Public Service Announcement to Founders (and the service providers who feast upon them)
This story was originally targeted at founders in the cannabis industry and posted on my venture firm’s website, gtwy.co, on February 27th, 2017. Since it is applicable to all founders, I’m reposting it here. If you’re not in the cannabis industry, just ignore those references.
You did it. You left the corporate farm and ran straight for the jungle of entrepreneurship, armed with nothing but an idea and the determination to build your own company — in the cannabis industry, no less. You’re free, and you’re focused. You’re not mere livestock any longer: you’re a wild beast, and you feel as if nothing can stop you.
Of course, you’re wrong. There are plenty of hungry wolves out there in the forest, and they often drape themselves in sheep’s clothing, wearing name tags that read “service provider” and hiding their deadly fangs until it’s too late and they’ve drained you of all your blood. You can’t really blame them; it’s their nature. It’s what they do. You see, they really don’t care if you live or die. They just want to eat, and it’s crucial to recognize that you, my rogue lamb, represent the ultimate culinary fusion of two irresistible, mouth-watering dishes: cannabis and startups.
If you had any doubt about mainstream culture’s near fetishization of startups, look no further than Apple’s recent announcement of their “Planet of the Apps” show, in which celebri-founders like Jessica Alba, Gwyneth Paltrow, and will.i.am judge pitches and mentor companies hoping to build the next “killer app.” Service providers see this kind of circus — they read articles in TechCrunch about reckless venture capitalists throwing around stupid sums of money at seemingly ridiculous ideas — and think to themselves: “dinner!” Er…I mean, “customer!” Couple that with almost daily news stories about the exploding cannabis industry in which people are allegedly tripping over ever-increasing stacks of cash, and you, fair cannabis startup, are the hottest new item on the menu.
There’s nothing wrong with service providers, per se. In fact, good service providers that understand startups and respect the struggle can be valuable allies. But many service providers don’t understand startups at all. They come from a world of bloated corporate bureaucracy, where deadlocked committees with unpoliced budgets and vague success metrics are easily impressed by someone who actually gets things done and sends them a glossy report to prove it. This has trained many service providers to overvalue their work; they assume that if a half-hearted logo design job is worth $100M to Gap, then offering it to startups for $100k is a bargain.
But to most nascent startups, even the “perfect” logo is worth only about as much as what some service providers will charge you for an hour-long phone call. And guess what percentage of the company it’s worth? Zero. Zero percent. This isn’t because logos are worthless — they can actually be quite important — rather it’s because most startups have no money and can’t afford to be throwing equity around like it’s 1999.
Like an Orange Country plastic surgeon with his eye on a shiny new yacht, Predatory Service Providers (PSPs) will try to convince founders that they need much, much more work done than they actually do. Consider these (anonymized) examples of what I’ve seen in my years working with startups, both at Gateway and before:
A simple, clean website with email capture and a blog.
$10k to build a proprietary site, presumably one that only the service provider could maintain.
Spend the weekend on Squarespace. It costs under $20/month and comes with templates.
$5,000/month for “CFO services” for two years, plus some equity. Because, you know, everyone needs a CFO.
Hire an accountant that costs $150/hr for 1-2 hours/month.
Help with trademarking a name.
Pay $5000 to hire lawyers who will hire a paralegal to search for conflicting names.
Be the paralegal. Step 1: Google your name to see if it’s in use by someone who might sue you, or in a way that would be similarly confusing to customers. Step 2: Spend your own time looking through the Trademark Electronic Search System at http://uspto.gov to find potential conflicting trademarks in your space.
PSPs like these can exploit young companies because founders often feel overwhelmed, and rightly so. After all, typical founders are patently unqualified to do just about everything they’re supposed to do in order to build their businesses. Founders actually do need help. Fortunately, not all service providers are wolves. You can generally tell when a service provider is experienced at working with startups because 1) they will be focused on teaching you to fish, rather than fishing for you; and 2) they will forego short-term profit to take risk with you in the hopes of building a relationship that will eventually be more profitable for them in the long term.
Service providers who are willing to be official advisors can be great allies. In this case, you usually form a relationship with a particular individual, not a firm, and grant him or her standard advisor-level equity (typically a quarter to one percent). In exchange, your advisor lets you do the work, but gives you feedback, corrects errors, and generally helps you improve your skill set in the area of his or her expertise. In other words, they teach you to fish.
When it comes to risk-taking, it is ironically often large companies that are more comfortable taking the startup risk with you. Some large cloud hosting companies will give services away for free to startups. Even Silicon Valley law firms, for example, have deferred-fees programs. If your startup dies, they’ll never get paid. But if you succeed, you’ll pay them for past work and hopefully — because of the relationship they’ve built — stick with them for all your future legal needs.
The best way to avoid predatory service providers is to embrace the MacGyver mindset from the beginning: if there’s a rubber band and some duct tape lying around, build it yourself. Don’t even look for other options, and make it really, really difficult for anyone to convince you to part with so much as a single penny. Your bootstrapped solution may make you uglier and less efficient, but you’ll be alive, which for early stage startups is most of the battle. Gradually, as your startup grows into a full-blown company with a healthy balance sheet and cash flow, you’ll have budget for expert opinions and glossy reports. Someday you might even use that budget to harness the very service providers you spent your baby startup days avoiding, and instead of predators, you’ll come to see them as your own well-trained pack of useful pets. But until that day, beware of wolves in sheep’s clothing.
Originally published at www.gtwy.co.