8Feb

Starting And Selling A Startup

Zach MangumThis is an exciting guest post to have here at Startup Flavor because it is one I’ve watched unfold up close and personal. My friend Zach and I worked together for awhile at Lendio. I saw Zach slowly and organically build his business and then take the risk of quitting a good job at Lendio to pursue his startup full time. I’ve always loved their company and products and I’ve been a regular promoter of both. This is a case of some good guys (Zach, Kevin and team) finishing first — which is just awesome and made my day when I heard that the company was acquired by Infusionsoft last month. For the record, GroSocial is a social media marketing software company based out of Orem, Utah that helps small and medium-sized businesses find new customers through popular social networking sites such as Facebook and Twitter. Zach has provided social media marketing services, technology, and consulting to thousands of businesses worldwide with a particular emphasis and specialty in helping small businesses. I’d recommend you follow Zach on Twitter @zachmangum.

Zach, thanks for sharing your story. I’m sure it will inspire many entrepreneuers as it has inspired me. Way to go, guys.

Starting And Selling A Startup

So many people want to be an entrepreneur. According to a study from the Kauffman Foundation, more than half of young adult Americans want to start a business. Which, to me, makes sense. It’s human nature to want to create. To want to improve the world around us. To influence the way people do things. The ambition in all of us tells us that we can change the world — even if it’s in the smallest of ways.

The steps people take in their journey to change the world via a startup vary. Some missteps create a lot of unnecessary pain and suffering. In an effort to help you avoid some of those missteps, allow me to walk you through a few of the more critical steps of (1) Starting a Company, (2) Raising Money, and (3) Selling a Company.

Starting a Company

Find an Attorney
This is step one (obviously). As simple as it sounds, there are a lot of things to consider once you and your buddy–or whoever you persuade to join you in your entrepreneurial fantasy–officially decide to start a company. If you’re serious about your startup, you need to think about how you legally structure your business. Talk to an attorney that has been around the block working with startups. Form a relationship early on with a rock-solid attorney. Recommendations are helpful in selecting an attorney, but nothing validates those recommendations like time and experience working with a given attorney.

Establish a Vesting Schedule for the Founding Team
Startups are rough. In fact, running a startup kind of bites. You will most likely go months at a time with little-to-no pay. Your friends, spouse, and others close to you will think you’re nuts. You will have people tell you that you should quit. Your thoughts are with your startup more often than they are with the things that really matter in life. It truly consumes you.

These pressures often cause founders to bow out prematurely. You don’t want a cofounder to leave your startup six months in and walk away with a sizable ownership stake (or any ownership stake for that matter). Work with your attorney to create a vesting schedule for each founder — yourself included — to protect yourselves from each other’s potential lack of personal staying power.

Obsess Over Your Product
The best companies have the best products. Apple, Facebook, and Google didn’t create massive companies on second-rate products. It is clear that incredible amounts of time, resources, and planning went in to each and every product. The best marketing is a killer product that people love — so much in fact that they can’t resist telling their friends, colleagues, family, and others about it. While I’m a believer in going to market quickly and in being agile, make sure that your product doesn’t suck! Make it lovable.

Raising Money

Data Sells
Nothing helps an entrepreneur tell a compelling story more than data. Far too often entrepreneurs approach investors with a nearly-completed product that looks pretty solid and a seemingly-logical pitch for why the product will be a big hit — but no data to validate their claims. You don’t need tons of data, but any data you can get your hands on will help you immensely. Fundraising instantly becomes easier when you can tell investors that per 1,000 unique visitors you are able to get 20 free trial accounts with 10-15% of those converting to paying customers. You may only have $5,000 in monthly revenue but at least you’ve got data that tells a compelling story.

Investors Put Their Pants On One Leg At A Time
Pitching investors can be intimidating your first few times doing it. After all, many of these dudes have started their own companies and have hands-on experience successfully doing what you’re trying to do. They’re super smart people, right?

