November 2009 Archives

Cleveland entrepreneurs undoubtedly need more help getting off the ground.  There are a few channels for early-stage support including JumpStart, Techlift, MAGNET, CIL, GLIDE, and various university programs, each of which I've had great experiences with.  Still, these groups can only do so much, since most first-time entrepreneurs really need direct and constant advice from entrepreneurs who have experience in their industry and have done it before.  A Y-Combinator branch or Founder Institute program in the city would help immensely.

On the other hand, GCA's service appears to cost the same as the big-time incubators but without the major benefits.  An entrepreneur should always ask themselves before handing out equity: "Is this person someone I will be glad I'm partners with in five years?"  Adeo Ressi, Paul Graham, David Cohen?  Absolutely.  GCA?  I'm not sure.  Let me be clear that I'm sure the individuals at GCA are highly capable businesspeople, which they've proven with their press coverage and footprint so far, but this does not mean they should be coaching first-time entrepreneurs.

Here are some problems I've been thinking about since first hearing about GCA this spring:

1.)  The partners have not succeeded as high-growth entrepreneurs.  Whereas in the current well-respected programs you work with entrepreneurs who have one or more multi-million dollar exits along with long careers of direct industry expereince, the GCA team has collectively founded one VC-track business, Zolio, which never raised more than a seed round and currently has about 1,000 monthly unique visitors.  I can't say that my track record is much better right now, but I'm also not running a startup advisory firm.  Actually, the main reason I'm writing this blog post is that I had been thinking about doing something like this a few months ago and realized that if I did, someone would write this article about me ;)

- How they could fix this: GCA needs entrepreneurs-in-residence on staff that work consistently with clients.  That would at least give some meat to the notion of value-added advisory for new entrepreneurs.

2.)  The partners have very little other experience relevant to startups.  Aside from Zolio, the management team has some work experience but not what I'd imagine is necessary to really provide something unique for their clients.  Todd has some business analysis background which definitely helps, but that's about it.  Dar's experience isn't very relevant (two years working as an independent architect; managing a P&L but for a one-man show).  Their engineering expert Jeff worked as an engineer for a small hardware company for a few years - OK but not an industry expert.  VP Finance Celia has worked in ibanking (looks like mostly family-owned companies, middle market manufacturing etc. as is common in NE Ohio), but as I've learned since my summer at Western Reserve Partners, finance in the ibanking sense has little relevance to startups, since you need operating history to do any sort of traditional financial analysis, and raising capital for an established business is an entirely different art than raising early-stage funding.

AGAIN, I am not ripping on the management here.  I'm only saying that they don't seem to be the right people for coaching a first-time entrepreneur.

3.)  The ambiguous economics of a GCA engagement could result in naive entrepreneurs getting taken advantage of.  Visit GCA's website and look for the nitty gritty details of what a relationship with them will cost you.  You won't find much.  Go look at the competition's sites I listed above and notice that all these groups very explicitly describe their program's economics: amount the firm invests, all associated costs, amount of the startup equity taken in return, etc.  They do this for good reason: there are a lot of snake-oil salesmen in the startup world due to the relative inexperience of startup entrepreneurs.  I've run into the type before: pushy and sleezy financial advisors trying to sell insurance products to Fresh Fork while we were clearly struggling financially, "angel funds" pushing personal lines of credit as the best way to fund CitizenGroove (extremely easy to do, charge 5% commission, walk away smiling), a Nevada-based "social network expert, investment banker, and venture capitalist" trying to provide consulting for a cut of equity (soon afterwards found a web community comprised of people he had scammed in the past), the list goes on....

I doubt GCA is in that camp.  I'm guessing the firm is well-intentioned, but they don't have the intuition and understanding that comes with a long history of serial entrepreneurship.  They may enter into agreements with startups which they think are fair, even though the agreements are way out of whack when compared with competing programs throughout the country, simply because of this lack of experience.

- How they could fix this: there's no reason not to have a standardized, publicly-available business model for something like this.  The details should be listed on their site.  Should be easy enough.

4.)  Although the details aren't publicly available, I gather that GCA is expensive even in comparison to industry-leading startup incubators.  This is hearsay (although we could verify if the details were listed on their site, see above), but I understand that GCA asks for  equity in the range of 5-10% for access to their consulting services and presumably free accounting/legal.  This does not include any invested capital.  This is *a lot* of your baby for some free business services, office space, and advice from people who, as mentioned, don't have any track record building high-growth companies.

Additionally, I'm not even sure the services offered are free of charge.  From their July 2009 FAQ:

For one comparison, look at YC's program.  You definitely receive some funding in the ballpark of $10-20k, help with all the legal work (although you pay for it in IOUs to the law firm) and services from people who have already made the mistakes that could sink your startup, and connections to dozens of angels and VCs (personal connections built over decades by the people who run the program, I might add).  Oh, and if you have questions about your business you can ask someone with 20+ years of industry experience and wildly successful projects such as Paul Graham.  How much does this cost you?  2-10% of your equity.  Granted they don't offer you office space, but other similarly-priced programs do (Polaris' Dog Patch, Techstars...)

5.)  Do the accounting and legal services actually help much?  Unless there is value-added guidance from someone who has been around the startup block a few times, I can't imagine being pointed towards service providers (who probably will be paying a referral fee?) is better than doing it on your own.  It's not too hard to network, get references, and find the right people to help with these things.  I'd recommend going to Gorilla Group meetings, 20/30 club meetings, and getting in touch with groups such as Civic Innovation Lab, Jumpstart, and Techlift to get suggestions.  Help finding these people should be icing on the cake, not the main reason you give up 5-10% of your company.

6.) Ultimately, we will not know if GCA is effective until a company raises institutional money.  GCA's youth means their lack of seed or Series A raises is to be expected.  I would personally let other people take the risk, though, and wait until at least one or two financings come through before I jumped on board.

Happy hunting to all.

Kyle

The big one I mentioned is worthy of sharing with the world, the biggest mistake during my time working on FFM that I'll never make again:

A startup should ALWAYS have the "brains" behind their core business IN HOUSE!  In the case of a software company like us, this means software developers.  During the process of creating a product or service, these technical people will be making mistakes, learning about the business processes, and in general building what you might call "institutional knowledge" specific to the company and industry.  

A startup's core competency cannot be "we are the best in our niche at being business people," it needs to be something like "we are the best at *creating* a product/service that caters to our niche," which requires in-house technical skill.  FFM was started by a bunch of people that at the time had never built a web application, thinking that we could outsource the actual technical work and use the resulting product, but this meant that we could not evaluate the outside firm's work, be confident in the status of the project, or in the event of an overall failure have learned from mistakes made during the project.A software company should have a software developer, a biotech company a bioengineer, a cleantech company a chemE and/or EE, etc., and those individuals need to be sold on the idea and be equity partners.

This may seem obvious to experienced entrepreneurs, or those on the west coast where "software developer turned entrepreneur" is the startup archetype.  But to a group of business students starting what ultimately became a software company in Cleveland, it was not so obvious.  Furthermore, while we had advisors, mentors, etc., this wasn't something that was stressed by anyone else.

So I'll stress it now.  YOU NEED A TECHNICAL CO-FOUNDER!  With equity, who loves the company.