The crowdfunding component of The Jumpstart Our Business Startups Act (JOBS) is designed to help startup and emerging growth companies raise capital through new securities exemptions.
“It’s a promising platform for companies that are already doing small-dollar raises of capital,” says Jeff Roberts, a director at Kegler, Brown, Hill & Ritter. “With the high cost of capital from venture and angel funds and the general unavailability of bank funding, small businesses, startups and emerging growth companies are looking for different ways to raise funds, so they are very excited about the possibility of crowdfunding. It’s worth the hype because currently, raising capital is expensive and investors are hard to locate.”
Smart Business spoke with Roberts about how to benefit from crowdfunding.
What is crowdfunding?
Crowdfunding concepts have been in the market for quite some time with companies like Kickstarter providing a platform for businesses to raise money through donations. With the passage of the new JOBS Act, businesses will soon be permitted to issue equity to investors based upon a securities exemption that allows companies to raise up to $1 million annually from non-accredited, small-dollar investors such as friends and family, and those who want to place their money somewhere other than the stock market. Funds will be raised through regulated online crowdfunding intermediaries.
Investors will be limited in the amount of money they can invest. According to the JOBS Act, investors with an annual income or net worth of at least $100,000 can invest up to 10 percent of their annual income or net worth. Those with a net worth of less than $100,000 can invest the greater of $2,000 or up to 5 percent of their income or net worth. The dollar amounts at risk on the front side are small, which helps alleviate the fear of some skeptics who think some investors may spend their life’s savings on a fraudulent venture.
What kinds of companies should consider crowdfunding to raise capital?
Local restaurants (or other small businesses with dedicated customer followings) that need to make certain capital improvements can go out and raise the money for those projects through these online intermediaries. Any startup company that doesn’t generate a lot of income up front could also take advantage of the crowdfunding platform, though such companies may have more difficulty in generating a buzz.
The financial disclosure requirement for raising $100,000 or less is not as great as raising between $100,000 and $500,000. In the latter case, you have to provide reviewed financials, and in raising more than $500,000, companies have to provide audited financials. The cost of providing those financials has been a roadblock for some small startups. When their accounting bill can be $10,000 to $20,000 before they raise a dime, it can be prohibitive to their market access. Given the cost profile, companies with less than $100,000 in financial needs may be best served by this new platform.
What are the potential legal risks associated with crowdfunding?
Companies seeking to raise funds though this exemption need to be more concerned about compliance with state laws that govern corporations, limited liability companies and other entities because, given the relaxed federal regulation, greater emphasis will likely be placed on state law fiduciary duties.
If Ohio can come up with some sort of regulatory scheme that makes it efficient to raise capital this way, then it could become the Delaware of crowdfunding. A lot of the governmental bodies and politicians like that idea and are behind it, but it’s still early. And since federal regulations will trump state law, how this will be regulated between states is still up in the air.
What could change about crowdfunding regulations?
Crowdfunding won’t become a reality until the end of the year because the SEC has 270 days from the date of enactment to put its regulations in place. While some specifics are included in the JOBS Act, there are still some open questions and equity cannot be raised through the crowdfunding securities exception until the regulations are released. What worries me is that the SEC, in an attempt to hurry up and get something out there, might throw out proposed regulations that are not really well thought out, which may create additional road blocks that effectively eviscerate the purpose of the JOBS Act, which is to make it easier and cheaper to access money.
What can companies do now?
Put it on your radar as an opportunity. Some companies considering doing raises in the next six months are operating under the old SEC rules and might put off those investments until they can see what happens with crowdfunding. But otherwise, not much can be done until we know what that landscape looks like.
If a company is interested in crowdfunding, where should it start?
Seek out legal counsel because this is such an unknown area. Issuers of crowdfunding equity are going to have questions about which intermediary to use. Should they go through a licensed broker/dealer instead of a crowdfunding intermediary? How much money should they raise? What are they going to have to provide in the way of financial disclosures? Hopefully, as the market develops, the process will become more efficient and well defined and the cost of fundraising will decrease.
The ability to go to nonaccredited investors online and the ability to reduce transaction costs by not expending substantial amounts of money on securities compliance is a step in the right direction, but time will tell how successfully crowdfunding can be implemented and what type of demand it generate.