Having pitched dozens of angel investors and venture capitalists there is one thing that I learned early on that has stuck with me. Once I learned this lesson, fundraising became instantly easier: investors put their pants on one leg at a time. In most cases, investors aren’t nearly as smart as they’d like you to think they are. Are many of them good at what they do? Absolutely. Have many of them started and exited their own startups? Yes. Does this make them an expert in your business or industry. Nope.

When pitching investors you need to command attention and speak with extreme confidence. Show them that no one in the room knows more about your business and your industry than you do. Prove to them that you are worth the risk. In many cases, an investor can hate your product but love you and you’ll close the deal. Never, never, never does it work the other way around.

Create A Market
One of your primary objectives in raising capital should be to get as many commitments as possible early on. Investors are sheep. You can go from the typical uninteresting startup that no one will touch to the hottest startup on the block literally overnight with one commitment. Use this dynamic to not only help you raise the full amount of capital you’re seeking, but to help you get the terms you want by creating competition for your deal.

To aide your startup in securing these financial commitments you need to be on AngelList. It’s an incredible resource for startups and one of the best things to ever happen to the angel investing/venture capital industry.

Selling Your Company

Valuation Matters
If you’re fortunate enough to take your startup from your garage to a potential acquisition there are several things that, if you’ve planned properly early on, will make life much easier for you. One of them is valuation planning. Many entrepreneurs believe that when raising capital, giving up less ownership is always a good thing. Not true. Here’s why…

High valuations mean that investors’ dollars buy fewer shares. Investors need great financial returns in order to approve an exit — and yes, if you’ve raised money, your investors have a say in whether or not you’re able to say “yes” when an exit opportunity comes along. If you, through your incredibly awesome pitch, were able to convince investors to invest at an overly-inflated valuation, you’ll find that when opportunities to exit come, you may be required to turn them down because the acquisition price isn’t high enough to meet the required return of your investor(s). Which stinks. Especially if the outcome would have been very financially rewarding to you personally. In short, don’t price yourself out of potentially great outcomes.

Create A Market
Interestingly enough, selling a company is a lot like raising capital. If your startup receives interest or, better yet, an offer, your next step is to create a market. The willingness to pay for a given party is low until that party realizes that there is competition for the item they want (basic economics: if supply is low and demand is high, price goes up). You’d be shocked how many other potential suitors exist for your business if you simply ask partners and others if they’d have interest.

Be Honest
The due diligence process associated with selling a company can be painful and incredibly draining. You will be forced to reveal ugly scars, warts, and bruises. You will be looked at and inspected from every angle. If the acquirer is smart, they will inspect literally everything. If there are skeletons in the closet, they’ll find ‘em. It is absolutely imperative that you own and embrace your company’s weaknesses by being 100% transparent and honest throughout the process. Any fabricated data or misrepresentations will kill your deal before it ever gets legs.

Note that this advice isn’t necessarily universally-applicable to everyone and I do not claim to be an expert simply because I’ve been through the process before. My case was unique. Yours is, too. As you operate your startup, be sure to always be clear in “why” you’re doing what you’re doing.

Changing the way the world works is a tall task — if your motivations for doing so are solid, you just might pull it off.

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About Zach Mangum

  • Steven Wellman

    Great read. I was Launchup last night and he spoke at that. Zach seems like a really good guy with a solid head on his shoulders. So far every time I’ve heard or seen what he’s had to say I’ve really learned a lot. We need more good people like Alex and Zach to help those of us that haven’t made it, hopefully, yet. Thanks for sharing!

    • alex_lawrence

      Zach is a really good guy. Very legit. Your turn next, Steven!

  • http://www.facebook.com/jamesm90 James McDougal

    Always great to hear from those who have been down the road AND sealed the deal. Nice article Zach.

    • alex_lawrence

      Agreed, James. That’s why I asked Zach to write it — because he legitimately lived it.

  • Chloe paver

    Nice article. Thank you

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