When I was 8 years old, I started my first Lemonade Stand. I wanted to buy a new bike, and my mom had budgeted money for it, but I decided to use it on an electronic keyboard instead.  Once the coolness of the keyboard was gone (4 days) I really wanted that new bike. She said the money she allocated for the bike was gone – so I had to figure something else out.

That afternoon I sat on the porch, upset, while I watched all the neighborhood kids riding their new bikes.  My summers were spent in Rocky River, OH right across from a high school. Each day I noticed hundreds of kids gather for summer tennis camp and then my mind started turning….At 50 cents per kid, times the hundreds of kids a day, surely I would produce enough cash to buy that bike.

After 5 days grueling in the sun, I made a total of ten dollars. First fifty cents was too expensive. Then I was missing kids that didn’t exit where I was set up. And I got some parents that thought I was cute…but that wasn’t sustainable.

So I went to Phase II of the business plan; find neighborhood kids to set up stands at each of the four corners where kids exit. I would geographically expand so they can’t miss me.   I came up with new ideas; I added bananas, oranges, and other tasty treats. At the end of the shift I would pay out my neighborhood friends with enough money to buy ice cream, some candy and a coke (2-3 bucks). They were thrilled. And so was I.

At the peak of my enterprise, I was selling close to $25/day.  And that summer, I earned enough to buy my bike and more.

From that moment on, it was never about what I couldn’t have; it was about how I could create a plan to achieve my goal. Over 30 years later, I am the CEO of Kem Krest, a $100 million company handling the global supply chain for GM, Ford, Nissan, and others.

Last year, Elkhart launched Lemonade Day. A program started by Hoosier-born entrepreneur Michael Holthouse in Houston, Texas. His daughter wanted to buy a turtle, and instead of giving her the money, he helped her build a Lemonade Stand and earn her own money. Today there are over 100 cities participating in Lemonade Day and more than 120,000 kids putting up stands and learning the fundamentals of business at a very young age.

My experience with Lemonade Day was uplifting.  Teaching kids the fundamentals of business strategy, marketing, accounting, and operations would be next to impossible in a textbook. But give them an experience and an incentive – and they get “tricked” into learning.

Many of these kids are earning their first dollar. What a feeling of empowerment and freedom. It reminds me of going into a deli, dry cleaner, or other small business where they have framed their first dollar.  Why do people frame their first dollar? It’s a memory of that very moment when their risk and hard work paid off.  It’s when they earned wealth by something they created. And it’s a reminder of how hard it was do to.

May 5^th, 2012, I spent the day driving to each stand and drinking Lemonade until my stomach turned.  I asked the kids about their stands, their recipe, their experience and most importantly, what they would do with the money they earned.

I have distilled some of the responses from my interviews with these kids in a summary below:

(On Finance)

What is the cost of ingredients for your lemonade?

“Well…I got a loan from my dad to buy the stuff, so it’s pretty much free because I don’t think he writes it down.”

“I sell it for a dollar, so I am sure it’s much less than that.”

“10 cents. I don’t use lemons since they cost so much, so I just use cheap mix from Wal-Mart. It isn’t the best tasting…but not many people will buy more than one cup anyway!”

“$1.50. I use exotic fruit, a nice cup, and special stir straws. I am going to try to sell it for $10/glass.  I think it’s worth it. I wouldn’t buy it for $10, but people buy things for a lot all the time.

(On Marketing)

What have you done to advertise your stand?

“I called my grandma and asked her to tell her friends from their old person apartment to all come over – there are a lot of people there!”

“I am set up at the finish line of the American Cancer Walk…There are thirsty people everywhere.”

“Nothing! We just yell LEMONADE really loud when people walk by.”

“We handed out ads at Church at told them some of the money goes back to God; well, we are buying Hymnals, which is how we sing to God.”

(On Profit)

What will you do with the money you make?

“Donate proceeds to Riley – because I got back surgery there when I was little.”

“Donate proceeds to dig a well in Africa, so they can have clean water and not get diseases.”

“Buy a skateboard, a PlayStation, a laptop, and an iPod…and maybe some candy with the money I have left over.”

