Avoiding Entrepreneurial Failures

Avoiding Entrepreneurial Failures

 

It is the American dream to start a business, achieve growth with that business, and possibly someday pass it along to children or sell it for a profit.  In the article, Boomers Can’t Retire, it was explained how some entrepreneurs have found that they are unable to retire. The American dream may not be as easily attainable as some may think.  The Wall Street Journal article, Venture Capital’s Secret: 3 out of 4 Start Ups Fail, listed some unfavorable start-up statistics:

  • 75% of venture-backed US firms don’t return capital investment
  • Around 30% of start-ups fail completely – 95% if the definition of failure is projected return
  • Nonventure-backed companies fail more than venture-backed
  • 60% of start-ups make it three years and 35% make it ten

Author and Professor at Harvard Business School, Noam Wasserman, has some advice for future entrepreneurs in his book The Founder’s Dilemmas:  Anticipating and Avoiding Pitfalls That Can Sink a Startup.  In his book, Wasserman explains, “Often downplayed in the excitement of starting up a new business venture is one of the most important decisions entrepreneurs will face: should they go it alone, or bring in cofounders, hires, and investors to help build the business? More than just financial rewards are at stake. Friendships and relationships can suffer. Bad decisions at the inception of a promising venture lay the foundations for its eventual ruin.”

The new entrepreneur must consider problems they may encounter with people, as well as possible pitfalls he or she may encounter down the road.  By having foresight, the new entrepreneur can learn to be proactive to change.

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Things To Know Before Investing in an IPO

 

There is a lot of talk about IPOs lately.  IPO stands for initial public offering.  When a company decides to make shares of the company available to the public, it may sound like a great opportunity to get in on the ground floor.  However, it may not be easy or sometimes wise to buy into an IPO as soon as it is offered.

USA Today had an excellent article about Five Things You Should Know Before Investing in an IPO.  According to this article, some of these things include:

  1. Learn the Lingo – Do you know what a red herring is or an IPO offer price?
  2. It’s Difficult to Get In – It may not be impossible, but you may have to be a preferred client.
  3. First-Day Investing May Be Risky – If you like the thrill of rolling the dice, the first day can be a wild ride.
  4. Know the Sales Figures – Find out about the company’s annual sales performance.
  5. Know the Long-Term Outlook – “The Federal Reserve identified two characteristics of successful IPOs in a 2004 study: The companies have been around longer than other companies issuing stock for the first time, and they’re making a profit before they do so.

To learn more about each of these 5 areas, check out the article by clicking the link listed above.

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Top 10 Most Misunderstood Entrepreneurial Start-up Words

 

Some of the most interesting companies right now are considering going IPO?  If you are confused about what that means, you are not alone.  I find that a lot of my students would enjoy reading articles about new start-up companies but avoid them due to the writer’s use of confusing terminology.  Having taught entrepreneurship for many years, I have come up with a list of some of the most misunderstood words that have to deal with entrepreneurs and start-up companies to make things a little easier to understand.  Click on the links provided below for more information about the definition of the term:

  1. Angel Investors – Investors getting startup from self-funded stage to obtaining venture capital.
  2. Bridge Loan – a short-term way to obtain a loan that meets immediate needs for capital.
  3. IPO – Initial Public Offering – when a private company offers stock and becomes a public company.
  4. Limit Liability Company or LLC – legal form of a company providing limited liability.
  5. Me-Too Product – when competitors’ products are basically indistinguishable for yours.
  6. Portfolio – Holdings of a private investor or institution.
  7. Seed-Funded – investment to start a business until the business can fund itself.
  8. Start-up – Differing opinions on this . . . Check out the article:  How do you define a startup?
  9. Valuation – Company’s market worth.
  10. Venture Capital – Money or capital provided to start a business.  Those providing money may be referred to as Venture Capitalists.

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Fear of Past Dot Com Crash: Venture Capitalists Only Interested in Consumer-Targeted Companies like Facebook or Groupon

 

NOBOOM
via online.wsj.com

The dot com crash has had a big impact on how venture capitalists invest in the current market. To understand why, it is important to know a little history about the impact of the Internet and why these investors are leery.

The Internet became commercially popular in the mid-1990s.  By 1995, there was an estimated 18 million users on the net.  This led to the creation of online businesses which led to speculation about how big these companies could grow.  The problem came with how much these companies were actually worth vs. how much they were perceived to be worth. 

What causes a bubble and eventual crash?  When people get excited about a company stock, it can drive the price up but if it inflates to an unrealistic point where investors get wise to the fact that the company can’t be worth as much as they hoped, people bail, sell the stocks, the price drops, and the company crashes. 

The pain of those dot com crashes are still felt today.  Venture capitalists now may be more hesitant to invest.  Tom Abate with SFGate.com said that venture capitalists in 2000 made about 8000 investments valued at $100.5 million.  “In 1999 and 2000, Wall Street invested in 534 venture-backed initial public offerings.” Those, who cashed in early, made a lot of money.  As large amounts of money were being put into the market and speculation was growing, the bubble was forming.  NASDAQ hit its peak on March 10, 2000 at 513252, only to lose 78% of its value by October, 2002 when it dropped to 11411.

