SOLUTIONS

Top 25 Small-Business Challenges

PLAYBOOK

CONTENTS
GETTING STARTED
Challenge 1: Deciding When to Ditch the Steady Job Challenge 2: Finding the Time to Write a Business Plan Challenge 3: Sharpening Your Elevator Pitch And Your Business Plan Challenge 4: Choosing Between an Incubator and an Accelerator Challenge 5: Quitting Work for the Day When Youre the Boss 4 5 6 7 8 9

BRANDING/MARKETING
Challenge 6: Marketing a Product or Service Thats Ahead of its Time Challenge 7: Making Social Media Tactical Challenge 8: Deciding Whether to Embrace Mobile Challenge 9: Calculating the Value of Media Placements

10 11 12 13 14

MONEY MATTERS
Challenge 10: Securing a Line of Credit Challenge 11: Working with Investors Challenge 12: Using Debt Financing to Build a Business Challenge 13: Making the Most of Crowdfunding Challenge 14: Deciding When to Start and Stop Fundraising

15 16 17 18 19 20

CONTENTS
MANAGEMENT
Challenge 15: Protecting Intellectual Property Challenge 16: Tackling Legal Paperwork Challenge 17: Deciding Whether to Outsource IT Challenge 18: Building a Product as You Build an Organization 21 22 23 24 25

STAFFING
Challenge 19: Choosing to Hire Employees or Contractors Challenge 20: Competing for Top Talent Without Paying Top Dollar Challenge 21: Creating a Culture of Excellence Challenge 22: Building an Organization That People Are Excited to Join Challenge 23: Weighing the Telecommuting/Team Building Tradeos

26 27 28 29 30 31

CLIENT RELATIONS
Challenge 24: Raising Prices Without Alienating Clients Challenge 25: Sizing Up What to Invest in Client Face-Time

32 33 34

GETTING STARTED
Challenge 1: Deciding When to Ditch the Steady Job Challenge 2: Finding the Time to Write a Business Plan Challenge 3: Sharpening Your Elevator Pitch And Your Business Plan Challenge 4: Choosing Between an Incubator and an Accelerator Challenge 5: Quitting Work for the Day When Youre the Boss

GETTING STARTED | 4

CHALLENGE 1:

Deciding When to Ditch the Steady Job

To some extent, leaving a steady job (and steady paychecks) for the life of an entrepreneur is a leap of faith. Though you intend to make your startup succeed, nothing is certain. Like any leap of faith, the process takes patience, condence and a positive attitude. It also requires a good idea of how you plan to manage expenses and support yourself (or your family) until the new gig takes o. That last question often proves to be the hardest to ask and answer. If youve got money in the bank or a spouse whos still working, you probably are covered. If you recently won a jackpot in Vegas, you probably are good. If none of these scenarios is real for you, you need a bulletproof strategy for leveraging debt and investor money long enough to sustain the company and your own personal nances, too. Were not going to lie: This process can be hairy at times. It also can be rife with uncertainty. Travis Ness, co-founder of Renton, Wash.-based design agency Crossroads Creative, suggests that every foray into entrepreneurship should be prefaced with some serious self-reection in which business leaders ask themselves exactly what theyre comfortable handling on the road to independence.

You need to weigh whether the freedom of successfully working for yourself outweighs the short-term instability or anxiety [you might have], he says. The ipside of these question marks is, of course, the possibility of a smash hit. Yes, your current job may be steady, cushy and familiar. But when your startup succeeds, when youre the one at the helm of a multimillion-dollar business, it isnt going to matter where you were before the current project. All that will matter is what you have accomplished.

Besides getting yourself mentally ready for this adventure, consider thinking about what you need to have in place to prevent unnecessary hardship for yourself and your family.

SOLUTION:

GETTING STARTED | 5

CHALLENGE 2:

Finding the Time to Write a Business Plan

Weve all heard legends about entrepreneurs writing the crux of their business plans on cocktail napkins at local watering holes. (See Related: Five Businesses Born at a Bar) While the backdrops and the implements may dier in real life, the spontaneity usually doesnt. Once you have that critical idea, however, business plans take lots of time and painstaking eort. Some entrepreneurs have tackled the process solo. That was the case for Amy Norman and Stella Ma, co-founders of Little Passports, an educational products company based in San Francisco. The duo wrote the bulk of their plan while working for other companies, according to Norman. So they churned out most of the document on laptop computers at their respective kitchen tables, on weekends and after everyone in their families had gone to sleep. You nd time to write it whenever you can, says Norman, looking back. Whatever it takes. Other entrepreneurs, such as Je Platt, CEO and cofounder of the Sky Zone indoor entertainment venues, have brought in help. When Platt and his father, his co-founder, realized that their business plan needed to incorporate a hefty amount of market research, the duo hired a consultant to scour

the Internet, record pertinent information about similar sports businesses, and imbue the document with context. His involvement was bringing the industry expertise, says Platt, whose company has 30 locations nationwide and is based in Los Angeles. We knew that if we wanted to do this [plan] the right way, we wouldnt have time to tackle that ourselves. Even with the additional help, Platt says the plan ultimately took about 1,500 hours to complete.

However you approach writing your business plan, be prepared to put just about anything on hold to do it right.