Jeff Roberts is a director with Kegler, Brown, Hill & Ritter Co., L.P.A. Reach him at (614) 462-5465 or firstname.lastname@example.org.
Insights Legal Affairs is brought to you by Kegler, Brown, Hill & Ritter Co., LPA
Your trademarks are what customers use to recognize your company, your product, and/or your services. Wouldn’t you want to take the necessary steps to protect your hard-earned brand identity? Many businesses, especially startups, do not think about this subject until their products are ready to launch. Some do not consider trademark protection until even later, when they run into a conflict.
If you have reached that point, you are late, says Colleen Flynn Goss, Counsel at Fay Sharpe LLP. “It needs to happen early in the process,” Goss says. “Certainly not when the business is still a ‘shower idea,’ but definitely before your product is well on its way to market.”
Smart Business spoke with Goss about why registering your marks — whether trademarks or service marks — is important for emerging companies, and how to ensure it’s done right.
Why should these companies consider seeking federal registration?
Your trademark is your company and product identity. You may not realize it but as soon as you use your trademark, it’s yours. In the United States, trademark rights are based on use — not registration. This means that the first person to use a mark on a product or a service is considered the owner of the mark for those goods and services. These are ‘common law’ rights, and they are geographically limited to where you are actually selling or offering products and services under the mark.
Let’s say that you lead a startup company based in Northeast Ohio that produces and sells rain gauges in the Great Lakes region. With record-breaking rainfall, your company grows quickly and two years down the road you decide that expanding to the Pacific Northwest might be a good idea. But unbeknownst to you, an Oregon company has been using the same mark as yours in the region for the last year. If you had filed for a federal trademark registration two years previously, you would have been able to stop the Oregon company from using the mark. Instead, you are now entering into costly negotiations to work out a deal surrounding using the mark and selling your product in this new geographic region, or, even worse, re-branding.
So, even though trademark rights spring from use, by spending a relatively small amount of money and federally registering your mark with the U.S. Patent and Trademark Office you can obtain the nationwide right to the mark to the exclusion of later users of the same or similar mark for the same or similar products and services, even if you are not using the mark in every state. Federal registration also grants you other rights including the right to use the registered symbol, ®, next to your mark, which tends to deter others from copying your mark.
How can a company protect the mark it intends to use before actually using it?
As the leader of a startup you might wonder how thinking about federal registration affects you when you haven’t even brought a product to market. You’ve come up with this wonderful idea, kicked it around and it’s beginning to get some traction. But you haven’t used your mark yet. How can you protect yourself going forward against the company in Oregon (or someone right down the street) using your mark before you get a chance to use it?
That is where the ‘intent-to-use’ application comes into play. United States trademark law allows you to file an application to register a mark before you’ve used it. That way, you effectively reserve the mark for those products and services for which you intend to use the mark.
You must still put the mark into use on those products or services before the registration will issue, but the beauty of the intent-to-use application is that the date you file the application will be deemed to be the date you first used the mark. Upon issuance of your registration, the Oregon company that started using the mark one year after you filed your application will be precluded from using the same or a similar mark on rain gauges.
What are the risks of not filing for a federal trademark registration?
Some companies will still say, ‘I have common law rights to use this trademark. I’m not going to bother.’ And they do, but as I mentioned earlier those rights are geographically limited. The ‘great water gauge idea’ has been funded by your family, friends, or personal savings. When the idea blossoms with this infusion of capital and the product is commercialized, the pace at which business moves becomes quite quick. Now imagine that after investing all that time and money, you discover that someone other than the Oregon company has a federal trademark registration for what you thought was your mark and has been using the mark for ten years. That is a financial and timing nightmare that you don’t want to have to deal with. There you are, just about to launch, and all of a sudden you have no name for your product.
What steps can companies take to ensure a trademark is safe to use?
When you’ve had the ‘shower idea,’ and your plan to take that idea and create a company surrounding it is in its infancy, but it looks like it’s going to happen — that’s when you should start thinking about branding.
