Elana Fine, managing director of the Dingman Center for Entrepreneurship at the University of Maryland’s Robert H. Smith School of Business, took questions from readers last week with special guest Kevin Lenane, an entrepreneur who leads video indexing company Veenome. Here are excerpts from their online conversation.
Q.: Veenome exists solely to be acquired, having never made a profit. What do you think of the practice today of creating companies knowing full well you have a three-year window to be bought out or shuttered?
Kevin Lenane: Nice aggressive opening statement! However your information is inaccurate as Veenome is a [business-to-business] company and our key performance metric, so to speak, is revenue. We do not exist solely to be acquired, and in fact have been turning revenue for almost nine months. At some point this summer we will turn profitable and be well into the six-figure revenue range per month.
But on to your actual question. I think the practice of building a company solely to be acquired is tough because an acquisition is based on a moment. It’s too hard to predict these point events — people try to, but it’s not practical. I would say that if you are keeping a specific acquisition in mind as you create a company and raise money, you drastically raise your odds of running out of money because you haven’t built a business that can last.
Elana Fine: I’m going to go with Kevin on this one. I think the “watched pot doesn’t boil” cliche applies here. If you spend all your time thinking about the acquisition, you won’t ever grow a customer base or create value for the acquirer. That being said, there are some technology companies where once the technology is built, it doesn’t make sense to scale a larger manufacturing and sales organization and the founders might look to exit before they even start to build a business.
Q.: I have a full-time job with a fixed income and benefits. If I start my own business ... I have an idea of what I can charge clients, but no guarantee the pipeline will be as full as I would need it to be. I don’t really know all of the potential expenses. How can I compare a known income with a potential income?
Elana Fine: The best thing to do is to talk to others in the field to understand the start-up expenses, customer acquisition costs and sales cycle. Next start talking to customers — would they pay for your services? How much? How often? See if you can do a few pilot engagements while you still have a paycheck.
Q.: I am considering crowdfunding my new start-up. Any risks?
Elana Fine: Crowdfunding has pros — great access to larger pool of capital, visibility for your start-up, etc. However, it will be interesting to see how the baton passes when start-ups go to raise follow-on capital. Often it gets hard to chase down investors.
Kevin Lenane: I think crowdfunding works really well for hardware start-ups right now. If you want to demonstrate traction on product sales before a product is built, there is no better way to do it than Kickstarter. I think generally crowdfunding like Crowdfunder.com is really exciting too, but those platforms aren’t quite fully laid out yet. If I were a software entrepreneur and wanted to use crowdfunding, I’d consider using it as soon as the first platforms launch before the bad actors get on there.
I think the risks are basically uneducated investors feeling like they’ve been “burned” and not understanding the incredible riskiness of the start-up investment market.
Elana Fine: Kevin, what has been most surprising about running your own start-up? What was harder than you expected?
Kevin Lenane: I’m surprised at the impact that being a founder has had on my energy/attention. If you are really in it for the long haul, you can’t put your business away when you get home, go on vacation, go on a bike ride, etc. It’s always in a lobe somewhere — and this effect on your energy is pretty major. If you believe in what you are doing, though, it is tolerable. I honestly can’t imagine doing a start-up that I didn’t believe in — think the psychological impact of that would be very severe.
Q.: I met an investor who was interested in my product. We’ve had three meetings since my initial pitch, but I can’t seem to get him to commit. What are some tactics I can use for “closing the deal” with investors?
Elana Fine: Sometimes investors feel bad about saying “no.” I can’t really explain this phenomenon, must be how they get the “angel” title. Think of this like a sales process — at some point you need to ask for an answer. If there is hesitation, find out what information the investor still needs to know or if they want to wait for additional milestones. Don’t spend too much time unless they give you some specific metrics for follow up. It is like that movie “He’s Just Not That Into You.” If they don’t call, e-mail, tweet back then the timing/fit is probably not right.
Kevin Lenane: I’d also say if you think you will probably get a no — don’t pursue the discussion any further. An investor is more likely to come back after six months of waiting then reverse their no. Use your intuition and if you think it’s a no after five unanswered e-mails, wait it out and swing back when you have more traction.
Q.: As someone who is so connected to the start-up scene, you must have insight into recently launched start-ups. What are some of your favorite up and coming start-ups? What do you look for?
Kevin Lenane: Oh, there are a couple new ones that I love:
Atlas Wristband — it’s like Fitbit for every other exercise besides walking. The prototype is pretty incredible and can tell you how many push-ups you are doing or how you swing a golf club. A group of recent Hopkins engineers built it and are raising seed now.
TrackMaven — Allen Gannett’s new company that helps track competitors.
Both are answering such a clear need.