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Sizing Up a Start-Up
Michael Wolff founded Wolff New Media; it cratered; he wrote Burn Rate. Jerry Kaplan founded Go Corp.; it cratered; he wrote Startup. Adam Osborne founded Osborne Computer Company; it cratered; he wrote Hypergrowth. You know the old story: "If you can, do. If you crater, write a book."
You can understand their motivation. The book gives you the chance to make a few bucks off a failed venture, occupies some time while your emotions cool, and gives you a chance to blame the failure on somebody else. I have to guess that some rudimentary form of this effect drove Daniel Rippy to write Sizing Up a Start-Up. He tells us only a little about his own professional background, except that he was a product manager for a "software start-up" in Seattle that burned through $25 million in investor cash and "had little to show for it."
Rippy's employer seems to have fallen apart with less drama than the almost tectonic failures engineered by Osborne, Kaplan and friends, and his book is somewhat more modest as well. He attempts to explain the rudiments of evaluating startups for others who might want to work in one but who lack the ability to identify a good one. He also provides basic advice on stock options, startup lifestyles, and other topics of interest to anybody contemplating joining an early-stage company.
Though Rippy's advice applies to any young company, he concentrates on technology start-ups, especially software and dotcom. As such, he talks a lot more about identifying a good venture capitalist (which a nice dotcom will have), as opposed to measuring positive net margins (which no dotcom has). High tech startups also provide most of his examples and quotes. Rippy quotes executives of a number of technology companies on topics ranging from sizing up a management team to evaluating your own tolerance for risk.
Most of his advice is quite general. He explains that earlier stage companies are riskier, and that you'll probably work long hours. In a few places, he becomes quite specific, for example, analyzing the strengths of different venture capitalists. He missed a trick, I think, in failing to discuss some of the specific data most valuable to people who have adopted a start-up lifestyle. Where's the table of startup filled neighborhoods in New York City, San Francisco, and Austin, cross referenced by nearby all-night restaurants and gyms?
What's Good?
The best things in this book are also the most basic and practical. If you don't know how to value a stock option, you should figure it out before starting at a dotcom. If your potential employer hasn't actually shipped a product yet, you should probably remember to ask how many months of cash they have in the bank. Of course, these topics are more obvious to most people now than they were in the giddy days before April's collapse in NASDAQ.
The quotes from other people were generally insightful, though Rippy's stable of experts is smaller than it looks at first. He returns to the same people over and over again for more quotes.
What's Silly?
Rippy presents a spreadsheet for calculating your "tolerance for career risk". It's a bit like a spreadsheet designed to determine, in strict mathematical terms, precisely how much prettier you think Boston is than Springfield. The question is fuzzy; the inputs are fuzzy; the output is fuzzy; don't pretend it's physics.
Worst Bad?
His half-baked theories of organizational evolution and some of the space-filling material. Rippy spends chapters on the difference between "organizational infancy" and "adolescence," etc. The filler is quite obvious, and sometimes laughable. To bulk out what is essentially a brief comendium of common sense, he includes lines like "Your base salary must be at some acceptable level because you need to cover your living expenses on a day-to-day basis." (Really!?!? Oh no!)
Is it for you?
Are you thinking about maybe joining a startup? Do you know the difference between qualified and nonqualified stock options? If not, buy the book.
Stern is the president of Information Markets Corp. You can purchase this book at FatBrain.
Fortunately, the "dot com mania" on Wall Street has died down. Foolishly-spent venture capital is drying up, and startups are now being assessed on their ability to actually deliver some value, instead of simply having a Dot Com name.
History will record the last couple of years as the Internet's gold rush. Surely this has been a phenomenon of historical significance, probably the biggest since the Industrial Revolution. The next couple of years should be interesting to watch, now that the brick-and-mortar companies of old are starting to catch up with the Internet-only startups that hoped to replace them. Only the most well-managed of the latter will survive.
Does this mean that all start-ups are bogus? Of course not. But investing in one now, or taking a job at one now, is something to scrutinize carefully -- and this is something that this book will help to do.
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Ok...I'll bite. What's the difference?
The difference is basically when and how much tax you pay. Practially it can mean the difference between making money or losing your shirt.
With a non-qualified stock option, the IRS doesn't take its slice until you exercise the option (turn it into stock, in laymans terms). Income tax is payable based on the difference between the exercise price and the fair market value of the stock at exercise.
Qualified, or Incentive, stock options are basically not taxes as ordinary income on exercise, and are therefore far 'kinder' on your tax situation.
Be warned about non-qualified stock options. There have been situations where an IPO has collapsed and owners of non-qualifies stock options in the company have been left with stock which had a considerably lower market value than the tax bill they were presented with (which, of course, is calculated from the stock price at IPO).
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Oh boy,
The alternative to our silly free market system is very few companies that never fail, because they are propped up by the government. New industries in the US are financed by individuals (stock holders, initial venture capital then general public) who are willing to take a risk on a new market. Some companies fail, people lose money. Some companies succeed, people make money.
The fact that most new (and esp high tech) industries start and flurish in the US is specifically because of this cycle. The high rate of failure you state isn't because the people are incompetent, it is because there are enough people in the US willing to take risk on new ventures.
The high rate of failure is a side effect of success, not a warning sign of failure. The kinds of safe industries you are thinking of do have a low rate of failure (compared to high tech). Do they have a higher rate of failure in the US than in countries that prop up their larger industries to insure that even unsound companies stay afloat? yes.
I'll take our way over your pinko (had to say it once folks) solution.
