In the world of startups, there’s a common bias among investors towards teams of founders. While we can’t speak for every investor out there, it seems the common reason for this perspective comes down to skills; two founders bring twice as much experience and perspective to the table. This is such a pervasive bias that Inc.com was surprised when a study published by NYU and the Wharton School found that, in reality, a single founder has a much better chance of making it than a team. The study looked at over 3,500 businesses and found that, initial challenges in getting funding notwithstanding, the solopreneur is statistically more likely to build a business with staying power.
So, can a single person start a startup? Absolutely. The data puts solo founders in excellent company. To understand why, let’s take a look at the role founders play in establishing thriving businesses.
What is the job of a founder?
A founder’s primary role is to establish the vision for the startup, then put the pieces in place to make that vision a reality. In early days, that can mean wearing many hats. Many founders are de-facto CEOs, but that job isn’t always the same one; HubSpot acknowledges that the title of “founder” can eventually become passive; what makes a founder a CEO is the active work they do in building the business.
In a startup, then, where a solo founder is the CEO, they’re really a lot more than that. Building a profitable business around an idea requires some working knowledge of finance, management, marketing, sales, and operations… It can be a lot. And while many think of tech when they hear the word “startup,” the same is essentially true for founders in any industry; no matter what skills an entrepreneur brings to the table, there are going to be gaps. A team of founders might have one member focused on code and product development with another focused on financials and the business side of things, but that still leaves a lot of expertise that needs to be found somewhere else.
What is a solo founder, then? It’s someone who knows that they don’t want to be the smartest person in the room on every subject. That’s a strength that can make the difference between a successful business and one that goes nowhere.
What business can I do alone?
The short answer is you can do any business alone, if by “do” you mean start. But the long answer is no thriving business can truly be disruptive as a solo act. Tech startup founders become business leaders in a lot of different ways, but what unites them is the desire to change the way something is done for the better. Apps and other tech tools can do that with explosive results when the stars align, but sustainable growth requires a lot of work around understanding the market, adapting to customer needs, developing workable pricing models, and bringing a tech product to market in a way that gets attention.
To summarize the article, written by Gene Marks, no business is a one-person business. On one level, there just aren’t enough hours in the day for a solopreneur to make good money doing everything themselves. On another, it’s critical for a startup founder to embrace the notion that they’re going to be hiring help in some form or another, whether it’s through internal hires, vendors, or even SaaS solutions.
In other words: To unlock a startup’s potential, solo founders need the right team in every case.
Solo founders: Get ready for what comes NEXT
If you’re an individual with an idea for a tech startup and you are feeling overwhelmed at this point, you aren’t alone. The prospect of building that winning team of experts around your vision can be daunting if you’re approaching it from zero, but starting a solo business doesn’t mean going it alone.
NEXT Studios is a venture studio dedicated to supporting solo entrepreneurs and teams of founders alike with a proven process to take an idea and turn it into a business. It starts with helping entrepreneurs evaluate their vision—Does it solve a real need? Will people buy it? Can it generate enough revenue to sustain a business?—then gives them the resources they need to grow.
As Indiana’s first Benefits (B) Corporation venture studio, we’re dedicated to fostering the economic development of our state and its visionaries. That means helping solo founders get access to capital, but also to put that capital to work with the right team of experts to wear the many hats a startup needs. We believe in the power of individuals who are serious about changing the world, and it’s our job to help them prepare for whatever comes next.
You’re a curious entrepreneur with an idea. How can you start a business from scratch and turn your invention into an innovation? Innovation is about examining what others have left unexamined. It’s challenging the status quo, noticing trends that others are missing, and uncovering hidden customer desires.
There are many reasons for starting a new business from scratch. Freedom, learning new skills, and following your passion are just a few. To successfully build a startup from scratch, entrepreneurs need to have hustle, grit, and dedication to problems worth solving. At NEXT Studios, we follow a strategic process that can help entrepreneurs form compelling ideas, create a competitive advantage, and set them on a path to serial innovation with high returns. But first, let’s start with the basics.
Here are five steps to start a small business.
Step 1: Finding an idea
“How do I get an idea for a startup?” might be the first question entrepreneurs ask themselves. Here is the key: fall in love with the problem, not the solution. As an entrepreneur, you have to be passionate about the problem you are trying to solve.
Some of the greatest startups come from problems people didn’t even know they had. To invent an idea, consider what is possible. Before Microsoft and Apple, people were just fine with the analog way of working. The status quo was comfortable. When Steve Jobs and Bill Gates were crazy enough to conceive an image where every desk in every office would have a working computer, they stumbled across an idea that changed the world.
On a cold winter’s night in Paris in 2008, Gerrett Camp and Travis Kalanick couldn’t get a ride. That’s when they had the simple idea of requesting a ride from their phone. What began as just a thought turned into the global brand, UBER, focused on helping people move towards opportunities in the world.
Step 2: Make your new business official
Once a business model is set and initial funding is secure, there are a few legalities that need tending for your startup to be official. Here are a few requirements to start a business legally:
Select a business entity – The business entity is sometimes referred to as a business structure or legal entity, which refers to how a business is legally organized. There are four primary business entities: sole proprietorship, partnership, corporation, and Limited Liability Company (LLC). There are also other business models to consider, such as a certified B corporation.
Register your business with your state – This gives you legal grounds to move forward using your brand’s name.
Pick up the right licenses and permits – Depending on your business, this can include food, liquor, health, or business licenses.
Get an EIN – This allows the IRS to track your transactions
Open a business bank account – Keeping your business and personal finances in separate bank and credit card accounts make it easier to track the business’s expenses.
Step 3: Write a business plan
One of the next steps to start a small business is to write a business plan. A good business plan acts as a roadmap for how you’ll structure, run, and grow your startup. Most business plans fall into one of two common categories: traditional or lean startup.
Lean Startup plan – Lean Canvas – This plan uses a standard structure and It focuses on summarizing only the most important points of the key elements of your plan. They can take as little as one hour to make and are typically only one page. They are ideal for founders to identify assumptions and risks. The plans are living documents. A great resource for Lean Canvas is leanstack.com. With these plans, some lenders and investors may ask for more information.
