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How I Did It – An Interview with Andy Greenawalt

[cs_content][cs_section parallax=”false” style=”margin: 0px;padding: 0px;”][cs_row inner_container=”true” marginless_columns=”false” style=”margin: 0px auto;padding: 0px;”][cs_column fade=”false” fade_animation=”in” fade_animation_offset=”45px” fade_duration=”750″ type=”1/1″ style=”padding: 0px;”][x_image type=”none” src=”http://ctinnovations.com/wp-content/uploads/2017/05/Content-Detail-News.jpg” alt=”” link=”false” href=”#” title=”” target=”” info=”none” info_place=”top” info_trigger=”hover” info_content=””][/cs_column][/cs_row][/cs_section][cs_section parallax=”false” style=”margin: 0px;padding: 45px 0px;”][cs_row inner_container=”true” marginless_columns=”false” style=”margin: 0px auto;padding: 0px;”][cs_column fade=”false” fade_animation=”in” fade_animation_offset=”45px” fade_duration=”750″ type=”1/1″ style=”padding: 0px;”][cs_text]How I Did It – An Interview with Andy Greenawalt

Andy is the founder and CEO of Continuity Control. He’s a startup veteran, having been actively involved in startup ventures for more than 20 years. In addition to Continuity, he was the founder and CTO of Perimeter eSecurity, where he invented “security in the cloud” in 1997, and started his first ventures while still a student. His various businesses have been recognized by the Inc. 500, Finovate, and Bank Technology News, among others, for their success and impact. Andy is an active leader in the Connecticut technology community as the vice chairman of the Connecticut Technology Council, a board member of the Yale Entrepreneurial Institute and coach in the FIRST Robotics Competition. He studied philosophy and linguistics at UMass Amherst. Andy lives in Monroe, Connecticut, with his wife of 21 years and their two boys. Below is an edited version of a recent discussion.

CI: What started you on the path of entrepreneurship?

AG: I grew up in an entrepreneurial family and was a geek by background, so I was always building things and starting ventures as far back as I can remember. Many of us run into a corporate roadblock, when the company we work for doesn’t want to build something the way we think it should be built. In the mid-1990s, I was working for a company that did consulting. Connected networks were emerging. I said, “There is a world of opportunity out there, and let’s go get it!” I saw that what people really want is service, where they can pay a monthly fee and get just the function they want. I suggested we charge a subscription fee and connect by network to provide the service remotely for more people—tackle the problem in a different way. At the time, standard businesses had no appetite for doing it that way. Being young and stupid at the time, I took a shot and started my own business. I was 29.

CI: What did you learn from your first startup experience?

AG: I learned that the idea is probably about 10 percent of what it takes to start a business. When you’re young, you have a dream. You think, “We’ll build it and they’ll come.” I underestimated the obstacles and the level of perseverance needed—and the importance of luck. In the late 90s, when we were operating out of the basement, we managed against all odds to sign two massive businesses as customers. To facilitate that business, we needed $1.5 million of equipment. I applied to lease the equipment. I was shocked when the company agreed to lease it to us. Still, we got the equipment and put it into the field. Then the company realized it had based its credit study not on our company, but on a company with a similar name! At first, they wanted the equipment back. But we made our payments month after month, and the rest is history. That business’s success swung on a typographical error.

The point is that luck plays an important role. You need to position yourself to stay in the game long enough to get lucky. You can’t run out of steam before the luck shows up.

CI: What are some of the pitfalls entrepreneurs need to look out for?

AG: The vast majority of businesses stall out at about $1 million in revenue because they’re not thinking like a larger business. You need the long-range perspective to see that you’re actually a big business; you’re just small right now. It’s like looking at your child and seeing the man this boy might grow to be.

CI: How would that perspective translate into action?

AG: You need to systematically remove your obstacles. A lot of that has to do with creating clarity around what the client is actually buying and around the system of delivery. Often, in the early stage, there are a few great people in your company who make clients happy, but it’s not a well-understood system. You have to understand what the core DNA is that makes clients happy and try to replicate it, going from a person to a system.

