George has worked with thousands of entrepreneurs in helping them with their strategic planning, entity formation, IP protection, funding, acquisitions, and the whole range of their startup legal needs involving both deals and disputes.  He is a clear and insightful as a writer as well  and in addition to authoring the Startup Law 101 Series of tutorials for founders and entrepreneurs he also writes very well thought out essays on the Hacker News site.

In a recent post he addressed a point about considering investment options based on the bona fide needs of your business. When folks at a breakfast ask “how do I raise investment” one of the common answers is do you have a business that merits investment, and what type of investment. What follows is a great essay by George Grellas on this point that he originally posted on Hacker News at http://news.ycombinator.com/item?id=1613249. It is posted here with his permission, and hyperlinks have been added to provide references for some of his points.

High risk. High reward. High failure rate.

But, in this view, you are not doing a true startup unless that is the view in mind. Of course, any such startup will necessarily require large infusions of capital in order to aim that high, and this assumes it will be VC-funded.

I strongly disagree with this VC-only view of startups (that is, with its being the only legitimate form of startup), and the founders I have worked with for years have tended to reject it as a working approach to their startups. These sorts of founders have always valued the independence of keeping control of their ventures and of seeking to build it to the optimum level for their needs and then either selling it or keeping it as a longer-term business that is solidly profitable.

Even in the days when it took far more capital than it does today to launch the prototypical Silicon Valley startup, it is amazing how many such independent startups managed to thrive and flourish in the nooks and crannies of the startup world. The founders behind such companies had all the exceptional qualities that solid entrepreneurs need in order to conceive winning ideas and to execute them well.

In today’s environment, such independent startups are thriving and flourishing all the more as the capital needs for launching a startup have sharply declined. The independence of the entrepreneur, and the corresponding power of control over one’s own company, is stronger than ever. This is solidly confirmed today in Silicon Valley and elsewhere as early-stage startups are proliferating while VC-backed ventures have been comparatively stagnant. In this sense, it is perhaps a new era for startups. Those that want to build their company independently, or even those who ultimately plan to seek significant outside funding but wish to defer such funding until they can build solid value and minimize dilution, are in the ascendancy and this trend is possibly a permanent one.

All that said, the founders who fit in this “independent” category have never, in my experience, seen investors as the enemy. There is an antipathy to VCs who propose shark-like terms but never to quality VCs who can legitimately take the company to the next level. Maybe they don’t want to take the risks associated with such a course, but the founders see it as one legitimate option to consider – to consider and reject for many of them, perhaps, but to consider nonetheless. They are not harmed by the presence of such VCs but rather helped in that their choices are broadened for situations where such a path might become attractive to them.

Whatever may be said of VCs, though, there has never been any general antipathy to angels as a potential investment source. Angel investors have always come in all varieties. Many are successful entrepreneurs in their own right and they not only can invest money into a promising venture but also other talent and expertise that can help guide the venture. I have seen such situations firsthand, over and over again, where such contributions have proven invaluable to the startups involved and much appreciated by the founders. It is precisely by this means that founders often can raise the comparatively modest amounts of capital that would be too much for the founders themselves to risk but that are essential to building the venture to the point where it can become commercially feasible. Such companies have nowhere to go without such capital, and the angels are there to supply it on terms that are often reasonable and very much in the interests of not only the angels but of the founders also. To categorically write off this sort of investment as coming from some congenitally hostile source that must be resisted at all costs by founders is a mistake. Some ventures, of course, will want strictly to self-fund. But not all do. Indeed, from my experience with having worked with countless founders, I would say that most do not want to limit themselves strictly to self-funding because they themselves see that pure self-funding will not enable them to realize their goals for their venture.

I am not saying that all angel investments are good or that all angel investors are benign. It is a shark’s world out there and, whenever entrepreneurs are taking investment money, they need to watch their backs. But to dismiss angels as a category is to dismiss the idea that founders should have a broad range of choices before them in seeking to build their companies, and such a categorical dismissal is a serious mistake for most ventures. It is like saying that, because there are risks in a certain direction, I as an entrepreneur will never walk that path even while my competitors keep that option open for themselves and perhaps use it to outrun my venture through needed capital infusions that can often take a company to a better level.

My advice to founders: don’t be gullible in allowing yourselves to be cowed into taking in investment money for no good purpose other than to brag about being a legitimate startup; but don’t become so narrow-minded about investment options that you box yourselves into a strictly self-funded venture in cases where that may not be in your startup’s best interests.

In other words, forget categorical rules in this area. Consider angels and their investments in light of the bona fide needs of your venture and, if they can meet those needs, then by all means avail yourselves of the value they offer (and, yes, do it on the best terms you can and watch out for the vultures). If they don’t meet your needs, and you see more value in building a long-term profitable company without looking to be acquired, then by all means avoid investments that will only complicate your company and your life.

But by all means keep a balanced view of this or you will only arbitrarily limit your own legitimate options for building a successful venture.

Sarah is a serial entrepreneur who is leveraging her  software development consulting business, Blazing Cloud, to bootstrap her mobile-focused startup, Mightyverse.  Early in her career, Sarah founded a company, CoSA (The Company of Science & Art), which did part-time consulting using their own software libraries to bootstrap a product business, which led to the creation of After Effects (acquired by Aldus, and subsequently Adobe).  She finds her current bootstrap effort easier since the consulting is unrelated to the startup, keeping product development decisions separate from short-term revenue drivers.

