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Earlier today I was talking to an entrepreneur and we were debating the value of having an arch enemy in a startup (that is, another startup that’s the main competition and deeply disliked). In the college sports world, Duke and Carolina are arch enemies, resulting in both schools raising the quality of their game and level of competition (both schools have 5 national titles).

Here are a few thoughts on having an arch enemy in a startup:

• Having an arch enemy is a good thing as that means someone else believes strongly in the same market (competition is important as it helps validate the market)
• Remember to stay close to the customer and don’t get caught up in a feature arms-race with the arch enemy
• Build a program where you celebrate victories over the arch enemy in head-to-head deals (at Pardot, we gave out kill stickers, like football players have on their helmets, every time a sales rep won a head-to-head deal, to be displayed at their desk)
• Don’t make an arch enemy just to say you have one (it should be your main competitor that you see in a meaningful percentage of competitive opportunities)
• If you don’t have an arch enemy, that might mean you’re too early to the market, or aren’t getting in front of enough prospects

Competition is healthy. An arch enemy can be healthy, but don’t lose sight of the most important thing: the customer.

What else? What are some more thoughts on an arch enemy of a startup?

Continuing with yesterday’s post 99% of Entrepreneurs Shouldn’t Raise Venture Capital, there is a case that I left out: entrepreneurs should consider raising money when VCs offer simple terms that keep future options open. But first, a story.

Earlier this year I was talking to an entrepreneur that was growing a nice seven figure SaaS business. There was a desire to raise money and grow faster, but the current market opportunity wasn’t large enough to warrant institutional capital (remember: the size of the VC fund necessitates the size of the minimum exit), coupled with the desire to keep options open in the event an opportunity arose for a < $50 million exit. After talking to a number of VCs, it was clear there was interest to raise money at a fair valuation and do so with a term sheet that didn’t have blocking rights (meaning, the entrepreneur could choose to sell the business and not have to have the VC’s permission).

The entrepreneur chose to raise money on simple terms while keeping options open.

So, 99% of entrepreneurs shouldn’t raise venture capital, but a tiny percentage of entrepreneurs that might not otherwise raise money, should consider it if they can do so on their own terms.

What else? What are some more thoughts on raising venture money while still keeping options open?

Raising venture capital is glorified in the news and blogosphere resulting in many entrepreneurs believing that they too need to raise venture capital. Well, 99% of entrepreneurs shouldn’t raise capital, and here are a few reasons why:

• Limited Exit Opportunities – As Eric Paley outlined, the more capital you raise, the fewer the exit opportunities. Generally, the size of the VC fund is the size of the required exit, and less than 20 in 1,000 companies that raise venture capital sell for $100M or more.
• Market Outcomes – Most markets aren’t winner-take-all or winner-take-most, such that while quality companies are built in many new areas, the size and scale won’t be large enough to warrant institutional capital (ensure a better business model).
• Cash Flow Businesses – Almost all startups are better served as cash flow businesses, not venture-backed business, and everyone involved can still do well.
• 5x Value Multiplier – For an entrepreneur to be better off financially after an exit, the company has to sell for at least 5x more than if they didn’t raise money, which isn’t the case for most entrepreneurs.

99% of entrepreneurs shouldn’t raise venture capital. Think that doesn’t include you? Think again.

What else? What are some other reasons that 99% of entrepreneurs shouldn’t raise venture capital?

Recently I was talking with an entrepreneur that had a seed stage startup and a number of questions. After the conversation, I realized that I didn’t have a good link to share with a number of resources for seed stage startups. Well, here are 15 posts every seed stage entrepreneur should read:

1. 9 Simple Weekly Metrics
2. 5 Sales Tips
3. Budgeting for the $300k Seed Round
4. Don’t Hire Consultants to Raise Money
5. The Value of a Sales Assistant
6. 5 Common Mistakes After Raising a Seed Round
7. 7 Tips When Starting Out
8. 8 Metrics Questions to Raise Another Round
9. Startup Value Creation is Back-Loaded
10. Resist the VP of Sales Temptation
11. The Four Stages of a Startup
12. Simplify it Down to Selling or Building
13. 6 Steps to Building a Culture of Accountability
14. Develop a Meeting Rhythm
15. Build a Simplified One Page Strategic Plan

The seed stage is especially difficult and challenging. Entrepreneurs would do well to join a peer group and carve out time to learn from other entrepreneurs.

What else? What are some more posts every seed stage entrepreneur should read?

Eric Paley has a great post up on TechCrunch titled Venture Capital is a Hell of a Drug. As a successful entrepreneur and investor, he offers up a number of great ideas. Here are three quick thoughts:

1. Venture capital increases risk for founders
   1. You limit your exits
   2. You increase burn to dangerous levels
2. VCs need billion-dollar exits — you don’t
   1. Capital has no insights; it’s just money
3. Exit value is a vanity metric
   1. Practice efficient entrepreneurship
   2. Smart people, dumb money

Head on over to TechCrunch and read Venture Capital is a Hell of a Drug.

Continuing with yesterday’s post Plan for Equity Dilution Over Multiple Rounds, there’s another element worth mentioning: entrepreneurs often sell some personal equity during a financing round. Selling personal equity, as different from the company selling equity, is often called “taking chips off the table.” Since the entrepreneur has taken a significantly below market salary (if any salary), and now he or she is signing up for at least 3 – 5 more years, the natural desire is to de-risk things and sell some equity.

Here are a few thoughts on selling personal equity during a financing round:

• Many investors won’t buy founder equity unless there’s at least a few million in recurring revenue (often, much more revenue, or being near cash-flow breakeven, is required)
• Entrepreneurs can usually only sell a small amount (e.g. ~5% of their equity)
• Investors are more motivated to buy founder equity if they have a target ownership percentage (e.g. they want to buy a minimum of 20% of the startup, but with existing investors there’s only room for 18%, so they buy 2% more from the founders)
• When there’s a more competitive funding round (e.g. competing term sheets from multiple investors), it’s more likely that the entrepreneur can sell some personal shares

Entrepreneurs selling equity and “taking some chips off the table” during a financing event is fairly common once institutional investors get involved (e.g. after the seed stage). Entrepreneurs would do well to know what’s possible and what the current market will bear when it comes to selling personal equity.

What else? What are some more thoughts on selling personal equity during a financing round?

One of the areas I like to help entrepreneurs understand is how equity dilution works with each round of financing. A general rule of thumb is 30-40% dilution with each round (e.g. 30% for investors and 10% for a new employee option pool) such that founders usually have between 4 and 15% at time of IPO (see Founder Equity of Ownership at Time of IPO).

For simple math, let’s say an entrepreneur has 100% of the business. Here’s how the dilution might work, assuming 35% dilution in each round:

• After round 1 – 65%
• After round 2 – 42%
• After round 3 – 28%

So, after three rounds of financing, an entrepreneur would have 72% less equity (28% of the original equity).

Entrepreneurs would do well to understand how dilution works and to plan accordingly.

What else? What are some more thoughts on equity dilution over multiple rounds?