Traditional business plan – This plan is more common, uses a standard structure, and encourages you to go into detail in each section. It tends to require more work upfront and can be dozens of pages long. The challenge with this process is that the risks and assumptions are harder to spot and often the plans do not change over time. Lenders and investors commonly request this plan.
Step 4: Securing funding
Now that you have your business plan, you’re going to want to secure funding. Or you might ask yourself, “How do I start a startup with no money?”
Depending on the type of business, you don’t always need a lot of capital to get up and running. It’s true that to scale business you’re going to need some cash flow. Start by asking yourself what do you need to learn about the customers, the market and work to learn as much as you can for as little expense as possible. Find what is essential to your business and scour the internet for free resources. Whether it’s starting with a Facebook business page, designing your own marketing material on Canva, or trading your skills or resources with someone else in lieu of payment, there are limitless options.
When it’s time to look for more capital, there are many options open depending on what kind of business you are looking to build. Look into applying for a small business loan, small business grants, or local funding opportunities. Another option is to search for – and woo – potential investors. When approaching investors, keep in mind that the more you can do to begin building a vision of your business and demonstrate traction, the more seriously investors will consider investing. There are a myriad of ways to get that cash flow going. External investment can be the fuel to accelerate the growth of your business but is not the only way to grow, you may aspire to be a Unicorn, Camel or perhaps a Gazelle?
Step 5: Build Your Business
There is never a stopping point for entrepreneurs. When your startup has a foundation, you have to continue to grow and lay down the bricks. More next steps include obtaining business insurance, setting up an accounting system, developing a marketing plan, hiring employees, and building a customer base.
Here is an important element of entrepreneurship: if you love the problem you are solving,plan to pivot on your early idea of a solution. As you grow a fully formed corporation, challenges and obstacles will arise. See them as opportunities to learn, grow, and pivot to continue leading your business innovation to new heights.
Entrepreneurship is hard and lots of people get it wrong by repeating mistakes. NEXT Studios provides best practices, lessons learned, models, and direction to reduce the risk that your startup will fail and generate higher returns. We are the studio of entrepreneurs, for entrepreneurs, with entrepreneurs. Are you ready to get started? Find what’s NEXT and drop us a note here.
You have a great idea for an app or digital product. You are confident it will transform your target industry and improve the lives of end users. But what will it cost to get it off the ground?
Calculating tech startup costs is a process dependent on your assumptions. Unexamined assumptions can put your business on pause before it even gets a chance to launch. We often talk to entrepreneurs that have not engaged with potential customers to confirm that what they are planning on building is something that the customers even want. Assuming that you have validated your assumptions, you should have a pretty good idea of the Minimum Viable Product (MVP) you need to build and the specific functions it should provide. For non-technical founders, the number of functions in the MVP and the choice of the service provider will inform the total capital required to start a business. For technical founders we recommend sticking with a very small MVP—after all, your time has value!
We have supported many companies through the early stages of ideation all the way to successful investor pitches and fundraising. Now we want to share with you the insights we’ve learned about how to calculate realistic startup costs.
How Much Does It Cost to Start a Small Business?
On the surface, the cost to start a small business can be as little as a few thousand dollars. Before spending money on the subscription or purchase costs of app development platforms, web hosting, and marketing management platforms, we recommend spending resources learning from your customers. Plan on drinking a lot of coffee! Once you choose to develop the MVP based on customer feedback, the sticker price of these necessary tech tools isn’t representative of the full cost to use them. There is always a learning curve, and as the founder, you may have technical skills to bootstrap the MVP into existence all on your own. But what about the value of your time? It’s a lot of work to do alone, and you should plan to pay yourself at least some salary to keep a sufficient supply of ramen noodles and coffee flowing.
Generally, the practice is for founders to only take on expenses when they are absolutely necessary. But since that definition will be different for every startup, the costs of professional support in areas like sales, marketing, or quality assurance may also be part of your early expenses.
What Are Some Startup Costs for a Business In Tech?
Subscriptions to cloud services such as email, website, CRM, collaboration tools, rapid prototyping tools, AWS or Azure
Equipment like computers, software, smartphones, servers, and more.
Utilities like Internet and electricity
Office or Coworking Space including expenses to establish a home office.
Insurance like errors and omissions policies, cyber liability, and employment practices liability.
Market Research at multiple phases of development where you need to connect with and get feedback from your target audiences about your concept or product.
Advertising and Marketing including a website, digital content creation, pay-per-click advertising, print ads, professional organization memberships, and more.
Salaries for yourself and any vendors, independent contractors, or employees.
Accurately calculating the startup costs for your business allows you to request funding, attract investors, and get your product on the market. The US Small Business Association also provides a startup cost calculator worksheet you can use to estimate which expenses apply to you and which ones don’t. Silicon Valley Bank recommends estimating 18 months of expenses to get perspective on the total cost of your runway to launch.
How to Record Startup Expenses
Online bookkeeping platform Bench reports that two-thirds of founders use personal money to launch a startup. Whether you’re funding the venture yourself or have closed a pre-seed round with early investors, it’s to your benefit to record startup expenses. The IRS recognizes two categories of expenses:
Investigation Costs include everything from wages and salaries to rent to advertising and market research. This category generally includes all the expenses associated with investigating the market fit of your business and launching the enterprise.
Organizational Costs include the expenses to formally organize the business like incorporation fees, partnership filing fees, and legal or accounting fees.
Both these categories of costs are deductible, meaning you should record the expenses in a spreadsheet or tool like QuickBooks and keep track of the associated documentation for filing itemized deductions on your business taxes. Depending on the amount you spend, you may be able to deduct a portion of these expenses from your first year of business taxes or spread out the deductions over the next 15 years in a practice known as amortization.
There are also certain startup expenses that do not qualify to be deducted from business taxes. These include research or experimentation conducted before the business is legally formed, real estate taxes, costs of issuing stock, and the costs of transferring assets to the organization.
Get Support with Tech Startup Financials from NEXT Studios
NEXT Studios is a new type of venture studio established to help today’s entrepreneurs bring their ideas to market. This includes supporting founders at every step of the process from design thinking and prototyping to MVP development to releasing the product and pitching to investors. We want to help you take the next steps toward profitably launching your product or service—even if the next step is just the first step. Contact NEXT Studios to work with fellow entrepreneurs, launch your product, and move forward with confidence. We’re here for you.
