by Dave Berkus, TCA Chairman emeritus
You’ve surely heard the variations on this theme. “Ready, fire aim” was popular in the 1990’s, accredited to any of several authors. I used the term to describe my efforts in the artificial intelligence field, experimenting with new devices, the lisp programming language, and our first trial installations. It seemed an ideal way to describe a scrappy, entrepreneurial activity.
What happens to careful planning?
So why do so many business authors stress this behavior? Ready, FIRE, aim. What happens to careful planning, sure-fire metrics, quality test scenarios, market research, a good business plan – all in place before pulling the trigger of a new opportunity.
And who is right here?
If you’re seeking investment from anyone other than friends and family, you’re probably going to have to navigate through the exercise of careful planning, documentation and execution. Investors are a fickle bunch. They want to know that their money is not just being thrown at an idea that will become a trial by “fire.”
But speed and iterations are attractive benefits
On the other side of the argument is the truth of the claim that numerous iterations in the form of rapid prototypes and execution of new ideas in the field quickly refine the product or service to meet the needs of the customer, and at a far faster and cheaper pace than with careful pre-planning.
Cowboy coding in software and Internet development
In the software and Internet arenas, there is a term for this: “cowboy coding.” Without the need to carefully document the architecture and elements of a proposed application, a single programmer can much more quickly just code, test, and create revised code. And today, “no code” or “low code” applications can be created much more quickly without careful testing of the integration with cowboy-coded portions of an application.
Either way, without even pausing to document the process internally, no-one can easily take over the job, if for any reason the cowboy coder is no longer in control. And the result? Typically, we call that “spaghetti code” to signify code that is so often changed that it no longer looks clean and traceable.
Our conclusion to this dilemma
The conclusion is that the best process depends upon the product, its critical core nature to the business using it, and the way in which the entrepreneur approaches the need for outside investors.
Critical components of any operation or business must be carefully constructed, tested and inserted into the operation of the business. On the other hand, if a new free app has bugs, they can be corrected in the next automatic update, and probably without much customer noise.
So, which is better for you?
Which is better for you: rapid iteration or careful planning? What is your case for defending your method of creating new products or services? Have you ever been stung by releasing a “ready fire aim” project into the marketplace? Posted in Depending upon others, Hedging against downturns, Protecting the business | 1 Comment
Some businesses are built around a single idea.
And sometimes that idea is just too small a slice of the big picture to be interesting to investors. There was a recent investor event where I was keynote speaker, on stage only after several panels of experts had wowed the audience with their predictions and observations. One of the panelists made a point that resonated with me.
“Just a button, on a feature, in an app”
She stated that she had rejected the investment being discussed, because in her mind the entire company was “just a button, on a feature, in an app.” That comment sent me thinking about relevance, about longevity, and about market size for some of these entrepreneurial applicants looking for funding.
Can you envision round two?
So, what is your goal? If you have invented a game that will be marketed as a new app in the app store, have you created enough of a model to create an ongoing company, or just another app that will compete with the millions already in the store? Is your game using a unique engine, or series of animated characters, or method of play that will break ground with potential players, inducing them to look to you for more and more unique games over time? Or higher and higher levels with more purchased items for play?
How does an investor react?
[Email readers, continue here…] Far too many companies have been created around a button on a feature, and not upon a solution to a need in answer to a void in the market. Investors have seen this game before. We match what we see to what has succeeded for us in the past. And rarely do we see a plan for a single product that is not part of a larger vision and remain interested long enough to ask for more information.
There are exceptions.
The famously popular iPad throw-away app, “Draw It,” might at first seem an exception, until you dig deeper to find a dense plan around a series of social engagement products planned to follow. Can you extend your product into a planned series? Plan to create apps, not buttons, and not features. Posted in Finding your ideal niche, Ignition! Starting up | 2 Comments
My dad was a smart businessman, even if not formally trained. He occasionally gave me advice that turned out to be more than wise, looking back at subsequent experience and events. His personal teaching event was a typical experience, as I reflect now upon the tens of partnerships I have counseled over the years. Most often, one partner remained active as another partner drifted away from the business, no longer carrying the weight anticipated at start-up.
