startup competitions Archives

28 Mar 2016

Sticky Post By Matt Hottle Posted in Funding, Start-ups With No Comments Permalink

Read this Before Taking on Investors

Sticky Post By Matt Hottle On March 28, 2016 With No Comments

There comes a point for all startup businesses where they have to consider taking on investors versus bootstrapping their operations to grow the company. For a lot of founders, they wrestle with this decision several times in the first few years.

While I do think bootstrapping is sexy as hell, I’m not opposed to investors. Some startups can’t even take a business idea off paper without significant seed investment and many investors are absolute rock stars that will do anything they can to help an investment succeed.

With that stated, there are a few things to consider before taking on investors. For the sake of this article, I’m going to consider accelerators, incubators, venture capital and any other scenarios where equity is exchanged for cash or subsidies as an “investment.”

A VC fund is considered successful if 10% of their investments do well while you could 100% fail like any of the other 90% of their plays that don’t pan out. Don’t believe the hype; succeeding as a company is way better than “learning from failing.”What is it about that VC fund that makes sense for you- other than their stacks of cash? A typical VC probably only has about 2% of their capital invested in your company while you may have every credit card maxed out, loans from friends and family due and employees to pay at the end of the week. The stakes for you are ALWAYS much higher than your VC investors. Choose wisely.
Who is actually managing that accelerator or incubator? Are they a subject matter expert in the markets their incubated companies are competing in or are they just a big name in the startup world? Name recognition can be a huge asset as long as it’s big enough. Minor celebrities in those communities are probably not driving enough value if they aren’t also providing super-relevant industry experience.
Be careful not to fall for the “easy” country-club deal. Raising money among friends and acquaintances can be a legit way to generate capital but they require much of the same structure, governance and construction as a VC/ PE deal.For example, I found one deal where a minority owner provided capital in exchange for equity but then expected their investment to be paid back first before any other owners could receive any distributions of profit. That’s a pretty crappy provision considering this came with a measly $20k investment.
Pick your startup competitions with care. As I have previously pontificated, startup competitions can be a total waste of time when they are poorly conceived, executed or judged.There was a competition recently announced here in Birmingham where the contestants have to pay $50 to enter, compete in three rounds over a 6 month time frame, 50 companies could enter and the prize was only $10k.The lost-opportunity cost alone is higher than $10k and the contestants are actually subsidizing 25% of the prize money through their own “application fees.” By winning, you would be doing so on the backs of other start-ups. That just seems crappy and it a massive waste of time and resources.

Capital, or the lack thereof, is always a primary concern for a company wanting to start, grow or innovate. Every founder needs to seriously consider their individual opportunities for outside investment. It should not be an easy question to answer and the more thought expended when considering funding options, the higher the likelihood that a company finds investors that are passionate, supportive and truly helpful. If the total value of what they offer is measured in decimal places, you may need to consider other options.

18 Feb 2016

Sticky Post By Matt Hottle Posted in Entrepreneurship, Funding, Start-ups With No Comments Permalink

5 Things Startup Competitions Get Wrong

Sticky Post By Matt Hottle On February 18, 2016 With No Comments

Every city seems to be hosting startup contests where founders pitch their companies to a dais of “experts” live on stage in an effort to win some funding. Sometimes these competitions are massive and worth millions but many are much smaller; awarding $5k to $20k. It’s within these newer and smaller competitions that I have noticed a recurring series of mistakes.

1. The judges are not experts in entrepreneurial businesses

You see this when sponsors become the judges or the panel includes commercial bankers who are really not business-builders. I love bankers and many of my friends are a part of that industry but they are institutionally bad at valuating and understanding start-up businesses. They tend to judge a business idea in terms of if they would give them a loan and for how much.

2. Contestants are often post-funded companies that have been in business for a year or more

When you are awarding $10k to a company that already has employees and overhead, you have given them 6 weeks of operating costs. That $10k could have launched a prefunded company’s business plan and allowed them to get a credible pitch together to secure additional funds. Instead, you have floated an established company’s payroll for a few weeks. You’ve created almost zero value. If the contest is awarding $100k or more, that’s a different story but when you are giving away small amounts of prize money, focus on those for whom it has the greatest impact.

3. The best idea almost never wins

Based on the sponsors, the event’s host, the constituency of the audience and other non-business-related factors, the least deserving of companies often win these events. There are always ulterior motives at play and when those are allowed to propagate, you see some truly awful business models walking away with money that would have served a greater purpose being set on fire in the parking lot. Nobody wants to admit this happens- but it does.