It is estimated by Enhance Ventures that there are now over 550 studios in operation around the world, having grown by 625% since 2013.
This growth may come from several factors:
Due to the rapid growth of large cloud-based platforms like Google, Amazon and Microsoft, there has been a reduction in the availability of venture capital for early-stage startups. Investors are increasingly wary of funding a startup which could be seen as a competitor to one of the platform companies. To the degree that VCs make earlier stage investments, the risk reduction provided by venture studios makes those startups more attractive.
Many of the bigger opportunities for startups come from machine learning, deep computing, and other technologies that are beyond the capabilities of first-time entrepreneurs. Solving these issues usually requires the deep experience that few startups can afford. Studios offer this expertise in a teamed approach with the startup founders, which allows the company to be more ambitious in its goals, which could drive larger returns.
The typical ten-year cycle for a startup that focused on the largest sale price of the company is not the ideal training ground to develop new entrepreneurs and seasoned teams. It also tends to result in a lack of diversity in investors and founders, because the only objective is the best return on the investment, so anything outside of the “tried and true” is perceived to add risk. Studios can be tailored to cater to different geographies, diversity in founders and objectives beyond the biggest “exit.”
What is the difference between venture studios and startup accelerators?
Venture studios are not the same as startup accelerators such as Y Combinator or Techstars. A typical accelerator may offer a 10-to-12-week program focused on ideation or productization in exchange for $10,000 to $100,000 in funding and an equity stake. The objective is to help the founder move their business along to the point where investors might be interested in funding the next stage. It is expected that most of the startups will fail, and so an accelerator becomes an effective way to “play the field” and invest a relatively small amount of money in many different startups at the same time, such that if just a handful are winners, they offset the losses for the majority that don’t succeed.
While it’s possible to succeed as a startup founder without the support of a venture studio, partnering with one reduces the risk of failure and can accelerate your ability to access venture capital and the resources you need to succeed.
The new engine of intentionality in the world of startups and innovation
Sometimes called “startup studios,” venture studios are organizations designed to create new startup companies. They do this either by generating new ideas for startups or by recruiting founders with ideas, and then they apply significant amounts of time and capital to the process of growing the startup successfully. At the heart of every venture studio lies a process, which generally has four steps (though each studio may give them slightly different names):
Ideation – the process of coming up with a new idea and “pressure testing” it with potential buyers through conversation and the sharing of prototypes
Productization – the process of developing the “minimum viable product,” or MVP, which is not the final version but is enough to share it with customers for feedback and continued development
Launch – the process of creating and initiating a go-to-market strategy, including sales, marketing and customer support
Scale – the process of building an organization around initial market success that will help it grow
Venture studios are often outgrowths of venture capital funds, as each stage of the process requires capital funding to pay for each activity. Depending on the depth of the involvement, the equity stake taken in the company can be quite high, as startups are risky and most fail. The involvement of a studio in the startup tends to reduce the risk for investors, as the process and the experience of the team can help to avoid common mistakes that would cause others to not succeed.
There are several different models for venture studios, but most of the differences center around how much of the company is owned by the studio as compared to the founders.
1st Co-founder studios are designed for founders with an idea but little to no expertise in how to start a company. Generally, the studio will take half of the equity in your company, leaving you with the other half, and then they will do practically everything else from validating the idea through development of the product through the launch of the product into the marketplace. Usually, the founder will move into the role of CEO at the launch stage, and the company then operates like other new startups.
2nd Co-founder studios are designed for startups that are further along in the process. Often, they have a minimum viable product and some degree of customer interest but are struggling with a go-to-market strategy and the funding required to launch the product and scale a team. This is frequently seen with engineering-oriented founders who are experienced with a technology and have created the basic product but lack the business skill and experience to create a company around it. More of the equity is held by the founder in this model – typically 65% with 35% to the studio, and the role of the studio is to supplement the founder’s team with additional resources working in concert to move the company forward.
3rd Co-founder studios are designed for startups that have a solid team but have certain “holes” they need filled. A very typical need is for someone to manage the product or technology, or perhaps to setup and manage a sales team or a marketing team. In this model the studio operates like mercenaries brought in for specific purposes to complete the leadership picture. Here the smallest amount of equity goes to the studio – somewhere between 10% and 25% depending on how many needs must be met.
Of course, all of these are guidelines: there is an infinite range of models for studios across the spectrum.
Why do founders choose to partner with venture studios?
The core value proposition of a venture studio is to access skills, expertise and a network beyond the founding team. These resources reduce risk and enhance outcomes by equipping a startup with resources they usually cannot afford early on:
Skilled teams employed by the venture studio or through their partner network amplify the ability of the startup to execute and reduce the time and expense of rework based on mistakes and inexperience.
Methods and tools created and offered by the studio to portfolio companies help obtain results more quickly as they are the result of distilling experience and failures into process.
The willingness of venture studios to “roll up their sleeves” and provide hands-on guidance both reduces risk and provides accelerated mentorship and training to founders.
Essentially venture studios absolve you as founder from having to figure out how to attract or get investors to fund your business or how to convince someone to invest in your product. You get to focus fully on leveraging the skills, expertise and network of the studio to build your startup.
Can you generate more than a financial return? All successful things require both selfish and altruistic motivations. If you’re only altruistic, you won’t have the stamina to succeed, but if you’re only selfish, no one will want to work with you. Successful companies must generate financial returns, but they will not be sustainable over the long term unless they also generate returns that impact their community in positive ways.
As part of our series about “5 Things I Need To See Before Making A VC Investment” I had the pleasure of interviewing John McDonald. He has over twenty years of experience as an entrepreneur, most recently as the founder and CEO of ClearObject, a leading Internet of Things company which successfully exited to private equity in 2019, and at IBM, where he led technical sales for their software development tools brand in New York.
He is a founder and board member of the Indiana Technology & Innovation Association, chairman of the Technology & Innovation Committee of the Indiana Chamber of Commerce, a board member of TechPoint, of the Indianapolis Chamber of Commerce and of the Indiana India Business Council. He is also a member of the Social Enterprise Alliance, the advisory council for Hamilton Southeastern Schools, the Workforce Alignment council of Ivy Tech Community College, and the Dean’s Council for the Purdue Polytechnic and President’s Club at Purdue University.
