Postcards from the Bleeding Edge
Saturday, October 15, 2011
I'd written this months ago and meant to post it then. Having been through 14 startups now (of which 3 I started, 1 (none that I started) that worked out ok), I figure I have sufficient background to give advice... especially to myself. I tend to forget one or another of these points much to my own detriment, in the heat of creating a startup.
I keep forgetting to apply points 10 & 11 below to my own work. At present, I'm merely applying startup-like methods, some of which are working, some not, to a major R&D project. The number of points missing on the strategy are sometimes glaring - I merely want to fix a problem (bufferbloat) so well that it never bothers anybody again. As for profit motive, I have none - merely cutting my own annoyance level regarding the behavior of wireless networks back to "mellow", almost suffices.
1) Retain control. Most successful startups go through three rounds of
funding.
If done wrong, by the last round the founder(s) generally reduced to a tiny minority shareholding and have lost control of the company... and are usually forced out by the 4th round or IPO.
If done right, the founders retain 80% or more of the stock in the 3rd round.
I note that 9/10th of startups are not successful, and that a large percentage of the ones that 'make it' did so without benefiting the principals or employees to any real extent, only the VCs.
2) Paul graham is good. I'm a big fan. The ycombinator model appears to be working, but as to how much it meets goal 1, above, I currently have no insight.
3) Have a pitch, and a plan, pitch it often, *listen* to the responses and objections, and revise after every meeting. Don't be deterred by failure. Make sure your goals are shared with the people working with you, as well.
4) Selling something is great.
Selling something you can actually make and sell at a profit is vastly to be preferred.
5) Get to plausible promise before seeking any money at all. If you can't do a startup's initial development on what you already have, you can't afford to take risks of this size, and should stay gainfully employed at something else.
Once you start chasing money, chase it hard, chase it continously, get it in the bank, and spend it appropriately. While there is such a thing as 'too much money' while in growth mode, it's a nice problem to have.
6) Decide on your exit strategy early. "go public, "stay private", "make money for 5 years", "lose money for 5 years".
Cynically I note that you don't have to share your exit strategy with your employees or your investors.
It does help in planning and in motivating your people if you know what your exit strategy is - there are very different motivators for 'GOING IPO IN 2 YEARS' vs 'Make money, reliably, starting in 2 years', or 'provide a valuable service', or 'solve a global problem', and it changes the kind of people you get.
7) Incorporate early. Twice. The first company loses money, the second is in reserve. Both are handy to have around. Shell companies in particular establish credit that exists independent of your own income, over time.
It is best to have had a company around for 3+ years before starting to really use it.
If it were legal, given todays legal and tax environment, I'd incorporate kids at birth. As it is, at the moment I'd recommend incorporating 'em as soon as legal in Delaware rather than overseas. It really complicates you life unnecessarily. (that said, doing business with other businesses outside of the US is mildly easier, and shipping your kids overseas will give them a bigger picture than they can get in the US of world needs)
8) Get a good lawyer. Also, get a good accountant. Take the advice of both particularly as regards to points 5 and 6, not me! Two lawyers and two accountants are an even better idea. Bad lawyers and bad accountants have sunk more than a few startups.
Have a clear goal, corporate rules, etc, laid out, in a mission statement, etc.
I have no opinions regarding sub-s or LLCs. A few years back LLCs were all the rage. Talk to two lawyers and one accountant about it.
Regardless, you're going to lose money for a while. It's good to make that tax-deductable any way you can. Cash-flow will always be a problem, whether it's early days of no income or while facing unexpected growth.
9) Contract to hire. Never hire until you have to. The costs both of hiring someone and of firing them far outweigh the extra costs of paying contractors of various worthiness. Getting business insurance is a problem, getting health insurance is also a problem.
Limit your fixed commitments rigorously.
Contract yourself if you want. I use MBO partners for this - they get me a pair of 401ks, 1m in business insurance and take care of a ton of details that I don't want to, in exchange for 5% off the top of my billings (in the US) - where most agencies take 40%.
10) Recognize your own faults. If you are a detail person, get someone that can stay focused on the big picture. If you are a big picture person, get people that do details. If you can do both, do both, but on separate days. REMEMBER to do both, regularly.
(Being a detail person myself, I have to reset with long weekends periodically to review the mis-fired plans and replan. I've had to do a lot more of that this year, than I'd like)
In all cases, having a good and well enabled AA/secretary working for the CEO primarily is tremendously useful. Get stuff WRITTEN DOWN. (I use transcribr.com whenever possible)
Also having a good shared scheduling system is helpful. I could go on for pages here...
11) Set goals, and plan, rigorously, and both conservatively and optimistically. Revise your plan monthly. Software developers are notorious for over-estimating what can be done in a month, and underestimating what can be done in 2 years. Marketing guys are notorious for missing trends until they've already happened, and selling visions of things that can't be built by any software developer on the planet and promising them 'tomorrow'.
12) If you are risk-adverse, don't do a startup. By all means, DO! form a company to fund your own interests, and lose money with it profligately, it makes the IRS mad, and that's worth it in itself.