Think about the brand name — the mark — for your products or services, and the reasonable breadth of products and services on which you plan to use that brand name. You may start off with rain gauges, but plan to move from rain gauges for Northeast Ohio and the Pacific Northwest to smoke detectors in Texas under the same brand name. You should cover all those potential ventures in your intent-to-use application.
Before you file the application though, you still need to be certain that someone else has not already used and/or registered the same or similar mark for similar products. A trademark availability search will determine if there are prior state or federal trademark registrations or common law uses which would impede the use and/or registration of your proposed mark. Once you have determined that the mark is available, if you decide to seek federal registration, you can start the application process and move toward having your federally registered trademark soon after your product goes to market. The application process is fairly straightforward. From application through registration (excluding the availability search) it generally will take from nine to 18 months.
Colleen Flynn Goss is Counsel at Fay Sharpe LLP, can be reached at (216) 363-9132 or email@example.com.
Good news: It’s an ideal time to start a business in Columbus, according to Steve Barsotti, a director with Kegler, Brown, Hill & Ritter.
“The downturn in the economy has sparked a lot of activity in the startup space over the last few years,” Barsotti says. “Some people have started businesses by necessity as other career avenues have been cut off to them. Fortunately, the business community here is very open, with many resources available and a lot of formal and informal support.”
Barsotti emphasizes the importance of having a good business plan along with good records, books and documentation right out of the gate. “It’s critical to talk with good counsel and accountants when you first start out,” he says. “For a relatively small investment, they will help you set up the business in a way that will maximize your opportunity for growth and avoid more expensive problems down the road.”
Smart Business asked Barsotti about key considerations when starting up a business.
How does one determine the best legal structure for his or her startup?
The best legal structure depends on a number of factors, but it’s particularly important for startup companies to structure in a way that allows for flexibility and growth. The limited liability company (LLC) format is typically a good choice for startups because it provides for pass-through tax treatment and also allows the company to bring in different types of investors and structure preferred returns that investors in a start-up will often expect. Again, basic up-front legal and accounting advice can be critical. Oftentimes, new clients come to us and have already set up a structure that is less than ideal.
How important is the business plan?
A good business plan is the key. Without a good plan, there’s really no chance of getting any funding. It’s easy to get stalled. And it’s important to have a plan that is well researched and thought-out, but also builds in some flexibility. In the startup phase, you need the flexibility to improvise and adapt quickly.
Too often an entrepreneur might have a kernel of an idea, but they have not yet gone through the projections and numbers to determine if it would work as a business. The Small Business Administration (SBA) has good online resources for creating basic business plans.
How can an entrepreneur find funding in the present economic environment?
This is the toughest question for an entrepreneur to answer during the startup phase. The answer depends on the business’s capital needs and what is realistic.
A lot of businesses, in particular internet-based businesses, can be boot-strapped because they are not necessarily capital intensive. The owner uses personal savings, home equity, credit cards and ‘sweat equity’ to get the business off the ground. Asking friends and family is another common avenue, but this raises issues of securities compliance and can get pretty hairy if the business fails.
Because traditional bank financing has been difficult to come by, we’re seeing increased activity in private placement of equity investment with angels and accredited investors at an early stage, particularly for entrepreneurs who have a positive track record. Although bank financing is still tight, I always recommend talking with bankers to see what might be available. If nothing else, it can help develop a relationship and the banker can give helpful feedback on the business plan.
How can the owner protect his or her ideas and products right from the beginning?
At the startup phase, you’re trying to set up your business for cost-effective growth. Protecting your intellectual property is critical to that effort, and all startups should have an appropriate IP strategy, which will differ dramatically depending on the nature of the business. For some startups, strategic patent filings have to be made despite the cost in order for the business to have any real chance of success in the long-term. For others, patents may not be an issue, but speed to market or effective brand protection may be more critical. In all cases, you need to be smart and selective about whom you share your ideas with and you need to have basic contractual protections with those involved to protect confidentiality and to ensure that IP ownership is clearly vested in the company. Having template contracts drawn up is a small investment up front, but the consequences of not having them can be devastating and negatively impact the value of the business you’re trying to grow.
This will also help set the expectations of the people you’re dealing with.
