Inc.com - Marketing

Dave McClure, the brash-mouthed angel investor and entrepreneur-magnet, shares his lean start-up philosophy and his excitement about female entrepreneurs.

The premier session of South by Southwest's "Lean Startup" track was a frank discussion between Lean Startup guru Eric Ries and Dave McClure, founding partner and "Sith Lord" of investment firm 500 Startups. While the talk covered material fairly similar to what Ries discussed in the October issue of Inc. and his Friday SXSW panel, Inc.com was able to catch up with McClure and discuss his investment strategy, how the lean strategy affects his investments, and his support of female CEOs.

McClure is a magnet for entrepreneurs at SXSW. In navigating the hallways between his panel room and a nearby corridor, he was approached four times by people seeking a moment to do an elevator pitch or ask how to apply to his fund. While I was talking with him he was approached twice more. At least in Austin this week, it seems everyone wants in to funding from his 500 Startups firm.

And lots of companies have obtained that initial funding here. The team of five has invested in more than 250 companies over the past two years. A typical investment is between $25,000 and $100,000. Of the investments, he says, "twenty-five have hit their stride, another 25 to 50 might do so." I asked if he's doing better than other angel investors, and he said: "We have a much different model—we have a larger volume most angels can't match, and we are also willing to do follow on [investments.] Our first level of checking [for potential] may be as poor as other firms but our second or third is better. "

In discussing the lean start-up model on the panel, McClure said, "With seed investments, we're able to test for the entrepreneur's learning behavior quickly…so we're learning about them before we invest further. Lean means shorter cycle time, less money raised, which limits the entrepreneurs time for experimentation." Also, employing his own special breed of VC vernacular, he said: "We can identify if they're doing stupid sh-t and they can fail on a smaller budget."

McClure's investment thesis is revenue model focused. He's looking for transactional, subscription or lead-generation type businesses, or other growth-focused strategies. "An example is 955 Dreams. It is creating an innovative music player for the iPhone and iPad, which has been featured by Apple. It's really a music magazine experience, currently monetized by affiliate revenue, but there are other potential models in the company's future. It has more than 500,000 downloads, with several hundred thousand active users, which is a very good ratio.

Another example is MyGengo from Japan. It is an enterprise-focused cloud based crowdsourcing platform for language translation. Really, it's a very straightforward monetization model. "On both of these investments we have written more than 3 checks each, and we are in for more than $500,000," McClure says.

McClure is also focused on female entrepreneurs. "There are a lots of smart women in the market who don't as much attention as they should—the growth of female entrepreneurs in last 2 years exploding and there is better quality," he says. "We have one of the largest investment portfolios of women. 45 of our CEOs are women and we have over 70 woman co-founders."

In discussing how he advises companies around the lean model, McClure was candid on the panel: "Hate is closer to love than indifference—you can't iterate around indifference, but you can around hate." If customers care enough to hate your product, you can change it, and McClure and Ries agreed that a lack of feedback was a sure sign a company is in trouble.

If you're a start-up looking for an investment from 500 Startups, you'd be well advised to find someone who knows them well. As McClure says: "We have 175 mentors and 400 founders, and those folks help crowd source our deals. Since we only have five investors, we get most of our deals pre-filtered through that network."

Location-based apps are this year's SXSW GroupMe and Twitter. Zaarly and LocalMind are two to put on your radar.

Location-based mobile technology is sweeping through SXSW this year.

Consider two of the hottest apps, Highlight and Glancee, which allow users to search for and browse other users within a nearby radius, similar to how Grindr or the OKCupid app let users find each other nearby. Certainly, there's no dearth of experts predicting that this is going to be a popular new field.

"Highlight and several of its competitors, including Glancee, Kismet, and others, are the apps everyone seems to believe will be game-changers at SXSW this year, much as Twitter, Gowalla, Foursquare, and GroupMe were in the past," noted Daniel Terdiman at CNET.

But this article isn't about Highlight or Glancee. After all, connecting with strangers in public places may be helpful for networking, but it may just be a little too, well, creepy for mainstream adoption. In other words, these ideas are ideal for use at SXSW, but for real, everyday life? It's unclear. They're also not all that helpful for small business. So while early-adopters are fueling today's downloads, it's unclear if the trend is really a trend, or just a flash in the pan.

Instead, let's take a look at two business-friendly apps with proven business models that are gaining serious traction: Zaarly and Localmind, two companies that, in their own way, are attempting to redefine commerce, transactions, and even how the economy works, through location-based mobile technology.

A Social Commerce Revolution

When I sit down with Bo Fishback, the founder and CEO of Zaarly, a social commerce engine that allows users to buy and sell items from people in their neighborhood, he explains Zaarly's (rather simple) business model: The company takes a cut of every transaction. Right now, Zaarly tags a 10 percent fee onto the transaction, but Fishback admits that's subject to change.

Founded just last year, Zaarly has high hopes. The company raised a $15 million round of funding in October, and hired 39 employees within the year. Meg Whitman, the former CEO of eBay and the current CEO of HP, joined as a member of the site's board. And though the app and website have about 300,000 users, its founder believes they'll hit the million mark within the year.

Fishback, who has founded five previous companies and was recently the president of Kauffman Labs, says that Zaarly, and location-based social commerce, is just hitting its boom cycle.

Already, thousands of small businesses have realized the potential to use Zaarly, and Fishback says New York has been a particularly succesful market.

"This isn't a small idea," he tells me. "This could very well be a $50 billion company one day."

Forget Yelp or Google; Go Directly to the Source

Localmind's tagline is "Know what's happening. Now." So say you're at dinner with your friends, and want to have a nightcap at a local bar, but don't know of any bars in the area that have room for a big group. Pop open Localmind, find a user at a bar in the area, and simply ask them, "Hey, is it crowded over there?"

Right now, there's no monetary incentive for the other user to respond, but Lenny Rachitsky, the app's founder and CEO, tells me that "a significant percentage" of its 100,000 users respond to questions. With a reward system similar to that employed by Foursquare, Rachitsky hopes to fundamentally change how recommendation software—like Yelp—connects people to each other.

Localmind raised about $600,000 eight months ago, and plans to raise a second round in the next few months. The company has four employees (and an intern) based in San Francisco, and was founded last year.