4. The event tries to be “like” Shark Tank

As soon as one of these competitions invokes the Shark Tank name in its promotional materials, it immediately loses credibility with me. Mark Cuban is not coming to your event. It is a TV show that is 50% substance and 50% manufactured drama. The best contests hold non-public and lengthy discovery sessions between the companies and the judges. Financial details are poured over and every assumption is challenged. By the end of that process, a business plan has been credibly reviewed and vetted. When those judges name a winner, it’s a very carefully considered verdict. The contestants come away with invaluable insight and advice from experts that will benefit them in perpetuity.

5. Read the fine print for the award money

More needs to be done to explain to contestants any requirements that will be imposed on claiming the prize money after it is “awarded.” This includes details around benchmarking or timing thresholds required before the money will be made available. What tax implications exist and was that explained to them? One competition I watched closely actually had a very short window where the winners could claim their award and it required hours of drafting financial reports and updating the business plan. At one point, the 2nd place winner decided the $6k they won wasn’t worth the effort and forfeited the money.

It is truly outstanding that more of these competitions are popping up all over the country. These events can be future-altering opportunities for start-up businesses or they can be thinly-disguised advertising events for the paying sponsors.

As with most innovative ideas, the shift toward commercialization happens at some point and the original altruistic motivations are supplanted by the attraction to revenue and marketability. We’ve seen this shift happen with the best events. If you think that AOL purchasing TechCrunch won’t turn Disrupt into an event where sponsors look to sticker-up everything that moves like a NASCAR, you may be sincerely disappointed.

If organizers can focus on creating the best possible value for their sponsors while maintaining the worth of the experience for contestants, these competitions can help launch the next big idea.

18 Feb 2015

Sticky Post By Matt Hottle Posted in Entrepreneurship, Funding, Start-ups With No Comments Permalink

5 Things Startup Competitions Get Wrong

Sticky Post By Matt Hottle On February 18, 2015 With No Comments

Every city seems to be hosting startup contests where founders pitch their companies to a dais of “experts” live on stage in an effort to win some funding. Sometimes these competitions are massive and worth millions but many are much smaller; awarding $5k to $20k. It’s within these newer and smaller competitions that I have noticed a recurring series of mistakes.

1. The judges are not experts in entrepreneurial businesses

You see this when sponsors become the judges or the panel includes commercial bankers who are really not business-builders. I love bankers and many of my friends are a part of that industry but they are institutionally bad at valuating and understanding start-up businesses. They tend to judge a business idea in terms of if they would give them a loan and for how much.

2. Contestants are often post-funded companies that have been in business for a year or more

When you are awarding $10k to a company that already has employees and overhead, you have given them 6 weeks of operating costs. That $10k could have launched a prefunded company’s business plan and allowed them to get a credible pitch together to secure additional funds. Instead, you have floated an established company’s payroll for a few weeks. You’ve created almost zero value. If the contest is awarding $100k or more, that’s a different story but when you are giving away small amounts of prize money, focus on those for whom it has the greatest impact.

3. The best idea almost never wins

Based on the sponsors, the event’s host, the constituency of the audience and other non-business-related factors, the least deserving of companies often win these events. There are always ulterior motives at play and when those are allowed to propagate, you see some truly awful business models walking away with money that would have served a greater purpose being set on fire in the parking lot. Nobody wants to admit this happens- but it does.

4. The event tries to be “like” Shark Tank

As soon as one of these competitions invokes the Shark Tank name in its promotional materials, it immediately loses credibility with me. Mark Cuban is not coming to your event. It is a TV show that is 50% substance and 50% manufactured drama. The best contests hold non-public and lengthy discovery sessions between the companies and the judges. Financial details are poured over and every assumption is challenged. By the end of that process, a business plan has been credibly reviewed and vetted. When those judges name a winner- it’s a very carefully considered verdict. The contestants come away with invaluable insight and advice from experts that will benefit them in perpetuity.

5. There’s fine print about the award money

More needs to be done to explain to contestants any requirements that will be imposed on claiming the prize money after it is “awarded.” This includes details around benchmarking or timing thresholds required before the money will be made available. What tax implications exist and was that explained to them? One competition I watched closely actually had a very short window where the winners could claim their award and it required hours of drafting financial reports and updating the business plan. At one point, the 2nd place winner decided the $6k they won wasn’t worth the effort and forfeited the money.

It’s truly outstanding that more of these competitions are popping up all over the country. These events can be future-altering opportunities for start-up businesses or they can be thinly-disguised advertising events for the paying sponsors.

As with most innovative ideas, the shift toward commercialization happens at some point and the original altruistic motivations are supplanted by the attraction to revenue and marketability. We’ve seen this shift happen with the best events. If you think that AOL purchasing TechCrunch won’t turn Disrupt into an event where sponsors look to sticker-up everything that moves like a NASCAR, you may be sincerely disappointed.

If organizers can focus on creating the best possible value for their sponsors while maintaining the worth of the experience for contestants, these competitions can help launch the next big idea.