It’s common for founders and entrepreneurs to be very high-functioning in many areas—marketing, technology, finance and more. But in reality, they’re not great in any more than one or two areas. When building a business, you have to recognize what the component parts are and think about managing supply, delivery and other components as if you’re a billion-dollar company. You have to see that something that’s one person’s responsibility today in 10 years will be a department with a whole team. This is a major human resource challenge.

CI: What are some of the other human resource issues entrepreneurs need to focus on?

AG: You have to understand your own weaknesses and build a team around you—create a yin to your yang. You need to build a team of opposites that are highly fluid. You’re inventing a business that hasn’t existed before, so you need people who have incredibly high capabilities but who are flexible and fluid enough to deal with uncertainties.

CI: You’re involved in startups as an investor now. What advice would you give to entrepreneurs seeking venture capital?

AG: For a first-time entrepreneur, raising capital is a scary prospect. Many put together a PowerPoint and go talk to money. But they don’t stop and honestly reflect on whether or not they’re bankable. I went through that and realized I hadn’t done what was necessary to get financing for a company. So I got other experienced people and made them my bosses.

If you pitch to several VCs, and you keep getting no, you have to ask yourself why. Go back to the VC and ask why and truly listen to what they say.

As an investor, one common situation I see is that entrepreneurs don’t understand that the market for their product is too small. The possibility of building a big business is small, because the whole market isn’t that big. Some folks just don’t understand that.

CI: What is the biggest lesson you learned as an entrepreneur?

AG: Don’t hire anyone unless you have three viable candidates. When you’re starting a company, you’re trying to conserve cash, so you end up hiring someone when you actually needed that person three months before. Because of that, you’re tempted to hire the first person who walks in the door, and you invariably regret it. By having three good candidates, you can compare and contrast and choose the best one. If you do that, you’re always much better off.

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Why Your Company Should (Probably) Bootstrap

In my work, I see a lot of companies looking for investment. At the Angel Investor Forum (AIF), of which I’m president, we screen a few hundred companies per year, ask a couple dozen to present and actively pursue diligence on about 10. Plus, I mentor or judge at a couple of startup weekends each year and go to five or six accelerator demo days.

But I also have my foot in another camp. I’ve been an entrepreneur since 1979 starting and running companies that I own. You’ve never heard of any of these companies – they’ve all been bootstrapped. They are companies that I grew and profited from with no outside funding. Since 1994 I’ve been consulting for people who run such companies. The difference between bootstrapped companies and those with outside investment is stark.

The entrepreneurial world is changing

The problem I see is that everyone thinks starting a company and raising money go hand in hand. They don’t, but you’d never know it from reading the press. But there was no venture capital industry before the late 1940s – and some pretty big companies were started back then. Many are still around, like IBM, AT&T, GM, Xerox. Even into the 1970s and 1980s, when companies like Microsoft, Oracle and Dell were started, they didn’t go after outside investment first. They went after customers first. It might surprise you to learn that in the past 50 years, half the companies that have gone public did it without taking any money from venture capital firms or angel investors.

Only in the past 20 years or so has raising money become the first thing entrepreneurs think of. But in the past few months, people are starting to see the error of that approach. Don’t get me wrong – there’s a place for angels and VCs in the entrepreneurial ecosystem. I’ll get to that in a minute. But here’s what people are missing.

The kind of investment that’s right for your company is not up to you – any more than the size of your shoes is a fashion choice. You can choose the style of your shoes, but not the size.

I hear from entrepreneurs all the time about why they need money. They’ll grow faster, hire more sales people, add new features, etc. But investors don’t invest to grow your company. They invest to get a return on their investment. If people sold products the way they ask for investment, they’d be saying, “You should buy my stuff so I’ll be able to upgrade my Internet service to a faster line.” That’s not a very good sales pitch.

It doesn’t matter to an investor whether investment will make your company better – it matters whether your company makes a good return on his or her investment. In my work I see a lot of really good companies that are lousy investments.

A good company is not the same as a good investment

This idea is starting to gain popularity. Have you heard about the Series A crunch? Companies that got some early seed funding find they can’t get funded when they need to raise $1 million or more. Maybe they should have gotten their seed funding from selling their product to customers rather than selling their concept to investors.

