revenues, but on subscription fees, which is more stable, predictable, and better paying. They also provide services to customize their product for their clients.

After various squabbling between the Dragons, two offers were tabled. One was between Arlene Dickinson, Jim Treliving, and Kevin O’Leary, giving the full amount ($250,000), but for 50%, and Arlene wanted the right to confirm that the site was as marketable as they were claiming. The other offer was exactly the same, from Brett Wilson, but without the verification. The pitchers, Michael DeMonte and Jonathan Keebler, countered with 30% equity (up from the initial offer of 20%). Brett gave the trio of Dragons the first choice of accepting the counter-proposal, or negotiating from there. However, Arlene, Jim, and Kevin had already agreed they would go as low as 30%, and, rather than risk losing the deal to Brett at that price, decided to take the 30% for their investment.

This Week on Dragon's Den

In continuation with the articles I’ve been posting recently, here is another based on the show Dragon’s Den. If you go to their website, you can see a preview of the pitches that will be on the upcoming episode. My question is as follows:

Can you accurately guess, for each of the 8 pitches, whether there will be an offer, and, if there is an offer, how much equity will it ultimately cost, and will it be straight equity for cash, or will it have an alternate financing structure (e.g. establishing a line of credit/operating line)?

There is no prize for the right answer, although I will be getting in touch with anyone who gets it right to know what it was about the summary of the pitch that tipped you off.

For me, my guess is that the Fazzari Push-up Machine will get one of the offers, because they seem to have a reasonable product that can be leveraged. They are asking at a value of $300,000, but without knowing the details of their past sales, there’s no way to know how accurate that evaluation might be.

Alternatively, Techno Logic looks optimistic as well, with a product that fills a need with an exercise machine that takes up little space, but they have a very high valuation (just under $1,500,000) which they will likely have a hard time backing up with numbers. If they can convince one of the Dragons that the company is worth at least $1,000,000 then they may be able to strike a deal. Alternatively, the Dragons may offer an operating line as part of the cash to help deal with the high valuation.

Online Versus Face-to-face Networking

While these two concepts don’t need to be at odds with one another, I’m curious to know how people perceive the difference between networking online versus in person. Most people do both, whether consciously or not, but what’s the difference between the two?

One answer is that our online networks tend to be a lot more widespread than our in person networks, including a lot more people. However, when we connect with someone in person, we tend to create a stronger link on an individual basis.

What do you think are some of the differences between online and face-to-face networking?

How do you Network?

This post is a little different from my normal posts. All I’m going to do is ask a question, and I’m genuinely interested in your opinions on this.

Where and how do you network? Why do you network that way, and how could your existing networking be improved? What changes might you make to your networking activities, if you were able to?

To start, I will provide my answer:

I network primarily on a variety of websites, such as Facebook, Linked In, and Twitter. I try to participate in those communities, and interact with the people I’m connected with. I also have a regular networking meeting about once every 5 weeks with several people working in similar fields to my own. On occasion I will attend a business card exchange event. Ideally, I would like to spend more time in face-to-face networking, were time and distance not factors.

Dragon's Den Episode 5

I just finished watching the fifth episode of Dragon’s Den – if you missed it last night, you can watch it on the CBC website. Note that this article will include spoilers, so if you haven’t watched it yet, do that first. Then please come back and read this.

As is usual for the show, there were eight pitches and two deals, with 6 strikeouts. The deals were of interest, because neither deal was quite the way the entrepreneurs expected.

The first deal went to a company that makes edible dough, asking for $500,000 for 25% of the company. The deal was finalized on 3 dragons ultimately joining the offer to provide the funding in exchange for 10% royalties until the investment has been repaid (that is, 10% on the first $5,000,000 in sales) and 3.5% royalties on all sales after that. The reasoning of the dragons was actually fairly simple – the investment was going to be used almost exclusively to launch the product in North America, and there was no guarantee that more money would not be needed later on.

From the perspective of the entrepreneurs, this is likewise a good deal – they shift the risk of launching the product to their investors, and don’t have to give up equity. The royalties they pay are only for the North American sales, which means that they can expand elsewhere without losing out because of the deal. The only way they could lose is if the company is ultimately worth a fortune, in which case, everyone wins.

The second deal was also different than expected as well. The pitch was for $30,000 for 30% of the company, which sells hand-crafted Elvis costumes. The deal that was ultimately brokered was from 2 dragons for $5,000 for 5%, and $25,000 as an operating line. In this case, the entrepreneurs ignored one piece of information when accepting the deal – an operating line includes interest payments, and that needs to be negotiated as well. The investment was small, but that is to be expected with an extremely niche market, where the profit margin may not be very high.

