Let's Eat Cake

Carlin, Jordan, and Zach graduated university in May 2009, and while most graduates were eagerly chasing entry-level cubicles, they undertook probably the most ambitious project they could think of:  start a business developing the standard for augmented reality.  Don’t know what that is?  Watch this.   This is another example with what can be done with the technology.  Even if you do know, watch it anyway; you will be amazed (and probably a good deal freaked out).

The best part is that the business is mostly funded by outside investors – my kind of business.  Naturally, I had to find out about how they are managing all of this, in the hopes of gaining some ideas (and inspiration) for the rest of us.

HOW IT BEGAN

Jordan Parker conceived the idea for the business in January, 2009 for his entrepreneurship class project at the University of Rochester.  After discussions with classmates Carlin Gettliffe and Zach Kozick, who had become close friends while founding Art Awake and the Urban Exploring Club at UR, the three were inspired to go forward with the real thing.

An idea is one thing, but a real company is quite another.  After the conception of the idea, the three spent a month just thinking it out and planning how they can make this into a useful service and meaningful product.  The very first step to materialize their company was to legally incorporate it, which they did through LegalZoom.com, without any lawyers or accountants.  Although a convenient resource, it is better to hire a lawyer to avoid running into issues later.  So in July 2009, Omniar Inc. was legally born.

For tax purposes, an S Corporation is the ideal structure for a company like Omniar – privately owned, with a small number of investors and no income.  Unlike a C Corporation, which gets taxed on both the company revenue and the owner income level, an S Corporation gets taxed only on the earnings of the owners.  So, as long as no money is withdrawn by the owners, an S Corp doesn’t have to worry about taxes, which is a pretty good arrangement for a start-up.   (Obviously, don’t take my word for it – check with specialist for the facts before making any decisions).  So, what’s the next step?  Start building and developing the product so you actually have something to show for your idea.  As Carlin says, “until you have something, you don’t have anything.”

THE TEAM ORGANIZATION

Jordan and Zach are the technical brains of the operation – Jordan is in charge of the back-end infrastructure and Zach focuses on mobile software development – while Carlin is the business development and marketing front-man.  In addition, they employ an outside software development firm and accounting firm who are compensated traditionally, a lawyer paid in equity, and an intern from UR.  Carlin explains that in the beginning when you have absolutely no money, you have no choice but to find people to work for equity.  You should also recruit experienced mentors and advisors to your team and compensate them with equity, as they are key to helping your business development.  But once you have some funds and a solid team in place—and assuming that you really believe in your product and company—it is much better to compensate traditionally so that you can retain the maximum amount of equity.  After all, this is how you will earn your income.

In Carlin’s experience, there are two distinct types of people who are willing to work for free or for equity, polarized by age:  the straight-out-of-college youth, motivated and adventurous; and the older and experienced people interested in serving as mentors to young entrepreneurs.  (By the way, they are looking for more interns.  If you are interested, keep reading for contact information below.  And I believe there is possibility for some telecommuting, so don’t be shy if you don’t live in Rochester or Boulder.)

ON NETWORKING AND FUNDRAISING

Omniar is funded completely by outside investors and donors, and so far they raised upwards of $100K through the University of Rochester, angel investors, and friends and family.  Perhaps counter-intuitively, Carlin finds that personal networks and more socially geared events are the best avenues to meet the right people to help you with your endeavor.  At industry conferences you will find a higher concentration of potentially interested contacts, but people at these events are often burnt-out and distracted from meetings and networking, making it harder for them to connect with you or remember you.

Beyond personal and professional networks, don’t forget about the university network, to which anyone who attended university has access.  However, it becomes vastly more fruitful if fertilized by an active contribution to the college and student life during enrollment, which allows you to form relationships with potential mentors and teachers early on.

Carlin, Zach and Jordan’s continuous involvement with the Center of Entrepreneurship at UR working on ArtAwake and participating in the Kauffman Entrepreneurial Year (sponsored by the Kauffman Foundation helped them develop a strong relationship with the center, which is now one of their primary investors.  David Silon, a Silicon Valley entrepreneur and a professor of the entrepreneurship class in which Jordan conceived the idea for Omniar, is one of their most involved mentors.  He assists with just about everything from technical issues to business matters, adding a valuable contribution to the team.

Omniar’s founders have found most of their specialists and contributors by being active in networking, both at industry conferences and through personal connections.  The key question they ask everyone they talk to is “Who else do you think we should be talking to?” which is an effective way to begin utilizing the networks of others they meet, even if that person himself isn’t the right one to be talking to.  As always, don’t expect to get what you want unless you ask for it directly.

VENTURE CAPITALISTS

Recently they have started seeking investments from venture capitalists (VCs), which is a different fundraising process in itself.  It generally consists of several meetings; the goal of each meeting is to secure the next meeting.  To land the first meeting, you usually need some kind of introduction by a person who knows the VC.  During the first meeting you make your pitch and answer questions (most of which you should be already anticipating).  If the investor is interested, you schedule another meeting.  Through these meetings you have a series of discussions that delve deeper into your business, which is typically a several-month process.  At some point, the VC will make a decision on whether or not to invest, and then another month or two of due diligence takes place, during which every detail of the company and its documents are painstakingly analyzed for possible problem points.