Did you read this profile of two companies in the same industry? RJMetrics got started with $10,000 of bootstrapping money and got its first customer in three months. GoodData went for funding first and has now raised $75 million. The founders of RJMetrics own 80% of their company. Not so for the founders of the GoodData. And here’s the money quote:

If RJMetrics were to sell for, say, $50 million, the founders would be set for life financially. If GoodData were to sell for $50 million, it would be a disaster.

A recent copy of Inc. magazine has an article about a company (ESRI) with almost $1 billion in revenue that has grown for 43 years without a layoff or downsizing. Here’s what Jack Dangermond, co-founder, says:

One thing that has made us so successful is that we’ve never taken outside investment. That means we can concentrate on what our customers want – not what the stockholders or VCs want. That’s a strategic advantage.

In the past dozen years the cost of starting many types of companies has plummeted due to cloud computing, hardware getting cheaper, open source software being more powerful. All of these reduce the cost and risk of getting a product to market.

Add to that the newly discovered concepts of learning entrepreneurship. The phrase “business model” is not just a change in terminology replacing business plans and competitions. It is in fact a new way to start a company with less risk. Customer development, lean startups, business model canvases – these are more than buzzwords: they are all new ways to help entrepreneurs earn their craft faster and better, so they can start companies more rapidly, with less capital and with less risk.

According to Chris Dixon (himself a VC with Andreeson Horowitz),

There are lots of tech companies that are very successful but don’t fit the VC model. If they don’t raise VC, the founders can make money, create jobs, and work on something they love. If they raise VC, a wide range of outcomes that would otherwise be good become bad.

The numbers support this concept. At least 500,000 companies get started every year in the United States. Many people are surprised to learn the VCs fund only about 3,000, and angels probably fund another 60,000. These numbers are approximate, but the order of magnitude is right. That leaves a lot of companies to bootstrap. Why? Not because they can’t find investors, but because their model isn’t right for equity investment.

What is the right model for raising equity investment?

You’ll know you are using the right model when you can generate the kind of returns investors need. At minimum that means being able to sell your company and returning to investors 10 times their money in five to seven years, or three times their money in two to three years. Minimum. That generally happens when one of the following is true:

You have a market that’s large enough to create a billion-dollar company.
Your market is large AND is such that there will only be one key player (like eBay), so you have to grow very fast to eliminate all the competition.
You have invented some technology that’s protectable and desirable to an acquirer for strategic reasons.
You’ve grown a company fast enough to prove the business model, but there’s a huge untapped market that your acquirer has the resources to exploit.

These returns generally don’t happen when several competitors are pursuing the same idea, when your technology can be easily replicated, or when your success depends on the whims of fashion. In those cases you can often run a profitable bootstrapped business by executing well, but it’s much harder to have an exit that gives investors the returns they want.

What’s different about running a bootstrapped company?

The biggest difference is that a bootstrapped company focuses on selling products or services to customers. For a company with equity investors, that’s only the first step. An invested company focuses on selling the company. This difference drives all the other differences.

An invested company focuses on fast growth. You have to be bigger than the competition to get acquired. A bootstrapped company focuses on getting cash in the door faster. So it needs sales. Usually this means it grows slower. Often it can pay much more attention to customers than to competitors.

A company looking for equity investment spends a lot of time going after investors for cash to grow. A bootstrapped company gets cash primarily from customers – so it needs to make sales right away. Often that cash comes from an alternative sale. For example, you might sell consulting services to bring in money that will fund the development of your product. Investors frown on this because it takes focus away from your key objectives.

Bootstrapped companies try to keep their expenses variable so they minimize cash outlay while they grow. They do this even if they might save money by spending more up front. This may mean leasing equipment rather than buying, paying more in commission for sales because it means less in salary, or hiring part-timers and contractors even if a full-time employee would be more productive.

A strong ecosystem emerges when there are companies at every level and scale: those that should be funded by angels and VCs and those that should bootstrap. But equally important is that entrepreneurs learn what it takes to make a strong company and learn which type of funding is right.