If you read between the lines – these outcomes aren’t just cute. They have a hint of real business understanding. From an eight-year-old.

Entrepreneurship is a journey. The sooner you start it, the more natural it is. I applaud all the young entrepreneurs that have found the value and excitement in making their first dollar.  I admire the creativity these kids put forth in designing colorful stands and interesting recopies and I appreciate that at a young age, they were willing to give up a sunny Saturday for the possibilities of making a buck.

Elevate Ventures is there to help those that want to create a “lemonade stand of their own.” Whatever your stand is, it is sure to be empowering and a challenge – and hopefully will result in a framed dollar on your wall with a great story of how you earned it.

For more info on Lemonade Day Elkhart visit: https://www.facebook.com/LemonadeDayElkhart

By Guest Blogger, John Hurley

How does a relatively young self-funded company increase its reach within a saturated, competitive market?  Pouring money into marketing and outsourced assistance is the first solution that comes to mind. But, the 2013 SmartFile Platform Bake-Off reveals how a forward-thinking initiative can increase channel awareness without depleting the budget.

SmartFile puts “a new twist on cloud-based file sharing and FTP via its open source API and homegrown, open-hardware solution. From Fortune 500 companies to the one-man enterprise, SmartFile is the trusted platform chosen by businesses of all sizes to move big data in any environment.”

Geared to promote collaboration between Indiana businesses and statewide academia, the 2013 SmartFile Platform Bake-Off is an open source programming and design competition for Indiana college students. The ‘Bake-Off’ was also created to drive awareness for both open source development and SmartFile’s new API. With many unique methods to enterprise data sharing, syncing and storage already in place, SmartFile is creating the first online file platform for developers looking to add file sharing and storage capabilities to any system without downloading software.

The Bake-Off is a fun way to encourage the next generation of developers to use the platform and provide feedback. The contest makes possible the development of new applications for SmartFile customer to utilize – helping build the SmartFile brand and brand loyalty. With some of Indiana’s top business minds on the judging panel, students will have a ‘platform’ to showcase their technical talents, network with peers, and design a valuable application they can call their own. The $17,000 in cash prizes are also enticing, which SmartFile will award to finalists at the April 23^rd judging ceremony.

With only seven days left to finish developing a web-app that integrates with SmartFile’s API, the SmartFile development team is hosting a 24-hour “hackathon” set to kick-off at 8:00 pm (EST) this Friday, April 13, 2013.

Ecosystem cultivation isn’t just a matter of spending more money. Developing a vitalic ecosystem that surrounds and supports our world-class products is what ultimately drives the overall success. By engaging students and the open source channel, the Bake-Off helps cultivate a supportive ecosystem for SmartFile’s platform initiative.

To learn more about the Bake-Off, watch the official trailer on Vimeo, visit the website or follow SmartFile on Twitter (@SmartFile).

Tomorrow, we’ll be posting a guest blog post from John Hurley, President and Co-Founder of SmartFile, a technology company here in Indianapolis. John will be talking about his involvement in an upcoming competition, uniquely named the SmartFile Bake-Off Competition.

Bake-Off?! Yum. But no, this is not an ordinary bake-off, complete with cupcakes and pies. This event is actually an entrepreneurial competition, meant to be an opportunity for university students to show off their programming and design skills through the creative creation and manipulation of open source programming and APIs (application programming interfaces).

While the SmartFile Bake-Off should be a practical, enlightening and fun experience for its participants, its launch is also indicative of a recent upward trend seen in entrepreneurial competitions targeting students in Indiana. A few years ago, Startup Weekend launched at Notre Dame for the first time. TedX, an organization famous for spreading innovative ideas, just finished hosting speakers at the IU-Bloomington campus for the second year in a row and will be launching its next event at Purdue University in West Lafayette for the first time. In less than a month, Elkhart will be launching its own Lemonade Day, an entrepreneurial event focused on teaching kids how to run and manage their own small businesses. These competitions are meant to foster creativity and entrepreneurship in the younger generation – and perhaps the next big thing.

