TABLE OF CONTENTS:
II. Previous ventures
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"Going out on your own" is a very complicated and risky matter. It normally takes several years of hair pulling thinking and months of preparation before it materializes. After that, luck usually plays a role in the success. If you stop by any popular book store, you can always find a couple of shelves of books concerning going out on your own written by entrepreneurs of all professions, from retails to high tech. So I won't bother to tell you about what you could get from a book. Rather, I will recount what I went through starting from the very first venture up to a small success today, and making comments along the way. At the end of the write-up, I will give you a general road map, i.e. the road that I have taken. By no means the comments and road map are meant to be universally correct. They have been filtered through my own view, perception, experience, and situation. Take them as is and adapt them to your own situation. You will see countless mistakes I've made over the years and have paid for them dearly in terms of effort (or time) and money. Some mistakes are naive, some just plain ignorant. Hopefully we all can learn from them and avoid making them (Ha). I hope that all of us will contribute to this issue as this is the American dream, VNese dream too :-)). I also sincerely hope that more of us will have a chance to be our own boss and really having some freedom in both thinking and doing our professional jobs. With all of that in mind, travel with me in this fun and joyful journey.
II. PREVIOUS VENTURES
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I am currently one of 3 senior partners and owner of a small company that specializes in signal and speech processing, registered in Maryland. We have been in business for more than a year and there are no signs of slowing down in the near future. Our vision of the future is stronger and clearer than ever. According to a recent statistic from a special issue of Inc. magazine last month, more than 50% of founders with current successful company have tried the entrepreneurial route more than once before. So don't be discouraged by a couple of failures.
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My first venture, or is it mis-venture, occurred about 11 years ago. I was working with a state of the art DSP at that time, the Fujitsu MB8764. This chip was way ahead of its nearest competitor, the TI 32010, by running at 10MHz clock and employing the Harvard bus architecture, separating the instruction and data paths so that most instructions can be executed in 1 clock cycle. I used to spend weeks laboring over stacks of assembly language listings and the very unfriendly debugger. Most speech processing algorithms were written in Fortran. So it is natural to think about a cross compiler that can go from Fortran to an intermediate form then to the target DSP assembly. The intermediate form would provide the flexibility needed to adapt to various DSPs. I talked with 4 other engineering friends of mine about the idea, and all of us were very excited about it. However, probably none of us really believed that the idea was good enough. So we agreed that we all would keep our fairly well paying jobs and worked on the project during our evenings and weekends. We discussed the project extensively and immediately split up the work according to individual strengths. Beside the technical task, I got to do the market survey on the side. Within 4 months, I found a company in Texas which had announced that within the next 3 months it will ship a whole line of cross compilers for the TMS320xx DSPs. Even though we were not targeting the TI chip, we got discouraged greatly by the news. The "coalition" faltered. More than a hundred man hours were wasted. I laughed at myself and more seriously started to read about how to start a business. I found out that this mis-venture had all the ingredients for failure.
a) First of all, a more thorough market survey needs be done BEFORE any extensive work is performed, NOT in parallel as in this case. In case of new and emerging market like this software, statistics of related products would dictate whether there would be a market or not. These data include how many companies are going into the DSP market, what applications can be implemented using DSP chips, the company(ies) already in the DSP compiler market. These data helped determine how large the market could be and whether one or more competitors could be tolerated.
b) Secondly, the so called "company" had no organization. Even though it may sound like a cliche, but a tightly organized group has a lot more chance to progress and survive. In my case here, the group consisted of 5 engineers. There was no president or marketer(s) to think about much more important matters: financial analysis, manufacturing, advertising, distributing, accounting, long and short term strategy, etc. All effort was put in to make the product the best it could be. Then what? Where and how do we sell the product to make money?
c) Thirdly, there is no firm short or long term plans for the product and the "company". There was no such thing called "vision". The short term plan was to build a good cross compiler for the Fujitsu DSP chip; the long term plan the same compiler for other DSPs. There were no plan how to market and distribute the product. We lost touch with reality. No financial issues were ever raised in the many meetings we had. We were totally wrapped up in the technical aspects of the product. This mistake is very common with young, enthusiastic, and inexperienced entrepreneurs. It is a fatal mistake. I have read about numerous excellent products that failed in the market for lack of marketing and distribution, and about numerous companies that folded due to cash flow problems even with hundreds of thousands of dollars backlog.
The biggest lesson I learned here is that engineers do not make a company and keep it going. Guys with visions (i.e. the marketers) make a company. The financial officer keeps the company going. Engineers only make products sold by a company. That's how "small" the task of the chief engineer feels like. The technical problems usually do not doom a company, the financial and marketing problems do.
