Startup FAQ

FAQ for Startups

Our expert team of serial entrepreneurs answer the most frequently asked questions (FAQ) relating to new businesses, investors, and startup money:

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The differences between incubators and accelerators have blurred in recent years as both provide mentoring and support services.  However, in general, incubators provide reduced cost or free office space to startups and provide focused training and connections to mentoring.  Accelerators, on the other hand, provide comprehensive programs to support the entire team in their journey to develop a prototype, validate the market, grow the team and establish the infrastructure upon which the startup will grow.  These programs typically take an intensive effort from the founders and mentors from the accelerator over a 12-16 week period.

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A few do.  However, it is generally the exception as most angel groups are seeking companies that are beyond the concept stage.  Typically, angel groups are looking for experienced management teams with concepts that have been validated in the market.  Consider screening the angel groups to determine if they are interested in concept plays.  If they are, it will be indicated on their website.  You might also consider applying for an accelerator program.  Accelerators are designed to grow seedling concepts and will support your efforts to succeed.  Here again, we would suggest you do your homework and identify which accelerators are the best mutual fit to increase your probability of acceptance.

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As a policy, we do not endorse accelerators.  However, the reality is that like anything else, there are accelerator companies that are not so good and those that are great.  The trick is doing your homework in an effort to understand what the different accelerators offer and if their offering is a match to your needs.  Accelerator Options, a TurboFunderSM   tool, can help you with this task and potentially reduce your research time and effort significantly as it identifies accelerator companies which have been ranked highly in independent studies over the past few years.

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Angel groups typically desire to invest their monies into scalable opportunities which also bring a transaction event allowing them to cash out in 3-5 years.  Family lifestyle businesses don’t generally facilitate either of these actions.

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The numbers vary but as an order of magnitude, for every 100 opportunities submitted to angel groups, 15-20 are screened by the screening teams with 4-6 accepted for presentation to the members.  Due diligence and term sheet negotiations reduce those further to 2-4 opportunities which actually receive an investment.  The best path for the entrepreneur is to use the “rifle approach” as opposed to the “shotgun approach”.  Entrepreneurs may be best served to do their own due diligence and submit only to angel groups to which their opportunity is a match with the groups’ criteria.

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The investors actively participate in networks, supporting the identification, screening and due diligence of opportunities and generally make their own independent investment decisions related to each project.  Investors are less active in funds where the identification, screening and due diligence, as well as investment decisions are made by a small group and the monies the investor committed to the angel fund is invested on their behalf by this group.  Investment into a fund results in the investor participating in all investments of the fund.

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Most angel groups list their investment criteria on their website.  If you are a startup company in Miami and the midwestern angel group indicates they invest only in companies from within the Midwest, you are likely wasting your time submitting your opportunity for consideration. It is important to carefully review the criteria of each angel group to determine if there is a mutual fit.  By doing so, you can focus your submissions toward angel groups which might have a legitimate interest.

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Most startups with submissions to angel groups simply do not meet the criteria of the group.  Had the entrepreneur done their homework up front, they would have known this in most cases.  Regardless, numerous opportunities cross over the desks of these angel groups.  They simply don’t have the time to respond in detail to all of those submitted which are not a good fit.

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We suggest you utilize a cloud based project management tool like Trello. It is provided in a dashboard display and is very flexible. Its’ organizational flexibility permits you to designate a place for notes, ideas, projects under consideration, in process, etc.should you like. Additionally, it’s cloud based system includes permissions enabling you to share it with others. You can also utilize it to help you prioritize tasks and become more efficient.

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There are numerous places entrepreneurs should look to seek startup mentoring / advisory support. Examples include the entrepreneur’s personal networks, the local / regional startup community, trade associations and institutions to name a few. For further discussion of these and other ideas for identifying mentors the entrepreneur should consider “Where Does an Entrepreneur Find Advisory Board Members?

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All business opportunities require funding to operate and grow. Startups are no exception. There are numerous avenues the entrepreneur may pursue to obtain funding including but not limited to Family and Friends, Pitch Contests, Accelerators, Crowdfunding and Angels. You can explore these and other opportunities in the FundingSage Blog Article “8 Options Entrepreneurs Utilize for Startup Concept Funding“.

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It would be my opinion that it would less difficult to succeed as an investor. My conclusion is based on the ability for the investor to diversify, thereby reducing their risk.

However, the ultimate answer depends largely on what you start with and how you define success. For example, if you have funds which can be invested, becoming a successful investor is significantly easier then if you do not and must spend years developing an investment foundation. Under this scenario, it may be less difficult to succeed as an entrepreneur.

It should be noted that even with the appropriate knowledge base and experience, obtaining success at either is generally difficult.

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Investors of scalable companies expect the companies to utilize the capital invested to grow the company. As such, their expectations are that their investment is utilized to build equity which results in substantial returns at a future liquidation event.