It looks like these entrepreneurial competitions and events are not only here to stay, but are here to grow. And if you’re an entrepreneur (or even an investor), you won’t want to miss any of it.

To learn more about the upcoming Bake-Off competition, visit the Bake-Off’s homepage. And to hear John’s perspective, don’t forget to check back on our blog tomorrow.

An important area in which Elevate Ventures works to develop profitable companies is broadly described as ‘information technology’ (IT), including the hardware, software, and organizational structures that support the informatics resources the modern world requires to store and utilize information.  One reason Elevate works in the IT domain is its rapid ‘clockspeed’ [1], which supports rapid commercialization life cycles and creation of jobs.

On the other hand, it turns out that we humans, and the societies we create, operate at a slower clockspeed than IT.  This has consequences.  While traditional economic theory assumes that ‘agents’ are fully informed about the circumstances surrounding a choice, decision theorists are concluding [2] that we are unable to absorb and process sufficient information to make rational decisions, with implications for how we approach important decision points.  In sum, we must be both more conditional and more adaptive in managing choices and complex processes.  This is becoming obvious, as the business and market plans of successful companies serve merely as the basis upon which change is implemented.

The practical implications of this clockspeed mismatch are far more significant than as an explanation of the “irrational” decisions we make, however; in fact, it has begun to cause major dislocations in the economy.  Two books by Erik Brynjolfsson [3] point to both the impacts of IT on company productivity and organizational structure and their societal consequences.  Among other things, the clockspeed drive of IT is outrunning the ‘skills absorption’ capacity of major segments of the workforce, leading to disruptions in employment.

So, as we continue to develop new business models around the continuing IT revolution, it is critically important for all of us to participate in the solution of the basic educational problems that, unsolved, will be the rate-limiting steps in our business and societal success.

It’s not always necessary to reinvent the wheel to disrupt your industry. Instead, it’s often about recognizing that there’s just a spoke that’s missing.

Yesterday, I attended an event hosted by a portfolio company of ours, which is in partnership with IBM. In fact, many of its top management team members are former IBMers who believe in the solution that the company provides – an intersection of enterprise solutions, SaaS and cloud computing. During the conversations, inevitably, the question arose: “Why can’t IBM just do what you do?”

The reality is that our portfolio company is the spoke to this larger, dominated-by-IBM ecosystem. They have created an efficient solution that saves IBM and other big traditional enterprise solution providers the time and cost of resources to do it themselves. As one team member said, “IBM’s corporate, cost and incentive structure doesn’t allow them to do certain things…but IBM recognizes that they need to respond to similar offerings in the market place. So to stay competitive but also efficient, they partner with us and the solution we bring to the table.” The company didn’t need to reinvent the wheel to disrupt the industry – they just needed to find their place in the ecosystem.

This is one of those a-ha moments that resonates deeply with the famous innovation framework developed by Harvard professor Clay Christensen. Innovation doesn’t necessarily mean inventing something completely new. It doesn’t need to originate from research labs. It doesn’t even need to come from someone at the top with a grand vision. Often times, the most innovative and disruptive solutions come from the bottom (less costly), rapidly working its way up to a dominant position amid competition.

Today, corporate America’s CEOs are under pressure to create a frugal innovation agenda, which you can see here. Corporate America certainly has limitations, but that doesn’t mean that YOU are limited. Find your spoke. Enter the ecosystem. And then come find us when YOU come up with the next big solution.

Oftentimes people think that the terms surrounding a capital raise are straightforward – you sell me a certain percentage of the stock in your business in exchange for a certain amount of money. We each have rights pro-rata with our ownership. One day you sell your business and we each split the profits based on how much equity we own.

Unfortunately, many entrepreneurs think they know how to raise capital…and then they get screwed, because there are a multitude of terms sheet tricks that investors use to alter things like control and returns. In and of themselves, these things aren’t necessarily bad, but you need to make sure you understand the terms on the table when negotiating a deal.