What should the entrepreneur be aware of in terms of contracting labor or hiring employees?
Again, have good contracts. Ensure that confidentiality and non-compete agreements are in place and that intellectual property will be effectively transferred to the company. Be aware of regulatory guidelines that will help you determine whether someone is an independent contractor or an employee. If you need to hire employees, make sure you are in compliance with insurance requirements and tax filings. A good payroll service and a good accountant can certainly help avoid problems.
How can the business get additional help?
Columbus has really developed a solid network that supports startup activity. Technology companies (which include more than you may think) can find assistance with the TechColumbus TechStart Incubator, which has a high-profile presence and provides typical incubator support. In addition, the Columbus Chamber of Commerce is actively working to promote startup activity in the community and provides good networking, research and other support services. It can be a terrific resource for entrepreneurs. Many times, the key to success is simply connecting people with the right experience, vision and skill sets.
STEVE BARSOTTI is a director with Kegler, Brown, Hill & Ritter. Reach him at (614) 462-5458 or firstname.lastname@example.org.
Small startup businesses and individual inventors often don’t take the necessary steps to protect their intellectual property. That can hurt them in the long run, even rendering them unable to profit from their own ideas.
“Many startups look at what it costs to achieve patent protection and they say, ‘I can’t afford that,’ but that is underestimating the value of IP and properly protecting it,” says Sue Ellen Phillips, a partner with Fay Sharpe LLP. “The U.S. Patent and Trademark Office has done startups, individual inventors and small shops a big favor by initiating the provisional patent filing option. It gives smaller entities a cost-effective route to protecting their innovations with time to explore their options for getting to market.”
Smart Business spoke with Phillips about some common mistakes startups make with their IP and how they can protect their innovations.
Why should startups be concerned about IP?
They should be concerned primarily because it can be a very valuable asset to them moving forward, whether it is in the form of a patent, copyright or trademark. If they develop a cohesive IP portfolio, it gives them an offensive position within their relevant market, and they can also use it defensively to keep others from encroaching on their market.
On the flip side of that concern, startups should be aware that there are third-parties out there with IP that may be the same or similar to what the start-up is developing, and that there are serious consequences to encroaching on the IP rights of those third-parties. Businesses can be fooled into thinking the way is clear by not seeing their innovation in the market – but that doesn’t mean someone else does not have patent rights relating to that innovation. Not practicing your patented technology does not mean you can’t enforce it against an infringer.
Also, a strong IP portfolio can become an asset you can license or sell. Maybe you have several streams of innovative ideas that come from your initial ‘a-ha’ moment. You decide to concentrate on line A, but you also have lines B and C. As you’ve grown and your business has become more focused, you have realized you don’t really want those other ideas, but somebody else might. If your IP has been properly protected, i.e. if you have patent coverage, it can be a good revenue source, whether you sell your IP rights outright or license them and collect royalties.
What options are available for startups to protect their ideas?
A lot of startups have financial concerns. They usually aren’t working with a big checkbook, so they should take advantage of provisional patent filing, assuming they meet the patent office criteria, and file for protection of their ideas right from the start, particularly for patentable technology.
Under the provisional filing procedures, you file a patent application defining your innovation. It’s very inexpensive and the patent office doesn’t do anything with it for one year after your filing date.
Nobody looks at it, and it is kept confidential, but you have preserved your filing date. You can also now mark your product as ‘Patent Pending.’ A year from the filing date, you must convert the provisional filing to a full utility application filing and the normal examination process begins.
This provisional patent application is especially appealing for startups, because it gives them a year to determine whether or not they can find backing, whether or not it is a viable idea they can take to market, whether they can find a licensee or buyer who wants their technology or wants to partner with them. Essentially, you have a year to get your ducks in a row.
When a startup has an innovative idea, what should the next step be?
The first step is to record every idea. This used to happen in lab notebooks. People would make sure everything was properly dated, witnessed and signed off on by someone who could verify it was their work. Today, that happens on a computer, but you still want to do it. Keep good records. Document your progress.
Then, there are three basic things the start-up needs to do.
1. Initiate the process to protect their IP, whether by preparing and filing a provisional patent application or a full utility filing.