He graduated from Lawrence North High School in Indianapolis, and studied business management, computer science, and meteorology before receiving degrees in Software Development and Computer Information Technology from Purdue University at West Lafayette, where he was also the Student Body Vice President and Treasurer. He was named Purdue’s Distinguished Technology Alumnus in 2007 and Lawrence North’s Distinguished Alumnus in 2017.
Thank you so much for joining us in this interview series! Before we dig in, our readers would like to get to know you a bit. Can you please share with us the “backstory” behind what brought you to this specific career path?
While I was the CEO of my previous company, I never turned down a meeting request from a startup entrepreneur, because it’s a really hard job, and if there was any mistake I made that I could help you avoid I would be all too happy to tell you about it. But there was a distinct pattern to these conversations. Most of the time they had thought up some idea, dreamed up 20 markets they could sell it into instead of focusing on just one, and then leaned on some friends to build some sort of prototype. They then showed it to some potential buyers who told them all the things that needed to change before they’d buy, but they had no money to make those changes, and their wives were telling them to drop it all and get real jobs. What they were looking for was an investor to write them a check so they could keep working on the project and were frustrated that no one was writing them that check. That’s because no investor will ever write them that check, because they really have nothing to invest in except an idea and some degree of determination. I got to thinking about how useful it would be if there was an “agency” to help these startups succeed, and when I started sharing that idea with some friends, we all agreed that we should just go create it.
Is there a particular book that made a significant impact on you? Can you share a story or explain why it resonated with you so much?
“Atlas Shrugged” by Ayn Rand. If you’ve read it then you know why, and if not, do a web search on it and you’ll find out why you should. Atlas is the Greek god who mythologically holds up the world — but what if Atlas shrugged off his duties? In the novel, Ayn asserts there is a small group of “prime movers” who drive the world forward, and her stated goal for writing the novel was “to show how desperately the world needs prime movers and how viciously it treats them” and to portray “what happens to the world without them.” I believe that entrepreneurs are prime movers, as our role is to create things where there is nothing, putting people and resources to work and creating prosperity in the process, and I believe that together with fellow entrepreneurs, we have created a venture studio to be a force multiplier for entrepreneurship. I also admire that Ayn is a strong female writing about strong female characters in a time where that was very, very rare.
Do you have a favorite “Life Lesson Quote”? Do you have a story about how that was relevant in your life or your work?
“When all was said and done, more was said than done.” Ideas are free — everyone has them. What differentiates an idea from a product or company is the intentionality to act on that idea right now. Actions, not words, make companies.
How do you define “Leadership”? Can you explain what you mean or give an example?
My definition of leadership is encapsulated in the question, “Is anyone following you?” If not, you’re just a guy out for a walk. People frequently mistake management for leadership, but if you look at the root words “manage” and “lead,” you’ll find that they are practically opposites. “Manage” implies corralling and controlling, while “lead” implies bold new directions and striking out of the safe into the unknown. Some of the best leaders I’ve known are terrible managers — they can barely manage their own calendar let alone other people — but they have a way of inspiring people to work with them in spite of the fact that those people don’t report to them.
How have you used your success to bring goodness to the world?
I am no judge of that. I have certainly tried.
Ok, thank you for that. Let’s now jump to the main part of our discussion. The United States is currently facing a very important self-reckoning about race, diversity, equality and inclusion. This is of course a huge topic. But briefly, can you share a few things that need to be done on a broader societal level to expand VC opportunities for women, minorities, and people of color?
First we have to study where that problem comes from. Venture capital is essentially legal, organized gambling. You are making a bet on a team and their ability to execute on an idea. As such, the industry has developed ever-increasingly sophisticated ways of analysis aimed at reducing the risk of the bet in order to get that small edge. Dreadfully this has resulted in a tendency to place bets on known winners — serial entrepreneurs who have “done it before” and can hopefully “do it again.” As such, the vast majority of venture capital is plowed back into the same ecosystems of people who are predominantly white males, because those ecosystems have been made up of white males from the start, all with the intention (and excuse) of reducing risk and getting better returns for investors. But this inbreeding is starting to have a predictable and now numerically demonstrable result: overfunded teams that lack diversity and perform worse than capital efficient diverse teams. Smart venture capital knows this, but it’s hard to see past Sand Hill Road in Silicon Valley when it’s all you’ve ever known. The best thing we can do is elevate the great diverse founders and teams above the noise so they are visible to the investors who understand that they are better bets, and celebrate those who overcome bias and cut the check.
Can you share a story with us about your most successful Angel or VC investment? What was its lesson?
So, there were these two kids who went to school at Indiana State and started a business selling all kinds of French fries out of a food truck they outfitted, mostly at football games and the like. High turnover for labor, and they found themselves consuming too much time doing screening interviews, so they turned to technology to solve the problem. They wired up a cloud-based service where they could post up screening interview questions, and have the cloud call any candidates based on scanning for their phone numbers on submitted resumes and read them the questions. The recorded questions were then transcribed and sent back to them in an email. Brilliant. Also removed all the bias from the job interview process. Did I mention that they are Black, and that Indiana State is in one of the poorest counties in the State? Great ideas and great entrepreneurs come from everywhere, and if you’re only looking at white male founders in big cities on the coasts, you are going to miss some great opportunities.
Can you share a story of an Angel or VC funding failure of yours? What was its lesson?
A friend of mine was sick with cancer and was in the hospital over the new year’s holiday. As we were talking, a woman in brown scrubs came into the room and used a hand-held device to scan a bar code on a machine, and then walked out. I asked him what that was all about, and he said, “I don’t know, but the brown scrubs care about that machine, and someone in yellow scrubs seems to care about that one.” We realized that what they were doing was manual asset tracking — trying to keep tabs on where these machines were. Can you imagine a more expensive way to do that? So one of our founders had a similar experience and laid out a bold vision for how he could use things already in the room, like the television or the lights, as asset trackers so that no one would need to go around with handheld devices anymore. Really great idea, very much needed. But, on the way to solving that problem, he kept seeing other problems and other things he could solve. The result has been many months of no progress, because there was no clear, distinct focus around a single problem that could be solved with a tech startup. Focus is truly the most important thing to have.
