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Geek's Startup Business Experiences
FreshGroundPepper writes "A few friends and I are in the process of starting up a new software company. (We are compiling our business plan now) With the vast amount of software/startup experience among the /. crowd, we were wondering what kind of potholes and advice our fellow geeks could lend in the way of generic do's and don'ts in the early stages of the game. I'm not looking for legal advice so much as just any gotchas that others have run into."
One of the most important things is to spend the extra dough to hire competent people. I've been with three startups and they've all failed to do this in one way or another.
The first startup didn't hire anyone, so it never got off the ground. Lesson: If the existing staff is already working their collective ass off for you, and there's more work in the queue, get more people. The trick here is to not hire more people than you need.
The second company managed to hire an extremely talented staff for below industry-standard wages, due to the lure of the stock, but failed to keep this staff by awarding 3% raises to everyone in the company. By giving the top performers the same amount of raise and stock options as those not performing to the same level, the company all but assured that the talent would leave in droves. And they did. Lesson: A little extra money in the right place goes a long way to keep your talent.
The third company had a mostly incompetent staff and was the most aggravating company to work for out of the three. The handful of competent people there carried the load of the greater numbers of slackers, whiners, and incompetants. Lesson: It doesn't take too many bad apples to ruin the whole bunch.
I'd say besides what I already mentioned, one of the most important things to keep in mind is that an employee who wants to be at work, will be willing to go the extra mile to make it succeed.
I hope this helps. There are alot of hard lessons to be learned in the land of startups. Unfortunately the only way anyone learns anything is to fuck up and adjust accordingly.
Good luck.
Go with people you trust
I've done this three times, and twice come unstuck because of failures of trust between the technical people and the finance/sales people.
In the first case we were in a long development cycle for a product. The finance director kept giving us reports which said, yes, things were tight, but we were solvent and could do it. If he hadn't, we'd have diverted effort into consulting, which would have made a bit of immediate income.
In the end, just as we were about to launch the product, we ran out of money very hard. The finance director (who was experienced, and a personal friend) had been keeping two sets of books, and showing the rest of the team doctored figures. His excuse? 'If you'd known how bad things really were, you have gone off and done other things and we'd never have got the product finished'. Well meant, but not helpful.
In the second, the marketing director, a very experienced businessman introduced to us by the local business development agency, tride to bribe a local government representative to get a us contract. After we'd launched product, as sales were taking off, when we were already nicely profitable. Well meant, but very, very stupid.
If you're east of the Atlantic, don't waste time with VCs
I could not possibly count the hours I've put in to trying to raise venture capital. With excellent business plans - I had a business plan for Web auctions fully fleshed out and costed back in 1996, for example - competent key people, all that was needed (except finance) to make the project fly. It's just a complete waste of time, here in the UK. UK Venture Capitalist houses are extremely cautious and do not like either technical projects or geeks. If you invested that same amount of time in development that you waste hunting VC, you'd get your product to market.
I know only three groups who've successfully gone down the VC route, two from here in Scotland, one from France. All three moved their whole companies to California, first.
Don't take it too seriously
But finally, remember that it's a gamble, a chancy game. I wish you all the best: but, if you fail, remember that it's a set-back, not a disaster. Don't put yourself in a position where the company going down would personally bankrupt you. If it does happen, and you're reasonably sure the reason it happened wasn't due to your incompetence of some deep personal failing, brush yourself off, sort the mess out, and start again.
I'm old enough to remember when discussions on Slashdot were well informed.
Also get a good lawyer. Interview several and ask for a reference or two. There are a lot of law firms that seem really good, but are in reality over burdened by the amount of activity going on right now in software and the Internet. There are some firms that will take you on deferred payment if you have a solid business plan. Some will even offer to offset fees in exchange for stock later down the road. Shop around. A good lawyer is essential, especially when you are dealing with VC.
