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Short answer: “Not enough startups are getting started.”

Why?  Long answer:

I’ve started several companies over the years, raised venture capital funds, and produced millions in profitable revenues.  I’ve sold companies, merged companies, and ‘enjoyed’ all the roller coaster rides that go with it.  So, I know what it takes to start a company.  I’ve been involved (off and on) with the local startup scene since my first company in 1993, and I’ve seen the same problems in the startup community since that time.

The first issue I see in the local startup community is negativity.  There are a lot of people in our community who can tell you everything that’s wrong with your idea.  Many of these “experts” have never started a company or been part of a startup.  I’ve heard prominent people in the startup community say things like “You can’t start a software as a service (SAS) company in Louisville.  We’ve tried it, and it doesn’t work.”  What?!  I’ll write more on that at a later date.  The point is, negativity is POISON for an entrepreneurial community.

Advice and gentle steering in the right direction is wonderful, but for an entrepreneur to be successful, they need to have an almost insane and unwavering confidence and belief in what they’re doing.  The ONE THING that produces successful companies more than any other is PERSISTENCE – NEVER GIVING UP.  Of course, you’re never going to get things right from the very start.  You have to make adjustments to your company until it works, and advice for making adjustments is great.  But, if you act on everyone’s advice, you’ll constantly change direction and never get anywhere.  You have to follow your vision and your gut with almost maniacal grit and determination.  Ask Papa John.  I bet he had a few people tell him “you can’t start a pizza company and compete against Pizza Hut and Dominos.”

Another concern with the local startup scene is that too many people have a Silicon Valley mentality.  Several local companies (such as High Speed Access and Genscape) have raised venture capital and gone public or sold for a great return.  Everyone wants to find the next big one.  However, we’re not Silicon Valley.  We don’t need to throw $1 million or more at every decent startup.  In fact, there are a hell of a lot of ideas out there that can get off the ground for $10,000 to $50,000 and at least prove the concept or shut down.

Getting lots of small startups started is extremely important, but we don’t have much of a mechanism in our area to fuel a rapid churn of startups.  And, our community is not doing a great job of teaching startups the correct way to just go out there and raise capital for themselves.  In fact, I’ve heard a lot of people in the startup community discourage startups from raising small amounts of capital from a handful of investors.  The reasoning is that “savvy investors” don’t want to invest in startups with multiple investors due to the risk of lawsuits.  That’s true for some savvy investors, but if you structure things properly from the start, the startup can protect itself and future investors.

Besides, you can’t start a company without risk, and very few startups have the founder star power to raise capital from savvy investors to get started with just an idea.  So what should we do, only launch a few startups per year, as long as they have the superstar players involved?  I don’t think that’s the answer.  We need lots of startups to scrape together $10,000 to $50,000 and just GET STARTED.  We need lots of launches and lots of crashes.  Eventually, a few companies take off and produce great wealth for their founders and that small handful of investors who helped them get started.

The biggest problem in our startup community is the lack of successful efforts to encourage a much broader base of people to invest in startups.  I’m very happy that a few wealthy individuals in the area have joined together to form angel investment groups.  However, these groups don’t produce a high volume of startups.  Many of the local entrepreneurial organizations screen pitches and funnel startup entrepreneurs into these angel groups to ask for capital.  That’s a wonderful thing, but the angel groups can’t invest in a lot of small startups.  When they do invest, it’s usually because one of their friends already has invested a significant amount and performed all the due diligence.  Usually, those startups also already have some revenue and track record.

I am extremely glad that these angel groups exist and help a few companies out.  They do produce some results.  However, these groups usually are small (15 to 30 people).  How many companies can 15 to 30 people invest in over the course of a year?  I don’t care how rich you are, eventually you get tired of investing in companies that don’t produce a return.  Because of this, these angel groups don’t last very long.  In fact, we’ve seen several in the local area dissolve or shrink recently.  For the same reason, we’ve also seen organizations like Velocity shutting their doors.

If we could figure out a way to get a lot more people investing in startups, it would take a lot of stress off the wealthiest people in our area who, I’m certain, feel a lot of pressure to somehow fund the entire startup community.  Volume and spreading the risk among a lot more people is the answer.  More people sharing the risk of funding the entrepreneurial community should be our goal.

So, how do we make this happen? I’ll talk about a plan in my next article. (See PART 2.)

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