Can you share a story with us about a problem that one of your portfolio companies encountered and how you helped to correct the problem? We’d love to hear the details and what its lesson was.
We met a founder who spent his whole career as a technician who monitors systems in the operating room for life support, mainly for procedures like open-heart surgery. He had spent many years and hundreds of thousands of dollars on a very sophisticated system to track all of the data from these systems, partially to have one single control panel for all of them, but mostly to record a “ticker tape” of data for the purposes of proving that all of the systems worked well during the procedure and that he didn’t make any mistakes that caused any damage to occur. We asked him how many of these systems he had sold over the years. Answer? Not one. Incredulous, we inquired as to what the reaction was to his product when he shared it with the people in his industry doing the same work. He enthusiastically relayed their interest in having such a system, but also that they had no intention of buying one, because they expected their hospitals to buy the equipment for them. After a very long pause, I said, “You have spent a fortune in time and money developing features for your user, but not your buyer.” After another long pause, we asked him if there was anyone else in the hospital who might be interested in that data, which elicited another enthusiastic explanation of who and why might want to have the information for insurance, for liability, for patient outcomes, for Medicare — all sorts of reasons. We then explained that it’s a common mistake for startups to build features for users, but if the user isn’t the buyer, it’s almost always a waste of time and money. If it’s a B2B play, the buyer is almost never the user. Only in B2C is the buyer more likely to be the user, but then again, not always.
Is there a company that you turned down, but now regret? Can you share the story? What lesson did you learn from that story?
Honestly, we’ve never turned down a company yet that we’ve regretted, because we’re grown in our discipline regarding the things we need to see. Yes, some have gone on to succeed without our help, but that’s OK: we look at our relationships as partnerships, and that means we have to bring something to the table that the other party doesn’t have. We need to make each other better. Otherwise you end up with what I like to call “Barney” relationships (after the annoying purple dinosaur kid’s show), who’s title song goes, “I love you! You love me! We’re a happy family!” But then nothing ever happens of consequence.
Super. Here is the main question of this interview. What are your “5 things I need to see before making a VC investment” and why. Please share a story or example for each.
1) Do you have ears? Entrepreneurs need to build up walls high enough to keep out the naysayers, but not so high that you lock out all criticism, because some of them might be right. If there is a feedback loop from your own mouth to your own ear, you’re destined to only learn from your own mistakes. One guy we turned away because he built a technology that failed to launch because he didn’t research the market to understand what they needed. He then launched the same technology again in a different product form (which also failed, for the same reason). Then he came back to the table with the same technology in yet another product form. He was failing repeatedly as he repeatedly failed to listen to his own potential customers.
2) What is your protectable market? You can ask this question many ways, like “what is your secret sauce” or “what is your moat” or “what do you uniquely do differently,” but it all is really about understanding the things you could do to slow down a potential competitor and give you more time to execute. Our base assumption is that other people have the same idea you have, maybe lots of people, but what helps you stand out from them? We talked with one company who was really having trouble with this until we helped them see that their protectable market was locked inside of their own heads: they had so much insider knowledge in the industry they were in that no competitor could ever touch them in their ability to read the market and execute faster.
3) How are you going to use our money? We all know you’re going to need more. What we want to see is how you are going to use this money to get you to a place where you can successfully compete for more. It’s something like a landing on a staircase: you’re not to the top yet, but you can take a breath and prepare for the next climb. Use of funds is one of the simplest things to get right, and yet it’s usually too simple. For example, we had one company assert they needed $1M for sales and marketing until we pointed out that nothing rolls up to exactly $1M and that they didn’t even have a product developed, so there was nothing to sell or market yet.
4) Who is on your team? And by team, we don’t just mean the leadership and employees. What we really want to see is all the people who have advised you formally or informally, because we’re trying to understand who is implicitly vouching for your ability to execute. It’s unlikely that we know you or of your abilities, but your advisors do, and if we know any of them, you’re essentially borrowing their credibility to bolster your own. We looked at a company that had the typical 2–3 pictures of employees on their team chart in their presentation, and only through dialog did we learn that they were being advised by several military experts who had helped them land a company-making lucrative contract with the Department of Defense. That’s a game changer!
5) Can you generate more than a financial return? All successful things require both selfish and altruistic motivations. If you’re only altruistic, you won’t have the stamina to succeed, but if you’re only selfish, no one will want to work with you. Successful companies must generate financial returns, but they will not be sustainable over the long term unless they also generate returns that impact their community in positive ways.
You are a person of enormous influence. If you could inspire a movement that would bring the most amount of good to the most amount of people, what would that be? You never know what your idea can trigger. 🙂
All gifts come from God. When you understand that, your only natural reaction is to want to give back in some way. But we are so, so, poor in society at helping people unlock and give of their gifts. Our world is crawling with people to help manage your money or manage your health or manage your time — why is it not crawling with people to help you manage your God-given gifts? What would happen if everyone on the planet knew what their gifts were and had access to the most efficient vehicle for applying them in service of others? The free market economy has come closest to this, but it still has challenges in regard to gifts that aren’t easily monetized or in places in the world where the free market doesn’t exist.
We are very blessed that some of the biggest names in Business, VC funding, Sports, and Entertainment read this column. Is there a person in the world, or in the US whom you would love to have a private breakfast or lunch with, and why? He or she might see this. 🙂
Any of the wealthy business people focused now on giving away their fortunes for good. Impact investing is the best idea ever in philanthropy and for good reason: instead of giving away the money (which is a one-way street), they are venture funds that use philanthropic dollars to invest in companies and founders that are making an impact in their community and in our world. Any returns are reinvested over and over again as an evergreen donation, which means they can be used again and again for good. I want to understand why they wouldn’t immediately allocate their resources using this method, which could be a game changer both in creating new approaches to old problems, but also in seeing that those resources live on beyond them.
This was really meaningful! Thank you so much for your time.
Shelley Klingerman | Managing Entrepreneur for NEXT Studios and CEO & Founder of Stiletto Agency
Building a company with partners is a whole different experience than building a company by yourself. Ask me how I know. Both are rewarding and challenging, but they are different journeys. When you build a company yourself, you are 100% in control of the decisions that, for the most part, only affect you. It’s your success or your failure and you know that. It could be a great payoff for you, but you could also lose it all if it doesn’t work. And when it’s just you, you can control the level of risk you’re willing and comfortable in taking. Most likely that level of risk will come with a lot of questions; such as, “Do you have another source of income to get you by? Do you have a spouse that can support you while you test the waters? Are you going to jump in with both feet and burn the boat?” It doesn’t matter what you do, because you only have to “worry” about yourself. You can’t be silent because you’re talking to yourself and making independent decisions that you will immediately know about.