SOLUTION:

GETTING STARTED | 6

Sharpening Your Elevator PitchAnd Your Business Plan

Think of an elevator pitch as your executive summary. Its the quick-and-dirty version of exactly what you want potential investors (and maybe even customers) to know about the business youre trying to build. With this in mind, its critically important to draw upon components of the elevator pitch to inform and round out a formal business plan. Chris OLeary wrote the book Elevator Pitch Essentials (The Limb Press, 2008). He says a well-honed elevator pitch should provide a business plan with a one-sentence summary of what the business does, followed by statements that explain What the business does dierently How it adds value for customers How it will make money How it can scale over time The point of an elevator pitch is to get conversations started about your company, says OLeary, who is in St. Louis. While the elevator pitch provides quick hits on a number of topics, the business plan should be designed to go more in-depth. Credibility is another key part of an elevator pitch that belongs in a business plan. OLeary thinks most entrepreneurs spend so much time harping on the business itself that they ignore the need to explain and enumerate their qualications to make that business come to life. At some point along the way, you need to answer the whole question of Why you? he notes. You need to give people a very obvious reason to trust that you are the right person to run this business over time. To this end, OLeary adds that developing a solid elevator pitch usually prompts entrepreneurs to start thinking about sales and marketing campaigns.

CHALLENGE 3:

Try out the above exercise in brevity. It can not only lead to a sharper and more credible business plan, but also pave the way for overall business success.

SOLUTION:

GETTING STARTED | 7

Choosing Between an Incubator and an Accelerator

Both incubator and accelerator models are designed to help entrepreneurs bring ideas to market. But depending on what kind of help you wantand at what stage your company sits currentlyone choice may make more sense for you. As the name suggests, incubators are more nurturing environments, complete with advice from industry experts, structured introductions to potential funders and longer-term trajectories for idea development. Accelerators, on the other hand, oer quick pushes to help companies get over nal hurdles and deliver their products to market. Some popular accelerators include Y Combinator and TechStars. Some popular incubators include Idealab and YouWeb. Accelerators are set up to bring companies to market, while incubators oer entrepreneurs more room to fail, explains Peter Relan, CEO and co-founder of YouWeb, which has California incubation locations. We make investments in entrepreneurs,[accelerators] make investments in business plans. (See Related Article: Meet the Entrepreneurs Behind the Booming Business of Games.) Another dierence between the two is that incubators generally oer more resources. Patrick McCarthy experienced this rst-hand when he co-founded ATRP Solutions, a specialty polymer company based in Pittsburgh. McCarthy and his colleagues took the company through the Mellon Institute, an incubator tied to Carnegie Mellon University. Perks included unlimited use of critical instrumentation that ultimately saved the rm about $500,000. To build a high-tech company, you have to be able to analyze and characterize your chemicals, McCarthy explains. We could have invested the money on our own, but as part of the incubator we were able to use the schools stu and save our money for other things. In exchange for all of this help, incubators and accelerators alike usually require entrepreneurs to fork over a certain amount of equity. (In the case of ATRP, the universitys Technology Transfer Oce holds a stake in the rm.) Some might think these additional fees are exorbitant. Others say they are small prices to pay for a chance to hit it big.

CHALLENGE 4:

Consider whether you need a nurturing environment to better form a business idea or a place that will boost you to the next level. If you require the former, you likely will be more successful going with the incubator. If you need the latter, an accelerator might be better.

SOLUTION:

GETTING STARTED | 8

Quitting Work for the Day When Youre the Boss

Its dangerously easy for entrepreneurs to view their jobs as never-ending. So much to do! So little time! With seemingly innite demands, you might be tempted to work on your startup nonstop. And while this strategy usually works for the rst 72 hours, it almost always leads to burnout pretty quickly after that. Naturally, the key to managing your startup and your life is nding out how the two t together. You need to put up boundaries, says Cali Yost, CEO and founder of Work+Life Fit, a Madison, N.J.-based leadership-consulting rm. Take deliberate action in the areas that sustain your health, personal relationships, career networks, job skills and life maintenance, or they wont happen. In describing the ultimate goal, Yost is careful not to use the word balance, because she says, A 50-50 split between work and life is never going to happen. Instead, she notes, entrepreneurs must realize that the interplay between work and life is a constant ebb and ow. Jigar Mehta, director of operations at Matter, a edgling media accelerator based in San Francisco, experienced this rst-hand in 2012. When Mehta joined the company, it was in major bootstrap mode, and most of the executives logged interminable days. Mehta says the work was invigorating. But after a while, he started to see it have an impact his relationships with friends and family. Sooner or later, I realized something was missing, he remembers. Applying structure to his days reversed this trend. Currently, Mehta splits his days at lunch. He handles all phone calls before the break, and all meetings after. Another strategy, as simple as it might seem, is making lists. No matter how diligent you are, working until youve crossed o ve items from your list is a great way to quantify your eorts. Its also a good method to get stu done.

CHALLENGE 5:

As exciting as it is to start a company, adopt some rules for yourself to prevent it from consuming your entire life. Figure out what works best for you.

