Elana Fine, the managing director at the Dingman Center for Entrepreneurship at the University of Maryland’s Robert H. Smith School of Business, took questions from readers last week. Here are excerpts, lightly edited for grammar and clarity.
Q. Beyond the number of users I have, how can I prove to investors that people will really use my product?
Elana Fine: Walk investors through the entire customer process — how did the user hear about you? How did they first engage? How often have they returned? How much revenue did you generate? How did they use the product (and was it how you first intended)? What kind of feedback did they give you.? Did they need customer support? Also explain how the characteristics/demographics of your current users represent other likely users. The equation most investors want to understand is: Lifetime value of customer minus customer acquisition cost is greater than zero (and a lot greater).
Q. I see so many companies with business names that don’t mean anything or have nothing to do with what the company actually does. Are people just trying too hard? Do you have guidance on what makes for a good name for a start-up?
Fine: Names vary depending on whether you are business-to-business or business-to-customer. If you are selling to enterprises, they care less about your name and more about your product. The easier it is to understand what you do, the easier it may be to get to the right contacts. When selling to consumers, your name is much more part of the brand you are trying to build, so you might need to be a little more unique and sexy. That being said — yes — sometimes people do try too hard to be cute and witty, and the name they choose just ends up being confusing. Like everything, test your name with customers before paying for logos and trademarks.
There can be a fine line between luck or instinct. If Facebook had called itself Twitter — would it have been as successful or did the fact that a “facebook” meant something to students help early adopters understand the product?
Q.I am considering an advisory board, and giving members small equity stakes. Will this keep them motivated? My board will likely be three people working probably five hours or less per month (bouncing ideas; strategic development; networking).
Fine: Equity is a great way to incentivize new employees or advisers. I think they will appreciate your acknowledgment of the value of their time and expertise. However, like other equity grants, I’d suggest that they vest over time. You don’t want to grant the equity, only to find that an adviser is less motivated after you make the grant. I know that is expecting the worse — but you have to make sure to keep all incentives aligned.
Q. I built my software application and it’s in beta testing — now I want to build a stellar management team. I have two candidates in mind, and they’ve expressed interest (one to run sales/marketing and one to lead future research and development efforts). Do you have advice on how to think about sharing ownership with these first two senior teammates?
Fine: I’d start with the percent of shares you want to allocate for a management team. You have a number of options — including options. Meaning, you don’t have to immediately grant shares, but could grant options in the company, similar to a public company, but the value is much riskier. You could also grant restricted stock that vests over time. Typical management pools can be 10-15 percent — 1 percent for key hires and maybe 0.5 percent for other members. Definitely get advice because they all have different tax implications for the employee.
Q. I am looking for funding for my start-up, but I don’t feel comfortable pitching to angel investors. I know the business like the back of my hand, but I’ve learned that I’m not the best at effectively selling it. What are some other routes I can take to secure funding?
Fine: I only have one piece of advice — get comfortable selling it. Investors — especially early stage — are investing in you as the Chief of Everything, including head of sales. No one but you can do a better job selling others on your vision and plan to execute.
That being said, pitching your business doesn’t have to mean standing up in front of bunch of sharks. There are a lot of investors that prefer one-on-one meetings. Or look to AngelList and other crowdfunding sites.
Q. I am opening a business next season in the outdoor pest control industry. We have a few competitors in our market area now. My question is: How can we differentiate our company vs. just blasting a marketing campaign like everyone else does?
Fine: I’d probably flip that question right back at you — how do you differentiate yourself? Is it on price? Is it on breadth of services? Do you have a solution to get the gnats out of my front yard — if so please call me! Do you have a specific target customer? Are you organic? I don’t think a blast marketing campaign is worth it, if you have a specific target in mind. If you do want to blast — run tests to see what kind of mass marketing works best for you. Is it online ads? Is it painting your truck with the name of your company? Is it painting your truck a funny color? Is it fliers in mailboxes?
Q. What do you think about pros and cons of accelerator programs that want a significant chunk of equity for small amount of money, plus the promise of mentoring and networking?
Fine: I don’t have a specific formula — but think about whether they really are going to accelerate your company in a short period of time. There is a time value of money that comes to play (dusting off my MBA here). The idea of an accelerator is that it is worth the equity because in three months you will accelerate more than just cash alone. If you can get similar resources elsewhere, even if it takes a little longer, it might not be worth it. However, if there are connections and advisers that will help you generate sales or find new customers and help you exploit a small window of time to beat competitors to market, you might have given away a slice of a much bigger pie.
Talk to companies that have graduated from the accelerator you are considering — they will likely be pretty candid about whether the investment paid off.
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