The concept of an operating line is that if a company requires the money, rather than send them to the bank, the dragons will loan the money instead, but not as an investment. The question that is only sometimes answered on the show is the interest rate of that loan, and what guarantees there are that the rate will remain the same for a given period of time. However, from the perspective of an entrepreneur, there is little risk in accepting the loan, as they can always pay it off immediately if they find better rates elsewhere. Based on the interest rates that have been quoted on the show in the past, however, it seems that the current standard is about 10%, while the dragons seem to offer about 7%. At that rate, it’s unlikely that the entrepreneurs will be able to beat the offer.

Most Common Mistakes on Dragon's Den

I’m a fan of a show here in Canada called Dragon’s Den, where entrepreneurs pitch their ideas to a panel of dragons hoping for an investment. The catch is that the entrepreneur must get at least as much as they are asking for, or they get nothing.

The most common mistake I’ve seen, and it seems to permeate entrepreneurs, is that of a false sense of self worth. The entrepreneur states an amount of money they want (for example, $400,000) and the amount of equity they will give up to get that money (for example, 25% equity). In the example provide, that puts a value of $1,600,000 on the company, and the first thing the dragons are going to do is figure out if it’s worth that amount.

Knowing this, the pitch will include nice numbers – $300K in sales last year, new contracts to distribute the produce, and so on. But then the entrepreneurs start to show their weakness – they don’t mention the debt until prompted (in one case, $300K of debt), nor the fact that they have negative cash flow (in one case, $30,000 per month). The valuation they’ve placed on their business is suddenly much too high.

To be fair to the entrepreneurs, they often know why they need that amount of money, and they are desperate to get it. They are unable to get a loan for some reason (and that should be a warning of its own) and are hoping for an investor. They are also concerned that the dragons will lower the valuation of the company, so they start way to high in the hopes that it will end high. Not to worry though – one group pitching their idea only had to give up an additional 2% to get what they wanted (33% became 35%) which shows that accurate evaluations will be treated as such.

The other question that many entrepreneurs seem to struggle with is what they have planned for the money. Before handing anyone cash, the dragons want to know that their investment will be handled wisely, and that the person they are trusting with their money has already proven they can handle that kind of responsibility.

Pitching on national TV may be daunting, but it’s really no different than pitching to a venture capitalist in private (except for the national embarrassment when the entrepreneur’s idea is incredibly lousy). Make sure you have an accurate idea of what your company is worth (keep in mind active and passive income, expenses, debt, growth projections, past increases in sales – better yet, get an accountant to do this for you) and how much money the company really needs to grow to the next level. If you set a reasonable expectation, you have a better chance of succeeding to get the capital you need.

Bell Business Reports Review

I recently came across a blog called Bell Business Reports while browsing through questions on Linked In. (The blog itself can be found here, or find it later listed in my Blog Roll). Laura Bell, author of the blog, was requesting a link exchange, but once I read through some of her articles, I realized that here was yet another opportunity to connect with other people sharing similar types of information (but not the same, as I’ll describe in a moment).

Her most recent article, at the time of this writing, is about a show called Shark Tank, which is aired on ABC. This is the American version of Dragon’s Den, a show which has versions running in over a dozen countries. The premise of the show is simple – entrepreneurs pitch their products and companies to a panel of wealthy investors, who then choose whether or not they want to invest in the company. The precise rules, as well as who is on the panel, varies between the shows.

In Laura’s review of Shark Tank, she discusses several mistakes being made by entrepreneurs when pitching their products, from failing to have a realistic valuation for their company, to being stuck in the prototyping stage. She brings  examples from the show of each type of error made.

For an entrepreneur seeking venture capital, such reviews are extremely valuable, as they assist in creating realistic goals in the quest for money, as well as provide a critique of potential pitches.

Having enjoyed the first article, I decided to read more. Her article on the importance of networking () struck home, as this is a topic that I have discussed at length on this site (for a list of some of these articles, click here). Laura did an excellent job of summarizing many of the same issues, as well as some novel issues.

Overall, the writing is very clear, easy to follow, and covers interesting current topics. While you do need a membership to read all the articles at once, you can get access to some of the articles for free. If you have the time, it is definitely worth spending a few minutes browsing to get a better feel for the site.