Liquidation preferences

This is one of the most common terms in any negotiation. This helps protect an investor by eliminating the risk that they invested in an overpriced offering.  It also aims to help ensure an investor at least gets their original investment back in a liquidity event before common shareholders are paid. The most common provision is a 1x liquidity preference. This means that the investors get their money back one time, and the remaining cash is split pro-rata amongst shareholders. Similarly, a 2x liquidity preference gives the investor back 2x their original investment, with the remaining cash then being split pro-rata amongst shareholders.

Board seats and observation rights

In many cases, investors will ask for a board seat or board observation rights when making an investment. A typical early stage board would include 1-2 investors, 1-2 independent directors, 1-2 management for a total of 5 people. This is very common but make sure that the person assuming a board seat has something to offer your company. Typical board representatives can introduce you to customers, offer industry expertise, or other valuable insights. Keep in mind a board seat is generally reserved for the largest investors in a company.

Veto power

Veto power is one of the most dangerous things you can give to an investor. Investors will often ask for final approval before a company can issue debt, additional equity, options, or pretty much anything else under the sun. This allows an investor to wield outsized control over your business. The safest way to proceed if you must concede on a veto power term is to arrange it in such a way that the investor continues to maintain the power only if they continue to participate in a pro-rata fashion in future rounds.

Anti-dilution

This term means that a preferred shareholder cannot be diluted in the case of a down round. Whereas common shareholders would lose value, preferred shareholders with this right would see their conversion formula readjusted to maintain their percentage interest in the company.

Dividends on preferred equity / interest on convertible notes

Dividends and interest are common provision in most deals. Given that startups are raising cash because they don’t have a ton, these payments often accrue and are paid out in the form of additional equity.

Financial/other reporting

Investors will often ask for reports from a company. Monthly or quarterly financial statements are common and are a good practice for the company to prepare. Some investors will ask for sales pipelines or other operating metrics. The key to this request is to maintain confidentiality and to make sure that it is not overly burdensome to the company.

Conclusion

There’s no right or wrong answer to negotiating a deal. You might think you know how to raise capital, but the truth is that every investor will make their own requests. Make sure you have good, non-biased advisors and attorneys who are experienced in negotiating investment offerings, and you’ll take steps towards knowing how to raise capital…without getting screwed.

In our last two posts, we focused on communication. We’ve emphasized the importance of communicating with your Board of Directors and also the necessity of communicating with your potential investors. However, we have yet to address the importance of building a strategic dialogue with your customers.

Opening up a conversation with your customers is tricky, because there’s a lot of noise in the marketplace. There are a lot of companies clamoring for attention. So, you need to be strategic. What problem are you trying to solve? Who is experiencing that problem and what other solutions have they tried in the past? Why are you better? Remember that if consumers don’t believe your product is valuable, then it will quickly become irrelevant.

With the steps below, you can begin answering the above questions and build a strategic communications plan that will be based on data and information. Soon the strategic dialogue – and then the sales – will follow.

1. Find your niche – This is integral to any product, marketing and communications strategy. If your product meets the needs of entrepreneurs in Indiana, for instance, it might not make sense to advertise in trade publications in California unless you are ready to expand nationally. You need to be intelligent about understanding who will be deciding to buy or use your product and how you can target them – because you could be wasting time and money interacting with anyone else.

2. Be strategic – This plays into the first point. Don’t order blanket campaigns with bland messaging if your product meets a very specific need, for a specific group of people. Figure out where they hang out, how they send information to one another, and how they prefer to communicate? The smart decision will get you better results in the long run, even if the short-term solution seems easier.

3. Be truthful – Your customers will know if you are not being truthful. If you tell them your product will meet their needs and it doesn’t, they will tell their friends, who will tell their friends, and the first sale will mean nothing. Connect with your consumers. Understand them. Focus only on their market – not the general population. If you build their trust, you will build their brand loyalty, and you will have more than a sale. You will have a customer for life.

4. Know your competition – If someone is going to purchase your product and not someone else’s, you have to understand what’s come before you and why it didn’t or doesn’t work for the consumer. Where was the disconnect? Was it their messaging? Was it the product quality? Was it the customer service? If your product doesn’t beat your competition, your sales will be mediocre at best.