About the Author

John Seiffer runs CEOBootCamp.com and is president of the Angel Investor Forum of Connecticut. He’s been an entrepreneur since 1979 and lives in Milford, Connecticut. You can contact him at john@CEOBootCamp.com.

Finding the Right VC for Your Company

Tips from Successful Entrepreneurs

Transforming a great idea into a successful company takes money. If you’re an entrepreneur, chances are that the first funds you’ll cobble together will come from you, your family, your friends and perhaps an angel investor. But at some point, taking your startup company to the next, crucial, level is likely to require an infusion of funds only a venture capital resource can provide. How do you go about finding the right VC for your particular company? Connecticut Innovations asked four experienced entrepreneurs with successful fundraising track records to offer their advice. Here are the pointers they offered:

Start with Smart Targeting

“Every firm has a sweet spot they’re looking for in terms of their favorite kinds of deals,” says Harry Penner Jr., executive chairman and co-founder of New Haven Pharmaceuticals. “You can save yourself from kissing a lot of frogs that turn out not to be princes if you do some homework before you start knocking on doors.” Do your research. Christopher McLeod, president and CEO of AxioMx Inc., suggests exploring which VCs have invested in other companies in your industry. Check out VCs’ portfolios online to see if they’ve invested in companies similar to yours. And make sure they’re actually working on deals in your time frame, says Bryant Guffey, CEO of ZetrOZ Inc. “As a person looking for money, you don’t want to spend too much time on people who aren’t actively investing, although they can be helpful in connecting you to people who are.”

Tap into your networks. “If you have angel investors, ask them who they’re familiar with and network out from there,” says McLeod. If a VC firm you pitch to doesn’t think they’re a good match for your company, ask that firm to recommend other VCs that might be interested. Go to venture fund conferences and talk to participants.

When choosing VCs to approach, consider the dollar amount you’re looking for, says Eleanor Tandler, CEO of NovaTract Surgical Inc. Because of the nature of her company’s new device, for example, she knew she should target VCs looking to make smaller deals and could eliminate large, institutional venture capital. “I didn’t need to raise of lot of money. For me, the right investors were ones that would invest $1 million or $3 million, not $10 million.”

Look for People Potential

Focus on VCs that can connect you to other key people. “Ideally, the VC is active and has relationships in the general space your idea is in, so that you can get introduced to potential customers and suppliers who could help you build your business,” says Chris McLeod. Bryant Guffey agrees. It’s not about just the funding a VC can offer, he says, “but what contacts they bring to the table.” McLeod adds that the right VC can often help in employee recruiting, as well, “especially if you’re in a specialized field and need technical expertise.”

Seek Long-term Investors

McLeod recommends thinking beyond a VC’s immediate financing ability. “When you start looking for venture capital, you want someone you can be with for a longer period of time and that can help support you as you need additional capital,” he says. “You’re looking for someone who can create the most value with you over time.”

Consider Industry Knowledge

Eleanor Tandler advises that it’s important to choose a VC that understands your company’s space. “They have to have some appreciation for what you’re doing,” she says. “You don’t want investors who don’t understand your business and then try to tell you what you need to do out of context.”

Value Open Minds

Your product or service may not fit easily into established models in your industry. You have to keep looking until you find exactly the right investor for a particularly innovative idea. That’s how Bryant Guffey teamed up with Connecticut Innovations. ZetrOZ’s idea was to use a traditional medical device in a new way. Most VCs, Guffey found, were looking for a typical medical device for surgery or drug administration. “The great thing about CI was that they were willing to look at something outside the box,” Guffey says. “They took a leap of faith in us, and that inspired other investors.”

Assess the Relationship

Harry Penner stresses that when choosing a VC you need to think about the individuals you’d be working with. “You want a good working relationship. I tell people, whether it’s a corporate partner or a VC firm, once you take the money, you’re married.” Bryant Guffey echoes this point. “You need to think of it as a relationship and invest the time to make sure you’re comfortable with who your partner will be,” he says. “You need to make sure there’s an alignment of interest and horizon, in terms of the expectations of how the company’s development would fit with the VC’s fund objectives.” Penner notes, “You need investors who are committed to what you’re trying to do and are fully bought into your business plan and the team.”