SOLUTION:

GETTING STARTED | 9

BRANDING/ MARKETING
Challenge 6: Marketing a Product or Service Thats Ahead of its Time Challenge 7: Making Social Media Tactical Challenge 8: Deciding Whether to Embrace Mobile Challenge 9: Calculating the Value of Media Placements

BRANDING/MARKETING | 10

Marketing a Product or Service Thats Ahead of its Time

Entrepreneurs nd this one of the most dicult challenges in the current economic environment. The rst step in this process is to convince yourself. Its important to nd small, achievable steps you can take to prove the concept -- then run with them to build momentum as you sharpen the idea, says Matt Mickiewicz, founder of DeveloperAuction.com, a developer-recruiting web service based in San Francisco. Trying to jump all the way to the nal product is like trying to build the Golden Gate Bridge from one end while running across it, he says. Instead, start with a pier, then build some pontoons out from the edges, then cobble together some wooden bridges across parts of the river. The next step is to gather proof of concept. According to Mickiewicz, this step involves collecting realworld data from real-world users about the product (or scaled-down versions of the product). What works? What doesnt work? What features reign supreme? Getting answers to these questions will help demonstrate that the idea has merit. The third step in persuading others your idea is viable is to remain exible. Be willing to tweak product specications per feedback from focus-group users, or to rethink sales and distribution models based upon changes in the marketplace. It also means being open-minded to failure and recognizing that sometimes even the best ideas may not work. Finally, theres the art of timing. If an idea truly is ahead of its time, then, by denition, its not viable yet. Whats more, current technology and penetration have to be in line with how your product or service is going to be used. Imagine trying to launch YouTube when everyone was still on dial-up, Mickiewicz says. Sometimes a little context goes a long way.

CHALLENGE 6:

When it comes to convincing others about your idea, consider approaching it as a four-step process: Convince yourself. Gather proof it works. Stay exible about the idea. And think about the timing.

SOLUTION:

BRANDING/MARKETING | 11

Making Social Media Tactical

CHALLENGE 7:

Experts and entrepreneurs alike will tell you that social media is all about the conversation. That means the key to leveraging Facebook, Twitter and Instagram to your advantage is controlling what peoplecustomers, usually are saying about you in virtual-but-public forums. Content must be at the center of this eort, according to John Andrews, CEO and co-founder of Collective Bias, a Bentonville, Ark.-based social shopper marketing company. Andrews has found that companies can use keywords to game search engines into ranking certain pages higher than others. Experts call the practice organic search engine optimization (SEO). If youre producing more content than anybody else, its pretty straightforward: Youll dominate the conversation every time, Andrews says. Promotions are another great way to make social media tactical (As we learned in our Secret Sauce exercise in 2011. See Related Articles: The Secret Sauce Project, The Social Media Challenge: The Results). Here, the caveat is simple: Youve to have a plan for what youre going to do with all the people you gain from running a promotion. Andrews says that because promotions in the world of social media get instantaneous traction, its a good idea

to run two or three back-to-back to see which works best. Social media involves constant switch testing. When it comes to leveraging social media into a weapon against competitors, the third and nal key is to simply stay exible. If one particular campaign isnt achieving the desired number of followers or buzz, cut it o and try something new. Media such as Facebook, Twitter and Instagram give businesses the opportunity to interact with customers in real time; how businesses choose to wield that power is entirely up to them.

To make your social media eorts more tactical, create content regularly and run promotions but stay exible.

SOLUTION:

BRANDING/MARKETING | 12

Deciding Whether to Embrace Mobile

CHALLENGE 8:

CTIA-The Wireless Association reports there are more than 320 million mobile-phone subscribers in the U.S alone. So just about every business on earth needs to master and incorporate mobile technology if it is to succeed. Business development is about nding ways to help people nd ways to spend time with your product or service, says Greg Duy, CEO and co-founder of Dropcam, a San Francisco-based company that makes Wi-Fi video monitoring cameras. If people cant spend time with your product or service on their phones, youre missing out. In the olden daysyou know, the 1990sthe assumption was that companies had two opportunities to get customers to spend time with their products: at work or at home. Duy thinks that mobile technologies have changed the equation because they facilitate interactions any time. And in the world of mobile technology, quality trumps quantityevery time. Regardless of whether mobile technology companies specialize in software (read: apps) or hardware, businesses that excel in the eld usually experience

overwhelmingly positive word-of-mouth chatter, while those that handle mobile poorly usually suer from negative buzz. This, adds Duy, is reason enough to embrace mobile the right way. People expect certain levels of service, he notes. Its not just about doing it, but instead about doing it right. All told, a good mobile strategy wont come cheap. Some entrepreneurs say its hard to build a good user experience with design and programming for less than $100,000. Ultimately, such investments should pay huge returns, especially if the mobile market continues to grow.

Pursue a mobile strategy, when you can aord to do it right.

SOLUTION:

BRANDING/MARKETING | 13

Calculating the Value of Media Placements

CHALLENGE 9:

When applied tactically, media placements advertisements, advertorials and feature articlescan be successful components of a startups marketing strategy. But its often dicult to quantify value and return on investment of these eorts. One strategy is to survey customers on how they heard about you. If customers are willing to respond to brief questions after conducting business, they might reveal that they spotted your ad on their favorite website, or read about your product or service in a magazine. Another strategy is to oer special promotions available only in local media. At the end of each promotion, you should be able to get a sense of revenue driven through each specic channel. The rst thing is to be as small as you can until you nd what works for you, says Jim McCarthy, CEO of Goldstar, a ticket service based in Altadena, Calif. The second thing is to do everything you can to get results, even when its dicult to nd out what happens. Some entrepreneurs have opted to eschew paid advertisements almost completely, instead focusing their eorts on public relations. Take pie bake shop founder Chris Porter as an example. Porter thinks advertising is a ripo. Instead, he found

that a handful of newspaper and magazine articles played a critical role in Seattle-based A la Mode Piess successful launch. Without them, he notes, the four-yearold company likely would have stumbled disastrously out of the gate. Overall, Porter warns that whichever media placements entrepreneurs decide to adopt, the process of gaining value from these eorts usually takes time. It starts slowly, he says, noting that a little patience goes a long way. Every placement gets you more visibility until you become established and [the collective coverage] legitimizes your business.