Successful relationships can provide great value. Well-chosen partners can guide you, provide advice in challenging situations, and complement your own experiences so that you can improve your chances of success. The key, however, to all healthy, productive relationships is communication.

One of the most important relationships for any entrepreneur is with the members on their Board. Just like any relationship, it is critical to establish a solid, open and honest relationship with your Board at the beginning so that you can take advantage of the value and experience that each member will bring to you and your company and so they trust you as a leader. This will serve the company well and provide you with a solid foundation that will carry you through the good times – and the bad!

Here are a few tips that may be helpful in building a strong, productive relationship with your Board of Directors.

Build a strong Board of Directors: Most often your Board will be made up of the Founder(s) and the Major Investors. Often companies will add friends or management to the Board instead of seeking out experienced, proven, industry experts.  When given the opportunity to add additional members choose strong players who can help the company achieve their goals and help you grow as the CEO.

Get to know your Board: Spend some time outside of the regularly scheduled meetings to get to know your Board members…What are their strengths? How can they add value to the team? What’s their perspective on your business?  Also, identify an “inside advisor” among your Board members, someone in whom you can confide and seek their advice and council. This relationship will be helpful particularly during challenging times.

Hold regularly scheduled Board meetings – and make them count!: Your Board members have taken time from their busy schedules to spend time with you and your team.  It’s important to hold these meetings on a regularly scheduled basis and have a schedule for what you want to accomplish.

• Take time to plan the Board of Director meeting
• Have a agenda
• Drive the meeting
• Be direct. Encourage open, honest communications
• Be proactive-raise the “big issues”
• Follow-up with a summary and action plan

“No Surprises” – Unlike birthday parties, your Board of Directors will not like surprises: Ongoing, open communication with your Board tends to minimize surprises. Remember, your Board is here to help you and your team to be a productive and successful company. Although it may be difficult at times, it’s important to share everything with your Board…The Good, the Bad and the Ugly! They need to understand what’s working, what’s not working and what’s keeping you awake at night! Until they fully understand the situation, they can’t help with the solution.

Put your Board to work: Remember, your Board of Directors is there to help you and your company succeed. Don’t hesitate to put them to work to help you achieve your goals. Whether it’s sales leads, advice or contacts within the community…they are here to help. Ask for their help and be specific in your request!

As a CEO at a high-tech startup, I was nearly always raising money. I must have given my funding pitch 2-3 dozen times, namely to audiences that included VC’s, investment bankers, venture arms of some of the largest companies in the U.S. and high net worth angel investors.

I expected that an emphasis on funding in my pitch presentations would bring commitments. We needed money to launch and scale. I always thought, isn’t a funding pitch only about the money? But what I never expected was that feedback from investors would be just as valuable as any potential funding I was seeking from my pitch.

I recall one my first presentations to a Sand Hill Road VC in Palo Alto, CA. At the end of my pitch, the partner to whom I was presenting turned to me and said, “Thanks – very interesting. So, now my end of the deal is to provide you with feedback.”

And he did. He gave me his take on my company, the product we were commercializing, the nature of the market we wanted to penetrate, how our M&A target firms were likely to respond to us and when they would most likely want in. Ten minutes of feedback from a high powered venture capitalist was an education that felt as valuable as my MBA.

I began opening my investor presentations with questions to my audience about what they were excited about, what kind of deals they were funding, what trends they saw in the markets (particularly my market!). Before, during and after every pitch I made I received loads of valuable feedback from my audience – ideas on capital strategy, go to market strategy, what partnerships to go after, and perhaps most importantly, who to pitch to next.  I loved presenting to high-powered audiences because of the knowledge, wisdom and enthusiasm for my company I received from them.  This experience helped me refine my pitch presentation and be far better armed to answer questions in the future.

In my role at Elevate, I encourage every entrepreneur I work with to make his or her funding pitch every chance they get. But it’s not just the checks you should be seeking – you learn so much about your company and industry by creating an effective and compelling pitch presentation, whether you end up with funding from everyone you pitch to or not.