Another side note should be mentioned at this point for all potential entrepreneurs is that you should check the conflict of interest agreement that we all signed on our 1st day at a job. You may find that it's very vague and would encompass every thing you do professionally. It would be OK if you open a grocery store or working as a real estate agent (Ha), but probably NOT for opening a consulting business using your professional knowledge. In other words, no "moonlighting" :-)( The dangerous thing to note is that your current company will let you do whatever you like. You can even use their facilities to do your own business from your office. But when your "secret" company becomes profitable and/or larger, then you quit your job to attend 100% to your business, then your company is going to go after you. Now you have something to be taken away. Thus, NEVER do anything for your own business from your office. Your many years of hard work to build a business can be taken away legally at the turn of a dime if it can be proven in court that you did use the company's facilities. You can do many things to prepare for the new business, but NOT actually do it. What can and cannot you do? It's a grey area. You make the call.
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My second mis-venture started about a year after the first. I teamed up with a close and good engineering friend of mine and an older friend working in the marketing department. The company charter was to provide services related to satellite communication networks. Mine and my young friend's experience seem to complement each other very well. We have agreed to let the older friend be the president hoping to capitalize on his leadership and experience. I have learned well from the first lesson (Ha ?!?). From our initial meetings, it sounded like my older friend had some experiences in helping others to form their companies. We thought out a good and catchy name for our venture. I trusted this older friend to register our company with the state of Maryland which I recall would cost about $50 or so. I spent about $70.00 of my own money to subscribe for 6 months to the popular Commerce Business Daily (CBD) published daily by the government (Note 1). Since we all still kept our current jobs, we need a registered company to bid proposals. I have set up meetings with a couple good friends of mine who were already running a business and have agreed to team up with us. My president did not show up for the meeting. I confronted him about missing the meeting and about the registration and heard very ridiculous excuses. So from my leader there were lots of talk and no action, no vision. I got discouraged after about 4 months and put an end to it. The lesson I learned from this mishap is that selection of your partner(s) is an extremely important process for a new business, especially the president position. This person should have a vision of the products to be produced similar to your, same ideas about long and short term direction of the company, and a good knowledge of the market you are trying to penetrate.
There are many similarities between these 2 first mis-ventures:
1. All principals are very hesitant in quitting the current job to go
for the new business.
2. There was still no clear direction (or vision) for both the products (or service) and the company.
3. The involved parties did not really believe in the success of the new company.
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My third mis-venture came in about a year and half later ('85-'86). Still going with the engineering friend in mis-venture 2, called H, I found an old friend, called C, who was having a full time job and a registered consulting company. How he could do it, I was not told of the details. Our experiences are very much complementing each other. We had boasted to each other in the first meeting: "We could do anything now" (Wow!!?). We wanted to pursue small contracts to survive and work on a speech compression module for big bucks. The strategy is to build up a consulting business and wait to be bought out by a big company. We bid on various small contracts from all gov agencies: National Science Foundation (NSF), DOD, DOE, etc. Everything proceeded very well for about 3 months. I put in about 30 hours a week in addition to my full time jobs. The PC I used was near state of the art: a PC XT with 40 MB hard disk and 640 KB RAM. I worked more than a dog and had no life. Then came 2 pieces of news that broke up the coalition.
News #1: I learned that the speech compression module we were working on will be used in the bid of which other participants are AT&T, NEC. I used papers published by these companies to build our module. We are a small startup that nobody knows how long it will survive. I did not see we have a chance.
News #2: the current sole owner, C, had talked to a company in Oklahoma about video conferencing and wanted to sign a contract to do an impossible thing (at that time): design and deliver a module that can perform 10:1 color video compression in no more than 9 months. If the prototype demonstration was successful, the other company will buy us as one of their subsidiary. At that time, there was no such standard as MPEG, DCT was not known to compression video, and the most advanced DSP chip was the slow TMS320C25. C had worked with video compression before, successfully with a system with 2:1 compression rate. But we needed 10:1 compression, a technological break through in 9 months. I and H refused to cooperate in this project and the "coalition" was broken up. My big lesson to learn here is never do any thing half-ass, because the other half is going to be blown away also. I was really burned out after this mis-venture and it took me quite a while before I could recover both mentally and physically. Also my comment above about the importance of selecting a partner, especially for the president position, is more true than ever. The difference in our approach was too big to compromise.