2. Be sure your innovation does not infringe the IP rights of a third party. This step dovetails somewhat with the first. By conducting a state-of-the-art search or a freedom-to-operate search to be sure the way is clear for you to move forward, also known as doing your due diligence, you will be able to define your innovation in your patent application to achieve patentability over the art you find that may be close. This step also keeps you from finding out down the road, subsequent to any expenditure of time, effort and money to get your business up and running, that your use of your innovation is blocked by the IP rights of another.
3. Make sure you have appropriate documents and agreements in place to protect your ownership interest in your innovation. It’s very important for startups to ensure they have the appropriate ownership and confidentiality agreements in place with any third-party to which they disclose their innovation. An appropriate agreement provides for maintaining the confidentiality of any and all disclosures you may make to a third party, including an acknowledgement that they will not themselves use the information to compete with you or to help someone else compete with you. Depending on the service the third party is providing, it may be appropriate to provide for ownership of innovations that may be developed by them through collaboration with you and based on your IP. Also, be sure that your own associates and employees have signed employment agreements with these same provisions. You want to block off your technology as yours – effectively building your IP portfolio. Often, a startup or individual inventor will develop something that fits well with an existing business of a third party. Your first idea might be to take the idea to that company, hoping they will buy it or help you market it because it complements what they do. Especially in this instance, you want to make sure you have an agreement in place before you disclose anything, to prevent them from declining to do business with you and then walking away with your idea. Be careful to whom you disclose your ideas.
What all can be considered intellectual property?
Your intellectual property is not just your innovation. It’s not just the device or process, but also all the know-how you used in the developing the innovation. That can include design, manufacturing and processing, and many other aspects, even marketing.
If you are taking your idea to a manufacturer to get it produced, you will probably disclose a lot more information during a meeting than you put on paper. You need to realize that is all part of your total IP portfolio. Be sure that when you get those agreements in place they cover everything you might tell someone, give them in a physical format, or transfer to them electronically. Everything you disclose needs to be covered, not just the plans for your device.
What are some common IP mistakes startups make?
Startups often underestimate the value of doing their research and due diligence, and making sure what they are doing doesn’t encroach on the IP rights of a third-party. If they haven’t taken a look at that and they aren’t protecting their own IP, what often happens is they put a lot of time, effort and money into turning their innovation into a going concern, only to get a knock on the door from a third-party who says, ‘You’re infringing on my patent rights’ and proceeds to sue them for infringement. The legal system does not take kindly to those who do not do their due diligence and do not respect the IP rights of others.
You can lose everything you have by not respecting the IP rights of others. Of course, if you protect your IP, you can be the party knocking on someone else’s door.
Sue Ellen Phillips is a partner with Fay Sharpe LLP. Reach her at (216) 363-9000 or at email@example.com.
In the excitement and hard work of starting a company, it’s easy to overlook all the legal aspects. But having a business litigator involved from day one can improve your odds of having a successful venture and help prevent you from making costly mistakes down the road, says T.L. Summerville, a member at Dykema Gossett PLLC.
“I can’t stress enough the importance of an entrepreneur getting good litigation avoidance advice, in conjunction with getting advice on organizing the business and getting set up,” says Summerville. “Those two things go hand in hand, and it is critical to get that input from a qualified attorney.”
Smart Business spoke with Summerville about how an attorney can help your company take steps now to avoid litigation later.
Why does a business owner need an attorney from the start?
Beyond just doing contract documents, business owners really need to have someone look at what their exposures might be and how to avoid and control litigation in the early years of the business. The attorney can also assist with things such as putting together employment manuals and policies, which will help with everything from hiring decisions to discipline. That allows a business owner to address legal concerns in a more comprehensive manner than he or she may be accustomed to doing.
Take the opportunity from day one to use your lawyer, starting with the simple drafting of articles of incorporation, and then as you move forward, with things such as expansion and the acquisition of assets and property. But even if you didn’t take advantage of that opportunity from the beginning, it’s never too late to start forming that relationship.
What kinds of things would an attorney address early in the relationship?