"We offer the ability to connect to an event and ask what's happening," says Rachitsky. "In that way, we're like the reverse Twitter: Instead of waiting for someone to tweet at an event or a place, you can directly ask them a question. It solves a problem you have pretty much daily or weekly."

Investors reveal what grabs their attention--and what makes them cringe.

For a certain kind of tech start-up founder, the pitch contest offers a thrill that few other events can deliver: You have only a few terror-filled minutes to successfully demo your product (using shaky wi-fi, no less) in front of a firing line of judges who can—and will—find holes in your idea big enough to drive a truck through.

I've spent the last two days camped out at this year's Launch Festival, a tech start-up competition in San Francisco founded by entrepreneur and investor Jason Calacanis, where more than 40 start-ups competed for more than $1 million in prizes and seed capital.

In between the pitches, I asked investors and judges what it takes to make them sit up and pay attention.

1. The shorter your pitch, the more successful you'll be.

Calacanis claims that after five years of putting together the start-up competition, he's learned that the more quickly founders can articulate their business ideas, the more viable their companies usually are. Your first sentence is critical—state what your company does as clearly as possible. If you nail it, "I start thinking about what's possible to do with you," says AngelPad founder Thomas Korte. "If you don't, I stop listening because I'm trying to figure out what it is you do."

If you're given five minutes, don't practice a five-minute pitch; aim for just over four minutes. "If an investor is looking at you as a manager of an idea, they watch how you behave and how you manage time," says IdeaLab founder Bill Gross, a Silicon Valley tech veteran who picked up a lifetime achievement award at Launch. "Your demo is an indicator of how you'll manage everything else."

2. Identify the problem you're solving.

And don't stop there: How do you know it's a problem? And is it a big enough problem to support your solution as a business? These are all questions you need to answer. Here's where Space Monkey, voted best overall start-up at Launch, made the most compelling pitch. The company framed itself as a cloud storage provider that's cheaper and more secure than everything else on the market. The details of the technology behind it were complex, but the judges immediately understood the value proposition.

3. Pay attention to voice.

This one is a deal breaker at a tech conference: Don't be the one with the slick salesman voice. Oversell your nascent product and you lose credibility real fast. "Be real, be conversational," says Dave McClure, founder of the tech accelerator 500startups.

4. Never, ever use a video to give your pitch.

Start-up competitions are about giving live demos and speaking directly to the judges and the audience, says TechStars founder (and Inc. columnist) David Cohen. The fastest way to turn the judges against you? Skip the tough step of personally pitching your company and rely on a canned video instead. One poor soul learned this the hard way at Launch and took heat from the judges for it.

5. Explain why the heck people should trust you.

This one seems basic but it tripped up a number of start-ups at Launch. Often the entrepreneurs waited until they were grilled by the judges to mention that, oh by the way, their team includes an ex-Google engineer who really knows location-based technology or a former Merrill Lynch finance guy who's the perfect person to launch a beneficiary planning app.

"It's important to show that you have experience in your domain to build audience confidence," says Ryan Swagar, managing partner of venture51, a seed-stage venture firm that sponsored Launch. "Craft short bios that demonstrate to the audience why you and your team are tailor made for the job."

6. Pitch to the decision makers.

Customers want to know why they should use your product or service. Investors want to know how they will make a return. Who's picking the winning start-up: an audience of potential customers, investors, or both? "A number of companies I saw at Launch focused on the product but not about plans to scale," Gross says. The panel of investor judges were quick to nail anyone who didn't articulate some kind of growth strategy.

New research on just how many marketing messages it takes to completely turn off a customer.

Mae West said that too much of a good thing can be wonderful. Obviously Ms. West was never on the receiving end of the avalanche of marketing messages consumers now receive. And now recent research from Upstream and YouGov show just how bad an impression a deluge can make.

According to the 2012 Digital Advertising Attitudes Report, a study of adults 18 and over in the U.S. and U.K., a big percentage of people would stop using a product or service if they received too much advertising for it: 27 percent of those in the U.K. and 20 percent of the U.S. respondents.

It's a "major backlash," according to the study, that badly dovetails with the finding that nearly two-thirds of online consumers in both the U.S. and U.K. already feel that they are targeted by "excessive digital advertising and promotions."

In other words, people increasingly feel stalked and when they feel stalked they want to run in the other direction. That will likely only get worse as mobile marketing to cell phones and tablets begins to gear up. Roughly two-thirds of the people surveyed said they would dislike getting ads on their mobile devices.

The problems of perceived over-targeting doesn't stop with the 20 to 25 percent that say they would stop using a product or service, as you can see in this table:

Two-thirds of consumers say at the very least they would unsubscribe from a brand's promotions if the company delivered too many of them. About 28 percent of people in the U.S. and 37 percent in the U.K. would begin to respond negatively to further marketing from the company in question. One in 10 would take to protesting on social media sites.

This is just an extension of a similar problem in social media marketing. It's not difficult to understand. How often have you become frustrated with email newsletters, promotional tweets, daily deal alerts, and the mountain of marketing messages you receive in a day?

Each company wants to deliver its unique sale pitch and value proposition and with enough frequency that they won't be forgotten. But it's the corporate equivalent of the loudmouth at the cocktail party who won't stop talking. Eventually, people try to avoid eye contact, look for others to speak with, and otherwise do their best to avoid an annoying boor.

There are steps to take. In the U.S., 55 percent of consumers didn't want more than one message a month, although those between the ages of 18 and 24 were open to contact as frequently as once a week. When asked what would make them more likely to respond, 26 percent said marketing tailored to personal interests and 21 percent said that the material would have to be contextually relevant to what they were doing. At the same time, don't depend too heavily on those insights, because consumers could also react badly if they sense whiffs of cyber stalking.

The key is to communicate in moderation—enough to stay in touch, but not so much that your brand becomes the pariah in their inbox. At parties or in business, good taste goes a long way.

Customers buy brands, not products. If you can't articulate the reason for your company's existence, you're going to lose out.

If you're the head of your company, you have to be able to define not just what your company does, but why it does it.

Having difficulty? That's normal. You can blame it on the way your brain works. The part of the brain that contains decision-making and behavior doesn't control language, so when you're asked questions about why you do what you do, it's natural to get tongue-tied.

