6 Every Business Starts with a Belief
Every startup begins with a belief, and I want to know what that belief is. It’s not as simple a question as you may think. Quick: what’s the belief that inspires your startup?
When I say that every startup begins with a belief, most entrepreneurs nod their heads in immediate recognition. Pursuits always begin with a belief. Whether it’s a startup, an art project, a philanthropic cause, an invention, or social change, the belief always comes first. Some of the pursuits succeed and some fail, but I’ve never seen a pursuit fail because the belief was too big. When pursuits fail, it’s almost always because the execution is too small.
Whose beliefs are we talking about? The entrepreneurs’, to be sure. But angel investors start with a belief, too.
The entrepreneur starts with a belief in the power of a new product or service. The angel starts with a belief in the startup, which is another way of saying that the angel has a belief in the founder(s). The beliefs are intertwined. But at the start, most angel investors are less interested in the market merits of your belief than in the qualities of your belief system and your ability to execute.
These are some of the questions I need you to answer:
• What is the basis of your belief system?
• What do you believe about the nature of your world that causes you to have such confidence in your idea?
• Is your belief based on some personal insight?
• Have you identified a behavior that needs to be adapted and changed?
• Have you arrived at your insight through analytical analysis?
• Can you execute on this belief?
Paul Saffo, managing director of foresight at Discern Analytics and an expert on the dynamics of long-term change, said, “Don’t confuse a clear view for a short distance.” Just because something seems terribly obvious and necessary doesn’t mean it’s going to happen quickly or at all. A startup needs a belief, but the belief needs to be open to quick implementation.
When founders believe something, the belief shines though in every facet of their presentation. It’s like a riff in music; you hear it over and over again throughout the score. It represents more than the passion to build something. It means the founders have taken the time to challenge a set of established practices or attitudes, often in the analog world, that can be repurposed by a new set of practices or attitudes. Often the unifying principles are to eliminate asymmetries of information, reduce costs, increase market efficiency, and generally decrease friction. But in the end, I believe it’s about human behaviors. You can talk all you want about the business stuff, but in the end it’s all about understanding human behaviors and figuring out how to give people what they need faster, smarter, and perhaps even cheaper.
Do I invest only in high-tech? No, but it’s hard to imagine any business today where technology does not provide some critical leverage.
Yes, I need to believe in the belief, but I also need to believe in the execution. After I hear about the belief and the startup it inspired, my next questions revolve around the theme, “I wonder how they will execute?”
A Big Hairy Belief is of little or no value until it’s put into motion. I’m skeptical of startups that bring me a plateful of ideas generated by brainstorming or crowdsourcing. Maybe some of the ideas have merit, but the startup won’t know until it has subjected the lot to what Bob Killian of Killian Branding calls “crapsifting,” in which a skilled editor can perhaps extract a valuable nugget capable of execution.
As much as I like Big Beliefs, I’ll take great execution every time. Give me perfect execution of a decent-sized idea over imperfect execution of a big idea. Too many founders get selfsatisfied by the elegance of their Big Beliefs and fail to roll up their sleeves to figure out how to do the down and dirty labor that actually transforms a concept into a business. It’s the determination to execute flawlessly that transforms founders into successful entrepreneurs. I don’t want founders to be entrepreneurs; I want them to be successful entrepreneurs.
Too many startup teams disintegrate under the withering questions angels ask about execution: “How do you define a unit, and what are the corresponding unit economics?” “What’s the cost for customer acquisition?” “What do you expect the burn rate to be?” Are you ready for such questions?
I recall the 2010 Angel Capital Association conference in Boston when Timothy “Scott” Case, the CEO of Startup America Partnership, got up to speak. He couldn’t have been more excited to get in front of 500 of the most check-writing angel investors in the world. He began by talking about his enthusiasm to address such a distinguished crowed. “We need more angel investors in the world,” he said.
“No, you don’t!” said a member of the audience.
Startled, Case shielded his eyes against the glare of the lights and scanned the audience. “Who said that?”
“I did,” said a gentleman, standing up. He was one of the most respected members of the angel investing community, so he was not to be dismissed.
“Say what you mean,” Case said.
“The world doesn’t need more angel investors,” the man said. “The world needs smarter angel investors.”
Everyone nodded. Too many unsophisticated angels means too many down rounds, too many frustrated entrepreneurs, and too many disappointed angels. Stewarding startups to funding is difficult and requires angels with a real commitment to the task. The subtitle of this book refers to “smart funding” in honor of the angel who stood up that day. One of the goals of this book is to demonstrate that smart funding pursuing smart investments creates the optimum conditions for success for both startups and the angels who fund them.