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Typically, first time entrepreneurs are highly focused and work hard to develop their product / service offering with little or no input from users, (the market). As a result of this focus, many develop elegant solutions to problems the market has little need for or interest in addressing. Effectively, the result is they are unable to monetize their idea. The following blog article provides additional insight:

Key to Startup Success: Customer Discovery

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CEOs are responsible for leading the company at both the strategic and operating levels. The CEO sets the tone and agenda and is ultimately responsible for overseeing and delivering company performance commitments. In addition, the CEO is the liaison between the external investors / Board of Directors and the management of the company. A company without the services of a CEO would quickly find itself drifting without focus.

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Company founders are a startup’s initial investors. As the company requires capital for growth, the founders issue new equity in return for investment proceeds. Typically, investors will require specific rights as a part of the transaction. These rights are negotiated between the parties on an arms length basis. The initial step in the process is the development of a Term Sheet. The following blog on The Term Sheets will provide additional information:

The Holy Grail of Entrepreneurship: The Term Sheet, Part 1

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There are multiple possible outcomes for VC startup investments which do not result in an IPO. These include:

1. The startup can be acquired by a strategic player with an existing interest in the business.
2. The startup could be acquired by a Private Equity, (PE) firm and combined with existing parts of it’s portfolio.
3. It could be acquired by another startup addressing simlilar issues
4. The assets of the startup can be liquidated and sold.

For additional insight check out the FundingSage blog article “Are you a Startup Entrepreneur Seeking to Get a Glimpse into the Thinking of an Angel Investor?” 

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Capital obtained through an equity round would not result in a taxable event to the entrepreneur. It would constitute equity on the company’s balance sheet. Likewise, investment capital obtained through a debt offering would not result in a taxable event to the entrepreneur. Debt, such a Convertible Note, would constitute a long term liability on the company’s balance sheet.

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Investors quantitatively assess your opportunity through two questions during the pitch:

1. What is the potential market size; Is the market potential significant enough?
2. What is the entrepreneur’s valuation and is it reasonable?

Neither answers are absolute.

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There are numerous ways beyond personal and family wealth for entrepreneurs to raise funds. The Funding$age blog article “8 Options Which Can Be Utilized by the Entrepreneur for Startup Concept Funding” shares additional detail.

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An effective way to begin is to get acquainted with your regional entrepreneurial ecosystem. Your regional ecosystem likely provides numerous opportunities to participate, network and become acquainted with other entrepreneurs and investors in your region.

Examples of such opportunities are included in FundingSage’s Entrepreneurial Ecosystem Spotlights,  and include opportunities such as entrepreneurial meetups and events, startup competitions, co-working and makerspaces, incubators and accelerators, and colleges and universities programs.

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The simple answer to the difficulties raised in this question is that establishing a startup is a full time endeavor. By definition one cannot work full time employed for a third party and full time in their startup.

If you are accepted into a formal accelerator program, you will not be able to leverage the benefits of the program unless you are available full time. Similarly, significant investment is unlikely from investors if the key founder is not working full time on the opportunity. Additionally, concept and seed level investors generally desire that the startup use investment proceeds to grow the endeavor, not pay salaries, i.e. your earning your sweat equity. That said, most are comfortable with subsistence salaries once the startup is demonstrating some traction. Note however that most investors will avoid startups with founders demanding six figure salaries unless they have significant sales and scalability which is proven.

We would suggest working part time on the startup while you save enough money to facilitate leaving your full time job and moving full time to the startup. Once that occurs, you will be able to focus on growing and accelerating the startup, regardless of process chosen.

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Many investors consider an entrepreneurs’ raising of money for multiple startups simultaneously to be a “Showstopper”. Such an effort demonstrates the entrepreneur lacks confidence in their opportunities and lacks the willingness or ability to focus. It also begs the question, where will the entrepreneur spend their time should one of the opportunities find itself in “rough waters”?

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There are several key attributes I find common to successful entrepreneurs.
1. They must be enthusiastic; if they lack passion, so will their teams and partners. Successful entrepreneurs focus their passion to accomplish their goals.
2. They are capable of assessing, managing and dealing with risk.
3. They possess self confidence. The entrepreneur must have a firm understanding of themselves and be confident in their own ability to execute.
4. The ability to develop and focus on their strategic vision is fundamental. As such, focused vision is paramount.
5. Successful Founders have the ability to assess talent and lead others. Scalable startups are not possible without diverse, passionate, highly skilled, and motivated teams.
6. They constantly seek improvement; better ways of doing things. They do not hesitate to operate “out of the box”.
7. Most startups morph over time. Entrepreneurs must be customer focused and flexible to adjust to the needs of the market, and finally;
8. The typical successful entrepreneur is someone who refuses to give up, despite the constant avalanche of hardships they will face.

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The quick answer is no, it is not unrealistic. In the article “8 Options Entrepreneurs Utilize for Startup Concept Funding” I discuss numerous funding options for concept companies to pursue.

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