That's where great leadership comes in. Leaders are required to put in to words what a group does; they're required to cross over between the decision-making and behavior sphere and the language sphere. Leaders are great because they're good at putting feelings into words that we can act upon.

So it's up to you, as company leader, to define your "why." Here are four reasons you should, if you want to survive as a company.

1. Your company's "why" generates loyalty.

Apple can sell phones not simply because they have the smarts to make phones; every single one of their competitors can make phones too. What gives Apple permission to sell products beyond computers is the fact that it doesn't define themselves as a computer company; rather, it is a company that stands for something. It represents an ideal: Down with "the man"; attack the status quo; champion the individual.

As long as Apple's products are consistent with its cause, the company has the freedom to do things other companies cannot. Those who identify with Apple's cause, in turn, will say they "love" Apple--even if they think it's because of the products.

2. Organizational success (or failure) often dates from inception.

Most great companies were founded by a person or small group of people who personally suffered a problem, went through an difficult experience, or had someone close to them face a tricky challenge--and then came up with a solution or alternative. That original solution to that original problem is what they formed their company around; it's why they do what they do.

Organizations that just look to capture some market opportunity, or are born out of some market research, often fail (or else need endless pools of money to keep going). No one has passion for a problem revealed in market research. People have passion to solve their own problems or to help those they care about.

3. Companies get wobbly as their "why" goes fuzzy.

Microsoft used to be a company that believed in helping people be more productive so they could achieve their greatest potential. It's Microsoft's origin story. Look at Windows: Windows was a tool that allowed people to take advantage of this new technology called a personal computer so that each of us could be more productive and achieve our greatest potential. When Microsoft keeps this cause front and center, it is at its best.

Sadly, these days its founding purpose seems to have gone fuzzy; as a result, Microsoft has become just a software company. One iteration defined a cause and a movement; the other is just about products and unique selling propositions and product differentiators. We cared about the former; we just want the best deal from the latter. That's not where you want to be as a company.

4. Customers can't tell you what is most important.

As I've mentioned, the part of the brain that controls behavior and decision-making does not control language. So seemingly simple questions like "What's important to you?" or "What do you need so that you'll buy from us?" are actually hard to answer. Everybody says the same things: I want high quality, I want good service, and I want a lot of features all at a competitive price.

So how come when one product truly is the best, people don't necessarily flock toward it? And why do substandard products sell at all? It's because there are other factors in the decision-making process.

It's not that people are lying; it's just that they tend to answer with what can be easily seen and measured: price, quality, service, features. Riding a Harley just feels good--but a customer will probably tell you he loves his Harley because of the design, the engineering, and so on. To those that buy into Harley-Davidson's cause, the motorcycles are simply better.

So ask yourself: Can you define your "why"? If you don't know why you do what you do, odds are your customers won't either.

Oh, and by the way: Any company that can only compete on those things that can be measured (price, quality, service and features) ... is called a commodity.

This blog is based off on an interview I recently had with Ted.com video sensation and author, Simon Sinek. His book "Start with Why: How Great Leaders Inspire Everyone to Take Action" is not just a commentary on leadership; it extends to brand, culture and customer loyalty. I encourage you to listen to the full 30 minute audio and view Simon's video on Ted.com.

Access to capital is a perennial challenge for most entrepreneurs. Three experts share their advice on raising capital, in good times and bad.

Despite some hopeful signs of a recovering economy, entrepreneurs are still finding it difficult to raise money. A private capital markets survey conducted by Pepperdine University last fall revealed that 50 percent of business owners still can’t get financing.

So how do you make sure that you’re in the other 50 percent--the group that manages to walk away with a check? At Inc.’s annual GrowCo conference in New Orleans, we asked three experts for advice on raising money. Weighing in were Tim Williamson, co-founder of The Idea Village, a local incubator for entrepreneurs; Amith Nagarajan, chairman of Aptify Corp. and an early stage investor; and Amos Winbush, CEO of CyberSynchs, a universal data transfer and synchronization company. Here’s a rundown of the key points they made:

1. Make sure you’re ready. “We’ve had 3,000 entrepreneurs come to us needing money,” says Williamson. “And 99 percent of them were not even ready to get the money." Taking on an investor means you’ll always have pressure to execute. If you’re looking for outside expertise, ask yourself if what you really need is a good accountant, or a lawyer.

2. Bootstrap for as long as possible. “We try to coach people not to give up equity until you need to,” says Williamson. Winbush, for instance, paid employees (who he found on Craig’s List) in equity and ate Ramen Noodles for the first two years of his start-up. Finally, in 2009, he knew that if CyberSynchs was going to grow he’d need outside investment. By that time, he had already created significant value and was able to raise $1.2 million for 6 percent of the company. More recently, he raised a whopping $200 million for 12 percent.

3. Be prepared to hunt. “Everyone is one person away from an investor,” says Williamson. The trick is identifying the connection that will lead you to the capital you need. Go to local meetups and, says Nagarajan, “to local angel groups for advice to help find investors interested in your niche or industry.” He also suggests joining peer groups like EO, where your fellow entrepreneurs may be able to provide valuable connections.

4. Get your ducks in a row. Winbush says that having all your internal processes in order before you seek financing is critically important. That includes not just your finances, but any patents or contracts that are key to your business. “You also need to look at your team’s strengths and weaknesses,” adds Nagarajan. “Know ahead of time if you have any liabilities and be prepared to address them, or they’ll be uncovered for you when you’re not prepared.”

5. Remember that you’re interviewing them, too. “Investors will ask for references,” says Nagarajan,” but you should ask for references, too. You need to learn about their investment style to see if they’re a good fit for you.” Among the questions he says you should ask any potential investor: “How would you define success? What’s your time frame for holding an investment? Who would you put on my board?”

6. Don’t give up. Raising money is a journey and it requires stamina. Be prepared for “no”, but also resolve to keep knocking on doors. “Get a book and write the names of 50 people in it,” suggests Williamson. “Ask every one of them about your idea. It’s a process and it’s tough.” But even in an economy limping toward recovery, it only takes one “yes” to get you off Ramen for good.