Perhaps the most common mistake founders make is to believe every great startup requires a Big Idea, and that with a Big Idea, they will have no trouble securing financing. I wish it were that simple, because I’d love to live in a world guided by indispensable Big Ideas. But for better or for worse, that’s not the world we live in.
Some founders assume that if a business is profitable, it is fundable. Not so. Not all profitable startups are good investments for angels. Angels fund only businesses that are scalable, with the expectation of financial returns. We often are asked to invest in lifestyle businesses, such as restaurants, retail stores, or personal service businesses. These may be fine, profitable businesses, but they are simply not fundable. Such businesses are typically too labor-intensive to allow the scalability angels require. Nor do they offer the opportunity for a decent exit that angels need to make up for the large number of losses we historically have.
Another mistake that founders make is trying to get funding for startups with long sales cycles followed by long implementation periods. Startups can’t afford the time—not with a typical burn rate of $200,000 per month. You’ll be bled to death before you get paid.
I see a lot of Big Ideas that take my breath away by their sheer inspiration and chutzpah. I love the energy and passion that entrepreneurs and their Big Ideas generate. And I accept that the boundless optimistic energy of entrepreneurs is necessary to sustain the innovation and creation of a business. But the reality is that Big Ideas, by themselves, do not determine success, and they do not, by themselves, secure financing.
There is a growing number of what I call “Hollywood” angels who are easily impressed by shiny Big Ideas who you can probably convince to give you money. Unfortunately, these angels are quite binary in their investments. It’s either a big hit or it’s not. This has led to poorly thought out valuations, which at the start may excite the founders but turn out to hurt the company and the initial investors, because it’s so hard to achieve the expected financial goals. This leads to down rounds of financing that crush the entrepreneur and the initial investors.
“Don’t overstructure the deal,” says Manuel Henriquez, CEO of Hercules Technology Growth Capital of Palo Alto, California, a specialty financing company that provides debt financing to pre-IPO, venture-backed companies. He reminds angel investors that it’s called “risk capital” for a reason. “If you’re doing angel investment, accept that you may take some losses. Don’t oversaddle the startup with an unrealistic valuation that will make it impossible for the founder to secure additional financing,” Henriquez says.
Not every great company requires a Big Idea. Starbucks’ success is based not on unique coffee but on the underwhelming idea that customers would find the hangout atmosphere of its stores and the Starbucks baristas welcoming. Zappos is a great shoe retailer not because it sells better shoes but because it sells shoes better.
Some angels question the whole vision thing. Angel investor Linda Holliday sees a lot of startups based on ideas that are attractive but don’t really aspire to a grand vision: “If you believe there’s a better way to make change at cash registers, I might back you, but ‘vision’ feels like a big word for something so transactional.”
When entrepreneurs start talking to me about their Big Ideas, I listen. Then I ask questions. First of all, is the Big Idea really new? Has no one in human history thought of it before? It’s more likely that with a little digging, you will discover someone somewhere who indeed came up with the same idea and rejected it for reasons you will likely discover for yourself.
Combining a big vision and the ability to execute with precision isn’t for the faint of heart. But then neither is life. If you truly want your startup to reach its full potential, embrace the belief, but let the belief be the starting point of a detailed, step-by-step plan that you can flawlessly execute.
Your belief doesn’t have to be in the digital media space, either. While much of my investing is indeed in the digital world, and while social media is driving much of the startup economy, there are plenty of entrepreneurs who have impressed me with their beliefs and who are building traditional analog enterprises. What, for example, could be more traditional than retail men’s underwear?
Tom Patterson had a belief about men’s underwear. He believed that most underwear for men sucked, that none of the incredible innovation in women’s undergarments had migrated to men’s underwear. And he believed he absolutely knew how to make men’s underwear better. Before meeting Tom, I certainly didn’t give much thought to my underwear, but after listening to him for just a few minutes, I was ready to underwrite the revolution in men’s underwear that Tom was proposing.
Tom has basically reinvented men’s underwear. So the first lesson is that not all startups are cloud-based, social media plays. The second point is that Tom really made me work for the right to invest in Tommy John. You should also know that prior to starting his company, Tom worked as a medical device salesman.
I first saw Tom’s pitch at the New York Angels and was hugely impressed. After his presentation, I told him that I was interested and that he should call me. Some weeks later, I was having a drink with a fellow angel when Tom called. I was at this little bar that served a variety of craft beers and was at the feeling-good end of a flight of brews. “So, Brian, you said you want to invest in my company,” Tom said. “Tell me about yourself. Tell me why should I take money from you.”