The attorney will look at what research you’ve done into the problems that you’ve seen as common in your industry. For example, if you’re getting into the IT business, have you talked with other people in your peer group to find out what they did and how they protect their own individual property? What are your ideas on marketing your product and protecting the information that you are going to put out into the public domain? How do you envision your company being organized? Will it be a single-member LLC, or do you want to incorporate?
The attorney should also inquire about the kinds of contracts you see yourself entering into and how you intend to deal with staffing considerations. Will you hire at-will employees or use short-term contracts? Do you want to go through a staffing company?And what are the contracts that you are going to sign and lock yourself into? In a staffing agreement, what are the fees you are going to be charged?
At the beginning, you’ll be dealing with the attorney in very basic information in terms of who, what, where, when and why.
What would you say to business owners who say they’d rather just download standard forms from the Internet?
There is no one-size-fits-all approach, especially when you start talking about dealing with employees. As your company grows, you’re going to need expertise in that area. If you want to grow to 100 employees in 10 years, you need to talk to a lawyer to find out what you, as an employer, need to do to protect yourself against liability and comply with federal law, for example.
It’s just a better idea to have an attorney give you advice before you sign any contracts, even ones you might download from the Internet. And if your business is providing a service rather than selling a product, an attorney can help you make sure that your contract for your services includes the terms and conditions applicable to the provision of that service. You want to really dot the I’s and cross the T’s.
Too often, a company has just a very simple contract that says little more than, ‘I’m going to do this thing for you, and here is my price.’ But the finer terms or conditions aren’t sketched out. The contract may not include what happens if the buyer doesn’t pay within a certain number of days of the invoice, such as whether interest is going to start to accrue.
All of those things can be worked through with the advice of a lawyer, so if the purchaser stops making payments, it is clear how that will be addressed. Otherwise, if payments stop, you may have very limited options beyond waiting to see when the next check is going to arrive, because it wasn’t addressed in the contract.
What should a business owner’s relationship be with his or her attorney?
The attorney can help you with managing the legal aspects of your business, and hopefully that will be a partnership that will continue. The attorney should be your go-to person for whatever need arises, and you should know that that relationship will be there and that person is someone you can trust.
Your attorney should get to know your business, your industry and your competitors. The attorney should also be watching for trends that could impact your industry, such as changes in the law that could have implications on what your business is doing.
By working with your attorney as a partner, you can take the right steps now to avoid litigation in the future.
T.L. Summerville is a member at Dykema. Reach him at (313) 568-5359 or firstname.lastname@example.org.
A year or so after a certain company was started, the lead investor brought “Len” on as COO. He had an impressive career in some of the world’s best known companies — Disney, Citibank, Colgate Palmolive, PepsiCo and Cendant. His arrival was welcomed, an expectation that he would be able to bring large corporation discipline, structures and procedures to an undisciplined and sometimes chaotic startup. So with such a notable pedigree, why was he such an abject failure?
As it turned out, Len’s most impressive (and almost only) skill was his exceptional ability to manage upward. What had clearly taken him to the top in large corporations, and what retained the confidence of the company investors until the very end, was the sort of earnest flirtatiousness that makes otherwise intelligent, rich widows give all of their money to sleazy adventurers half their age. He told them exactly what they wanted to hear. He enthusiastically agreed with all of their ideas, however unrealistic, and convincingly blamed every failure for their realization on the incompetence of his subordinates. He created a climate of fear and confusion by constantly firing people and bringing on new ones so that he was the only one who knew what they had been told and what was going on. By so doing, he was able to assure the investors that he was a strong leader taking decisive action.
Big companies are in many ways like grand armies, and big company managers are their generals. Similarities include: absolute respect for rank, gold braid, scarlet uniforms, parade grounds for troop reviews, massed bands, saluting, stamping of feet, red-tabbed staff officers, large budgets for exciting new equipment and prison for the defaulters.