Change is never easy, but it's often essential. OtterBox founder and CEO Curt Richardson, found this out the hard way on several early endeavors.

I am the founder and CEO of OtterBox, a Fort Collins, Colo.-based company that makes protective cases for handheld devices. OtterBox celebrated its fourth year on the Inc. 5000 ranking of America’s fastest growing private businesses in 2011, coming in at No. 70. During the three-year period tracked, OtterBox grew revenue by more than 3,000 percent on a base revenue of $5.1 million.

Revenue growth is a concrete and definite measure of what, for many, is considered success. For me it is only the end result of what makes OtterBox successful. People often ask how we’ve achieved exponential growth, and for us it’s simple: adhere to a very specific set of core company values (we call Otter-tude) and be ready to accept change in everything else.

I’m what many would consider a serial entrepreneur—it’s in my DNA. I started or purchased a number of businesses before OtterBox, mostly in the tooling industry. We had successes with these companies, but in the end they just didn’t last. When change was needed, it wasn’t occurring. There was no system for it and, in many ways, I wasn’t allowing it to happen. By recognizing this fundamental weakness—thanks to great minds like Michael Gerber and Peter Drucker—I was more prepared than ever before to launch a business for success.

Today, OtterBox is a leader in protective cases for handheld technology but the company was founded on a very different type of product. The original OtterBox is a waterproof, crushproof container—great for keeping all sorts of personal items safe and dry while in or around the water. It’s a product that I was personally passionate about (passion happens to be one of the OtterBox core values).

While the dry boxes were a hit, the market was somewhat limited. Customers were soon clamoring for tweaks and enhancements: “How about a dry box in which I can actually use the touchscreen on my PDA?” Those first evolutions in the OtterBox product line up were just the outward facing element of the business evolution. Internally, things were evolving too.

In the weeks and months ahead, I hope to give you an overview of the OtterBox core values and how they have steered the company toward success. It hasn’t always been easy. It still isn’t, and I’m certain it never will be. But by keeping Otter-tude as our ‘center-line,’ I know we’ll always get where we want to go.

Did you fantasize about the lifestyle you would have as an entrepreneur? Surprised it hasn't turned out that way? It's not too late to turn things around.

Did you start your own business to have the freedom of being your own boss? Maybe you wanted to provide jobs for others. Did you fantasize about the lifestyle you would have as an entrepreneur?

And what has happened since? Maybe you provide a good living for yourself and your employees, but you work harder and longer than in any job you’ve ever had. Perhaps you feel trapped under the weight of being a “business owner.”

You don’t have to feel that way. You can provide money for yourself, jobs for others, and still have the freedom you hoped for. You just need to know how.

How do you turn your small business into more than just a job?

First, go to work on you business rather than in it.

Think of your business as something apart from yourself, as a world of its own, as a product of your efforts, as a machine designed to fulfill a very specific need, as a mechanism for giving you more life, as a system of interconnecting parts, as something created to satisfy your consumers’ needs, as a solution to somebody else’s problem.

Then ask yourself the following questions:

How can I get my business to work, but without me?

How can I get my people to work, but without my constant interference?

How can I systematize my business in such a way that it could be replicated 5,000 times, so the 5,000th unit would run as smoothly as the first?

How can I own my business, and still be free of it?

How can I spend my time doing the work I love to do rather than the work I have to do?

If you ask yourself these questions, you’ll eventually come face-to-face with the real problem: that you don’t know the answers!

Until you change your perspective about what a business is and how one works, you will never have the answers. The most successful small businesses are built on a repeatable system that others can easily follow. A turn-key system.

The best way to systematize your business is to first do each job yourself. Find the best or preferred way to do each task, and create a system for doing it that way that is easy to follow. Repeat this process for every function of your business until every part is systematized.

Then create a succinct operations manual that is detailed and easy to understand. The goal is that any new person can step into your company, and be up-to-speed very quickly after reading this operations manual.

Once you have your business systematized, you should be able to step back and let your company function the way it is supposed to. Your job, as the business owner, will be to watch it grow.

It will help more start-ups get out of the gate, but after that it's going to be messy.

Yesterday the House passed the Jumpstart our Business Start-ups (or JOBS) Act, in a rare demonstration of bipartisan good feeling. The bill’s wide support (it passed 390 to 23) indicates just how well-loved start-ups are now in the popular imagination.

The idea’s time has come, it seems: Some sort of crowdfunding bill also seems certain to pass the Senate, and President Obama, who called for removing regulatory barriers to capital access for small businesses in his State of the Union Address, is all but certain to sign it into law.

What does the House bill actually do for you?

Basically, it will make it a lot easier for start-ups to raise money and will lower the cost of going public. To get into the specifics:

• It allows you to advertise for equity investors on a crowdfunding site, something you can’t do now without running afoul of a bunch of securities laws.
• You can raise up to $1 million this way from investors putting in no more than $10,000 each, or no more than 10% of their income, whichever is less.
• You can raise up to $2 million if you supply your "crowd" investors with audited financial statements.
• You don’t have to disclose your company’s financial statements until you have more than 1,000 shareholders. Currently, SEC disclosure rules kick in once you hit 500 shareholders.
• It allows you to raise up to $50 million in an iPO without having to comply with the SEC’s full regulatory structure and related fees.

Is all that a good idea?

It’s hard to argue with a law that makes money more available to entrepreneurs. Massachusetts Sen. Scott Brown, who is pushing a similar bill in his chamber, says:

Imagine that the next Steve Jobs being held back by rules from the age of the typewriter. When are we going to give the tools and resources to our job creators? [Crowdfunding] is an innovative way to look outside the box and get up with the times to open up capital markets to new businesses and existing small businesses. It has the potential to be a powerful venture capital model.

But let’s keep things in perspective. Crowdfunding may be innovative and cool, but it’s not necessarily the answer to every start-up’s dream.

Think of it: Partnering with hundreds of unsophisticated small shareholders is a pretty inefficient way to fund a company. It could be an administrative nightmare to qualify all those strangers (are you sure that you’re investing no more than 10% of your income, ma’am?) and keep in touch with them, and as equity investors they do have rights. Their potentially chaotic effect on governance and control might scare off the serious VCs you’ll need to attract in future funding rounds.