In 2001-2002 while a lot of companies were over-valued and going bankrupt, people found their stock purchases were not such a great investment.  So now when Facebook and Twitter are considering going IPO it has some potential investors concerned.  This is especially true in the case of Twitter that has yet to publically show their business plan. 

What has the effect been on venture capitalists investing?  An article in Investopedia stated, “In the year 1999, there were 457 IPOs, most of which were internet and technology related. Of those 457 IPOs, 117 doubled in price on the first day of trading. In 2001 the number of IPOs dwindled to 76, and none of them doubled on the first day of trading.” SFGate.com reported, “In 2008 and 2009, a total of just 18 venture-backed companies went public.”

Investments have picked up for the consumer-oriented companies like Facebook and Groupon.  However there has been a venture squeeze for companies with business products.  Wall Street Journal reported, “In the first three months of this year, venture-capital investment in consumer tech companies nearly tripled to $874 million from $310 million a year earlier. Meanwhile, investments in tech firms with business products rose at a slower rate to $2.3 billion from $1.9 billion a year earlier.  The shift away from business-oriented technology start-ups has been gathering steam over the past few years. Venture investment into such companies was $11.9 billion in 2010, down 35% from $18.4 billion in 2006, according to VentureSource. The overall number of financing rounds these companies received also dropped 18% to 1,261 during that time.”

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Top 50 Venture-Funded Companies for 2011

The Wall Street Journal had a couple of very interesting articles about start-up companies and their ability to obtain funding.  The following list of top 50 venture-funded companies for 2011 came from one of those articles.  Of particular interest to me was the ease that some young entrepreneurs are finding in terms of ways to obtain capital, should their startups be technology-based.  Everyone is looking to get in on the next Facebook or Google.  Entrepreneur Aaron Levie, 26, was able to raise $48 million in less than 3 weeks for Box.net, his online storage company.  Check out what WSJ.com claims are the top 50 start ups for 2011 below:

Rank Company Name Location Industry Why It’s Hot 2010 Rank Total Equity Raised in Millions
1 Castlight Health Inc. San Francisco Health Care As consumers pay more of their health-care bills, Castlight lifts the veil on medical costs. 14 $81.00
2 Xirrus Inc. Thousand Oaks, Calif. Information Technology Founder Dirk Gates previously took another start-up, Xircom, public and then sold it to Intel. 9 $80.25
3 Xactly Corp. San Jose, Calif. Business and Financial Services Xactly’s partners include Microsoft, Oracle and Salesforce.com, which invested last June.   $69.00
4 Recycle Rewards Inc. New York Business and Financial Services Recyclebank is expanding internationally and currently operates in 29 states. 25 $73.35
5 ExteNet Systems Inc. Lisle, Ill. Information Technology ExteNet raised $128 million in a January 2010 round led by George Soros’s investment firm.   $191.90
6 Cyan Optics Inc. Petaluma, Calif. Information Technology CEO Michael Hatfield previously founded Calix Networks, which held an IPO last year.   $90.83
7 Aster Data Systems Inc. San Carlos, Calif. Information Technology Aster helps companies analyze data to understand customer behavior and detect fraud.   $47.00
8 Glam Media Inc. Brisbane, Calif. Consumer Services Glam’s sites attract 198 million monthly visitors world-wide. 13 $154.20
9 Carrier IQ Inc. Mountain View, Calif. Information Technology The software sits on 140 million devices world-wide, providing data to Sprint and Vodafone.   $48.00
10 Imperva Inc. Redwood Shores, Calif. Information Technology CEO Shlomo Kramer co-founded one of Israel’s largest tech companies, Check Point Software.   $54.00
11 Vidyo Inc. Hackensack, N.J. Information Technology Vidyo powers Google Chat and bundles its software on Hewlett-Packard PCs. 35 $61.19
12 Etsy Inc. Brooklyn, N.Y. Consumer Services It’s profitable and in August it estimated 2010 revenue of $30 million to $50 million.   $51.25
13 RGB Networks Inc. Sunnyvale, Calif. Information Technology RGB acquired mobile-video rival RipCode in June.   $119.00
14 IronKey Inc. Sunnyvale, Calif. Information Technology Founder and Chairman David Jevans helped develop Apple’s Internet strategy.   $50.30
15 Appia Inc. Durham, N.C. Information Technology Appia is moving to build app marketplaces for the likes of AT&T and Samsung.   $18.25
16 The Active Network Inc. San Diego Business and Financial Services Having raised at least $275 million, Active has made numerous acquisitions.   $272.44
17 Nimble Storage Inc. San Jose, Calif. Information Technology Nimble has built an appliance that provides primary and backup storage in one box.   $24.27
18 PatientSafe Solutions Inc. San Diego Health Care After raising $30 million in February, PatientSafe completed and launched its iPod Touch system.   $71.50
19 Glaukos Corp. Laguna Hills, Calif. Health Care Glaukos is developing a new medical-device treatment for open-angle glaucoma.   $117.55
20 Fusion-io Inc. Salt Lake City Information Technology Executive team boasts Apple co-founder Steve Wozniak. 2 $111.50
21 Achaogen Inc. South San Francisco, Calif. Health Care Has support from the National Institutes of Health and Department of Defense.   $103.00
22 NeuroPace Inc. Mountain View, Calif. Health Care Filed for approval of a system to monitor and stop epileptic seizures. 12 $130.30
23 Xoom Corp. San Francisco Business and Financial Services Two large, undisclosed public equities firms led its last $33 million round.   $81.44
24 Workday Inc. Pleasanton, Calif. Business and Financial Services The latest effort from Dave Duffield is challenging his earlier creation, PeopleSoft. 16 $110.00
25 SpiderCloud Wireless Inc. Santa Clara, Calif. Information Technology Helps carriers meet the growing demand for mobile broadband on corporate campuses.   $54.10
26 Jive Software Inc. Palo Alto, Calif. Information Technology Financed by Google backers Kleiner and Sequoia, Jive Software brings social-networking tools to big business.   $57.57
27 Federated Media Publishing San Francisco Consumer Services Federated Media has made three acquisitions since August to bulk up its advertising and publishing network.   $57.25
28 Boku Inc. San Francisco Business and Financial Services CEO Mark Britto previously led Ingenio to an acquisition by AT&T and Accept.com to Amazon.   $38.00
29 Zoosk Inc. San Francisco Consumer Services The “social” online-dating company has more than 15 million active monthy users. 42 $40.10
30 EndoGastric Solutions Inc. Redmond, Wash. Health Care With $120 million total raised, EndoGastric is pushing to profitability.   $128.68
31 Chegg Inc. Santa Clara, Calif. Consumer Services Chegg recently acquired two firms to expand into other student services. 32 $166.20
32 Everyday Health Inc. New York Consumer Services Everyday Health’s sites host 26.5 million visitors a month. In January, it partnered with AOL.   $77.20
33 Xsigo Systems Inc. San Jose, Calif. Business and Financial Services Xsigo’s board of directors includes Veritas Software’s Mark Leslie and HP’s chairman Ray Lane.   $60.00
34 Soasta Inc. Mountain View, Calif. Information Technology Soasta tests the mettle of online services prior to launch by simulating heavy traffic. 36 $21.05
35 Rally Software Development Corp. Boulder, Colo. Information Technology Rally was named the sixth best place to work in the U.S. by Outside magazine last year.   $49.25
36 Prosper Marketplace Inc. San Francisco Business and Financial Services Prosper leveraged the credit crisis to build a service matching lenders and borrowers.   $54.24
37 Pivot3 Inc. Houston Information Technology It says bookings doubled each of the last four years.   $78.00
38 Suniva Inc. Norcross, Ga. Energy and Utilities One of the only start-up solar-cell makers in the U.S. that’s enjoying rising demand. 15 $130.50
39 Veracyte Inc. South San Francisco, Calif. Health Care Developing minimally invasive molecular tests to provide earlier cancer diagnoses.   $49.00
40 ExactTarget Inc. Indianapolis Business and Financial Services Exact Target scrapped an IPO in 2009 and has bought three companies in 17 months.   $155.50
41 OncoMed Pharmaceuticals Inc. Redwood City, Calif. Health Care OncoMed has shown an ability to attack cancer stem cells, which resist traditional chemotherapy.   $168.02
42 ExaGrid Systems Inc. Westborough, Mass. Information Technology ExaGrid’s technology is similar to that of Data Domain, the subject of a $2.2 billion EMC-NetApp bidding war.   $78.10
43 SeeSaw Networks Inc. San Francisco Business and Financial Services Founder Monte Zweben previously founded Blue Martini Software and Red Pepper.   $19.59
44 Silver Peak Systems Inc. Santa Clara, Calif. Information Technology Silver Peak is growing quickly and taking on larger rival Riverbed Technology. 20 $59.80
45 Zilliant Inc. Austin, Texas Information Technology Zilliant uses scientific data to maximize profits by fine-tuning pricing.   $62.47
46 Yammer Inc. San Francisco Business and Financial Services Called “Facebook for business,” Yammer has been embraced by employees at large companies.   $40.00
47 Bivio Networks Inc. Pleasanton, Calif. Information Technology Its government contracts helped it navigate the recession better than most.   $78.30
48 TxVia Inc. New York Business and Financial Services CEO Anil Aggarwal has a decade of experience running electronic-payments firms.   $51.50
49 Service-now.com Inc. Del Mar, Calif. Information Technology Founder and CEO Fred Luddy was CTO of Peregrine Systems and Remedy. Former Documentum CEO Jeff Miller and Proflowers.com CEO Bill Strauss became directors last year. 45 $54.86
50 Aprius Inc. Sunnyvale, Calif. Information Technology Cofounder Peter Kirkpatrick hails from Intel and CEO Varun Nagaraj led NetContinuum.   $31.00

Source:Dow Jones VentureSource

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