In both technical and leadership roles, Sarah has been developing commercial software since 1990. She began focusing on Internet software as an engineer on Macromedia’s Shockwave team in 1995. She led the development of the Shockwave Multiuser Server, and later the Flash Media Server and Flash video.  Sarah believes that open source software provides solid technical foundations and compelling business models. She is an expert with Ruby and Rails and is on the OpenLaszlo core team.  An industry veteran who has also worked at Adobe, Aldus, Apple, and Laszlo Systems, Sarah was named one of the top 25 women of the web by SF WoW (San Francisco Women of the Web) in 1998.

How do you convert your customer’s understanding of your product or service into a sale? In order to sell your product or service, you have to ensure that your customer believes in your teams ability to deliver. Then you have to harness the right moment to make that sale.

Get your customer to view you as trustworthy and credible:

Here are some great suggestions from the Stanford credibility project:

• Make it easy for the customer to verify the credibility of your service. Have references, sample projects, etc easily accessible to the customer.
• Show that there are trustworthy and ethical people behind your product or service.
• Make it easy to get in touch with you. Make your email and phone number available to your customer.

Harness the right moment to make the sale and look for potential triggers

Some instances of triggers:

• Constantly communicate with your customer and be aware of his needs. There are many instances when your customer may think is an appropriate time to start with a new service or product.
• Keep track of when your customer is starting new projects. This is probably a time when s/he will like to make changes, implement a new system or service.
• New employees that your customer hires may have a different mindset to a product or service. You can educate them about your product/service.
• New rules and regulations: These are times when customers upgrade their systems and processes. Send reminders to customers about what your product/service can do to help them adhere to these new rules.
• Tax season/Accounting cycle: Be aware of the accounting calendar of your customer.

It was interesting to read “Fraternity of the Wired Works in the Wee Hours” about entrepreneurial nightowls in New York (“New York Nightowls is a late night co-working club for professionals”) who meet in co-working facilities from late evening to early morning:

“The goal is to come, get inspired, meet new people and get work done,” said Amber Lambke, a creative consultant. “It’s six hours of uninterrupted, productive time where you’re surrounded by other creative people doing awesome things.”

If the Bootstrapper Breakfasts® get started too late, consider one of the nightowl meetups:

• Boston Nightowls
• Los Angeles Nightowls
• Melbourne Nightowls
• San Francisco Nightowls
• Stockholm Nightowls
• Tel Aviv Nightowls

1) The customer has a need that should be fulfilled. To make sure that your product/ service is most suitable to your customer, think of why it would appeal to the customer. Different businesses look at the same product or service offering differently. For example, a small business will buy a one time service differently compared to a large business. Same goes while buying a subscription service or a support service.

The following questions will help you understand your customer and match your product/service accordingly.

a) Who is your customer and how do they function?

• is s/he an individual who pays by cash/credit card
• is s/he a small business owner
• is it a large business

b) What is the nature of the product/service you’re offering ?

• is it a one-time service/a one-time product that can be bought
• is it a subscription service
• is support offered along with the product

2) The customer weighs different alternatives to fulfill his need. Once  he has a few choices, he zeroes in on a particular choice. The customer then tries to re-affirm the decision made. At each step, you as the seller, have to make sure that the customer’s questions are answered and make him believe that the solution that you offer is the best.

3) Once the customer has chosen your product/service and is convinced, he tries to reaffirm his conviction.  To help the customer reaffirm that his decision is right, you have to make him believe in your product or service.

• Help the customer understand the offer and the benefits, make him believe that your offer is unique and give him a compelling reason to buy, have a trigger or a reason to act.
• Give him a free trial. The Freemium model allows people to understand the application. http://www.freemium.org/
  a)   ‘free trial” of full functionality and free but for subset functionality is something which the software provider will have to decide.
  b) There will always be customers who will use the free services but will not convert when it comes to paying for the service.

In conclusion, to better understand your customer, know your customer and how best your product or service can fulfill his need. Then help the customer understand any questions about your service and help him convince himself that your product or service is the most appropriate.

For bootstrappers, knowing when to trademark and how to do it affordably is a common question.  Thursday August 26th at 7:30 AM, Mr. Pete Tormey will present a short introduction about trademarks and provide a framework for working them into a startup business plan.  Mr. Tormey is a former bootstrapper and is now a patent attorney practicing in the San Francisco Bay area.

Thursday August 26th at 7:30 AM

Athens Burger Restaurant
6999 Dublin Boulevard
Dublin, CA

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Overview of issues the panel will address:

Many companies today don’t get funded.  Considering that, how does a small startup survive tough competition, company growth, and unpredictable markets with virtually zero capital?  It definitely happens and to help everyone learn how, we’ve compiled a panel of founders who’ve been there and investors who have seen it happen.  We’ll be discussing whether its possible to get by without funding, how to balance the budget if you try, and what problems you are likely to encounter.  We’ll also be getting into what tools to use, how to stay lean, stories of what hasn’t worked, and other fundamentals of the self-funded process.

Coordinates:

• Tuesday, August 17, 2010 at 6:30 PM
• Parisoma 1436 Howard St. San Francisco, CA 94103

Register here tickets are $25 in advance, $35 at the door.

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IHOP #828
8440 Mira Mesa Blvd
San Diego CA 92126
(858) 271-7995

Register at http://www.meetup.com/Bootstrappers-Breakfast-San-Diego