Startups should consider more unique strategies when it comes to media placements. Survey customers to nd out whats working, perhaps stick to local, and maybe even avoid paid advertising.

SOLUTION:

BRANDING/MARKETING | 14

MONEY MATTERS
Challenge 10: Securing a Line of Credit Challenge 11: Working with Investors Challenge 12: Using Debt Financing to Build a Business Challenge 13: Making the Most of Crowdfunding Challenge 14: Deciding When to Start and Stop Fundraising

MONEY MATTERS | 15

Securing a Line of Credit

CHALLENGE 10:

Dierent types of banks dole out dierent lines of credit to dierent kinds of companies for a host of dierent reasons. Among big banks, the name of the game is minimizing risk. This means bankers generally shy away from early-stage companies that havent yet tested ideas, and gravitate more toward middle- and later-stage companies that have been toiling for years to make a prot. Corey Ross, co-founder of BBC Easy, a Seattle-based company that automates borrowing, says a bank will usually consider lending to a company if it is at least three years old. If you have three years of losses but can present a clear path to success and how youre going to accomplish it, thats the kind of situation a big bank will take, says Ross, who also spent part of his career working inside a bank. You need to demonstrate nancial awareness. Among smaller banks, theres more leeway for interpretation. Ross notes that bankers at many smaller and community banks will take the time to sit down with entrepreneurs

and try to esh out specics of their companys nancial story. Some of the questions they might ask include: How did you get to where you are? What struggles did you have to overcome? What are you going to do with the money? Smaller banks might know the people youre doing business with, says Ross. In rare cases, these banks may even volunteer to act as liaisons or provide other services to help out. Whichever approach you take, note that all banks that dispense credit require extensive applications, as well as nancial statements and tax returns for the duration of the companys history. Consider this due diligence. Its the least you can do for a little money to help get things rolling.

No matter what, be prepared to demonstrate a business track recordas well as a persuasive case that the money youre seeking will allow you to produce prots to pay the bank back.

SOLUTION:

MONEY MATTERS | 16

Working with Investors

CHALLENGE 11:

Building a company with the help of investors can be a double-edged sword. On one hand, a broad and diverse investment group can act as a brain trust that can help you and your cofounders navigate critical junctures (or even day-to-day hurdles). Their passion, input and expertise can be just as valuable as their money. On the other hand corralling investors can be a bit like herding cats -- especially if the investors are frustrated or arent clear about the companys direction and want answers, stat. With this in mind, perhaps communication is the best secret to working with investment teams. If your investors feel like youre giving them information on the progress of the businessthe good progress and the not-so-good progressthen they nd themselves in a position where they can help, says Je Miller, CEO of Wheelz, a San Francisco-based peer-to-peer car-sharing company. Money is money. Your relationships with these people are the things that are going to translate into a competitive advantage down the road.

Still, there is such a thing as too much communicating. Miller, whose company has worked with about 25 dierent investors over the years, says that when entrepreneurs look to investors for input on every move, problems usually arise. One denite no-no: kowtowing to investors who want status reports once or twice a month. You have to make sure that the cart is not driving the horse, Miller says. As CEO, its your responsibility to take inputs and decide which course of action is best for the business.

Agree on ground rules upfront about the frequency and content of communications.

SOLUTION:

MONEY MATTERS | 17

Using Debt Financing to Build a Business

CHALLENGE 12:

Growing debt to build a business, also known as debt nancing, is a valid counterpoint to the more traditional route of funding a startup with angel investors or venture capital. Entrepreneurs who go this route say they do so as a way to retain equity and minimize new personalities on the management team. When you borrow on credit, you dont have to worry about giving up portions of the company. That said, playing with debt is always a risky proposition, especially when youve got to put up personal assets as security for the loan. If you must grow debt to build the business, shy away from credit cards (which often charge exorbitant rates after one year) and target banks that work with the Small Business Administration. Thats because large portions of SBA loans are guaranteed. Heres another alternative: Seek debt nancing from current investors. This was the right strategy for Dan Meader, CEO and cofounder of San Diego-based Allowance Manager, which makes allowance-tracking software for parents. In 2011, almost two years after the company launched, Meader saw cash ow sagging. He went to certain investors for a little boost.

This guy who ended up lending to us already had a vested interest in our success and had bought into the promise of the company, explains Meader. For him, it was lowrisk. For us, it was an infusion that enabled us not to dilute the interests of other shareholders. Meader oered some other general tips for growing debt wisely: Dont take out more money than youll need to nance the company Dont take on more debt than the available equity in the company; aim for a ratio of somewhere between half and 1-to-1 of equity to debt Dont stray from xed-interest loans

When nancing growth with debt, look to minimize risks when it comes to your lenders and loan terms to the greatest extent possible.

