Startups and Financial Audits

Annual financial audits are a cost of doing business for many tech startups. While they aren’t the most fun, they do provide great third-party validation of the books and oversight for how the business is being managed financially. Most entrepreneurs should not spend the $10k – $30k on an annual audit.

Here’s when an annual financial audit makes sense:

  • Institutional investors (like VCs) or other sophisticated investors are involved — they’ll require it
  • A bank line of credit or senior debt in the business requires it
  • There’s a business goal to be able to sell the business in the next three years — most buyers will require three years of audited financial statements

Most of the time an annual financial review, which acts like a lightweight audit, but without all the guarantees by the accounting firm, is a much more affordable way to engage a third-party to review the books. Entrepreneurs should understand when it does, and doesn’t, make sense to pay for an annual financial audit.

What else? What are your thoughts on startups and financial audits?

The Learning and Earning Phases of an Entrepreneur

Most entrepreneurs I know that have been successful tell me that their real success came on at least their second venture, and well after their learning phase. Phase one is learning from another successful entrepreneur or business leader and gaining serious domain expertise. This could be in the form of starting a company that doesn’t succeed or it could happen working with someone else — it doesn’t matter. What matters is that the entrepreneur works hard and learns as much as possible.

Mark Suster has a great post up titled Is it Time to Earn or Learn where he outlines this phenomenon in greater detail. The earning phase of being an entrepreneur is when you co-found a company and have a serious equity stake. Most employees, even in a wildly successful startup, don’t make enough money to retire. As a co-founder that owns a meaningful chunk of equity, raises a modest amount of money, and the startup turns into a base hit or double, there’s a very real chance of making enough money to never have to work again. Now, making money isn’t always the goal, but it’s an important component for many people.

The next time you talk to an entrepreneur, ask if they’re in the learning phase or the earning phase as there can be a serious disconnect between reality and wishful thinking.

What else? What are your thoughts on the learning and earning phases of an entrepreneur?

How Would the Ideal Startup Village Building Work?

Recently I’ve been exploring different buildings and areas for an Atlanta Startup Village (see Physical Atlanta Startup Village Idea and Physical Atlanta Startup Village Components). This is a nice-to-have type project that would be great to do but would have to be a no-brainer financially (e.g. a really good deal). So, assuming the area and building have the desired components, how would the actual structure work? Here are a few ideas:

  • Large co-working space with one interior conference room and one phone booth room for every 15 desks
  • Full event room that supports 100 attendees
  • Complete training lab with laptops and large screen TVs
  • Individual office pods with between 1,000 and 4,000 square feet per area including:
    – LED screen outside the pod entrance with company name and logo
    – Mini kitchen
    – Interior phone booths with glass walls (1 per 1,000 ft)
    – Interior conference room with glass wall and large LED screen (1 per 2,000 ft)
    – 5 desks on exterior windows
  • Moveable, large sliding glass doors between pods with locks on each side that can be opened to combine pods as startups grow (see moveable glass walls)

Overall, the goal is to be a central village for the startup community as well as provide flexible space for startups to grow from one founder to dozens of employees, all with minimal effort and minimal customization. Too much money is wasted by startups on ill-fitting long term leases and heavy customization (most offices have traditional layouts that are inefficient and not startup friendly). The startup village building would have to be designed unlike any building currently available.

What else? What are some other considerations for a building to be startup friendly and efficient?

Buckhead as the Heart of the Early Stage Atlanta Startup Scene

Midtown is the undisputed king of the Atlanta seed stage startup scene with the ATDC, Hypepotamus, and Georgia Tech (see Rob’s post). ATDC alone has dozens of startups in the building. With the seed stage being defined as under $1M in revenue and under 10 employees, it’s especially helpful to be in an area with great startup density. As startups grow from the seed stage to the early stage (10 or more employees with $1M or more in revenue), the ATDC becomes more difficult due to space constraints (there’s a waiting list for space) and the three year term limit (startups have to move out after three years) resulting in the startups that are most likely to be successful long term having to leave and move out.

Most ATDC startups that hit the early stage move north to the Buckhead, Vinings/Galleria, or Perimeter area — extremely large geographical areas with little startup density. Buckhead is the clear winner due to the central location between in-town neighborhoods and the northern suburbs. Here are some early stage and growth stage software companies in Buckhead:

Unfortunately, even with those software companies and more, there’s little serendipitous interaction as there are so many office buildings and such little walking around. Buckhead has great resources like access to interstates, train stations, restaurants, retail, and residential that it should become the heart of the early and growth stage Atlanta startup scene. This is even more true since it is centrally located to the metro area, more accessible to the northern suburbs (tech professionals eventually get married, have kids, and want an affordable house in a good school district), and more affordable than Midtown (Buckhead has many buildings with free parking).

What else? How can we make Buckhead more cohesive as an early and growth stage startup community?

Sources of Ideas Implemented in a Startup

At Pardot, one of my favorite things to do is to show guests the office and talk about many of our quirky and unusual ways. As you might expect, most of the ideas were generated via R&D (ripoff and duplicate) from others. We continually look for new ideas, try out the ones we like best, and keep the ones that feel right.

Here are ideas we like and their source:

One of the reasons I enjoy reading and talking to other entrepreneurs so much is that there are always new ideas. Most ideas I encounter are ignored but many are tried out and a few stick — you never know when you’ll come across a new idea.

What else? What are some ideas you like and their source?

Getting Started as an Entrepreneur

Recently I was talking to a successful professional who’s looking to make a transition and wants to be an entrepreneur. Of course, as a person thinking about being an entrepreneur, the best thing to do is to just do it (see JFDI). In reality, most people are measured and won’t jump in unless they feel like they have the right idea, team, and timing.

My recommendation is the same as Jason Fried’s of 37signals in his article How to Get Good at Making Money. The approach is super simple: test the waters of being an entrepreneur by going to local garage sales and spending $100 on stuff that you think will sell well on online followed by actually selling them on eBay. Here are a few of the benefits getting started this way:

  • It takes physical, manual labor to buy the products, list them on eBay, package them up, and ship them out — entrepreneurs have to roll up their sleeves and get stuff done
  • There’s a margin, or spread, between what the product costs and what it sells for, making it readily apparent what it takes to make a profit
  • Tools like eBay and Paypal aren’t hard but it takes time to learn them and make everything work
  • Spending $100 and 10 hours of time is a low cost way to test the enjoyment level of being in business for yourself
  • If you like it, try the whole process multiple times and see if you can make more money off your $100 each time

There’s an infinite number of things an entrepreneur can do to get started. Building an actual micro business with products and revenues is one of the best ways to start the entrepreneurial journey.

What else? What are your thoughts on how to get started as an entrepreneur?

Thinking About Startups and Competitors

One area that I don’t spend too much time worrying about is competitors. Most markets are not winner take all or winner take most such that there’s the opportunity for several successful companies to emerge. Email marketing is a great example of a market without winner take all/most (see email marketing companies with 100+ employees). Instead of worrying about competitors, I do think it’s worth tracking them for a few reasons:

  • Having competitors is important to validate that other people believe in the idea
  • Competitors provide a proxy for the level of market development (look on LinkedIn to see how many employees they have to get approximate company size)
  • Investors in competitors show the venture firms that care about certain markets, and provide third-party validation
  • Analysts that cover competitors can also provide reports and insight as well as segmentation

Competitors are a necessary part of the startup world but should not be obsessed over. The best thing to do is to stay close to your customers and provide a great solution.

What else? What are your thoughts on startups and competitors?