And while the democratization of capital formation sounds good as a theory, it will likely be messy in practice. Start-ups won’t be less risky because money is more available—quite the contrary—and so more than a few mom-and-pop investors are going to lose their shirts in crowdfunded start-ups. And let’s face it, not all entrepreneurs raising money from unsophisticated investors are going to use it to elevate humanity. Some percentage are going to use it to elevate their lifestyle before absconding to Belarus.

And if enough small crowdfunders have a bad experience, it won’t be good for anyone—especially entrepreneurs.

Will the act create jobs and help more start-ups succeed?

Probably eventually, but the way there is likely to be messy, too. As Eric Reis and Steve Blank of the Lean Start-up movement have pointed out, and as Cindy Padnos of Illuminate Ventures echoes in her column and Bo Burlingham in his, easy access to capital can sometimes be a start-up’s worst enemy. It can skew incentives and weaken the discipline required to get a company to experiment, fail quickly and discover a winning idea.

Most of all, it will not increase the number of great ideas, or great entrepreneurs. VCs like Mark Suster have long argued that the market’s worst problem right now is not too little cash but too much cash chasing too few good ideas. Adding more dumb money to the market won’t fix that.

Determining the right path for a new business or market begins with a precise examination and prioritization of the target customer.

Are you thinking about building a new business? Unsure of whether you are ready to invest? Not clear on the business model to pursue?

We are facing these questions ourselves as we think about creating a new line of business. In order to convince ourselves that we are ready to invest, the first thing we need to know was, what does a duck look like?

The first major challenge for any company looking to launch or expand its business is to define its target customer. For us, the old saying, “If it walks like a duck and quacks like a duck, then it must be a duck” is our motto.

In our current lines of business, we have a well-tuned sense of our target customers and opportunities, earned by years of experience. For example, if a potential new fee-based consulting client crosses our path, we know exactly what questions to ask in order to prioritize that customer. Those questions include:

• Is the client a C-level executive (ideally, CEO, CFO, COO or CSO) at their company?

• Is the client’s company large enough to support our fee structure?

• Is the client looking for thought leadership, or just extra arms and legs?

• Is the client in a situation that is ripe for us to help? (i.e., is there a sense of urgency and a clearly defined need we can serve?)

And so on. We can predict the odds of a successful, mutually profitable engagement based on the answers to those questions. Furthermore, we communicate those questions widely throughout our firm so that everyone knows what the duck looks like. No sense having the team bringing us rabbits when it’s duck season!

Note, by the way, that no client situation is a perfect “duck.” Every duck has blemishes, some more than others. We tend to find ourselves with many more potential clients and opportunities than we can pursue, so we must be ruthless about prioritizing our time and investment in them. We do ourselves no favors when we get overexcited about a potential client and ignore the blemishes.

As we begin to consider entering a new line of business, we have to challenge ourselves to be just as precise and thoughtful about what our new duck looks like. We are currently building our list of “duck” criteria. As we gain more experience those criteria will undoubtedly change, but it is important to have a solid starting point.

When we are confident in the answer, we will be on our way to building a great case for investment.

What has been your experience in building a business? How well have you defined your “ducks”? Please let us know in the comments below or email us at karlandbill@avondalestrategicpartners.com.

Once your start-up grows to more than 10 people, it's hard to maintain a sense of organizational focus. Here's how we did it at IndieGoGo.

If you run a start-up, you know a whole new definition of "busy." In the time I've been leading the worldwide crowdfunding platform IndieGoGo, I've learned the importance of doing what needs to be done rather than trying to accomplish everything on my to-do list all at once. As Bill Gross, the founder of Idealabs, recently proclaimed at a TEDx event in Southern California, the key is "focus, focus, focus." Now, that's something not too tricky to accomplish as an individual, but what about creating the idea of focus within a fast-growing team of employees?

The goal of my company, IndieGoGo, is to provide a way for anyone to raise money for anything, anywhere in the world. It's working: We have grown from five to 18 employees in the last six months. Along the way, we've learned an important lesson: Once your company is made up of more than 10 people, it is both harder and more important to have everyone on the team "singing the same song." At a start-up, it is important to continually review plans since tactics and personnel can change very quickly and incorrect assumptions can be made.

Meetings Can Be Your Friend

At IndieGoGo, we used to rely on e-mail and periodic meetings or phone calls to make decisions. Given coworkers' busy schedules, it was often difficult to ensure everyone is on the same page. Today we are shifting to a culture of consistency and proactive planning—instead of always reacting. This includes a fluid set of meetings for sharing and decision-making: quarterly board meetings, bi-weekly initiative status gatherings, weekly management talks, and daily team kick-off meetings. I've really come to believe that communicating your core messages clearly (and often!) is the key to keeping everyone on track.

Communicate Your Values Effectively

Keeping your team on track starts with values—the principles that guide an organization's internal conduct as well as its relationship with its stakeholders. This might seem fluffy, but the first step to building a solid infrastructure is setting a strong foundation. Having clear values will help in recruiting, executing project, and when making the tough decisions. As a founder, you also need to ensure your team understands your business model and how to execute against the long-term plans. The plan implemented to generate revenue and make a profit from operations in the start-up world can of course be fluid. Some companies change their models every quarter, while others never even focus on it. Changing directions to accommodate company focus or shifts in your industry happen. Just always maintain a clear understanding of the company's business model. This includes both knowing what the business model is and also what it is not—for example, IndieGoGo's business model is to charge a marketplace fee on transaction volume, not charge consulting fees for one-off development.

Prioritize Goals

Finally, keeping focus requires having a way to prioritize. It is important to let your business decisions and goals drive your priorities—as opposed to listening to the loudest person in the room. If time allows, you can use a criteria model to score each decision. Keep in mind such models are only as good as the input you put in. Do not doubt your instinct.

Consider the points above to be a baseline recipe for setting your team on a path to success. But, of course, all substitutes and creative changes are welcome, based on your team's unique experience or philosophy. Let us know in the comments if you have other tips on communicating and keeping your team focused.

Your company's Facebook pages are about to get a big makeover. Here's how to make sure you're ready for it.

Spent a lot of time learning about and building out your company's existing Facebook page? Oh well: It's pretty much being upended by March 30, whether you like it or not.