-sb
.sig Karma out the wazoo, better to spend points elsewhere if this is above 2 or below 0
To me, the best question to ask yourself is not "How much money will I make if I work there?", but "How much will I enjoy working there?". In my mind, put away enough savings so some out-of-work downtine won't kill you and then take the job you are least likely to dread going to day in, day out. Especially if long hours are a possibility. I've worked at shitty jobs where I punched in my eight hours every day and got a good check in the end, and let me tell you, give me a long hours at an interesting job every time!
When looking at an employer, questions like "Is their technology cool? Is the guy I'd report to a jerk, or a nice guy?" are far more important to your quality of life than cash or, heaven forbid, stock options.
And never, ever, ever delude yourself into thinking that stock options are real money. They are basically just free lottery tickets. Make sure that you can live on the salary they offer you. I'm personally on my fifth set of stock options. Grand income from them all: ~$3000. Worry about them during negotiations, but be very, very careful about giving up too much salary to get them. Never assume that you'll be able to make up the savings, whatever later, once you cash them in. And they are something to put entirely out of your mind the minute you take the job. Pretend they don't exist. Pretend you didn't get any.
In the end, if you like your job and earn enough to live ok, that's all you really need. Everything else is just gravy. And in these techie negative employment days, I don't know that even job stability is all that important, assuming you've been smart, and stuck a couple month's salary in the bank.
The cake is a pie
As a consultant you are paid by the hour- this tends to help avoid the 80-hour work week, or at least make it financially rewarding. It also avoids burnout- if you're careful about choosing the right contract, a month or two of 12-hour days can give you the savings cushion for a month or two of downtime, or a week in Aruba.
If you do choose to become a consultant, there are a few major pitfalls to consider-
I do not deploy Linux. Ever.
Thanks, this is a really concise review.
In the review the book is compared to some other "failure" books. I think it really is cathartic to write about things that went wrong, it may even be the best way to understand what happened and (theoretically) how to prevent it.
I think this is what inspired "Mythical Man-Month" by Fred Brooks (IMO this is required reading). His motivation was, in part, to describe how and why things fall apart from an organizational perspective. There was some commentary on interdepartmental politics, IIRC, but it was mostly about configuration management and why the massive project he had tried to manage was so over-budget and behind its schedule. I guess it is a "related reading" for this topic.
Some people have suggested that the work he has done is no longer as relevant and that his organizational princicples seem kind of dinosaurish to a company running on Internet time, while others say the things he discussed are so ingrained in Software Engineering that we see the book as a cliche (something like a Platonic discussion of the ideal project environtment). What do you think?
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Of course in the kind of capitalist marketplace that you find in America, home of the startup, you pretty much have to expect that the failure rate of starting companies is going to be sky-high, especially when coupled with a market such as the "net generation" in which customer loyalty is at an all time low.
Classic economic studies show that when free market principles are taken to their extreme then the differential rate of success of new companies will fall to near zero, and the startup phenomenon has proven this to be as true in practice as it is in theory. When the market is completely unfettered, only companies with an extremely small risk quotients can succeed in entering the marketplace.
I hate to say it, but despite its past successes in promoting wealth and productivity, laissez-faire capitalism in America is now beginning to stifle the market and remove the potential for innovative newcomers to gain market share. The amount of capital liquidity is down as more and more companies settle into their post-expansion phase in which they attempt to stifle any up-and-coming competition rather than generate new sources of revenue.
Maybe it's time for some help for the little guy before the market stagnates and a country with a more balanced system of economic policy becomes the world's #1.
After an interview process and they show you around, you should have the option of signing and NDA and asking to see everything they have to offer in terms of the business model, projections, staff, and organization. If a start-up has a business model that fails in general assessment in *anyway* or fails to demonstrate good long-term goals, forget about it. Also, turn the interview around from yourself to the staff. Question your projected boss. What does he/she really know? Is he/she a technical type that has a clue about what you're going to be instructed to do, or is he/she just a figure head that works as an underling for the top people, pushing employees around. Are the higher-ups well educated people that you could truly respect? What about your potential co-workers? Are there a few that are confused by constructors? Are some of them installing RedHat for the 3rd time that same day? Usually lack-luster employees shows that management just wanted to get some quick help together for practically no cost just for the sake of impressing VC's. Bad. Also, observe the office organization model. It's usually a bad sign if everyone is running around between tasks in an aimless fashion. (Yes, that's vague, let me clear it up.) If you see someone who should be writing code stapling papers together in place of an office manager, bad sign. A good start-up company should have people hired for their respective positions and not unrelated ones.
When I say that you should be lofty, you should remember that a good start-up company knows talent and will relentlessly pursue talent. Why? They know that they will only succeed if they can convince the best minds around to join their team. A start-up that is doomed to fail is one that interviews talented employees, but says, 'well, you cost too much, we can find someone cheaper.' Bad. Always remember to turn questions back at your interviewer. If they really want you and your skills, they'll put up with quite a bit.
Lastly, make sure there is a lot of work to do! A start-up company should be busting its ass to become successful and beat everyone else to the punch. They should not be chaotic, but they should have their workload assessed and everyone on the team aughta be shoveling away at the pile, not standing around cubes with coffee mugs preaching how great they are. (Don't forget that if there isn't a lot to do, there's something fishy - and it might also mean that you'll not be needed for too long.)
This is just a collection of thoughts from my own meandering experience with start-up's. Don't be discouraged though! A friend of mine and I have gone through several of these things and it's incredibly frustrating. Many, however, will become successful and you'll know it when you join! Stick with it and someday you'll be cashing in on loads of valuable stock. :-)