Build a Better Board

In some cases, VCs, especially lead investors, will have a seat on your company’s board. Assembling an effective board requires a fine balance. Board members may vary in their perspectives, but should share a fundamental philosophy. “You don’t want groupthink or to have everyone cut from the same mold, but you do want to avoid potential conflicts,” says Chris McLeod. Ideally, he says, the board should include people who bring a variety of skills, experiences and expertise. Consider the strengths you already have on the board, then look for others with unique attributes to round out the team.

Bryant Guffey notes that, while he and his team didn’t want to bring on people who had all different views on which way the company should go, they did want enough variety to have “a healthy exchange of ideas.”

Some investors may have “observer status” on a company’s board. Technically, this means they don’t vote on key issues. But Harry Penner offers some advice on the subject. “Sometimes you might find that the dynamics between board member investors and observer investors is such that observers can end up having as much clout as some board member investors,” he says. “Be careful not to put too much emphasis on the difference between board members and observers in how you deal with people.”

Make a Compelling Case

Once you’ve got the ideal VC in your sights, of course, your challenge is convincing them to invest in your company. When your big moment arrives, says Eleanor Tandler, “You can’t underestimate the impact of having a succinct story with a value proposition and a strong business plan.” While VC firms may include people with backgrounds in engineering, software development or other disciplines who might be interested in the intricacies of your product, she says, “VCs’ decisions are always business decisions. Wowing them with your science isn’t going to do it. The value proposition is the most important—above and beyond anything else.”

A final piece of advice Bryant Guffey offers is, “Don’t give up. You’re going to get a lot of no’s before you get a yes.”

The Panel

Bryant Guffey, Co-Founder and Chief Executive Officer, ZetrOZ Inc.

Bryant co-founded ZetrOZ in 2009 while pursuing an MBA at Cornell University. Before Cornell and ZetrOZ, Bryant was a lead design engineer at General Dynamics, a multi-billion-dollar defense contractor. ZetrOZ is utilizing next-generation ultrasound technology to create a new wave of convenient treatments for today’s most common pain conditions.

Christopher McLeod, Co-founder, President and Chief Executive Officer, AxioMx Inc.

Chris is the former president and chief executive officer of 454 Life Sciences, where he led the commercialization of its high-throughput DNA sequencing systems and managed the company’s integration with Roche Diagnostics following its acquisition. Previously, he served as executive vice president of CuraGen, negotiating strategic drug development partnerships. Prior to joining CuraGen, Chris was chief executive officer of Havas Interactive (formerly Cendant Software), a leading international computer game and software developer. He serves on the boards of and is an investor in numerous startups. AxioMx is a leader in recombinant antibody technologies.

Harry Penner Jr., Co-Founder and Executive Chairman, New Haven Pharmaceuticals Inc.

Harry previously founded and co-founded six other biotechnology companies, including Rib-X Pharmaceuticals and Marinus Pharmaceuticals. He is also chairman of Affinimark Technologies and Prevention Pharmaceuticals. From 1993 to 2001, he was president, chief executive officer and vice chairman of Neurogen Corporation. Previously, he served as executive vice president of Novo Nordisk A/S and president of Novo Nordisk of North America Inc. New Haven Pharmaceuticals is a specialty pharmaceuticals company developing proprietary prescription pharmaceuticals that utilize currently marketed drugs or generally recognized as safe active pharmaceutical ingredients for use in therapeutic applications that represent significant market opportunities.

Eleanor Tandler, Founder and Chief Executive Officer, NovaTract Surgical Inc.

Before founding NovaTract Surgical, Ellie was the director of venture development at UConn R&D Corporation, where she worked to create new business startups based on innovative technologies developed by University of Connecticut faculty and staff. While in that role, she served as interim CEO of New Ortho Polymers, a UConn startup focused on developing new orthodontic appliances using high-performance polymers. Prior to that, she spent five years as a venture capital investor with Radius Ventures, an early-stage venture capital firm focused on health and life sciences, based in New York City, with approximately $230 million under management. NovaTract Surgical is a venture-backed startup company founded to develop innovative laparoscopic medical devices for surgeons to take minimally invasive surgery to the next level of ease and simplicity.

