Have you caught the start-up bug in your encore career? You wouldn’t be alone. According to a recent Gallup study, people over 50 represent one of the fastest-growing groups of entrepreneurs in the United States.
As successful, well connected, and smart individuals, many boomers (and YourEncore experts) are approached by start-ups asking for their time, money, and expertise. But how can you pick the winners from losers?
The right decision can be both financially and professionally rewarding. The wrong decision can cost you time, money, and aggravation.
I have spent many years working with entrepreneurs, helping start-ups raise capital and build their teams. Before taking the plunge, I recommend you have these three questions in mind during all of your conversations with the founder of a pre-funded startup:
QUESTION #1: Does the Founder View His Idea Currently as a Shiny Marble or Is It Already the Size of a Basketball?
I could also compare “an idea” and “a company with millions in sales,” but the marble/basketball metaphor provides a better visual.
Have you ever met a founder who thought his company had a pre-funding value far exceeding the norm? In most cases, he is looking at the idea already as the size of a basketball, and almost never was it ever a marble.
These founders already see the world as if their startup succeeded and may very well be under-appreciating the effort it will take to get there.
A founder who has a realistic view of where they are in the start-up process, I believe, is vitally important. It sets the right expectation for the founder and all who get involved. This is also a strong signal, based on my experience with entrepreneurs, that he understands the journey.
ASK YOURSELF: After speaking with a founder, what is his view of his new startup, today? If he simply has an idea, does he have a current healthy appreciation of it being just a shiny marble? If yes to both, then proceed to the second question – The David Statue Question!
QUESTION #2: Does the Founder See the “David Statue” and “Its Original Marble Block” at the Same Time?
What do the David Statue and the marble block have to do with entrepreneurial endeavors?
It’s a useful metaphor in the context that Michelangelo clearly saw his David in the giant piece of marble before he started. A founder also needs this chutzpah.
He has to believe this vision will happen (i.e. a very successful company with products/services and customers). Starting a company is as daunting as taking the first chisel to stone. Michaelangelo, as a founder, had to have the guts to think big and audaciously.
As an aside: If the founder doesn’t see this vision for his company, you may need to ask – why not?
At the same time, when the founder acknowledges that his idea starts as a marble block, he is grounded in everything he does. He recognizes the challenges ahead and the thousands of chisels that will be required to sculpt his statue. It may be “there,” but without proper effort, planning and time-consuming craftsmanship, it will never happen. These chisels represent the team he signs up, their sweat via hard work, funding raised, multiple minimal viable products, luck, focus, planning and timing.
When the founder sees both the marble block and the statue, the founder should have a healthy appreciation of the future efforts by all involved.
ASK YOURSELF: When the founder talks about what it will take to grow the business, does he have a big vision and a healthy appreciation of what will be required (with help from others) to attain it?
QUESTION #3: Is the Founder More Interested in His "Starting" Equity % or the $$$ at Projected Exit?
Another way to ask this same question if you were a founder: Would you rather have 10% of a successful company, or 100% of a company that never made it?
The answer may seem obvious, but it frequently isn’t to a founder. What he allocates to the “chiselers” will really tell you how he thinks about getting help from others and, frankly, if you should get involved.
Here’s an example: I recently met a patent owner. He absolutely believed he already owned a $10,000,000 basketball (it was inferred). What I saw was that he owned a shiny marble – a patented idea not yet validated in the market and worth significantly less at that point in time. I recognized the amount of work required to strategically package the IP, possibly find willing end-users, and ultimately frame this value to find one or more different “field of use” licensees. Nevertheless, I was intrigued and pitched him about working together, via my innovation consulting firm. I would even work on a pure success basis, if I could validate with my own experts his David Statue beliefs.
He looked at me and point blank said, “Why should I give you part of the revenues?”
He failed Question #1 – he thought his patent alone was already a basketball. He had no appreciation of the effort required and failed Question #2. He also failed Question #3 because he had no intention of giving up any part of his equity – after all, he had created all the value by getting the patent. In his mind, he didn’t need help because market success was inevitably going to happen. He’d find the licensee(s) and have 100% of his basketball.
ASK YOURSELF: If you feel the founder rightly recognizes what is required to grow his business, do you feel his initial offer to you recognizes not only your value but the value of others in the company, or does he want to maximize his ownership at all costs?
Let's Sum Up All 3 Questions
Founders who do not want to share in the pie are expressing their true belief structure. In my experience, this portends trouble. The founder will always come first in all decisions. This is the underlying culture they bring to their companies. They start out with an inflated belief in their vision, and do not have a healthy appreciation of what’s required to get there. This deadly combination will show up in how they treat stakeholders and employees.
ASK YOURSELF: Does the founder understand he is giving up a piece of a “real” basketball that results after I, and others, have invested our own time and energy to help build? It was not a basketball at the idea stage. It wasn’t the David Statue, yet. It was a marble and a marble block. Does the founder understand he may be giving up a healthy slice of the company at this early stage for this assistance, but ultimately he’ll be rewarded with far more $$$?
Please realize every pre-funded startup situation is different. Your answers will be observational and subjective as you get to know the founder or founding team. If the founder “fails” one or all of these questions, it doesn’t mean you should pass on the opportunity – just enter into it with open eyes. There will always be exceptions, like Mark Zuckerberg, where the founder does manage to maintain a healthy equity stake, high valuation and control (right place, right time, right person), but there are thousands of failed startups where greed and ego won out, and where failure didn’t have to occur.
As you look for good opportunities, these three guiding questions should help in your task.
About the Author: Rob Steir is a YourEncore expert and Managing Director of MindForce Consulting, an innovation consultancy where he works with companies and entrepreneurs on technology commercialization, intrapreneurial ventures, and go-to-market strategies. You can find more articles from Rob on his LinkedIn page.