The seed capital to accomplish the starting procedures above is about $15k. Yearly, maintaining the corporations depends on your locality, but runs less than $1k each, accountant < $1k, lawyer less than $3k, and if you can't find a way to lose 3x that much money pre-tax on a regular basis to make up for it, see multiple points above.
I keep forgetting to apply points 10 & 11 below to my own work. At present, I'm merely applying startup-like methods, some of which are working, some not, to a major R&D project. The number of points missing on the strategy are sometimes glaring - I merely want to fix a problem (bufferbloat) so well that it never bothers anybody again. As for profit motive, I have none - merely cutting my own annoyance level regarding the behavior of wireless networks back to "mellow", almost suffices.
12 suggestions for startups
1) Retain control. Most successful startups go through three rounds of
funding.
If done wrong, by the last round the founder(s) generally reduced to a tiny minority shareholding and have lost control of the company... and are usually forced out by the 4th round or IPO.
If done right, the founders retain 80% or more of the stock in the 3rd round.
I note that 9/10th of startups are not successful, and that a large percentage of the ones that 'make it' did so without benefiting the principals or employees to any real extent, only the VCs.
2) Paul graham is good. I'm a big fan. The ycombinator model appears to be working, but as to how much it meets goal 1, above, I currently have no insight.
3) Have a pitch, and a plan, pitch it often, *listen* to the responses and objections, and revise after every meeting. Don't be deterred by failure. Make sure your goals are shared with the people working with you, as well.
4) Selling something is great.
Selling something you can actually make and sell at a profit is vastly to be preferred.
5) Get to plausible promise before seeking any money at all. If you can't do a startup's initial development on what you already have, you can't afford to take risks of this size, and should stay gainfully employed at something else.
Once you start chasing money, chase it hard, chase it continously, get it in the bank, and spend it appropriately. While there is such a thing as 'too much money' while in growth mode, it's a nice problem to have.
6) Decide on your exit strategy early. "go public, "stay private", "make money for 5 years", "lose money for 5 years".
Cynically I note that you don't have to share your exit strategy with your employees or your investors.
It does help in planning and in motivating your people if you know what your exit strategy is - there are very different motivators for 'GOING IPO IN 2 YEARS' vs 'Make money, reliably, starting in 2 years', or 'provide a valuable service', or 'solve a global problem', and it changes the kind of people you get.
7) Incorporate early. Twice. The first company loses money, the second is in reserve. Both are handy to have around. Shell companies in particular establish credit that exists independent of your own income, over time.
It is best to have had a company around for 3+ years before starting to really use it.
If it were legal, given todays legal and tax environment, I'd incorporate kids at birth. As it is, at the moment I'd recommend incorporating 'em as soon as legal in Delaware rather than overseas. It really complicates you life unnecessarily. (that said, doing business with other businesses outside of the US is mildly easier, and shipping your kids overseas will give them a bigger picture than they can get in the US of world needs)
8) Get a good lawyer. Also, get a good accountant. Take the advice of both particularly as regards to points 5 and 6, not me! Two lawyers and two accountants are an even better idea. Bad lawyers and bad accountants have sunk more than a few startups.
Have a clear goal, corporate rules, etc, laid out, in a mission statement, etc.
I have no opinions regarding sub-s or LLCs. A few years back LLCs were all the rage. Talk to two lawyers and one accountant about it.
Regardless, you're going to lose money for a while. It's good to make that tax-deductable any way you can. Cash-flow will always be a problem, whether it's early days of no income or while facing unexpected growth.
9) Contract to hire. Never hire until you have to. The costs both of hiring someone and of firing them far outweigh the extra costs of paying contractors of various worthiness. Getting business insurance is a problem, getting health insurance is also a problem.
Limit your fixed commitments rigorously.
Contract yourself if you want. I use MBO partners for this - they get me a pair of 401ks, 1m in business insurance and take care of a ton of details that I don't want to, in exchange for 5% off the top of my billings (in the US) - where most agencies take 40%.
10) Recognize your own faults. If you are a detail person, get someone that can stay focused on the big picture. If you are a big picture person, get people that do details. If you can do both, do both, but on separate days. REMEMBER to do both, regularly.
(Being a detail person myself, I have to reset with long weekends periodically to review the mis-fired plans and replan. I've had to do a lot more of that this year, than I'd like)
In all cases, having a good and well enabled AA/secretary working for the CEO primarily is tremendously useful. Get stuff WRITTEN DOWN. (I use transcribr.com whenever possible)
Also having a good shared scheduling system is helpful. I could go on for pages here...
11) Set goals, and plan, rigorously, and both conservatively and optimistically. Revise your plan monthly. Software developers are notorious for over-estimating what can be done in a month, and underestimating what can be done in 2 years. Marketing guys are notorious for missing trends until they've already happened, and selling visions of things that can't be built by any software developer on the planet and promising them 'tomorrow'.
12) If you are risk-adverse, don't do a startup. By all means, DO! form a company to fund your own interests, and lose money with it profligately, it makes the IRS mad, and that's worth it in itself.
The seed capital to accomplish the starting procedures above is about $15k. Yearly, maintaining the corporations depends on your locality, but runs less than $1k each, accountant < $1k, lawyer less than $3k, and if you can't find a way to lose 3x that much money pre-tax on a regular basis to make up for it, see multiple points above.
Labels: startups
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