Facebook's latest announced round of changes to Pages, the business equivalent of your personal profile page, go live at the end of the month. They remind me of this great quote from Tom Bedecarré, CEO of mega-agency AKQA, at last week's IAB Annual Leadership Meeting: “For clients, Facebook is becoming the Internet," he said. "And for brand marketers, Facebook is the black hole of marketing.”

True enough. And I'm guessing that most of you don't have a mega-agency like AKQA to help you along in the learning/fixing/updating process.

While Facebook extols the virtues of its new timeline-based Pages, I do feel it's important to address the pain these changes will impose upon small and medium-sized businesses. I field weekly inquiries from businesses that don't even know where to start with social networks like Facebook–let alone how to keep up with both the never-ending barrage of new platforms while juggling changes to existing ones.

Complaints & Concerns

If you read up on the concerns of smaller brand Facebook marketers, you'll find comments like "Will the changes never end?" and "How can we recoup dollars spent building out the Facebook Pages we already have?" Others question how to resize images to meet the new standards–new "cover" image at 851 x 315 pixels; profile pictures at 180 x 180 pixels; custom apps at 111 x 74 pixels–or bemoan the change to tabs and the elimination of controlling the default landing page.

There are also rules and restrictions as to how promotional you can be on a landing page you can no longer control. According to Facebook's product guide, for example, cover photos cannot include:

• Price or purchase information, such as “40% off” or “Download it at our website.”
• Contact information–such as a website address, email, mailing address, or information that should go in your Page’s “About” section.
• References to Facebook features or actions, such as “Like” or “Share” or an arrow pointing from the cover photo to any of these features.
• Calls to action, such as “Get it now” or “Tell your friends”.

(The policy also points out that "Covers also must not be false, deceptive or misleading, and must not infringe on third parties’ intellectual property." But I hope you weren't doing that anyway.)

These restrictions–as well as more prominent and now publicly displayed data "Insights"–have caused some in the social media space to postulate that these changes will only help Facebook sell more ads to deliver those calls to action–or to drive traffic to particular custom tab within a Page.

"We made these updates to add more dimension to what's trending and what's hot right now on the page," a Facebook spokeswoman said of the additional data display. She added that it "provides more insight into what's actively happening on the page at that moment in time."

New Features

Those who like Facebook Page changes point to features such as:

• Opportunities to do more rich and visual storytelling–with Milestones to highlight new locations, clients, hires, and happenings
• The ability to "pin" a key post to the top of its Timeline
• Private messaging–which, like Twitter, will now allow brands to communicate privately with their audiences
• Better and easier-to-use admin tools

Need help figuring this out on your own? Visit Facebook's Help Center or download their product guide for new pages. Or hurry over to Facebook's Marketing Classroom for some live help today.

The CEO of Likeable Media shares 3 pearls of wisdom he received as an up-and-coming entrepreneur.

Advice is a funny thing—when we ask for it, we're usually looking for validation for what we're already thinking. Yet good business advice seems to come our way when we're least expecting it. I've been blessed to know great mentors and successful entrepreneurs over the past several years, and here are a few of the pearls of wisdom I've picked up:

Hire slow and fire fast. Having the right people in the right seats on the bus is the single most important aspect of building and running a successful company. In order to do that, you have to be very deliberate about hiring—take as long as it takes to find the right people, especially for senior positions. I've heard of companies taking as long as a year to fill certain positions. If and when a new hire isn't working out, ask yourself if that person is worth holding onto in another position, or if it's time to let go. Keeping the wrong staff does a disservice to your company as well as the staffed; Zappos's famously pays people to quit early on if it's not a good fit. Whatever your method, take your time to board the right people and—lightning fast—get the wrong ones off the bus.

Nail it, then scale it. Echoing the words of Paul Ahlstrom, the author of Nail It, Then Scale It, don't grow before you're ready; get your business model and infrastructure in place first. Many entrepreneurs are too focused on their own vision to listen to the friends and first customers who can truly help mold the product or service into perfection. That said, if you work diligently and intently on the model itself, building it with scalability in mind, the sky's the limit—once you're ready to grow. Think big, but focus small until you've proven that the model works, and can carry out the big vision.

Learn from your first, earn from your second, give back with your third. This doesn't mean that you won't make money on your first start-up. It does mean that we all make lots of mistakes when we do something for the first time, and as long as we learn from our mistakes, there's great take-home value for us. While you may be super excited about the future of your first company, know that there's more in store for you as an entrepreneur. You will have opportunities to earn and to give back, so don't worry about the mistakes you're sure to make along the way. Instead, focus on learning as much as you can now.

Dave Kerpen is the CEO of social media and word of mouth marketing firm Likeable Media, an Inc. 500 company with triple digit revenue growth for four consecutive years, and the author of the New York Times bestseller Likeable Social Media. @davekerpen

Being a young business owner with much older employees to supervise can be awkward. Or not. It depends on how you handle the situation.

As more and more young folks develop start-up dreams and start their own businesses, the inevitable result will be more and more young bosses, many of whom are supervising folks much older and more experienced then themselves. That could be awkward. Or not. But it depends on you.

So how can baby-faced business owners get the best out of their older employees without raising their hackles? It's a delicate problem, but at least there's a lot of great advice out there for those struggling with the issue. The latest addition in this growing genre is a post by Under30CEO outlining 10 ways to manage those older than you. Some tips, like show appreciation and forget about popularity in favor of focusing on what's best for the company, apply to all generations really, but others are more useful for this specific challenge. For example:

Consider a Double Mentorship. Depending on age, some of your employees may benefit from being taught about new technology or trends. You also may be able to learn from the experience of one of your seasoned employees in one way or another. Exchanging mentorship may be a great way to connect with employees and share skills.

Don’t be Intimidated. Although you may be young, there’s a reason you’re at the top level in the company, and every employee who works for the company needs to understand and accept that and give you the respect that you deserve. Don’t be intimidated, you rock at your job!

Under30CEO is far from the only resource to offer advice, however. The American Express OPEN Forum blog has its own run-down of tips for young managers, including its own admonition not to be intimidated and recommendation to start a mentorship program, but the post by Mamta Badkar also offers a few fresh ideas:

Understand differences in lifestyle. If they're excellent employees but have to go home to their family instead of a happy hour, cut them some slack. Try reorganizing social events to be inclusive.

