Tuesday, November 15, 2011

Richard Branson on How to Avoid Common Startup Mistakes

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BY Richard Branson

Editor's Note: Entrepreneur Richard Branson regularly shares his business experience and advice with readers. What follows is the latest edited round of insightful responses. …

Q: What are some of the most common mistakes entrepreneurs make when starting out? -- John Gachiri

A: Making mistakes is part of the process of building a company; quickly recovering from them is what's most important. …

But your way forward is not entirely uncharted: When you notice an opportunity that has never occurred to anyone else, there are certain steps to turning your vision into reality. You must formulate an innovative business plan, find funding, hire the right people to carry out the plan, and then step back from your role in the business at exactly the right moment.

Step 1: Stay on Target
A mistake often associated with the first step is signaled by an entrepreneur's inability to clearly and concisely convey his idea. You have to be able to generate buy-in from investors, partners and potential employees, so nail down your "elevator speech" -- what you would say if you ran into an important potential investor in an elevator. Try using a Twitter-like template to refine the essence of your concept into just 140 characters. Once you've done that, expand your message to a maximum of 500 characters. Remember, the shorter your pitch is, the clearer it will be.

An associated error is lack of focus. ... Clearly define your goals and strategies, then establish a timeline. Don't let the other possibilities or hazy dreams distract you from achieving your goal.
Getting too far ahead of yourself is also dangerous. If your product or service is still on the drawing board, don't get sidetracked by plans for future versions. As a general guideline, looking two or three years ahead is best, but the nature of your business and feedback from your investors will help you determine just how far ahead you should plan.

Be flexible, because just as lack of planning can be a problem, adhering blindly to your plan is a surefire way to steer your company off a cliff. A successful entrepreneur will constantly adjust course without losing sight of the final destination.

Step 2: Be Realistic About Costs
Don't shortchange your start-up when estimating the funds you will require -- you'll just diminish your chances of success. Keeping your expenses under control is vital, but don't confuse capitalization with costs. …

Step 3: Hire the People You Need, Not the People You Like
As tempting as it may be to staff your new business with friends and relatives, this is likely to be a serious mistake. If they don't work out, asking them to leave will be very tough.

When Virgin starts any new business, we always hire a core team of smart people who already know the industry and its inherent risks. … One of your goals should be to find a manager who truly shares your vision, and to whom you can someday confidently hand the reins so that you can carry out the next step.

Step 4: Know When to Say Goodbye
A great entrepreneur knows when the time has come to leave the CEO role. It's seldom easy, but it has to be done: few entrepreneurs make great managers. …

Stepping back doesn't mean turning your back on your business. …

Image representing Google as depicted in Crunc...Image via CrunchBaseImage representing Larry Page as depicted in C...Image via CrunchBaseFounders shouldn't hesitate to re-insert themselves into their businesses when necessary -- look at Larry Page, who temporarily returned to the CEO role at Google in April. That said, I had to laugh when I heard this news, wondering how many managers at Virgin businesses had thought, "Wow, I hope this doesn't give Richard any ideas."
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FAQ: What the new U.S. crowdfunding bill means for entrepreneurs

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Image via CrunchBase

Scott Edward Walker is the founder and CEO of Walker Corporate Law Group, PLLC, a law firm specializing in the representation of entrepreneurs.

Last week, the U.S. House of Representatives passed a crowdfunding bill that will allow startups to offer and sell securities via crowdfunding sites and social networks. If passed by the Senate and signed off by the President, the bill will become a law, giving entrepreneurs new options for raising money for their companies. …
What is crowdfunding?
As the term suggests, crowdfunding is funding from a crowd of people; that is, many people provide small amounts of money to finance something. Crowdfunding has its roots in charitable causes, including the advent of microfinancing …
Can startups use crowdfunding now?
Under current laws, startups may not sell stock or other securities through crowdfunding sites or social networks… They may, however, accept donations.
This is because of applicable federal securities laws ... The laws include the following:
  • A prohibition against “general solicitation” — which means that a company may not offer or sell securities unless there is a substantive, pre-existing relationship between the company (or a person acting on its behalf) and the prospective investor. (See “Can I Raise Money For My Startup Via Twitter?”)
  • Disclosure and state law compliance requirements if the investors are not “accredited investors” — which usually makes the offering too costly and onerous. (See “Ask the attorney — securities laws.”)
  • A requirement that any intermediaries (including websites) must be registered with the SEC as a “broker-dealer” in order to legally accept any transaction-based compensation in connection with the sale of securities. (See “Finder keepers could be losers, weepers”).
What will the new crowdfunding bill do?
Basically, if this new crowdfunding bill becomes a law, all of the foregoing prohibitions and requirements will be lifted, and a startup will be able to sell securities through crowdfunding sites like Kickstarter, or social networks like Twitter or Facebook, so long as the company (and its intermediary, if applicable) comply with the bill. According to the bill, the company will have to meet these key provisions:
  • The company may only raise a maximum of $1 million, or $2 million if the company provides potential investors with audited financial statements.
  • Each investor is limited to investing an amount equal to the lesser of (i) $10,000 or (ii) 10% of his or her annual income.
  • The issuer or the intermediary, if applicable, must take a number of steps to limit the risk to investors, including (i) warning them of the speculative nature of the investment and the limitations on resale, (ii) requiring them to answer questions demonstrating their understanding of the risks, and (iii) providing notice to the SEC of the offering, including certain prescribed information.
Are there any downsides to crowdfunding for startups?
Yes, there are several key downsides that you need to be aware of before jumping into crowdfunding.
First, startups must understand that minority stockholders have certain significant rights under state law, including voting rights, the right to inspect the company’s books and records, the right to bring a derivative claim on behalf of the company, and certain protections against oppression by the controlling stockholders. …
Second, having hundreds of stockholders is an administrative nightmare and will be time-consuming and costly. …
Third, startups will likely have difficulty raising funds from VCs and other sophisticated investors if they have hundreds of unsophisticated stockholders. …
What’s next?
Now we wait for the U.S. Senate, … The White House supports the House bill, so upon reconciliation, it will be signed into law. Then entrepreneurs will have a new option to consider when raising money for their startup.

About the Author, Scott Edward Walker

Scott Edward Walker is the founder and CEO of Walker Corporate Law Group, PLLC, a boutique corporate law firm specializing in the representation of entrepreneurs. Scott has 15+ years of broad corporate law experience, including nearly eight years at two prominent New York City law firms. He has built a strong team of lawyers, with offices in Los Angeles, San Francisco and Washington, D.C. You can follow him on Twitter as @ScottEdWalker or check out his blog.
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