Some tips from the front line:
1) Definitely pick a CEO and differentiate duties. In a start up, many of the founders will be doing many things, but make sure that one person has the eventual say. The previous poster is absolutely correct in stating that the CEO's main dities will be in raising money and forging relationships. If someone on your current management team can't do this, find someone who can.
As a startup, many times you see founders acting as "partners", each giving their input to every decision. Reaching a general consensus is a good thing to get everyone involved, but don't operate democratically, nothing will get done.
2) The previous post summed it up: Divide the equity equally amongst the founders. This also means that you should look closely at each founder. Some one who leaves after the first month because they were marginal in the first place can return to cause problems. Wayward founders can become a legal nightmare if you are successful. Equal equity is important to give a sense of fairness to all the founders. If you deviate from this, make sure that there is a real good reason for doing so.
3) Get your elevator pitch down. This means basically that you can powerfully explain what you company does to someone sharing an elevator with you. If it takes you five minutes to explain what the company does, then you need to do some rethinking! Keep it simple and powerful. Ideally it should be explained in a single sentence like, "We aim to be the Amazon.com of snack foods."
4) Think angel. For your first round of money, unless you have a VERY good business plan or an amazing management team (or both!) most VC will not touch you. There is a lot of hype about how much VC money is floating around, but the reality is that they are very selective in who they invest. Angels are your best bet for the initial seed round until you have something to show.
5) Initial valuation. Be careful. With a good idea, a good BP, and a capable management team, you should be able to get as much as a $5 million dollar valuation. But don't shoot too high. If you get too high a valuation, the next round investors will laugh at you. And if they come in at a lower valuation, you will definitely piss off the initial investors (not to mention invoking any legal nasties like ratcheting clauses that will probably be a part of your agreement). Moral: get a realistic valuation. Seek out angels first, unless you really think you have the Right Stuff(tm). In that case, go for it. There are a lot of good VC and they are indispensible for both cash and industry contacts and management assistance.
6) Don't get discouraged by competition! If you have a good idea, chances are that there are 20 other startups moving at the same time with a similar idea. Plan to execute quickly and make sure you do it better. Darwin works overtime in this economy, so be ready for it. But don't get discouraged by competition. Its inevitable and makes you work harder to make a valuable product or service.
7) Lastly, don't be afraid to admit you don't know something. The last thing that investors want to find out is that you lied to them about something. Be honest and frank and you might find that someone can get you your answer or provide a resource to assist. No plan is perfect. No team is perfect. And they know it.
Good luck to you all! Its a hard, long and frustrating road to start your own company, but the rewards are worth it. Even if you "fail" you take away very important lessons and experience to use next time.
Bring in experienced businessmen, NOW. Get a solid person in charge of marketing. You can't think "develop product, market it," marketing and development need to work in sync. Be certain that the market that you are aiming for exists and that you can capture it.
Get a good CFO once the seed money comes in. An accountant is NOT good enough. It takes time to raise money, be certain that you will know when the next infusion of capital is needed.
Decide on jobs initially. There NEEDS to be a President/CEO, his decision is final. You need a chain of command, not by committee. Make certain that whomever is your starting CEO is ready for the responsibility (raising money, forging alliances). Even more important, make certain that they are ready to step down when the company needs someone experienced in that role.
Divide the initial equity evenly among the founders. There should be NO room for equity fights in the beginning.
Hire good, intelligent, motivated employees. If one of your first hires is bad, you're sunk.
Good luck.
Alex
OK, I am not going to write a comprehensive "how to start your own company" guide here, but I'll give some random pieces of advice (based on my own experience - a company I started with a couple of friends got funded a month ago after six months of work).
:)
:)
:), but can gain great experience, great contacts, have fun, and potentially retire soon (though I do realize that chances of the latter are pretty slim)
1. Choose a name that nobody else would think of using (something like Red Hat is a perfect example) - we got a pretty generic URL, but then it turned out that it was also trademarked (by someone else), so we still have stupid legal problems, which divert our time from the meaningful stuff.