Know what motivates them. They may prefer better benefits over small bonuses, or they may want flexible hours. Keep it realistic and try and see where you can match the company's and employees expectations.

Or if you're looking for a deeper dive there's a whole book on the subject by Peter Cappelli, director of Wharton's Center for Human Resources, entitled Managing the Older Worker: How to Prepare for the New Organizational Order. To get a sense of whether it might be for you, check out this short video interview with Cappelli, explaining how not to be that nightmare younger boss.

Do you have any other tips to help young bosses avoid being nightmare managers?

Connections can be an entrepreneur's greatest resource. At a pre-SXSW event, Inc. caught up with Startup America and Endeavor about about start-up mentorship.

Over 60 entrepreneurs attended a pre-South by Southwest (SXSW) event Wednesday called the Entrepreneur's Unconferencence. The gathering of global entrepreneurs, hosted by Dell, was an unformatted event; The participants created the agenda, made panels on issues that affect their business, and shared best practices with their peers. Though the sessions were active and engaging, the highlight of this event was learning about the work of two organizations that support the work of entrepreneurs, Startup America and Endeavor Global.

Let's start with Endeavor. It's a program that finds promising pockets of entrepreneurs around the world, and selects mentors to accelerate the growth of their start-ups. David Assael and David Basulto, who co-founded a global architectural news site called Arch Daily, have first hand knowledge of working with Endeavor.

When the two Davids started in 2008, they quickly gained a following of architects in their native Chile. Assael, an architect himself, said: "Many architect's look for inspiration, materials, and resources for their projects. We let architects upload their pictures, blueprints, materials lists and information about great projects they've done. One architect told us his coverage on our site led to 14 magazine articles and changed his business."

Arch Daily's unique model lead to rapid growth; it soon expanded into the US market, and a further to Brazil.

"We didn't have a business background, we're architects," said Assael. "Endeavor helped mentor us, and gave us the help to dream big. They connected us to people, meetings and feedback from people who have run large companies. People from countries like ours don't always have references for creating startups, so we need to learn to dream." Today, the two are now running a 60-person firm with offices in Sao Paulo, Santiago, and New York City, reaching over 500,000 architects per month.

And then there's Startup America. CEO Scott Case gave me an update on their year of growth. "Since last year's SXSW conference, we've focused on more clearly defining who we help – companies in their first five years run by the founders," he said. "We try to connect them with the community of other entrepreneurs around them, and connect them to serial entrepreneurs at the local level."

Case reports that Startup America has obtained commitments for over $1 billion in in-kind services, connected with 6,000 start-ups covering every state and territory, and has started a webinar-based experts series.

It is encouraging to see these kinds of connections for startups, both in the U.S. and abroad. This is just the beginning of a huge influx of start-up companies and resources descending on Austin, Texas for SXSW, and we'll be bringing you coverage each day from the conference.

Gorging on capital can be the worst thing for your start-up's health. Here's why.

Which do you think is a better predictor of your company’s future? To have such a great concept that investors throw $400 million at you to bring it to life? Or to face enough skepticism that you can squeeze out just $9 million over multiple rounds of funding?

Okay, you knew it was a trick question, but the facts are pretty surprising. History shows that capital efficiency—raising no more than you need—has been a better indicator of success than capital access. Apple raised just $9 million in venture money, Cisco just $3 million. YouTube raised just $15 million in total and was acquired for $1.7 billion. WebVan, on the other hand, was the company that raised over $400 million. It was out of business within four years.

Obviously, how much capital you need depends on the type of company you are building and the stage of your company’s lifecycle. My venture capital firm focuses on high-growth companies that plan to complete globally and need outside funding to maximize growth in their early years. But it pays to be capital efficient no matter what kind of company you run, for a couple reasons:

1. It keeps things real.

Raising smaller amounts tends to keep your options open and your investors’ expectations reasonable. With less money in the bank, you won't be under pressure to ramp up hiring or shoot for a pedal-to-the-medal growth rate. Your investors won’t be pushing for a possibly premature exit.

Research from the Startup Genome Project shows, in fact, that 74% of tech startups fail because they try to scale too soon—essentially, they apply large amounts of capital to grow their businesses before they really know if the business makes sense. The pressure from excess capital can tempt entrepreneurs to shortchange research on customer demand or market requirements and leap on a single false positive signal. Once a large influx of capital comes into company, it’s hard to take the time to develop a deep understanding of customer or user needs.

2. You need far less money than you once did, anyway.

New technologies, such as pay-as-you-go cloud computing and open source software, make it much cheaper to start a high-growth business with small amounts of capital. Today it may take as little as as $50,000 - $250,000 to build an initial cloud-based product, though it will certainly require much more over time to scale globally.

3. Less capital means you need only small wins to keep everyone happy. And small wins are easier.

If you can make progress with a small amount of capital, you are more likely to a) not need more capital, which preserves more ownership for you; or b) if you do need future rounds, investors are more likely to give you a higher valuation. Your initial milestones might include product development goals, such as the beta release or a public launch, or business development goals, such as gaining initial customers or a critical distribution partner. These can be compelling proof points for future investors.

Within my own portfolio, for example, the Hoopla Software founding team gained over three dozen paying customers from their angel financed efforts before seeking the first institutional round of investment. An ability to execute well against a plan is exactly what our firm looks for in a founding team.

4. That said, give yourself a cushion

Yes, you should be as capital-efficient as possible, but you also need enough money to ensure your survival if everything doesn’t go as planned – because it never does. At a minimum, you should seek enough to cover an extra quarter of expenses beyond your budget. There are just too many things that you don’t control.

Back in the late 1990s, when I was a founder/CEO myself, I learned this the hard way. I had accepted a term sheet that was due to close in 30 days. In the interim, I realized that my VP of Engineering just wasn’t the right person for the job. Talented engineers were hard to come by at that time, and this decision scared by investors, who delayed the financing while I looked for a replacement. The search took 60 days; Had I not been able to temporarily finance the company from existing capital, my company might have had a very short story to tell.