In a partnership it’s different. You are bringing various experiences and perspective to the table to build a company. No single partner’s thoughts, opinions or experience trumps another, UNLESS YOU LET IT. If you don’t speak up, it’s on you. Most partnerships come together because everyone is bringing an important perspective to the table and you are stronger together than you are independently. Always keep that in mind, you are there for a reason. There might be times when you feel your perspective doesn’t align with the majority so, “I must be wrong” or you trust the others. That’s common, however, your purpose for being at the table is to disrupt the group think and provide a DIFFERENT perspective. One that might be completely opposite of what’s being discussed, but it’s your responsibility to make sure it’s considered. It might not be the way things go, but at least it was considered. I’m here to tell you, it can be intimidating and misinterpreted (by you) that, “I don’t see it that way, so I must be wrong”. Yet, it is so important that you don’t silence yourself. You need to be heard for the benefit of the company that you’re equally responsible for building and its success. If you are a female, this whole experience has the potential to be exacerbated.
As someone who is passionate about this challenge, I spend a lot of time empowering women on how to seize control of their safety through my work in Stiletto Agency, as well as empowering visionaries (entrepreneurs) to seize control of their future through my work as a Managing Entrepreneur with NEXT Studios. And to be completely honest, I spend a lot of time managing this for myself. Ladies, if we’re going to come to the table, we have to check any insecurities, passiveness, and 100% trust at the door. Acknowledge feelings when they surface and know they were given to you as tools to guide you through life in both personal and professional situations. There is NO feeling that should be dismissed. Every feeling/emotion has a very important role. Some are meant to pause you; others are meant to make you act. They are YOUR feelings. You own them. No one can tell you they’re wrong.
You may allow others to provide you information that you can take into account to work through your feelings, but they can’t change them, only you can. My point is, when something doesn’t FEEL right to you, it’s real. It might not be the way someone else feels, but that doesn’t mean your feelings aren’t valid. When you’re building a company or making your way through a corporate environment, don’t not address something that doesn’t feel right to you. Unchecked, these feelings will manifest into things like resentment or panic, which become a much larger distraction and can unnecessarily derail your success.
Women get concerned about being labeled, so we don’t speak up. We need to. For our own good and for the good of our business. Do not silence yourself. I often go back to this quote by Eleanor Roosevelt: “No one can make you feel inferior without your consent.”
John McDonald | Managing Entrepreneur at NEXT Studios
Sitting at home one evening feeling hungry, you pop out your phone and flip through the specials on DoorDash, looking for something you like. As you scroll, you remember that you’re out of napkins and paper plates, as there’s been a lot of takeout meals delivered to your house recently. You flip over to the local grocery store app and add them to the list for the scheduled delivery tomorrow. After placing your orders, you switch over to YouTube, looking for something entertaining to watch while you wait. Up pops a show from a favorite chef, and you’re inspired enough by what he’s making to add some of the ingredients to your grocery store order, and then to go to Amazon and order yet another specialty cooking utensil you’ll probably only use once.
Sound familiar? If your house is like my house, scenes like this play out every day, more so now than ever due to COVID. What you may not realize, though, is that each of these events represents an interaction with the gig economy — something that was already happening before the pandemic, but now has accelerated into a way of life for millions.
The gig economy is a system whereby organizations hire independent contractors to work for limited periods of time for a specific function. The name comes from an informal term used by musicians to describe being hired for a single performance or limited engagement, and it now perfectly describes all kinds of jobs beyond just playing a guitar. Essentially you as an individual have skills and have time, and these are in demand by other people who would like to pay for that time and skill, but not as a long-term or permanent employee.
The gig economy has been a part of food service for a long time, and the upending of the taxi industry through Uber and Lyft is well documented, but the growth in technology-based platforms has enabled locating, hiring and paying a gig worker infinitely easier that it was just a few short years ago. This has enabled the spread of the gig economy to now include writing, art and design, media and communications, software development, information technology and project management. Most interestingly, a significant portion of some traditional industries are converting to gig workers, including accounting and finance, legal work and education.
According to Gallup, about 36% of US workers are now involved in the gig economy, and if this growth rate continues, more than half the workforce will participate in it by 2027. This growth rate is three times faster than the growth rate of the workforce as a whole, according to Forbes. More importantly, according to McKinsey, 78% of gig workers say they’re happier than those working traditional jobs, 68% say they’re healthier, and 51% would not go back to traditional work for any amount of money. It’s clear that the gig economy is here to stay and isn’t just a COVID-related temporary disruption in how work gets done.
What is the long-term impact? It’s likely that there are several:
1. Every industry will be transformed by the gig economy. The transformation that has already occurred in short-distance ground transportation via Uber and Lyft is coming in every industry. For some, it is well underway: in 4Q 2020, 54% of the products sold on Amazon actually came from third-party independent gig economy sellers, and almost half of its deliveries are now done through gig workers. For others, such as legal and financial services, long-standing regulations are slowing the transition, but are not stopping it: legal assistance requests through gig economy platforms like Docketly jumped significantly as COVID began and have not slowed down
2. You will become part of the gig economy personally. If you’re not already offering your time and talents and resources through some sort of on-demand platform, you may be missing out on a personal business opportunity. Got a pickup truck? Uber launched Uber Connect, where you can hire out yourself as a driver to deliver small packages and materials to businesses or to a factory. Know how to code? Any number of online platforms would hire you now to develop or to test software written by others. Like to teach? Online academies and local school districts are looking for gig workers to fill in their teaching staff.
3. The gig economy represents a renaissance in entrepreneurship. Once thought reserved for the elite few, going into business for yourself is one of the principal ideas upon which our US economy was built. According to the Kauffman Foundation, all new job roles created in in America come from new startup companies — deciding to start a business and then making your first hire: yourself. This accounts for the high marks that gig economy workers give themselves related to fulfillment and sense of purpose, as well as their desire to stay with it and not return to traditional work.
