5 traits often spell success for managers of start-up ventures

Recently I've been thinking about the similarities that exist among successful start-up ventures — i.e., those that achieve a high rate of return for investors.

Following are five traits I have seen among startups that experience an optimized liquid return.

• The company plans cash flow via an integrated financial projections workbook. The company knows with reasonable certainty what its cash needs are and how to handle surpluses and deficits. The best entrepreneurs are cash managers, cash conservers and cash finders.

• The company plans capitalization through several rounds of capital. The company is organized in its record-keeping and precise in handling equity issues. It optimizes fund-raising by taking in the right amount with each round. There is a good balance between equity and debt financing, not selling equity too cheaply or too early and avoiding loading the company up with too much debt.

• The founders and other officers and principals take little or no salary during the first one to three years. This seems to be a hard lesson for many in Utah to learn. Many would-be entrepreneurs want investors to fund their lifestyle by having exorbitant (by startup standards) salaries for the founders and early officers. This sucks the lifeblood out of the new company. Every dollar, whether from operations or financing activity, needs to be pumped back into company improvement and growth, not salaries.

In fact, this is actually a major red light for me as an investor. If the founding entrepreneurs are taking out salaries beyond "rent and grocery money" for the first year or two, I am inclined to run away. Quickly.

And if an investment is made in any deal, especially an equity investment, then there should be a contractual salary cap for all founders and officer-shareholders coupled with a requirement that the company pays out dividends if cash surpluses reach a certain level. Why should the entrepreneurs take out a huge salary while the investors sit empty-handed? The fact of the matter is, they shouldn't.

• The CEO is a Pied Piper. The CEO does not need to walk on water, but he does need to be able to rally the troops and get them to do extraordinary things. One Utah County leader once persuaded all his employees to work for no cash compensation — options only — for one year to save the company. Years later, they were all handsomely rewarded.