It was a very direct question, and it sobered me up straight away. There I was, outside a bar on the Lower East Side, trying to sell myself to a guy who had an idea to improve underwear. I don’t remember exactly what I said, but my lasting impression is that I was fascinated by the direct way he wanted to know everything about me.
I think most angels have outsized egos. I’ve been told I do, and there’s plenty of evidence for confirmation. I believe that most angels would react positively, as I did, to Tom’s questions. We all secretly want to share, in detail, what makes us special. I appreciated his questions about how I could help him realize his dream. I do remember one question he asked: “Can you be committed to me?” Such a powerful question. And my answer was, “Absolutely.” And I am—I am totally committed to Tom Patterson. Now I almost always wear Tommy John underwear.
Tom’s story is instructive. He was raised in Milbank, South Dakota, a small town in which his father owned a funeral parlor, furniture store, and ambulance service. Entrepreneurialism came easily to young Tom, and he started a number of small enterprises such as lawn mowing and snow plowing while he was in high school. He told anyone who would ask that his goal was to build a successful brand from the ground up. Upon graduating from Arizona State University, he took a conventional job as a medical device salesman, but he was always restless for his chance.
Tom got into the retail business by accident. He was a fervid fan of the old MSNBC show The Big Idea, hosted by Donny Deutsch. “I was always impressed by people who could turn ideas into products and businesses,” Tom recalls. “What I loved about the show was that Deutsch would insist that the inventors go through all the steps: ‘Okay, you got the idea, then what? You made the product, then what?’” Tom realized that what many of the successful products had in common was that they improved on existing products. “I came to realize that most people were frustrated by limitations or deficiencies in the products they used,” he says. On his commute to work, Tom kept asking himself what products in his own life needed improvement.
One day, he got out of his car after a long commute to go into a hospital for another sales presentation. He noticed that his undershirt had risen up and bunched around his waist. During his pitch to the New York Angels, when Tom mentioned this moment, every man in the room inspected his waist for what Tom calls EFG (excess fabric gut)—that shapeless bump just above the belt line caused by a loose-fitting undershirt. I could relate to what Tom was saying, because the same thing frustrates me.
There in the hospital parking lot, the vision for Tommy John was born. “Why can’t someone make an undershirt that won’t rise up?” Tom asked himself. He thought about how badly his undershirts fit and how quickly they lost their shape. Men’s undershirts were designed like Band-Aids, he realized—almost disposable. A quick trip to the shopping mall confirmed his hunch: no one made undershirts that were really fitted to avoid EFG.
About this time, fate forced Tom’s hand. It was 2008, during the financial crisis. Tom was laid off from his medical sales job. From watching The Big Idea, Tom understood that there is no better time to start a business than during a recession. He decided to go for it:
Instead of going back to corporate America, I did everything you’re not supposed to do. I depleted my savings account, I cashed out my 401(k), I relied on my friends at American Express. I decided never to be the coulda/shoulda/woulda guy who regretted what might have been. I thought, “Gosh, I have a product that every one of the 65 percent of men in America who wear undershirts needs.” I knew I could always get another medical sales job.”
In the following weeks, Tom worked to refine his idea. He drove to Los Angeles and bought $100 worth of a light fabric with stretch and recovery characteristics that he thought would make a good undershirt. Then, with his rudimentary drawing skills, he sketched out a pattern for an undershirt. He took the sketch to the tailor at his dry cleaner and asked if he could sew an undershirt based on the pattern. The tailor’s response: “Why do you want to waste all this great fabric on an undershirt?” But he said he would sew it.
Tom tried the shirt on and was delighted. No more EFG. His undershirt didn’t ride up even on long commutes, and even after numerous washings, they kept their fit much longer than conventional undershirts by Hanes, Jockey, or Fruit of the Loom. After more research, he developed a patent-pending fabric that is soft and super-wickable with properties similar to cotton but that resists shrinkage and yellowing. Tom was personally pleased with the results, but could he get his friends interested?
He ordered up 15 more shirts and gave them to men he trusted to provide him with authentic feedback. Tom intuitively understood something I tell all the founders I mentor: it’s very hard to get authentic criticism. Everyone, especially those closest to the founder, wants to be supportive, not realizing the most supportive thing to do is to be absolutely candid.
