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While the growth of The TacomaAngel Network (TAN) is important, what I really want to point to is their efforts to make Tacoma a better environment in which to do business. Tacoma is a tough place to do business for many reasons, most of which I won’t go into in this post.

Tacoma has tried unsuccessfully for years to attract businesses from outside the area. So far the local successes have been local startups. Honestly, I don’t really see that changing very much in the near future. Unfortunately, Tacoma is so tough to do business in, once a business is capable of moving to another city, they often do.

Tacoma’s best bet is to work with people and businesses that started here. TAN is a good example of how that can be done. While venture capital will likely grow businesses to prominence more quickly, there’s generally not a lot of venture capital available in the early stages. Angel investing, while it is a form of venture capital, is much more hands-on and provides a lot more in the way of guidance and advice, along with the usual oversight that any venture capitalist will require.

This is one of the things that Tacoma needs in order to get out of it’s slump. And yes, it is in a slump, contrary to what politicians and bureaucrats try to tell us. Just spend a few hours downtown on a weekday. There are only a fraction of the number of people (i.e. workers, employees, business people) that one would expect to find in a city this size. I have a feeling that part of the reason these politicians and bureaucrats are afraid of Russell leaving is that it will clearly expose just how little is really going on downtown.

I have a fair amount of experience with small tech startups. Having started my own in 1986, I’ve had the opportunity to do business with dozens of them over the years at various levels of involvement. Through that I’ve learned many of the pitfalls that they encounter, seen how they dealt with them (either successfully or unsuccessfully) and found some things they could have done to avoid them. Angel investing is one of the ways that startups can gain the kind of advice that they need to stay on track.

Here are some examples of the typical pitfalls that startups will face:

• Inexperienced Management- It seems that very few startups are created by experienced business managers. Most are experienced in one or maybe a few major facets of business, but seldom will they have broad enough experience to keep every area of the business out of danger. In some cases the business is started by an engineer or other technical person with experience in product development or product management. Most have very little experience in accounting or finance, operations, personnel or facilities. Others might be from a marketing or sales background which gives them the ability to make a good first push to get the business started, but then they get hit with all of the other aspects that they’re likely not ready to face. Angel investor are generally aware of this shortcoming are are willing to help guide the entrepreneur through the unknowns.
• Lack of Capital - Startup money can be hard to find. If the person with the idea and the motivation doesn’t have their own personal wealth to draw from, or family and friends with money to burn, there aren’t many options. Banks are said to lend money to people who don’t need it, meaning that you have to have money to get money from a bank. Partnerships seems like a viable options but almost always result in power struggles and a parting of the ways. In all my years I’ve only worked with one true partnership that has lasted more than a few years. Venture capitalists like things to be a little more established before they’ll write a sufficient check. For most, Angel investors are the best route because they often have the capital to draw on to write the check, and generally they also know what they’re getting into and are willing to take the risks along with the entrepreneur, provided that he follows the advice given (or has a good explanation as to why he didn’t).
• Finances and Budgeting - Pitfalls everywhere in this area. Making sure there’s enough money around to meet a payroll it critical to a business’s survival. Failure to meet it can result in loss of employees and poor morale. Late payments and missed payments can destroy a credit rating and prevent access to needed funds in the future. Probably the worst failures that I’ve seen in this area were in the dot com’s that bragged about their ‘burn rate’ (how fast they went through investor’s capital).
• General Understanding of Business Principles - One of the biggest contributors to the unsustainable growth of tech firms (especially dot com’s) and to their subsequent demise was a lack of understanding of simple business principles, not only by the businesses managers themselves, but also by their investors. Take the Initial Public Offering (IPO) for instance. Historically this has been used to provide capital needed to either grow a company or to bring it to profitability. But before stock is sold to the public a company should either be profitable or have a clear path to profitability. If a company doesn’t have either of those it’s still a startup and would have been considered a high-risk investment. Never would a respected capital management fund invest in such a company, that is until the dot com bubble. A simple business principle like that cost jobs, careers, retirements and even contributed to an international economic downturn.
• Taxes - You won’t stay in business very long if you owe the IRS or the State money. Throw in local tax burdens and trouble sets in fast. In addition to the money is the paperwork, forms and filing deadlines. Messing up on those can not only bring about fines and additional interest, it can also result in criminal charges (in extreme cases).
• Hiring, Training and Personnel - It’s not just a matter of hiring the right people. It’s also about creating the right positions to fill and about hiring them at the right time. If hired too late they won’t be trained and ready to go when needed. If they’re hired too early they’re just a financial burden with no return on investment (ROI), and often are given busy work to do until the time they’re needed, which confuses everyone about their job description and can undermine their morale. Not being ready to meet the personnel requirements (filings with the government, payroll taxes, benefit enrollment, etc.) can lead to huge legal problems and again, problems in morale. There are a lot of questions that angel investors can help with, as well as provide access to a safe peer group (that won’t steal your ideas or lead you down the wrong path).
• Organization and facilities - Some people within a company, such as computer programmers and accounting staff, need to be in a quiet area to work. Others, such as sales and marketing staff, need an environment with a lot of interaction so they can help each other refine their skills and pitches. Obviously, the two don’t mix well. Not having proper facilities to accommodate these and other issues can slow growth, production and yes, damage morale. Entrepreneurs with narrow experience, no matter how extensive that experience, will often miss the signs that facilities and organizational problems are growing. Having the outside opinion that an Angel Investor provides can help head off the problem before they come to a head.
• Temperance, moderation and persistence - Overzealous entrepreneurs often sidetrack their business by focusing on the things they know best, while neglecting other areas or by not seeing the impact they have on them. Building a business is generally a slow, relatively steady process that still feels like a roller-coaster ride. Things that seem run-of-the-mill to an experienced manager can seem like the end of the world to one that is inexperienced. Having an experienced investor who can calm some of the fears is great for any business owner. Yet getting too excited about relatively small successes can lead to sloppiness, and that to other problems.
• Growth - I’ve seen a number of businesses destroyed by what they thought they wanted. One example was a semi-conductor manufacturer I worked with in the 90’s. Their technology was so in-demand that they could barely keep up with orders. As time went on they started to cut corners. One of those corners was in quality control of their raw materials (silicone wafers). Before the problem was recognized they had sent out months of orders to their customers. They weren’t able to replace the stock in time and lost most of their customers to their competitors who may have come to market with that product later, but they were ready to meet the need. That company never recovered and was purchased by a foreign company for pennies on the dollar and the technology was absorbed into other product lines.
• Community Relations - Even businesses that focus on customer bases outside the local community can run into problems if they’re not well tied into to the local business environment. I think this may be a little bit of Russell’s problem over the years. While the city did take them for granted (in my opinion) they also could have reached out a little more at certain times in their history of involvement in the Tacoma community. This is one area where TAN outshines most others in this city. Tacoma still has an old boys club that carries a lot of weight with other businesses and with local government. TAN is tied in fairly well to that group and therefore provides almost immediate access to the ‘insiders’. This is especially important if the business is going to try to market their wares locally.

So, for all of these reasons and for some not mentioned, I want to applaud TAN for helping to take the city’s business community in the right direction. I hope their efforts are fruitful.

This entry was posted on Saturday, March 1st, 2008 at 7:19 pm and is filed under Tacoma Economy, Technology. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.