So, how can you leverage the gig economy for your business? Here’s a few ideas:
1. Recognize that you probably already are. From how you source supplies to how you find new workers, you and your coworkers are probably already leveraging online gig economy platforms to get your work done. Identify what those are and look for ways you can expand their usage to save money and increase flexibility.
2. Look for jobs within your organization that could be gig economy jobs. The list today is much longer than it was even a year ago. Look for roles that can, or should be, done mobile or from home. Look for roles that aren’t time-dependent, meaning the work could be done at odd hours or on the weekends. Also, look for roles that can be done largely digitally, without the need for special equipment that might be found only in a single location. All of these roles have the potential to be made more flexible and dynamic through the gig economy.
3. Think about new ways you could leverage the gig economy to help your company grow. If there’s an app or platform that already offers what you do through the gig economy, consider becoming part of it. If not, consider starting up one in partnership with a technology incubator or studio.
There’s no doubt that the gig economy is a growing and important part of how work gets done today. While it was already happening prior to the pandemic, like so many things, it was greatly accelerated by it. The only question for you is if you will be the victim or the victor of this 2021 and beyond megatrend.
This is the first installment in our “3 Questions” series contributed by subject matter experts throughout the tech community in Indiana. This series takes complex tech topics and explains them in easy-to-understand ways without the dense jargon so every reader can learn a little bit more about our industry.
When we set out to build our first startup company, I had no idea how time consuming and confusing it would be to raise capital. I didn’t appreciate that it wasn’t just one of my jobs as the leader, it is the primary job as a leader of a startup company.
Everything else flows from success in raising capital. It allows you to hire the people and partners you need to build the company and keep them aboard, which is the secret to any successful business.
What types of capital sources are available to startups? What is the difference between the types of capital? What are the keys to unlocking capital?
There are primarily four types, and they align very nicely to the four stages of the development process of a new technology startup employed by venture studios everywhere like Central Indiana’s High Alpha and my own venture NEXT Studios.
The first stage is ideation.
This is where you create new ideas for startups, and “pressure test” those ideas by studying things like your target buyer and market and what problem you are solving for them. Typically, the venture capital employed at this stage is called “pre-seed funding,” which is often sourced from your friends and family. These people are investing in your company largely because of you—who you are to them and what they believe you can do with their investment when given a chance. Often, your closest friend and initial investor is yourself—this is called “bootstrapping” and is simply using your own money to start up your own company. An extremely limited number of “pre seed” organized funds also make initial investments at this stage, many of which are tied to local economic development or industry initiatives. In Indiana, you can sometimes start a company with as little as $25,000 in pre-seed capital (though $100,000 is more typical), especially if there is a physical device as part of the product idea.
The second stage is productization.
This is where you take your initial idea, which has been vetted in the ideation stage, and turn it into a “minimum viable product” or MVP. This is the first complete release of your offering, and while it may not have every feature you will ever want, it’s enough to get it in the hands of some pilot users and gather their feedback. You’ll use that feedback to improve the product and build your “go-to-market” strategy to engage and win customers, which you’ll use in the next phase. Typically, the venture capital employed at this stage is called “seed funding”, and often comes what are called “angel investors.” Angels are high-net worth individuals who deploy some of their wealth at this stage for many reasons, the most likely of which is that they are also successful entrepreneurs who want to help new startups take flight. These investments are high risk, and in some ways are like organized gambling, where they bet they are placing is on you and your idea. In Indiana, I’ve seen angel-backed seed funding rounds as small as $200,000, but more typically these are between $500,000 and $1 million, depending on how complicated the MVP is to build and test.
The third stage is launch.
This is where you take the go-to-market strategy you developed in stage two, coupled with the improvements you’ve made to your product through your pilot users, and launch a full-scale plan to attract, win and keep customers. This is where you start to grow your team substantially for the first time, largely by hiring business development representatives, inside sellers, outside sales representatives, marketers and customer success reps, depending on the talent needs of your go-to-market strategy. Typically, the venture capital employed at this stage is called your “A-round,” or the first of what may be many future rounds of venture capital, and it’s often sourced from organized venture funds.
Venture funds are a unique type of investment vehicle. Unlike angel investors, where individuals make the decisions about what startups to invest in with their own money, venture funds are made up of “limited partners” or LPs who sign over money to the care of a group of “managing partners” who are employed by the fund to scour opportunities, make investments, and manage those investments for the LPs. They are paid management fees for this, and usually a “carry,” which is a share of the profits if any of those investments result in a successful return. Venture capital funds will have a stated focus for their investments, a range for the amount of investment they will make (called a “check size”) and some process for reviewing and scoring potential deals (called a “thesis”). These parameters are typically unwavering, as they are what was used to attract limited partners to invest in the fund, and therefore cannot be changed easily. Sometimes VCs will insist on “leading” a round, which is to say they are responsible for building and executing the deal on behalf of themselves and other investors, and in a deep review of the company’s structure, finances and team, called “due diligence.”
In Indiana we have a unique organization called Elevate Ventures, which is funded in part by the State of Indiana to make equity investments in startup companies. They are a venture fund, but often work with angel investors and other funds to co-invest in companies at this stage to help them succeed and pull together smaller sources of funding who may not be in position to lead the round. Because of Elevate, “A-Round” investments can often be as small as $500,000 and be made up of multiple smaller investments, but typical launch-stage investments are in the $1 million to $3 million range.
The final stage is the scale stage.
This is when you’ve proven your go-to-market strategy works, and you’re seeking funds to scale up the company’s operations to grow its market share and continue to improve the product. This is the primary domain of most later-stage venture capital firms, who like to see success in the marketplace (called “traction”) and financial stability and sales growth that suggest that the company might be able to make a profit (called a “pathway to breakeven”). Each venture capital round at this stage will be labeled the “B-Round,” the “C-Round” and so on, and can grow in size from $2 million to $10 million or more, until the company has reached a scale where venture capital is no longer required to fuel growth initiatives.
Venture capital in all its forms is the oxygen that makes technology businesses live. Success in raising venture capital is largely tied to clear objectives as to how the money will be used to advance the company to the next stage. It’s a necessary part of growing a company faster than normal business cycles would, because technology rapidly becomes obsolete. It’s effectively a “growth hormone” and like any medicine, it should be taken as directed by an educated patient.