Tom called his friends and said, “Hey, I’m gonna send you some undershirts. I need to know if they are good.” Their response was predictable: “All right, Tom, whatever.” Well, a few days went by, and Tom started to hear back from his friends. They all said, “Wow! These are great. Can I get four or five more?” Tom said, “Gimme a month.” Encouraged, Tom went to Los Angeles, found a manufacturer, and commissioned a lot of 200 undershirts based on his design and fabric. He sold that first lot and used the money to commission 500 more and to build a website. And that’s how Tom’s business got started. When I met him, he already had a small online retail presence and some wildly enthusiastic customers.
With positive reviews in hand, Tom relocated to California and founded Tommy John. Tom’s big break came when he secured a meeting with a buyer at Niemen Marcus, which tested the undershirts in three stores. Sales exceeded expectations, and soon every Niemen Marcus was stocking Tommy John men’s underwear. High-end retailers Nordstrom and Saks followed in short order. Tom outsourced the manufacturing to China, where the margins were better, and relocated the company to New York, the fashion capital of the world, where he felt the brand would most prosper.
Tom’s first presentation to the New York Angels came in September 2011. We invited him back two months later. The differences between the presentations were striking. Says Tom,
Everything takes longer. You pitch and revise. The second pitch forced me to dig even more into the financials, the P&L, the balance sheet. I knew the numbers, but I didn’t know them as well as I should have known them. Founders really need to understand the margins. The New York Angels really pushed me on the math over and over again. Eventually, you connect with someone who believes in you. Things align when they are meant to be.
As an investor, I liked that Tom had a successful sales background. To me, that meant he could articulate a value proposition and, more important, that he knew what it takes to make sales calls happen. I was also impressed by one of Tom’s “aha” moments. Tom describes the experience in his own words:
Shortly after my product was accepted by Niemen Marcus, I learned that the sales managers of each department gather all the sales associates for a short “morning rally” in which they review the sales numbers of the previous day, note the day’s sales and promotions, and go over selling points or “collateral” to move the merchandise. I was invited to attend one of these meetings and was totally surprised when the sales manager turned to me and said, “By the way, we have Tom Patterson, the founder of Tommy John underwear, here. Tom, can you come up and say a few words?”
I had no idea I would be called on to say anything. Luckily my sales training kicked in, and I stammered a few details about the product and its features. Well, that department sold more Tommy John undershirts that day than ever before. So I started asking—begging—to speak at as many morning rallies as possible, and each time I did, the sales numbers—and subsequent orders—would go up. Whenever I visit a city, I beg for the opportunity to speak before the sales associates.
As for funding, six months into the project, Tom got about $100,000 from a friend who loved the product and offered to invest. I came along when Tommy John already had a proven niche brand, sustainable revenues, a distribution network, and growing market share. I tried the product, and now I swear by it. There’s no going back to Hanes when you’ve tried briefs from Tommy John. I’m a proud investor. Revenue in 2012 was $5 million, up from $1.5 million in 2011.
Having updated the undershirt, Tommy John turned its attention to men’s undershorts. “We don’t develop a problem unless we can solve a problem,” Tom says. “Women’s underwear is like the Jetsons, futuristic, innovative, and fun. But underwear for men hasn’t been modernized in generations.” The upshot of Tom’s innovation? A men’s brief with fabric that stretches and rotates in all directions instead of just up and down, or left and right. Plus, as promised, it solves the problem of briefs riding up the wearer’s thighs. The biggest innovation: a “quick-draw” fly that is oriented not vertically but horizontally. The briefs even have a pocket for an iPod.
Looking back on it, it wasn’t the quick-draw fly or the iPod pocket that impressed me most. It was the utter simplicity of Tom’s belief that he was uniquely positioned to reinvent men’s underwear. He had thought the situation through. With his experiments, he demonstrated so much with so little. His interest in solving the underwear problem wasn’t partial. It was complete.
Tom is what I call a visionary. His belief led him to see things that others didn’t and to create a solution to a problem that people didn’t recognize as a problem with a solution. I mean, I’ve long been frustrated at my undershirts jamming up around my waist, but I just accepted it. People who invent the future see things that we don’t see; they have deep beliefs in the way things should be and undertake to change the status quo to make them better.
To launch a startup, entrepreneurs must make thousands of decisions. If they get even a third of those important decisions right, they’re geniuses. There are no guarantees, but decisions inspired by these five beliefs will go a long way to getting it right the first time.
1. The team we have is ideal. Business models and product specs are easy to change. The hardest thing to change is the mix of partners. There are no hard and fast rules about how to do this, but a long history usually is a good sign. I love it when I see a melodic and fluid conversation between founders.
