www.RMIUG.org
January 12th, 2004
"Starting an Internet/Software Company Today"

01/12/04 RMIUG Meeting Minutes - Starting an Internet/Software Company Today

The meeting started at 7:00 p.m. with a full house in attendance.

Dan introduced the RMIUG committee, including new member Josh. He also
pointed out that this month is the 10th anniversary of the RMIUG.

Dan thanked the RMIUG sponsors for their support:

MicroStaff (http://www.microstaff.com) generously provides food and
beverages at the meetings. The company provides Creative and Technical
Talent for Web, Interactive Media, Marketing Communications and Software
Development projects.

ONEWARE (http://www.ONEWARE.com) -- a Colorado-based software company that
provides semi-custom web-based applications, is the sponsor of the RMIUG
meeting minutes.

NCAR -- for the use of their wonderful facility.
______________________________

Announcements:

Jenny Shedd with Microstaff announced that the phone is ringing in 2004 and
there are many new job opportunities posted on the Microstaff web site,
http://www.microstaff.com.

There is a job search organizer portal available at www.jobfiler.com. This
lets you store specific search item locations on sites like Monster.com in
your own database so you can find them easily later.

Dan asked warm up questions and introduced the first speaker for tonight:

Justin White (justinw@thewellworks.com), president and founder of Wellness
Business Systems. Justin has a wide range of experience, and was a CIO in
the food industry, as well as a Microsoft Developer, Sales Manager, and
General Manager.

Justin is speaking about the market factors he looked at to start his own
company.

STARTING AN INTERNET/SOFTWARE COMPANY TODAY

[slide presentation]

"The Agony and the Ecstasy"

To Justin, this title characterizes the process of start-up.

  • His company makes business solutions for the wellness industry service
    sector
  • His company's first product is a business management system software
    package called Wellworks.
  • It integrates scheduling, among other functions
  • First code written: Nov 2000
  • First marketing : May 2003
  • Today: 60+ customers on 3 continents:
  • He's invested 8000 hrs of time and $150,000 so far.

"FAGETTABOUTIT" :

  • Sleep
  • Free time
  • Rational decision making
  • Significant others
  • Cleanliness
  • Godliness
  • Sanity

WHY START A COMPANY?

-Pleasure in the work, and in the result - and knowledge of the value of the
result to the community -. (quote from Albert Einstein)
-[another way to look at it, is to ..] Be Like Mike [from the book]:
Michelangelo had no choice - he did it [the Sistine Chapel ceiling in the
Vatican] every day for 12 years without fresh air, having no life, and he
did it because he had to [creatively]. Justin recommends asking yourself,
do you have a choice? Because - if you do, starting a company might not be
for you.

GOOD IDEA'S AREN'T WORTH SQUAT!

("gee, I wonder if anyone's thought of this?? ")
-don't get too enamored with your own ideas - people buy solutions, not
ideas.
-ideally, you don't want your customer to say your product is "cool". You'd
rather hear a sigh of relief because it will save them time, and/or solve
their problems.

KNOW THE NUMBERS:

  • How many customers?
  • How many competitors?
  • How much market share is owned by which competitors?
  • How much cost in $$ and brain damage to capture enough market share to make
    your business invest-in-able? (by you or others?)

-Don't move ahead without knowing this stuff. If you can't prove to others
who have bucks that your idea is solid and can make them money, then you
don't have consensus from anyone other than yourself that your business is
viable.

-He's been asking - how can he refine it, and make it invest-in-able?

COLLECTIVE IGNORANCE TRUMPS INDIVIDUAL STUPIDITY:

-Surround yourself with good advisors from inside and outside of your
industry, so you don't think you know things that you don't. Someone to
think through problems with, as a start - they will lead you to others, and
the group wisdom is at least helpful. What makes you so special?

[ask the right questions]

-Have competitors misread the needs of the customers? In other words,
intuitive and aesthetically attractive are desirable features to a yoga
teacher, rather than it being a really cool database, for example. The
customer needs are what's important.

-Are market forces changing in your time-to-market window?

-What phase of the product adoption curve is the marketplace in? (i.e., for
PCs it's roughly 1978 - 2010). You need to figure out where you are in that
curve, because the curve will influence/dictate your product development
cycle.