SOLUTION:

MONEY MATTERS | 18

Making the Most of Crowdfunding

CHALLENGE 13:

President Barack Obama formally welcomed in crowdfunding as a startup-company revenue source when he signed the Jumpstart Our Business Startups Act in 2012. This means its now legal for entrepreneurs to nance endeavors by pulling together donations from a multitude of customers. The U.S. Securities and Exchange Commission is cautioning companies not to oer equity in return for cash to the general public, but upcoming rules from the agency will open the door for companies to seek investments from just about anyone. At the time of this writing, rules were expected to be issued some time in 2013. Leveraging this platform to your advantage, however, takes gumption. For starters, its important to take advantage of the speed with which crowdfunding can deliver cash. While traditional fundraising avenues such as angel investment and venture capital can take months, crowdfunding can work in a matter of weeks, says Zach DeAngelo, vice president of sales at Little Duck Organics, a New York-based company that got most of its rst round of funding through the San Francisco-based crowdfunding platform CircleUp. You need money to survive, DeAngelo says. If that means taking money from friends and family and here and there, [you] do what it takes to allow your company to not die.

Entrepreneurs can leverage crowdfunding platforms for other benets, too. First on the list is validation. If an entrepreneur isnt sure how big or popular his or her particular market might be, gauging the market size by interactions through crowdfunding could provide some valuable insight. Next, theres the virtual focus group eect. In many cases, entrepreneurs will leverage a crowdfunding platform as a way to test product design and marketing campaigns. People spend thousands of dollars to go and get peoples opinions in focus groups. You can do that for free with crowdfunding, says Danae Ringelmann, co-founder of Indiegogo, a crowdfunding platform also based in San Francisco. Opinions shared during a focus group are just that opinions, Ringelmann says. Crowdfunding oers a window to understanding actual behaviors.

To do crowdfunding right, entrepreneurs must spend time crafting a pitch and selling to their potential donor base. It isnt a perfect product-testing ground but, in an environment where options previously were limited, this new approach is a welcome addition.

SOLUTION:

MONEY MATTERS | 19

Deciding When to Start and Stop Fundraising

CHALLENGE 14:

Considering the open-ended nature of entrepreneurship, its perfectly normal to view fundraising as a Sisyphean task. Still, it pays to be specic when youre raising money to nance a company with specic goals. You need to go into VCs and say, With this amount of money, we will build a product, says Gleb Budman, CEO of Backblaze, a data -backup service based in San Mateo, Calif. Or maybe the money is needed to secure a rst customeror prove customer acquisition. Theres something wonderful about setting goals, meeting them and coming back with specic data on why they should give you more, Budman says. It also means being realistic about timetables. Budman thinks it generally takes entrepreneurs an average of three months from the time they start seeking funding until an idea is funded. To maintain control of the fundraising process, most entrepreneurs rst nurture relationships with venture capitalists and other investors. Then they give the suitors a deadline for submitting term sheets.

Obviously theres a risk that youll get nobody to give you a term sheet by that date, but if youve set your timeframe realistically, chances are youll do well, Budman says. One last piece of advice: When it comes to fund raising, more isnt always better. Some entrepreneurs often think if the money is cheap that is, if investors are falling over themselves to fork it overthe smart play is taking whatever you can get. Dont get caught in this trap. The more money you raise from outside sources, the more you dilute ownership of the concept. Yes, you want to make your vision a reality. But you also want to keep it yours.

The best strategy involves establishing a very modest series of funding goals, recognizing when you have achieved those goals to the best of your ability, and then pulling back on fundraising eorts to execute the plan.

SOLUTION:

MONEY MATTERS | 20

MANAGEMENT
Challenge 15: Protecting Intellectual Property Challenge 16: Tackling Legal Paperwork Challenge 17: Deciding Whether to Outsource IT Challenge 18: Building a Product as You Build an Organization

MANAGEMENT | 21

Protecting Intellectual Property

CHALLENGE 15:

Technically speaking, there are three main ways to protect intellectual property (IP) in todays business environment: trademarks, copyrights and patents. The rst two are important but not overwhelmingly so. Common law in most states aords entrepreneurs a certain degree of trademark and copyright protection just from using their brands. (Entrepreneurs, though, cannot recoup money beyond damages under case law.) Patents, on the other hand, can be critical -- especially in industries where products are based on proprietary research. Patents legally protect you from competitors swooping in and stealing ideas. In order to get a patent, you must register specic ideas with the U.S. Patent Oce. The process is tedious, involves many hours of lawyer time and can often stretch out over four or ve years, says Mike Masnick, CEO and founder of Floor64, a Sunnyvale, Calif.-based media and consulting company. Entrepreneurs need to ask themselves if the protection oered by patents is worth all of the time and money you need to protect them, says Masnick, who has presented

in front of the European Union parliament on IP and has written extensively about the subject over the past few years. Masnick oers an alternative approach to protecting IP: building something successful. His advice: Even if youre not protecting IP under the law, being rst or being best in the market is often the best protection entrepreneurs have against copycats. If you oer the best solution in the marketplace, even if someone copies you, people will recognize that you led the way and follow you for that, he says. In this way, the business world operates no dierently from the way individuals do. Leaders, not followers, are the ones who drive everything.

If you lack the time and money to apply for patents, as most startups do, your best protection against IP theft is to stay ahead of the competition.