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My last venture started late summer of '93 and led to the current company of mine. I changed my job in summer of 1987 to work for a DOD contractor and met my 2 partners here. The president is a very close and trusted friend, call HS. We car pooled for a while, went out to eat lunch together almost every day, and talked about our dreams. We worked together for a while then he was promoted to be my manager. HS had a lot of contacts while working as a technical manager. In early 1989, we started to talk about new ideas that can make us rich and started to see other people came out with products we had planned. Near the end of '89, the laptop PCs were not popular yet because of high cost and the PCMCIA bus did not exist. In '89, modems were bulky and expensive, and hard to setup (with DIP switches). A portable modem of the size of our palm that communicates with the PC through the serial port would make a hot product. I told HS about it and he was very excited. So we started to do market research for it. 3 months later, some small company (I forgot the name) came out with the product selling for about $120. A couple months later, HS started to talk with me about a mapping software for the PC that would render obsolete AAA trip tick. We both thought that this product was neat. We sat on the idea for about 6 months and see PC USA software coming out selling for about $80 (I recalled). These are 2 major ideas that stayed well in my mind and they are not the only ones during '90-'92. Late '92, we had a good idea for a consumer product that possessed quite a bit of good properties: very original (we did not find similar product on the market), and competitor tolerant (market is large enough that 1% of market share can spell millions of dollars). We did some more market research for it and decided it was worth the risk. We went all out for it. Late summer '93, we took the plunge. Here are what we did:
Action 1. I and HS quit our very well paying jobs and incorporate a company. HS is the president. I am the VP of Engineering. The 3rd friend, SC, would quit in a couple of months due to personal difficulties. He did quit as planned.
Action 2. We had an attorney to register us with the state and IRS. Spending $1500 in attorney fee while having no income hurt. Reading that some guys in some state (I forgot) can register your company for $50 did not make the decision easier. But we did not want to take a chance on the company name. Bye bye $1500 :-((
Action 3. The attorney went through with us options to incorporate: full corporation, S-corp, partnership, etc. He suggested S-corp and we agreed.
Action 4. The attorney also helped us to create something called "Articles of Incorporation" which is basically the by-laws of the corporation. This by-laws states who are the officers of the company, their shares of equity, their duties, how the equities will be bought sold in case an officer died or opted out, shareholder meetings, etc (many more provisions). There are only 3 positions in a company that are registered and known to the IRS and the state government: president, secretary, and treasurer. All corporate papers must be signed by a person holding one of these positions. This is the legal requirement. The title you see on the business card is for doing business with customers only: president, VP of something, manager, etc. You make up these titles as you see fit.
Action 5. Decide on many matters stated in the by-laws: how the equity is divided among the owners, buy back option when a partner opt out or die, how the board of directors is formed, how shareholders vote etc.
Action 6. Had a firm and clear vision for the product and the company: we will continue to work on contracts to afford work for the product. Even though the product has been changed slightly from the original conception, it remains our main focus. I believe that it is better to stay at your well paying full time job than to go out on your own and become a contract house. There is no doubt many people do fairly well by working on contracts, I do not think the results are worth the efforts. I strongly believe that the long term future of a company depends on whether it can come up with a product or service and maintain it.
I have some comments on these things that we've done. For action 1. Remember the main reason for my first couple failures: hesitant to go all out and do not firmly believe in the idea. For not quitting the full time job and trying to do a side business, I failed a couple of times, burned out badly, abused my body and mind, and imposed hardships on my family. It was quite enough for me personally. You will pull many hairs out before you could make this decision, but do make it decisively. In our case, we all had savings that we could survive for more than a year. So quitting the job did not have immediate impact. A personal note: the habit of receiving a paycheck every 2 weeks will irritate you tremendously, the stack of bills seem to grow higher as days go by, and your house mortgage will weigh 2000 tons on your shoulder. To survive, you need:
a. Full support of your family. I do not consider any kind of money or ambition worth the happiness of my family. Never quit your job if that is the cause of the arguments and possible breakup of your family.
b. Reduce your way of living to a frugal but healthy level.
c. Really believe in yourselves and follow your vision (i.e. the game plan). Many times you will ask yourselves whether you did the right things and have doubt in your own ability. Many days will be long and hard.
These are common and will go away every time you reach a goal or sub-goal. I found great relief and held strong belief in myself by practicing my religion more seriously.
While we are on the subject of money, I would like to mention that I do not believe in venture capital seed money for what we want to do. The pros and cons of venture capitals go as follows, you make your own call. I opted not to pursue venture capital for seed money.
a You can still maintain your regular salary every 2 weeks.
b. You feel better having some other company behind you, support you, and may help you designing and pushing through the product faster.
a. You sell your company short. When your company is young, it's not worth anything. A couple hundred thousand dollars may sound a lot for an investor to put up, but it's not much when you divide it out among the partners. If you only need a regular salary every 2 weeks, do not quit your job in the first place. That means you do not have enough guts to weather other big storms later. Unless you really need that capital, don't go for venture capitals at the initial state.
b. Hard work will be required to make business plan and presentation, and sometimes demonstration. This will take you away from the technical work.
c. You will lose a big portion of the company equity, sometimes the controlling majority. How does this differ than working for your previous company? Now you work for the venture capitalists. No difference (Ha).