MONEY

-Protect your own capital if at all possible
-VCs - they want to own your baby, tell you how to raise it, and don't care
how pretty its eyes are. (READ: Equity). They will tell you how it should
look, etc. Not that Venture Capital money is not ever right, it can be -
but understand what they're looking at.
-Angels - want a good deal and maybe some feel good [from it], too. (READ:
Convertible Debt).
-Friends and family - [this can be] tricky for most, [and] potentially
disastrous. (READ: you have to live with these people [or not] in the
future!) It can work out, but you must go into it with the understanding
that you're risking money belonging to people who are important to you.

But Justin says he wouldn't trade a moment of the last 3 years to work for
the best company in the world.
___________________

A few more questions from Dan:
How many people in the audience have raised at least $10,000 for a startup?
(several) $100,000? (a few less) A million dollars? (about 2) TEN million
dollars? (2)
Dan: I need to speak to you guys! :-)
___________________

Dan introduced the next speaker:

Patricia Hursh (Patricia@SmartSearchMarketing.com), president and founder of
Smart Search Marketing; former Qwest and Microsoft employee. Her company
manages paid search engine advertising and educates clients on effective
search marketing programs. She's going to speak on making the transition
from being a full time employee to being her own boss.

Patricia: She's telling a different story than Justin and Julian.

This is about a journey of evolution for a self funded business, rather than
product development. She thinks this might be more attainable for some.
Topics she'll cover:

  1. What kind of business - Who they are, what they do
  2. Her path from employee to business owner
  3. Why she took the plunge
  4. What worked - What didn't
  5. What keeps them up at night

_________

1) What kind of business?

It's a full service search engine marketing firm. They work with
businesses.

Her clients want to make sure they're front and center on those result pages
when they come up. She might be a partner with a traditional firm. She's
been doing search engine marketing for 4-5 years - she founded her Co. as an
LLC about 3 years ago.

They use all different kinds of methods (mostly Pay Per Click), and they're
using everyone from Google to AOL [slide with many SE logos on it].

-The bulk of their revenue comes from running search ad campaigns, in the
form of a management fee, which is a percentage of media.
-They also make money from consulting - asking how their client could do
something differently, improve upon it, etc.
-Education and training - knowledge transfer. This revenue stream is
unique, ideally, because unlike the others, it doesn't require you to take
on more work. However she's still examining the issues around this.

2) Her path from employee to business owner -- How did she get there?

-She saw that the jobs she was doing were getting more and more specific.
So she decided to work for a company that would give her the most
experience/broadest base of exposure for very market specific skills.

-She also was able to capitalize on market opportunities & personal
relationships. First, it became really obvious to her that search engines
were going to take off. She decided to position herself as a search engine
marketing expert. Second, she really leveraged those she already knew, and
many of them now work with her.

-She also took calculated risks.

-She also really learned her business while she was being paid by someone
else first: She learned -- how to put together a client pitch/proposal on
electronic marketing, how to format it, etc. She learned all this by working
as an XOR consultant.

3) Why she took the plunge

-control and flexibility - she wanted to be able to control who she's
working for, when she travels, etc.

-to reap more rewards for her efforts - she wanted a balanced life & to work
less, but it really didn't happen. Because you never end up turning down
work.

-for tax advantages - they had 2 incomes on W2s, and this LLC gave them the
flexibility to decrease their tax liability.

Ask yourself: Do you have the characteristics of a successful entrepreneur?
Read, and educate yourself, and talk to people to find out.

4) What worked - What didn't

[what worked]

-Becoming a consultant first
-Maintaining relationships with employees and clients - when she left, she
had a contact that she could essentially take with her. This meant she had
an immediate revenue stream with no marketing costs - (due to her previous
contacts) This takes less time than being a consultant.
-Focus and refocus the specificity of your niche - rename /reposition
yourself as necessary. This can be tricky, because you feel you might not
get some work, but they decided that if they wanted to broaden their appeal
they had to narrow their focus. This enabled them to keep some really big
clients, because they're viewed as a specialist in their niche. She cited
Time Warner Cable as an example. This specialization also made them less
threatening.

[what didn't work]

-Becoming too dependent on one income source - her example was XOR (as well
all know, the contractor isn't the fist one to get paid, if a company goes
belly up!).
-Sub-contracting prevented us from focusing on our business. If your pipe
is
full, you may not be defining/building/your own business.