SOLUTION:

MANAGEMENT | 22

Tackling Legal Paperwork

CHALLENGE 16:

Depending on whom you ask, there are literally dozens of legal documents that entrepreneurs should line up before they jump head-rst into a new venture. Some, however, are more important than others. First, its critical to consult a lawyer about properly documenting the businesss formation. This process involves choosing an optimal corporate entity, then forming and registering that entity. It also requires drafting an operating agreement and constitutional documents to clarify the structure, function and operation of the venture. Next, lawyers can help startups protect intellectual property with customized licensing and technology transfer agreements for third parties and vendors. Its also necessary to have an airtight nondisclosure agreement to ensure protection when disclosing ideas to angel investors, venture capital funds, employeesand even programmers and vendors. Then, of course, theres the issue of equity structure. Sai Pidatala, a corporate-law attorney in Washington, D.C., notes that companies usually need lawyers to draft vesting clauses to ensure that company stock is vested only after a certain amount of time or after certain benchmarks.

This ensures that a founder doesnt leave immediately and cant retain ownership in a company for which he is no longer toiling, Pidatala says. If you think you cant aord all of this legal work, think again. The law rm Orrick oers a set of templates for startups to follow to tackle some of these forms on their own. (Though, its generally a good idea to retain the services of an attorney to make sure the forms are lled out properly.) Whats more, a number of business law rms, including Orrick and Gunderson Dettmer, are open to compensation models through which startups can postpone payment for up to one year.

Time and money may be tight, but skip your getting your legal documents in order only at your own risk.

SOLUTION:

MANAGEMENT | 23

Deciding Whether to Outsource IT

CHALLENGE 17:

Fighting simply to survive, many startup owners nd it daunting to manage hardware, software and other aspects of information technology. Sure, small companies can tackle these issues in-house, but nding the right person for the job can be both time-consuming and expensive, especially in competitive markets such as Silicon Valley. For this reason, entrepreneurs may want to outsource their IT needs. Were not talking here about farming work overseas. Instead, were talking about hiring a technology services company to come in and manage certain aspects of a startups computing environment. Depending on the business segmentand the size of the company itself this approach generally is less expensive than hiring a dedicated IT pro. The strategy usually works best for companies with less than 50 employees, says Bill Cox, president of Sonoma Computer Products, a Santa Rosa, Calif.-based ITconsulting company. When a company surpasses 50 workers, the scenario typically requires too much desktop support.

Cox also notes that most outsourcing arrangements deliver a broader range of expertise than in-house hires. Startups may rely on an in-house programmer or engineer to manage their network part time while also juggling the skills they were actually hired for, he says. Outside rms often have multiple engineers on sta to supply experienced support across a range of IT skills: server management, networking equipment, mobile device integration and things like this. Of course there are exceptions to this approach. If a business uses specialized equipment to interface with the network, or employs unique applications, or operates in high-security computing environments, insourcing might be a better option long-term. Whichever option you select, remember this: Its easier to move from in-house to outsourced, than the other way around.

Most business owners may want to consider hiring a technology-services company once they meet the 50-employee mark.

SOLUTION:

MANAGEMENT | 24

Building a Product as You Build an Organization

Even the most skilled entrepreneurs can juggle only a nite number of responsibilities at one time. Thats why the ability to delegate is critical when grappling with the Herculean tasks of building a product and organization simultaneously. Put dierently, you need to know what youre bad at. Maybe youre technically excellent but youre not a marketer, or [youre] a showman and a visionary but commercially lacking. Maybe your product marketing instincts are great, but your people management skills arent that strong, says Dave Slutzkin, founding CEO of San Francisco-based website-auction service Flippa.com. You need to know yourself honestly so you can best shape the organization to ll the gaps, Slutzkin says. The way Slutzkin sees it, a product always is shaped by the organization that creates it. So if youve hired 15 developers but no user experts, youre going to end up with something technically genius that users dislike. On the other hand, if youve got a strong designer but weak developers, youll end up with a pretty product that fails to work consistently. You need to get the right balance across the team, Slutzkin says. This balance is the key to everything. Theres one responsibility that entrepreneurs never should delegate when starting out: product quality. Because every product your organization puts out will bear your name, its important that you single-handedly make sure quality stays consistent throughout the process. Ultimately, you can delegate quality control to the team but only after your company has leveraged product success to establish a reputation. Until then, consider it one of your most critical tasksboth for the companys immediate success and for continued success down the road.

CHALLENGE 18:

The overall goal here is use organization-building to create a better productas well as a better entrepreneur.

SOLUTION:

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STAFFING
Challenge 19: Choosing to Hire Employees or Contractors Challenge 20: Competing for Top Talent Without Paying Top Dollar Challenge 21: Creating a Culture of Excellence Challenge 22: Building an Organization That People Are Excited to Join Challenge 23: Weighing the Telecommuting/Team Building Tradeos

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Choosing to Hire Employees or Contractors

CHALLENGE 19:

Building a business of independent contractorsaka 1099s, after the IRS form you send themcertainly has its benets. The 1099 tax form reports the amount paid for services to noncorporate independent contractors. For starters, hiring these workers translates into lower overhead, since freelancers dont require oce space, benet packages or other perks associated with fulltime employment. Employers who hire these workers also arent required to withhold income taxes, Medicare and Social Security on the workers behalfrealities that translate into operational savings across the board. When it comes to 1099s, theyre even are more scalable: You hire more of them during a high tide of work and hire fewer of them when business is slow. But there are downsides to hiring these types of workers, too. Kevin Hartz, CEO and co-founder of San Francisco-based event-promotion service Eventbrite, says that many entrepreneurs are looking to develop a corporate culture at their startups, and this culture starts with employees who are invested emotionally and nancially in the companys success.