A typical offer to a VC includes a piece of equity and preferential treatment (preferred stock), which means that the VCs get first dibs on payouts (regardless of whether the liquidation results from success or bankruptcy).  VCs typically cash in on their investment through a buyout by a larger company (ahem Google), or an IPO.  In less likely scenarios, a VC can receive returns from the company becoming profitable on its own.  This scenario is less attractive for a VC because it implies slow and gradual growth of the company.  Since most of a VC’s investments will be losses, VCs prefer realizing big and quick returns on a rapidly growing company rather waiting for it to develop into profitability over many years.

THE PAPER TIGER

There are no set rules on what documents you need for fundraising, but generally, the more the merrier.  What Omniar’s advisor calls “The Paper Tiger” should include various industry papers, product descriptions, a business plan, marketing documents, and anything else that helps you tell your story and show your identity on paper.  This is purely a selling game.  The help of a mentor becomes very important in identification and gathering all of these documents.

The most interesting thing I found in my conversation with Carlin is that a business plan is not necessary to start a business or even to start looking for investors.  In fact, it is downright impractical to write a business plan before you get started – it is something that comes after several months of idea sifting and business development.  Business plans are often overly focused on numbers, which are difficult to determine prior to getting your feet wet.  For Omniar, the development of a business plan came six months after starting the business, and took another three months to complete.

WHAT OMNIAR IS UP TO (another resource for entrepreneurs)

Currently, Omniar is stepping away from fundraising to focus more on product development and marketing.  They want to add more value and have a better proposition before pursuing more investors.

They have also just started with the TechStars program in Boulder – a competitive, 3-month incubator program for start-ups.  Omniar was one of the ten companies admitted out of over 600 applicants.  Through this program, the company trades a 6% equity stake for $18,000 and access to mentors and investors.  Carlin explains that the funding is negligible – just enough to cover expenses during the program – and the real benefit of TechStars is the networking; access to mentors, investors, and services; as well as the visibility it provides for the company.  Omniar will also be one of the three companies to be video recorded during the program, which will be part of a video series on the TechStars website. The program keeps track of statistics of past participants, which can also be found on the website.  So keep checking there for updates on Omniar’s progress!  The 13-week program culminates with “Investor Day,” where potential investors gather to watch presentations of the ten companies.  Although after this the program is officially over, there is opportunity for similar events such as presentations in Silicon Valley.

The best part about programs like this is that their value is virtually indestructible – whether your company succeeds or fails, the experience, information, and networks you obtain through the program stay with you for your future endeavors.  When looking at incubator programs, Carlin finds that for-profit organizations are much more effective, because they have a stake in the success of your company and therefore are motivated to help you succeed.  Not-for-profits are less selective with their applicants, you have to pay them to participate to cover their expenses (rather than them funding you), and they don’t have a vested interest in helping you grow.  Additionally, their lack of funding can mean fewer and less valuable resources.

NECESSARY SKILLS

Although technical skills are particularly important in a business like Omniar, Carlin points out that the most crucial skill is simply recognizing what you don’t know.  Nobody has all the skills or knowledge necessary to start any business, so knowing where to ask for help becomes critical for success.

Another key ingredient is motivation.  Undertaking such an ambitious project is overwhelming, but the magnitude of the challenge itself is very exciting.  The idea that you are doing something that can change the world is a huge motivator, and every milestone turns into extra fuel in the gas tank.

From the beginning, the founders have agreed that they are OK with the idea of failure.  In the worst case scenario, they have nothing to lose, but rather an opportunity to gain a valuable learning experience.  It’s important to remember at every embankment that failure is an important part of the process, and even if you fail nine times, the tenth success will more than make up for the other nine.

In the best case scenario, Omniar has everything to gain and the world to benefit.  Why depend on the whims of a job market when you can create the opportunities yourself?

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WANT TO GET INVOLVED?

Omniar is still in its rapidly growing green stages, and they would love help in the following departments:

• Marketing; especially social networking, blogging, etc.
• Advisor with experience in the mobile software industry
• Advisor with experience in location-based services
• Android (Google mobile OS) developers and other programmers
• People with strong knowledge in computer vision

If you would like to apply for work, help out, donate, or invest, please email info@omniar.com.  They have an opening posted on www.omniar.com/news.

If you just want to know more about Omniar, please also feel free to shoot them an email—they are always interested in talking to people.  You can also find their website at www.omniar.com.

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MORE RESOURCES

Here are some start-up and funding resources that have been recommended by the Wall Street Journal:

• thefunded.com
• angelsoft.net
• onstartups.com

Carlin Gettliffe contributed to this article.  Images from Omniar.com

Tags: business, entrepreneurs, innovation, lumatic, omniar, san francisco, technology