5) What keeps them up at night?

-Competition is increasing quickly. The larger traditional agencies are now
getting into their niche - SEO [search engine optimization] companies are
now getting into marketing -

-Costs are rising. It used to be easier to get a good ROI. Now this
channel is looking more like other channels. But [on the positive side]
clients may be more likely to hire an expert.

-How should we choose our clients?

-Is it a scalable business?

-Are we building intrinsic value? (i.e., not quite like proprietary
technology - is it an agency? A lifestyle business? Or value that is
appropriate to sell?)

Planning for the Future:

-Finding the right partners. Example: Search Engine Watch. [They have to
ask themselves] What is it they want to build to be a desirable partner?

-Defining repeatable processes - (in order to scale the business, and to
productize it).

-(How to make $$ while they sleep!)
___________________

Dan - Definition of an entrepreneur: someone who works 16 hours a day for
themselves, in order to avoid working 8 hours a day for someone else.

Dan then introduced the next speaker.

Julian Gallow (julian.gallow@himmelblau.biz), founder of Applied Software
Technology, and Sky Blue Microsystems; Investment Analyst, and former
Executive Director of CTEK Angels. He'll share his perspective on start up
issues.

"The Mysteries of Raising Capital"

Some of this will be repetitive.

WHOM TO APPROACH?

-Family, friends, and fools - idea, concept, product development, market
research - (consider credit cards, personal asset loans, SBA, SBIR [small
business investment research] grants) - if you're prepared to do the
paperwork, they will give it to you! This can go bad - but here in Colorado
three brothers made each other invest together, so they are All in on it and
there is no jealousy.

-Angels (that cruel misnomer) - [these days you] must show some pre-revenue
or acquisition of beachhead customers: small deals. You can't just use
Powerpoint [presentations] anymore. The phrase [Angels] comes from off
Broadway theatre angels, due to the risk. Now they're called business
angels.

-Venture capital - it used to be they'd fund C or smaller deals.
Typically, now [when you pitch], you're already showing strong market
validation, and have a product, and can do large deals. I.e., your
infrastructure should already be in place.

-Mezzanine funds - (and all that jazz) -. To use for new market
penetration, mergers, and acquisitions.

-Banks - provide collateralized loans. Liquidizable assets.

WHAT TO TELL THEM:

-Demonstrate somehow that there's a market opportunity there.
-And show that your technology/product/service/ addresses that market
ell - (mention customer ROI)
-That your marketing and sales strategy will get the product to market
effectively (the one about the mousetrap - and Patricia's example).
-Convince them that the executive team can execute on the plan. [in order to
do that] They must have the necessary qualifications, experiences, and
industry relationships. KNOW the area you're in. Like music, or wellness,
for example.
-The use of funds will disproportionately increase the value of the
ompany - i.e., it'll increase exponentially from 300 to 3 million, not 300
to 300,000.

Ten to twelve percent is not attractive, but 200% growth with 1000% return
is what you want. Mention exit strategy and investor ROI.

WHAT NOT TO TELL THEM:

ALL about the technology [they don't care] - but talk about the business.

VC's AREN'T ANGELS:

VCs - have a fund vs. personal bank acct or assets.
VCS are paid through a fee for managing a fund, vs. Angels having day jobs,
families, and hobbies like golf. So think carefully how you approach them.

VCs fulfill a charter from their Limited Partners, vs. Angels having
investment tastes that will change. See if you're a fit for the VC, and if
you are, play that up. Angels might [and often do] change their investment
"tastes" on a whim.

VCs exist to invest - vs. Angels who choose to invest, or to not invest.

VCs make large, firm - wide decisions, whereas Angels make individual
decisions. You don't need all Angels to agree, just as many as you can have
[in agreement].
____________________________

Panel Questions

Q - if someone in the audience is interested in approaching CTEK Angels,
what should they do?

A - [Julian] - check out the website, assess requirements, all in service of
smoothing the process.

A - [Justin] As a CTEK client, I'd add that it's a process. It depends on
your experience, the type of opportunity you're looking to fund, and I view
the charges involved as anteing up.

Q - what is a business plan?

A - [Julian] - 5 of the 8 [items] I gave above are the chapter headings on
the Business Plan. [he has an] Additional comment on exit strategy -- you
must
be able to get money out. There are good software and consultants out and
about for writing business plans.