To 1099 people means you dont value them as owners and partners in the business. You just seem them as hired guns, he says. You 1099 a service provider like a consulting shop, not the team members you want to work hard for you and help you build the next great thing. Another downside to independent contractors is that they put their own interests above those of the company as a whole. Its their very nature. Finally, of course, theres the risk of misclassication in the eyes of the IRS. Ward Ozaeta, president and CEO at San Diego-based 6 Degrees Realty Capital, suspects companies could be on the hook if they erroneously label independent contractors as employees. The contractor might seek unemployment insurance after his or her contract ends. This would open up the company to scrutiny from the tax court, including unnecessary investigations, tax audits and even lawsuits, Ozaeta said.

The bottom line is: when opting to sta your startup, choose wisely.

SOLUTION:

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Competing for Top Talent Without Paying Top Dollar

Dollar-for-dollar, theres almost no way small startups can compete with huge companies for talent in the nations hottest job markets. For this reason, its important to supplement competitive salaries with a host of other perks. Stock compensation usually is a huge part of these packages, giving employees more and more equity in the company the longer they work. Its an additional nonmonetary benet that can truly provide one-of-a-kind opportunities for employees. If you go to a smaller company youre much more likely to be working on a critical product or key campaign, says Andy Kurtzig, CEO and founder of San Franciscobased online professional-services company Pearl.com. Knowing that youre really making a huge impact on your employer and its ability to be successful makes it fun to come to work every day. Many smaller companies also compete against the big boys for talent by oering exibility. Kurtzig notes that one of the senior execs at Pearl.com is a single mom with two young children and says the company has worked with her to create a exible schedule in which she drives in early and leaves early enough to skip most of the evening trac and be home in time for dinner. Finally, a number of startups across the U.S. have been known to sweeten job oers with peripheral perks that larger companies simply cant match. For instance, crowdsourcing design service 99designs in San Francisco gives most employees the opportunity to spend time in the companys Australia oce. Employees receive four weeks of vacation time annually as opposed to the standard going rate of two. We are trying to keep parity between the perks for our Australian and European employees and the perks for our employees here, says CEO Patrick Llewellyn. Add these perks to a good salary, fun culture, and coee and beer in the oce at all times, and this is a pretty great place to work.

CHALLENGE 20:

Consider stock compensation, exible schedules and work environments and unique perks as you try to hire hard-tosecure talent.

SOLUTION:

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Creating a Culture of Excellence

CHALLENGE 21:

Its one thing for your business to be successful. Its entirely dierent to approach day-to-day operations with a culture of excellence. In the former scenario, satisfaction is achieved through protability and growth. In the latter one, satisfaction is more of an elusive ideal, something you (and your employees) are chasing inexorably. Laura DePasquale knows all about the commitment required to achieve excellence. Shes one of only 18 female master sommeliers in North America. Shes vice president and general manager for the Florida division of Stacole Fine Wines -- a wine wholesaler and importer thats part of Ashland, Virginia-based The Vintner Group. DePasquale spent the better part of a decade studying to become an expert in her craft. Over the years she has tried to instill in employees an appreciation for the work. Im never satised, DePasquale says. She notes that after every big project, its important to have a postmortem to discuss what we did well and what the opportunities for improvement are which includes the goal setting, direction and execution of the project. Whats more, DePasquale notes that she and her team continue to push education, requiring all salespeople to bone up on ne wines and wine regions of opportunity.

They even make an eort to educate customers. By providing the highest level of wine education, we ultimately shine a spotlight on the excellence of our wine and spirits portfolio, DePasquale says. In general, other strategies for creating a culture of excellence include regular powwows to share best practices, intermittent performance exams, regular job reviews (with suggestions for the future) and clear career trajectories so employees have promotions for which to strive. Amid all of this intense focus, its also a good idea to institutionalize levity. Group retreats, free meals and seasonal parties help employees stay motivated. They also guarantee fun.

Consider asking yourself how driven you are with your business, and whether you are promoting a culture of excellence.

SOLUTION:

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Building an Organization That People Are Excited to Join

Great places to work are built on a triumvirate of challenging work, generous benets and day-to-day relationships that employees experience while on the job. Assuming that the all-hands-on-deck approach to work at a startup is inherently challenging, this means entrepreneurs must focus on the latter two if they wish to create an organization that people are excited to join. Engineering extraordinary programs is relatively straightforward. Anything that goes beyond the baseline in a companys home market will stand out. While most startups dont have money for free meal programs like those at Google, they might be able to aord one free meal a week, or similar perks such as good coee and free beer. Stellar benet packages also go above and beyond the current norms. Medical, dental and vision coverage is standard. Additional days o and on-site childcare are an obvious upgrade. Arguably the toughest of these tasks involves fostering fullling day-to-day relationships. Such a perk pertains to employees feeling that they are being treated fairly and that they own responsibility at work, says Barbara Curran, chief nancial ocer at Seattle-based online furniture retailer Curran Online. Short communication channels that enable issues to be addressed quickly are a must, she says. The less bureaucratic an organization is, the more excited people are to work there. Of course there are other ways to create an organization people are excited to join. Curran notes that a pleasant visual workspace is important, since employees spend anywhere from eight to 12 hours working each day. Another key factor is salary. While employees may prioritize non-monetary benets as important reasons for taking a new job, competitive compensation is important from a practical perspective, and should not be overlooked.