An entrepreneur walked into John McDonald’s office in late April with an idea that could transform the process of buying and selling a home. He had drafted a chart that laid out his plan, and now he needed an app and a website to make his vision a reality.
“The problem,” said McDonald, whose new Next Studios in Fishers just launched to try to turn ideas into products and products into companies, “is that at no point did he ask any Realtors, any homebuyers, any home sellers for their input.”
“If he continues to go down the pathway of developing this service, he might be right,” he said. “Or he might be wrong. In which case, he’s going to suffer a catastrophic failure in his business model because he failed to, at the very beginning, pressure-test the idea with actual victors or victims.”
So McDonald and his colleagues will be doing that pressure-testing with the entrepreneur using design thinking, the name for a particular way of approaching problems and situations to come up with solutions or products.
They’ll start with a session to gather input from potential users about his idea. That will yield information about their target persona—here’s whom they’re after and why—and they’ll use those findings to shape the rest of the process.
From there, McDonald and company might put the entrepreneur’s home-selling plan through as many as 14 exercises to test its viability. The purpose is to figure out how best to make the product faster, better, easier, more fun—and, therefore, improve the user’s life.
That’s design thinking.
“This user-centric view has always been part of what I’ve been trying to do,” said McDonald, who founded and later sold the internet-of-things firm ClearObject. “Only recently have I discovered that it had a name and a process.”
What is design thinking?
Design thinking has been around since at least the 1960s. Sometimes it’s called “human-centered” or “customer-centered” or “user-centered” design. Initially, its focus was in areas such as architecture, graphic design and industrial design, to produce physical products.
Today, said Erik Stolterman Bergqvist, professor of informatics and senior executive associate dean at Indiana University’s Luddy School of Informatics, Computing and Engineering, design thinking is used nearly everywhere. In education to design classes. In service design. Legal design. Policy design.
“In many of these areas, people have never seen themselves as designers,” said Bergqvist, who has been teaching design for 35 years and has written or edited five books on design thinking and related topics.
Designers, he said, are good at getting to the core of an issue. If someone approaches a designer and says, “We have this problem and we want you to help us,” a good designer asks, “Are you sure that’s the problem?” They think creatively, openly and they also think in terms of the outcome—what are the consumers trying to achieve?
“The whole idea with this design-thinking movement,” Bergqvist said, “is that, when you change your mindset and you start to see yourself as a designer and you start to be aware of the possible approaches and methods and techniques that designers are good at using, things happen. You will now be able to do different things and you can do it in ways that lead to new and different results.”
Practitioners of design thinking say it’s transformative.
Reuben Zielinski is co-founder of Carmel-based Redux, which developed technology to remove water from cellphones and other small electronic devices. He said the design-thinking process helps him sort through ideas in a logical way.
“By labeling it ‘design thinking,’ I use it as kind of a gut check of, ‘Are we skipping any steps here?’ If we start putting a design together and say, ‘Wait, we skipped the research part here,’ or, ‘This is taking too much effort if we haven’t proven there’s an opportunity yet,’ it allows us to back up,” he said.
“And whether it’s a questionnaire or anecdotal information or reviewing data we have from our existing users, it’s been a great way to make sure we’re not skipping any steps.”
Without the process, Zielinski said, “It’s easy to get excited about something and say, ‘Let’s order it and figure it out.’ We’ve proven time and time again, you keep following the steps.”
Redux’s latest invention, the Gen CM, a hearing-aid dryer, came to be because now-director of audiology sales Matt Hay’s hearing aid got wet during a ski trip to Michigan.
From the time Zielinski was presented with the problem, it took four months to talk to consumers and audiologists about what they wanted from the product and then design and redesign a smaller, faster, better box that can dry a hearing aid in 12 minutes—less time than the typical appointment with an audiologist.
Redux started working on the hearing-aid dryer at the end of last year. If all goes as planned, it will be on the market in mid-June.
More than products
Design thinking is in use in a wide variety of firms across the Indianapolis area—and in a variety of projects. SmallBox, a marketing agency that focuses on strategy, web and brand experiences for mission-driven organizations, helped a large not-for-profit figure out how its different state associations and worldwide organization could best complement one another’s work.
Design director Sarah Herbert said SmallBox took the organization’s leaders through a two-day experience using design-thinking processes, which start by empathizing with the customer.
“We always start conversations talking about who it is we’re solving for and thinking of ideas for how we can begin to include them as co-creators in the process,” she said.
From there, the strategy was to frame the challenges and opportunities to create a difference in the customers’ current experiences, come up with ideas about how to implement changes, build prototypes of the ideas and test which ideas are best. In the final step, participants were given Monopoly money to fund the best idea.
“When you attach money to it, people really pay attention,” Herbert said.
The result was three ideas the organization is now exploring.
DORIS (an acronym for Design Oriented Research for Impactful Solutions) is a firm that uses design thinking to help companies rethink their workspaces. The firm consulted with a west-side food manufacturer to reconfigure its workspace to help make its employees more comfortable. The workers, called bakers, had a hard time at break times and lunch times with crowding and other concerns. Restrooms were too far away, and locker rooms were inadequate.
DORIS founder Samantha Julka and her colleagues went through an eight-step design-thinking process that prompted management to change the physical layout of the facility.
“It’s designed the way the employees thought it should be,” Julka said. “And once they reopened, they have outperformed month over month. Every month, they produce more. The inclusion of the bakers has paid off for them. They’re more productive and effective.”
KSM Consulting, which solves challenges in technology, data analytics and management consulting, worked with high school seniors in a large suburban school district to think through the projects designed for an innovation class.
KSMC took the students through a five-step process designed to think about the right way to solve problems, to understand how our minds process the world and problems they encounter, and to know how to separate traditional thinking from innovative solutions.
“Most of us have a real hard time being innovative in day-to-day life and tend to approach problems in traditional ways,” CEO Mark Caswell said. “Design thinking gives you a framework and a language and a way to talk about it, and it allows you to give your entire organization a way of doing things.”
Caswell’s advice: “The best way to learn design thinking is to just do design thinking. Just try it. You can’t mess it up. And even if you mess it up, that’s all part of the process, anyway.”•