But if big companies are like grand armies, then entrepreneurial startups invariably have to behave like guerilla bands, living off the land and operating from the cover of the forests and mountains. They need to be nimble, quick to adapt, making do with what they have or can acquire, carrying everything they need on their backs. They must move lightly, gaining ground with clever tactics and minimal resources, not to hold it with costly set piece battles. They have to build a climate of creativeness and inclusiveness. Their leaders can only earn the respect of their subordinates by treating them as partners in a common enterprise, formal rank counts for little. When Len arrived without his staff car, without his polished general staff, pulled from the comfortable and respectful atmosphere of his headquarters chateau far behind the lines, and found himself living in the caves and sharing the danger and discomfort with his troops, he simply went to pieces. There was nowhere to hide or nobody to hide behind. People could see the fear in his eyes when the shooting started; they watched him nervously wipe his sweaty palms as he was expected to make a decision and give a clear command. His rank was no substitute for his lack of moral fiber, his talk of all the big companies he’d worked for couldn’t hide his current incompetence and his bombast didn’t fool the people who were expected to carry out the plans.
Out of his depth and unable to control the situation, Len’s behavior became increasingly irrational, his accusations more wild, his blame more extravagant, his actions more bizarre until he appeared to suffer some sort of nervous breakdown.
In the end, Len simply ran away, without a word to anyone, leaving behind everyone else to try and deal with the mess. But by that time he had bankrupted the company.
Julian K. Hutton is president of Merlin Hospitality Management, where he oversees the company’s Hotel Management and Distressed Asset Management operations, drawing on 20 years experience in the worldwide travel and hospitality industry.
The risk of potential failure is ever-present in the life of a startup, especially one that is located in Silicon Valley. As a senior leader, your goal is to maximize the possibility of success by assessing risks and taking advantage of the opportunities that they can present.
Break new ground
Several years ago, my Virsto co-founders and I set out to secure funding for our startup and spent many days visiting venture capital firms along Sand Hill Road, home to many Silicon Valley venture capitalists. Time and again, those VCs would assume that as a startup in the virtualization space, we naturally would develop our first product to support VMware, which was essentially a monopolist in that market at the time.
They were wrong.
On the contrary, we made a conscious decision to build our first solution supporting Microsoft’s yet-to-be-announced competing technology platform. The reason was simple: It was the green field. Many of the companies that were developing products for the market-leading platform had been around for years, giving them ample time to establish themselves and crowd the market. We made a bet that Microsoft would rapidly take market share. We knew that by choosing the alternative path, Virsto would have the opportunity for faster growth with many new users who would need a product to support their brand-new platform.
It was a carefully calculated, strategic risk that we took, and along the way, it taught us several valuable lessons about the keys to going after the green field.
Plan growth wisely
The first order of business was to establish our beachhead. To set ourselves up for success, part of our plan was to grow the company strategically. The first two years were spent developing the technology, determining the product specifics and mapping how the company should grow. We did not outsource quickly or hire with abandon. Instead, we opted to manage our cash reserves carefully before turning on the growth, once we had proven what we had was truly viable.
Too often, startups get overeager and try to “focus” on too much. It is a classic mistake: Right out of the gate, you get excited and want to chase every opportunity in your field of vision. Instead, Virsto took the tack of securing only the capital we needed to start the company and to support our research and development. Determined not to waste a penny or squander a moment of our headstart in the market, we became experts in a specific area that promised great potential growth.
Build a passionate team
A CEO interacts daily with a staggering amount of people in numerous ways — customers, employees, channel partners, board members, strategic partners, investors, lawyers, bankers, prospects and so on. To keep the business running smoothly, it is vital to be team-oriented and assemble a talented group of individuals, interacting with each person in different ways so that each gives you his or her very best.
It is necessary to bring passion to your role, and this is particularly relevant when you are all focused on one goal. At Virsto, our team is defined by its determined optimism. This is a team of people who are very excited about what we are doing and who enjoy working with each other and with our customers and partners. The gang has a strong desire to make a difference, to build something significant. <<
Mark Davis is the CEO and co-founder of Virsto Software. He has been at the center of the networked storage and virtualization revolutions since their inception. He launched the first Fibre Channel disk array in 1994 and was instrumental in growing Sun Microsystems from a nonplayer to the largest Unix storage vendor within five years. Before co-founding Virsto, he was CEO of storage resource management vendor Creekpath Systems, engineering its acquisition by Opsware (now HP), and also repositioned ConvergeNet as the inventor of SAN-based storage virtualization, resulting in a $340M acquisition by Dell.