CHALLENGE 22:

Consider asking yourself whether your own business is a place you would want to work ateven if you didnt own itand improve the workplace perks and communication environment accordingly.

SOLUTION:

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Weighing the Telecommuting/Team Building Tradeos

Theres no question that a work force of remote workers translates into lower overhead for the mother ship. Nearly a third of roughly 7.4 million businesses across the U.S. already allow telecommuting, according to the nonprot Connected Nation. And a study sponsored by online meetings company Citrix Online suggests nearly half of the jobs in the U.S. could be suitable for full-time or part-time telecommuting. Still, just because working remotely is an economical option in general doesnt mean its a strategy worth implementing across the board. For startups, the challenges with this approach are twofold. First, having workers spread across disparate work sites can impact creativity in a bad way. While technologies such as Google Hangout and Skype have helped bridge these gaps, theres no substitute for the creativity that emerges spontaneously from face-to-face brainstorming sessions and other physical get-togethers. (Some allege that body language is a big part of that creativity, and this kind of nonverbal communication is lost when peering through a webcam.) Second, if youre looking to build a company that is viable for acquisition, having workers spread all over the place could become a bugaboo when its time to crunch numbers. Jay Levy, a founding partner of New York-based Zelkova Ventures, says acquiring companies typically want acquisition targets to have employees in one place because it makes it easier to absorb them. Some rms wont do a deal until all of the employees for the acquisition company are centralized, says Levy, who also co-founded a Napa, Calif.-based startup named Uproot Wine. Levy adds that perhaps the best approach is a hybrid, with a bulk of workers in a headquarters location and a handful of contractors who work remotely and come in for meetings from time to time. Above all else, he notes, exibility is key.

CHALLENGE 23:

While telecommuting has advantages, it also makes sense to have many of your workers operating out of the same location -- at least some of the time.

SOLUTION:

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CLIENT RELATIONS
Challenge 24: Raising Prices Without Alienating Clients Challenge 25: Sizing Up What to Invest in Client Face-Time

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Raising Prices Without Alienating Clients

CHALLENGE 24:

Theres no way to sugarcoat it: Raising rates is one of the biggest challenges for a business owner. You dont want to cut o the proverbial hand thats feeding you. At the same time, you need to maintain a positive cash ow and grow for the future. For Mark Morse, CEO of Minneapolis-based branding agency Morsekode, the best strategy is to communicate about impending changes, and be as transparent as possible. As there is a need to elevate prices, you go to key customers and let them know, he says. Transparency could mean explaining to the client that health premiums are creating heavy cost pressures. Or maybe the price of video equipment the company uses is going up. So many people forget that nancial discussions are normal part of a relationship, Morse says. One of the ways that Morse communicates with his customers is by inviting them to individual and independent quarterly review sessions. During these meetings, Morse and his colleagues share information about everything from new technologies and new hires to potential price increases on the horizon. Morsekode usually gives clients ample warning about these price hikes, if for no other reason than to make sure theyre in the know.

Thats a key part of deliveryno surprises, says Morse. Another strategy for communicating with clients about pricing is to show them whats under the hood of current pricing structure at every step of the way. Some companies do this with regular newsletters that subtly (and sometimes not so subtly) explain the overhead and processes that drive the retail price of products and services. Others utilize social media to let customers know why the company is growing, how the company is doing it, and what rate increases truly mean for them.

Customers dont have to be happy about price bump-ups. They just have to accept them. Openness and honesty can make this process easier for everyone involved.

SOLUTION:

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Sizing Up What to Invest in Client Face-Time

CHALLENGE 25:

Face-to-face meetings arent mission-critical, but they certainly can make a big dierence in client relations. Just ask Heather Stouer, founder of Alexandria, Va.based organic-foods company Mom Made Foods. Stouer once ew 10 hours round trip to have eight minutes in front of a prospective client -- the very same client who agreed to sign with Mom Made because she trusted them. I think [success is] just about really being sincere, trying to be yourself and telling your story, she says. Storytelling in person is really important. We are passionate and sincere [about our story] and we [tell] it best when we are face-to-face. According to Stouer, in-person meetings are even more important early in the relationship with a new client. Because your clients have no experience working with you, she says, the face-to-face becomes an important part of making those clients comfortable. Even though youre selling a product, theyre really buying you, Stouer says. Of course in-person get-togethers arent always practical. Especially when money is tight, investing hundreds of dollars for every eight minute meeting isnt sustainable over time.

The key is to choose your client meetings wisely. When deciding, always weigh the potential monetary and nonmonetary expenses of engineering a face-to-face visit with the potential monetary and non-monetary rewards. On those occasions when you gure it isnt important to meet clients in person, embrace technology-driven options such as videoconferencing, Google Hangouts and Skype. Anything that makes the experience more personal is going to end up beneting you in the end, says Jay Levy, a founding partner of New York-based Zelkova Ventures. Convenience is important, but business relationships are still about personal connections.

Figure out a way to get at least some kind of face-toface interaction with clients, especially when youre just starting to work with them.

SOLUTION:

CLIENT RELATIONS | 34

att Villano is a freelance writer and editor in Healdsburg, Calif. He is a regular contributor to

Entrepreneur, and has covered startups and entrepreneurship for The New York Times, TIME and CIO. He also covers a variety of other topics, including travel, parenting, education and seriously gambling. He can be found on his personal website, Whalehead.com, and on Twitter @mattvillano.

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