Managing Growth – Recognizing and Hitting Transition Points

Most startups fail. A recent study of 2,000 venture capital-backed businesses showed that 75% failed in three to five years. They are not my audience. The companies that get liftoff, break free of the “small business” gravitational pull of $1M sales/year and keep going – you are my audience. Congratulations!

Growing businesses, whether they be service-, manufacturing- or technology-based companies, begin to gather momentum and then scale. That’s the point when they hit upward inflection points that are step-ups from where they are today. They expand products, plant capacity, market reach by segments, geography or international markets, and even physical locations. They may take on partners for manufacturing or distribution, and their need for what they see as “nonessential services” (like legal, finance and executive recruitment) accelerates to uncomfortable levels.

Most successful business founders have a unique ability to focus, becoming riveted on filling a customer-valued market need. Yet they all seem to have the same blind spots that cause them to miss critical transition points with common negative impacts. The results are the same: they fall behind and become reactive, leading to nonconstructive stress throughout the organization. The further one gets behind these inflection points, the harder it is to catch up.

#1 – Managing for Profitability

It is about the money. Seriously. Building a culture driven by financial goal setting, commitments and ownership, timely performance reviews and recovery plans, for if you fall behind, is critical. Required are staffs and teams that understand managerial finance, including managing-for-profit, productivity, cash flow management and building a healthy balance sheet. When do you do this? Timing and dedication to the process are key before you run through scarce capital and cash.

#2 – Transitioning to Marketing

Companies go through stages, beginning with invention and proof points and then moving into initial sales and broader market acceptance. Somewhere in there, the world notices your “better mousetrap” and competitors want “in” to your market. Some erstwhile competitors are big and have plenty of resources. So how do you compete? Refining your value proposition and aiming at defensible market niches is the key. Along the way, pricing strategy becomes crucial. The most important variable is changing the game before the competition recognizes it. That’s called marketing, and doing this too late is, well, too late.

#3 – The Most Valuable Resource – Your People

It never ceases to amaze me that many executives do not realize that their key resource goes home at night. You can have incredible patent protection, but if the “people engine” isn’t running, you are in deep trouble. Similarly, at inflection points, if you do not add key human resources, you will fail. Most growth businesses are too slow to add a human resources manager or executive, and that is a killer. Think about the complexity of staff quality and timely hiring, compensation planning and management training and development at all levels and performance appraisals. Think, also, about developing a corporate culture that is positive, progressive, honest and risk-taking. When do you get started on this? The sooner the better!

#4 – Win in Your Primary Market

You cannot sell the second if you do not sell the first. Become well established in your primary market and build upon that to be successful. Develop your credentials of value, quality and service. Too many growth businesses go horizontal into additional products and markets too soon and default their primary market before expanding. I call these “hobbies,” and they are distracting and resource diluting. In today’s business world, you must execute with precision, quality and speed. You need to determine what is a critical path and what is not.

Founding CEOs are focused and driven, and that is what ensures their success. They know what they know, but all too often they neither recognize nor appreciate what they do not know. The above stress points are very real, and simply understanding that they loom ahead is helpful. Successful companies confront them in a dedicated and timely way. Others miss the inflection points and inject unnecessary risk into their business equation. How you adjust and develop new practices will define the future performance of your business.

About the Author

Jeff Goodman is the principal of Best Practices Inc., a business consulting firm located in West Stockbridge, Massachusetts. Jeff has helped companies such as General Electric, IBM and others make timely, high-quality decisions. He will dig deeper into some of the points highlighted above in future articles. You can contact Jeff at jeffgoodman47@outlook.com.

If you are interested in learning more about this “Managing Growth” topic at a CI-sponsored seminar, please contact Melanie Hoben at Melanie.Hoben@ctinnovations.com or 860-258-7820.

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