My experience as a founder, CEO, and VC has taught me the wisdom of running lean. Raise just enough to get yourself to attainable milestones and to cover the unexpected. Raising more won’t help. It might even hurt.

Business owners sometimes make these common revenue-killing mistakes. Make sure you know how to steer clear.

Want to make sure that everyone on your sales team is ready to jump ship for your competition? Implement one of these all-too-common sales management "strategies."

1. Keep them uninformed. Update your website without telling the sales team, so that the customers can tell them what’s new in your product set.

2. Undercut their prices. Offer a better price to customers on your website than the sales team can offer directly to face-to-face customers.

3. Overstaff the team. Hire more sales reps than your likely level of sales can support–and have all of them compete for the same business.

4. Play favorites. Save all the best leads for the top rep. Then send the lousy leads to the rest of the team, just in case they get lucky.

5. Under-equip the team. Fail to provide your sales team with sample products–especially if demonstrating those products is necessary to closing a sale.

6. Over-market your brand. Spend big money on marketing campaigns that have no tie-in to the products that the sales team must actually sell.

• Read more: Why Sales Hates Marketing

7. Raise unreasonable expectations. Encourage the sales team to sell a product, even though it is currently unavailable or on back-order indefinitely.

8. Let 'em fly blind. Set an ambitious sales target or quota, but fail to devise or communicate a sales strategy that will make it achievable.

9. Reward unrealistic enthusiasm. Openly praise sales reps who set unachievable targets while demeaning reps who set practical ones.

10. Create speed bumps. Devise an incomprehensible compensation plan, and then make the sales rep figure it out in order to get paid.

11. Bait and switch, version 1. After hiring a sales rep, change the compensation plan in a way that drastically reduces the commissions that are actually paid.

12. Bait and switch, version 2. Have the sales rep build up business in a big account then declare it a ‘house account’ that doesn’t pay a commission.

13. Change your mind. Often. Change your target market every few weeks, thereby rendering useless any progress made toward the former target.

14. Hang 'em out to dry. Release products that aren’t sufficiently debugged or field-worthy, and leave the sales team to take the heat from angry customers.

15. Fail to provide support, version 1. Release a new product but provide the team with no case histories or product-specific tools and training.

16. Fail to provide support, version 2. Don't do any market research, thereby leaving the team to figure out how to fight off competitors.

17: Demand busywork. Overload the team with administrative work and CRM tools that consume time that could be better spent selling.

Readers: Any other ways to mismanage a sales team come to mind?

If you found this post helpful, click one of the "like" buttons or sign up for the free Sales Source "insider" newsletter.

The Lean Startup; Amber Case, co-founder of Geoloqui.com; Reid Hoffman, founder of LinkedIn; Ben Silbermann, founder of Pinterest.'>

SXSW Interactive is one of the biggest tech and start-up conferences of the year. It's also overwhelming. Here are our must-see sessions.

If you're anything like us, you're incredibly excited for South By Southwest, but you're also a bit overwhelmed. The Interactive portion of the conference, which runs March 9 to March 13, features hundreds of sessions, thousands of speakers, and tons of shows, company announcements, start-up competitions, launches, lunches, and the occassional brisket breakfast taco.

There's so much to do at SXSW that no matter how outstanding your planning skills are, there's no way you're going to be able to catch everything. It's not uncommon for VCs and entrepreneurs to use SXSW as a backdrop for business deals or publicity stunts, and just stay away from the convention center—where the festival's keynote speeches and headline panels are held—altogether. But we at Inc.com really like SXSW's breed of thought leadership—and think if you're going to Austin, you should make a real effort to soak in some of the smart stuff. Here, we've distilled five of the official events you really shouldn't miss. Now, by no means is this list complete. The full schedule can be found here, so check it out, and weigh in below on what you think we've missed. And check back throughout the weekend at Inc.com/SXSW for updates.

1. Amber Case (Sunday, March 11, 2 p.m.) Case, who is a co-founder of Geoloqi.com, and one of the 2012's SXSW keynote speakers, will present her speech on the "Ambient Location and the Future of the Interface," a must-see for any software engineer, Web start-up CEO, or really anyone interested in how people interact—and will interact in the future—online. She also has one of the coolest job descriptions we've ever heard: cyborg anthropologist.

2. Eric Ries (Friday, March 9, 5 p.m.) Ries, the author of The Lean Startup, will explain "the new science of entrepreneurship," with insights gleaned from his best-selling book. "The Lean Startup approach fosters companies that are both more capital efficient and that leverage human creativity more effectively. Inspired by lessons from lean manufacturing, it relies on "validated learning," rapid scientific experimentation, as well as a number of counterintuitive practices that shorten product development cycles, measure actual progress without resorting to vanity metrics, and learn what customers really want." Ries shared his scientific method for launching profitable companies with Inc. magazine in our October issue.

3. Ben Casnocha & Reid Hoffman (Saturday, March 10, 11 a.m.) Hoffman, the founder of LinkedIn, and Casnocha, an author and entrepreneur, will present "a new blueprint for managing your career." The two wil discuss some the "best practices of some of the most successful start-ups on the planet (such as PayPal and LinkedIn), and how these strategies can be applied to your career -- no matter your industry or job function."

4. Billy Chasen, Jesse Kirshbaum, Seth Goldstein (Tuesday, March 13, 12:30 p.m.) Chasen and Goldstein founded Turntable.fm, one of the hottest music start-ups on the scene today, while Kirshbaum founded Sound Ctrl, an event platform for music and digital media. The three will discuss the future of the "social music experience" and running a successful start-up.

5. Ben Silbermann (Tuesday, March 13, 11 a.m.) Silbermann, the founder of Pinterest, which has seen explosive growth in the last year, will explain how he became the guy behind the fastest-growing social media service on the Web in a Q&A with entrepreneur/investor/blogger Chris Dixon. Silbermann rarely does interviews, so ready your Twitter thumbs: this is a sesion where anyone could break some news.

Bonus: Check out actor Rainn Wilson (The Office) on Saturday, March 10. Wilson, you may not have known, is also an entrepreneur. He founded SoulPancake with his son, and though we're not exactly sure what his speech will be about (something about "art, philosophy, creativity, and spirituality," and helping people "explore what it is to be a human") we're sure it will be a happy diversion.