2. When you go to VCs, don't think that they are stupid and can be blinded by bullshit and buzzwords (first-mover advantage, scalable model, etc.) - many (maybe most) of them have very technical backgrounds, started companies themselves, and can speak your language. However, it also helps to speak theirs - read a couple of issues of something like Forbes ASAP, Fast Company, etc. - I generally don't read them, but it helps to tune your mind to the right wavelenght before presentations
2a. Don't think that you are the smartest. If you have this idea, chances are that someone else also did. Moreover, chances are that some of the VCs already funded a similar company, so, obviously, avoid those ones - they will just steal the good ideas from your model for those companies (and they ARE allowed to do that, because they do not sign the NDAs)
2b. Don't give up - we went to A LOT OF VCs before finally getting funded.
2c. And if you are young, they WILL rip you off (in terms of equity they take vs. money they give). Life's a bitch. But if you're successful, it's not going to matter
3. Try to use all possible connections you have, even the weirdest ones. If you have some friends/professors/former bosses/etc. who are very well-known, or just merely very successful, try to get them as advisors - if they are nice they will agree (it's zero marginal cost to them), and you might benefit a lot by just mentioning them as an advisors. Try to get many people fast, even half-committed - it is much nicer to say that you have 10 people (and, of course, give names) when you try to rasie money than to say "well, we two have this great idea". Remember, at the very early stages funding is closely related to the size of the company, e.g. # of people in it.
4. Have fun. Always remember that you have nothing to lose. I personally consider this whole start-up thing to be a game, in which I can only lose time (which is valuable, but I've still got a lot of it - like 50 years
Good luck!!!
Well, among my several employers, I've been through a couple of startups over the years. One went well for the investors, but I was too junior to make much off of it. The other was as bad as it gets... it was so bad it didn't even make a detectable crater when it went chapter 13. So here goes:
1. The aforementioned crash & burn went ch. 13 because the two key founders had a combined emotional age of 6. Choose the team carefully. The VC's also primarily fund on quality and track record of the team.
2. What is missing from your team? A good marketing guy? No one is more important to success -- including the chief software architect -- so park your geek ego, OK? By the way, most marketing guys are not *good* marketing guys -- get someone that is clearly insightful. If it smells like arm-waving BS, it is. Do you have a manager? You need someone who has actual people management experience for a few years with >16 person teams... this is *not* an area for OJT.. and well meaning but clueless about people management and keeping a shop running will drive good people away... besides burning up your money.
3. Remember that the job of a start-up team is to put scalable processes in place. Almost all companies go through "growing pains". Most can be avoided. The pain is caused by outgrowing the processes that work for small teams. Example: 2 guys whacking code can survive without a defect tracking system. 20 can not. Every process needs to be examined for scalability.. you will miss some, and those will be the walls you hit.
4. When something begins to smell a little like a mistake... ruthlessly surface the issue and squash the mistake immediatly. Bad hire? Throw the bum out NOW. Bad choice of tool? ditto. Chapter 13, Inc. would have done far better if the board had been *less* patient with the clowns at the controls. Small companies can take too many self-inflicted wounds.
5. You *do* need a business plan. Revise it regularly. It's for *you*, not the VC's. Keeps you focused on what matters.
6. Pinch pennies, but in the right places. It's pretty simple, the less money you burn, the more of the company you keep for yourself. Cheap used furniture or even plywood holds up a monitor as well as anything else. Use your money to buy tools that make your coders squirt ascii like a firehose and squash bugs in dozens.
7. There happens to be way more money in the hands of VC's right now than at any time in recent decades. WAY more. They are funding stupid deals that will crash and burn. They are funding big deals because little $2M dribbles doesn't invest it fast enough. Your challenge will be getting noticed, because they are too busy pushing money into the hands of people they already know... people that have made them money in the past. So.. back to #2, do you have somebody on your team that knows how to raise money from VC's? Find one.
And best of luck. A start up will be be best, worst, most educational, most tiring E-ticket ride you can find. Whether you make a zillion or if you crash and burn.