2. We believe in launching sooner rather than later. A startup hasn’t really started working until its product or service has been launched. Research and focus groups are fine. But nothing educates a startup about what it should be developing until something is injected into the marketplace.
3. We understand our customers. I’m impressed by founders who work harder at asking intelligent questions than at answering them. The best startups understand their customers sometimes better than their customers understand themselves.
4. We are committed to metrics and analytics. The simple act of measuring something has an uncanny tendency to improve it. Of course, measurement is rarely simple. It’s easy to measure the wrong things. I like startups to have a belief in measurement and the discipline to be guided by what the metrics reveal and then to adapt as quickly as possible.
5. We believe in being frugal. The reality is that most startups fail before they can deliver a product or service that customers are willing to pay for. What happens is that the startups run out of money. I want to see a culture of frugality in everything the startup touches.
In this book’s introduction, I promised to tell you about the winners of the first Boston College Venture Competition (BCVC), which awarded $10,000 in honor of my mentor, the late Professor Harold G. Buchbinder. The winners were a team led by Boston University MBA candidate Phil Mark. His iPhone application is a male-only social network (“where guys go to be guys”) called Jaxx that is designed to help men stay in touch. Phil’s big insight is that unlike women, who want to socialize over shared information and feelings, men prefer to engage by sharing sports, drinking, and other guy bonding stuff.
Like virtually all startups, Jaxx did not emerge fully formed. The product that Phil first submitted was a location-based application called MineGames. I was among the judges of the business plan competition and came away impressed less by the game than by the founder. Cofounder Phil Mark recounts the team’s experience with me:
We were so green. Brian helped us narrow down the problem we wanted to solve. He wanted us to talk to many more people and do a lot more user research. The questions Brian asked helped us think deeply about the value we were adding to the user. In MineGames was embedded the idea for what we really wanted to do with Jaxx, and he helped us identify it, extract it, and polish it for the world.
Through Jaxx, guys can create a private circle of friends and then send group messages about various activities or events going on in their area. Men can also create challenges for individual friends or an entire group, whether it be betting on a poker tournament or a lifting event. Popular is the “suggest a plan” feature, which allows guys to either accept or decline invitations for a proposed night out. A “roast” function allows guys to leave geonotes out in the world for their friends—essentially a clever “What’s up?” that can be opened when friends arrive at the tagged location.
When I first met the Jaxx team, they were barely past the inspiration stage. Phil Mark recalls what he learned from that early stage of the startup process:
Expose your thought process to as many people as early on as possible. You need all the feedback. Find advisors who will really challenge you by asking why. Why are you doing that? Why do you think the customer will buy that feature? Why is that of value? Value for whom? Entrepreneurs must connect with their customers. You have to get out of the office, talk to customers, and get the product in their hands.
The most valuable asset you have is time. Really focus on people who care about time and can help you use it best. Once we got confident about what the value proposition was, that’s when we made our greatest progress. Oftentimes the feedback you get will be neutral or positive. You really have to seek out people who are confident enough to tell you where you are off or where you lost your way.
Build relationships with investors. In order to secure funding from angels, an entrepreneur needs to establish relationships with potential investors, provide metrics by which the entrepreneur will be held accountable, and deliver. To my regret, there were early connections we made that I did not nurture because I thought they weren’t interested in our product. What they were interested in was the team and seeing what product we would eventually build.
Most startups hit snags, and Jaxx was no exception. Just as this book was going to press, Phil told me that the team was putting the development of Jaxx on hold “for the time being.” The team ran short of the funding required to maintain a fulltime commitment to the startup. I was sorry to receive the news. When Phil Mark made his Boston University presentation, he was the hands-down winner.
I worked closely with Phil and the team he pulled together, but in the end I chose not to invest. I had to two concerns. First of all, I didn’t think the startup had the right team in place. There were redundancies within the team. As CEO, Phil recognized this problem but hesitated to make the tough decisions the situation required. It’s hard to unravel a startup team that isn’t working; that’s why it’s so important to get it right from the beginning. But if a correction needs to be made, it should be done quickly. The startup environment is unforgiving of those who waste time, and Phil took too long to make the tough decision.
The other reason I didn’t invest is because I simply wasn’t convinced that the team really understood its customers, nor could the team articulate why those customers would demand Jaxx in their lives. When I offered them some points to consider, they seemed enthusiastic, but nothing changed. In the end, I concluded that the Jaxx team was like a lot of startups that I see. They mistook a product for a company. They got lost in building something cool and forgot an important lesson: cool may get attention, but it doesn’t mean there’s a business to be scaled and funded.