So, what could happen with a partnership over time?
It’s just one – the most prevalent – of the many things that can happen to well-meaning partners after time changes plans, and after the business passes through phases of growth or contraction. The assumption at start-up is that all partners will carry their assigned weight for the foreseeable future, as percentages of ownership are divided accordingly.
Rarely is there any formal written agreement memorializing these initial expectations and stating the consequences of non-performance or inability to make capital calls when required. In fact, rarely are issues discussed involving downside protections, even including key-person insurance benefiting the partnership in case of an unfortunate event. And how about a buy-sell agreement if one partner wants to sell their interest to a third party unacceptable to the remaining partner(s)? How about non-compete agreements? Non-disparagement clauses?
It is always wise to have an attorney help memorialize a partnership agreement, even if painful conversations must take place to do so. Here’s an example of what not to do…
A personal story about a partnership gone bad
[Email readers, continue here…] I recall one very personal situation when I was young, that reinforces Dad’s advice. Through my college years, I managed a phonograph record production and manufacturing business that I created as a senior in high school, using independent contractors in local venues to record tapes from musicals and performances from schools, colleges, churches and organizations throughout the USA and Canada – and then to sell the records to the appropriate audiences.
Partnerships are strained with growth and troubles
The business grew to significant size during my college years, and I informally associated myself with an equally young partner, of course without any written agreement or discussion of downside throughout those years, ceding to him all recording work throughout the large home territory and other helpful technical work. The agreement was that he would retain all the revenues generated from those activities and that I would finance the company and manage it. We received lots of press, even nationally, as we managed our teenage business.
Changes of circumstance often ignite pressures
A year after graduation from college, I left for six months to serve my active duty obligation in the US Navy, while others – not the partner – took care of accounting and customer relations.
And shortly after I left for my military service, my partner left the company without notice and set up a competing company in my absence, never saying a word to any of us. I was bitter, but unable to do anything about it, since there was no written partnership agreement. Luckily, after my return from active duty, my company flourished, even went public later, and his remained a small, one-person operation for the rest of its existence. But, as they say, everything he learned, he learned from me.
Dad was right, even if I learned the lesson years later.
Have you a partnership story to tell? Lessons learned to be never repeated? Or do you have a harmonious relationship to recall, one that could even be ongoing? My friend, Rich Sudek called partnerships “a marriage without sex” and reminded us that we often spend more time with our partner(s) than with our family. Posted in Depending upon others, Ignition! Starting up, Protecting the business | 8 Comments
Investors love it when entrepreneurs draw little or no money from their startups. It extends the cash available for research and other necessary fixed costs and gives the fragile, young company more “runway” to get to breakeven.
What are you worth to the business?
But when forecasting the ultimate viability of a business, many times an entrepreneurial founder uses a low, unsustainable salary rate for him or herself in order to show early breakeven. And that is the quandary for investors. If you had to replace yourself with a professional hired to duplicate your skills, what would you have to pay in salary and incentive today? That amount is almost always higher, much higher, than the amount budgeted for the entrepreneur.
A “messy” solution
[Email readers, continue here…] You could start by charging more for your executive salary, then paying out less in cash, accruing the rest into a payable amount due to you in the balance sheet or plan. But that is a messy way to demonstrate that you are taking less than market wages from your company. Ultimately, the accrued difference will amount to a large enough liability that several things could happen, all of them negative.
What would the IRS think?
The IRS could see that you are not paying yourself interest on the accrued debt, and consider it invested capital, eliminating your ability to repay yourself in the future. Worse yet, the IRS would then consider the accrued amount to be taxable income upon which no tax was paid, since the accrued labor as an investment has value that was not accounted for from previously taxed earnings.
Another “trick you might use – wrongly
Or you could voluntarily convert the loan into stock with a single journal entry and a stock certificate. But the tax effect would be the same if audited – you would owe tax on the booked value even if not paid in cash.
What is the solution?
The solution is to explain to potential investors that you are projecting under-market wages for yourself or the founder(s) for a period of time, perhaps until breakeven, and then to agree with them that you will move to market rate at that time. Posted in Ignition! Starting up, Raising money | Leave a comment