[Justin adds] Being in the final stages - it needs to fit. A good business
plan flows from an organic source - you don't just write it to get the
money; that's [the money you make] just the apple on the top.

[Julian adds] he likes to see 600 kb and 16 pages - if you keep it concise,
it means you're clear. If you need 60 pages, you're rambling.

Q - do you see any changes in the categories of funding in the near future?

A - [Julian] the optimist in him says sure, he'd like to see more get
funded. More fools, maybe?

Q - how much control does an Angel investor want and what sort of say do
they have?

A - [Julian] It varies. Some are buying themselves something with their
money, and want control for various reasons. They don't trust you with
their money, or just want to run something.

Q - [Dan] - do you take any Angel money you can get? Or not?

A - [Julian] it depends. You look for someone who brings with them some
experience of the technology, the market, etc. Unless you have an excellent
team you've already worked with before, and can work with them. But be
aware that you have to deal with new personalities.

Q - [to Patricia] in your transition, how did you handle taking customers?
Didn't you have to walk a tightrope?

A -initially, it was very transparent to clients. She had to be very
flexible to be able to do that [walk the tightrope]. The bankruptcy also
made that much easier. She then was able to take many clients direct.

Q - how did you get the word out about your products and did you ever
contemplate using a PR firm?
A - [Justin] he decided product adoption/development cycle wasn't the best
way to go--- so over time, he's done direct mail, direct fulfillment of
packaged
product, he's advertised, he's done trade shows - approached it in all ways
except for PR. He wants to hold off on that until he can state clearly to
the market that he has the preeminent brand in the niche.
______________

Trivia Question: How many years did Justin work for MS?
Answer : 10
______________

Q - how many customers should you have before you approach?

A - ideally, you'd have SOME. No specific number - but the general point is
market validation (i.e., the parameters that went INTO it, is what he's
questioning) - convince the investor that there's a market for this product.
A customer who pays you money is the best demonstration of that.

[Patricia adds] she had 2 great clients who came with her - so she didn't
have to be self funding.

[Julian adds] - he felt like he needed to establish not only market
validation but some value to the company before he started raising capital.

Q - SBA shut down the small business loan part. Will this affect the
market?
(correction - it wasn't funded to the same amount, but it wasn't shut
down).

A - SBA is a great source of funding - but it's a guarantee by the
government to the bank. So it requires the bank to take collateral. So it
looks some like a bank loan. The point is, the amount of money you can get
out of the SBA is not a lot greater than your net worth - so how does that
affect ventures? Well, most folks need more money than their net worth but
can't put their entire net worth at risk.

Q - could you touch on your exit strategy and how it's evolved as business
has grown?

A - [Patricia] they're just starting to think about that right now - it's
only been about a year that she feels she's been out there running a
company.

What is it, do they need it.

[Justin] - it depends on the kind of company you're trying to build. For
his company, which is large, they feel exit strategy is crucial. They're
identifying potential buyers, mergers, etc. One of the companies they've
identified lost 20% market share this year. The point is, the exit strategy
is only as good as the moment in time [in which] you're looking.

[Julian] - exit strategy seen in business plan:

- "either an IPO or an acquisition" But seriously, give the VC examples of
who might buy, and what they might pay. So describe and quantify the
appeal, but as Justin said, it may change immediately. So build a quality
business with great inherent value.
_____________

Trivia Q - This meeting was scheduled for Nov. and was cancelled. Why?
A - High winds.
_____________

Q - what inspirational experience inspired you?

A - [Justin] - Bill Gates, because he worked for him. He has an attic full
of carcasses from which to learn. The thing that distinguishes MS is timing
and execution, on top of the idea itself. It's one thing to have the idea -
but one must create a management structure that allows proper execution.
And MS (and GE) are good examples of best practices of continuing drive
towards excellence in management.

[Julian] - if it's only money, go into investment banking instead. You must
be passionate about it, and go and build it well. The money is the cherry
on top. It's a helluva lot of work to think through stuff. It doesn't just
HAPPEN, like it seemed like it was, in '99.

 

RMIUG (http://www.rmiug.org/) appreciates the sponsorship of
MicroStaff (www.microstaff.com) and ONEWARE (http://www.ONEWARE.com).

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