What about bank loans? They always want collateral and personal guarantee. They want to be sure you are not defaulting on the loan. Note that all possible corporation registrations do not shield you from this liability. It's a personal loan. Banks, venture capitalists, and potential investors all have a common DEMAND from you and your company: something to show, a prototype for example. Nobody would even take the time to see and hear you if you don't have something to show. We had lost our faces a couple of times in trying to obtain a loan or some investment without a working prototype. Don't even think about these sources without a working prototype. Normally a startup company can get capitals backing because:
a. The founders are very well known in the technical community, for
examples Dr. Viterbi of Qualcom, John Sculley of Apple, Steve Jobs of Next
b. The niche market is very well known and it does not take long to break even. Normally, the founder(s) must know the bank or the venture capital very well. Inc. magazine has many of these real stories.
I found them very informative and entertaining.
For action 2. No comments. You got the point.
For action 3. S-corp is good for short term tax purposes since new company usually loses money in the first few years. The business loss will be divided among the owners and claimed as personal loss (schedule K-1). S-corp can be converted to full corp easily. Full corp will not be an advantage until your company revenue reaches 7 figures and # of employees more than 40 or so. Full corp is an entity that is like a person w/ respect to the IRS. All liabilities incurred by the company will be handled by the corporation. You, the owner, will not lose your house or car if the company cannot make a loan payment. Consult books about these legal matters if you want to know more. Best of all consult with an attorney in this field.
Since the legal matter is so important and I am totally ignorant about it, I preferred to let a professional to handle it. I would be extremely cautious about spending $50 to register for a company that I will quit my job and work day and night to build up.
For action 4. Imagine creating this Articles of Incorporation yourself. Good luck (!!??).
For action 5. For S-Corp or full corp, the equity of the shareholders will determine the formation of the board of directors, which in turn determines the direction of a company. 51% majority in equity will assure you of total control since you can vote out a director and vote in a different one. It's not possible for more than one founders to have 51% majority. Equal shares for all original founders seems like the best solution.
For action 6. I cannot stress enough the importance of having a good vision. As a founder of your company, if you do not know where your company is heading will prove disastrous. Read many magazines of all fields to keep you up-to-date with new technologies and the economy.
III. GENERAL ROAD MAP
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Here is the general road map that I promised you at the beginning of the write-up.
1. Have a good idea for a niche product or service. I have seen enough start-up companies folded or are in trouble for trying to create a market. The latest one being the company making the voice operated remote control for TV and VCRs. Phillips had a contract to market and sell the product and just announced to drop the product for not meeting some sales quota. The company is on the brink of collapse.
2. Prepare the product or service by performing a thorough market research of the product/service AND related ones. This will allow you to estimate the size of the market and make some educated guess about the risk.
3. Save up enough money to help you through the development cycle, or at least until you can find additional financing. When you spend half a day worrying about bills, you have done it wrong. Your productivity will decline faster than you can imagine.
4. Setup short and long term plans for both the product and the company. Will your company just try to make, market and sell the product? Will you take on any contract work? Can the product survive some competition (you are bound to have some, sooner or later)? How will your company cope with competition? Regardless of whether you need to present a business plan to a loan officer or an investor, you MUST have one written down. Of course, it doesn't have to be pretty. A written business plan forces you to think concretely about your product. There are many software package out there to help you with a business plan. I use BizPlanBuilder, a $70.00 package. I do not trust shareware in this matter.
5. Select a good team if you cannot do it yourself. I never think I could survive on my own. With a partner, you could do technical work while he goes out trying to find contracts or money. Even if your product turns out to be a total flop, you can still survive and have a shot at something else down the road. You have a much better surviving chance with a team. I like to team up with trusted friends the family of which I know very well for many years.
6. Go all out for it once you determine that the risk is well understood and taken. It is very frustrating and de-moralizing when you wasted many hundreds of hours for something and nothing materializes. I had my full share of this in all of my mis-ventures. Make sure you and your family are ready for this big step. Remember: nothing is worth your and your family health and happiness. Make a responsible and decisive call.
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I had written a lot more than what I originally planed. I hope my real experiences give you lots of useful information. Post your own experiences and comments on this subject so that I and others could learn from them. Good luck to our endeavors, whatever they might be. Be joyful and happy, always. Vien.