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How to Manage a Real Startup: Nr 4 in a series

This is a draft of a chapter of my new book. Your comments are welcome.

CHAPTER 1

Doing a startup is like building a bicycle while you are riding it. Awkward, demanding, risky, exciting, fun and rewarding. Nothing else is like it. There is no school that teaches that.

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                   (Chapter 1 continued)

As CEO of a new enterprise, it’s like being a sculptress with a large lump of clay. She starts with an idea of what the statue will become (a beautiful Venus de Milo). As she sculpts, she thinks, things happen, time opens doors for alterations and as the creative work continues, the original image is altered. In the end, the clay will be greatly altered. It may emerge looking more like a handsome David or angry Moses.

People upset your plan. Plans are executed by people. Startups need lots of new, unknown people. They have to be added quickly. If you don’t have enough people, growth will be slowed. That’s dangerous in the race to become king of a new mountain. It’s the number one reason startups do not meet their ambitious growth plans. Excellent people that fit the culture of your company are hard to find. Even harder to recruit. And even harder to retain during the rough and tumble of building a world-class new enterprise. Serial entrepreneurs are brilliant at recruiting and retaining the best. Their investors love them.

Investors upset your plan. They can lose faith during the inevitable hard times and stop financing your growth and quit. They run out of money and struggle to raise a new fund. They balk at participating in the next round of financing. “We won’t let “good money follow bad.” They demand more from your performance as chief executor than you can deliver. They want too low a price per share on the next round of financing. Their terms of the next deal are outrageous. Their partners kick them out and you get Joe, the stupid jerk, as a substitute. It happens. Often. Too often. Get prepared for it. It is likely to happen to your startup.

Customers upset your plan. Yes becomes no. Ten becomes one hundred. Next month become never. They appear to be the ideal target but turn out to be a detour and waste of time. Their purchasing cycle becomes a case of the creeping close. It adds months and becomes years. Competition lies to your customers. About you personally as well as your products. On and on it goes as you execute. Startup CEXs know how to deal with that. They are superb at it. They actually enjoy the ups and downs. It’s part of the execution ride. The ride of terror. The ride of your life. It is one reason you are doing this startup.

Suppliers upset your plan. They can do the job but then they cannot. On time becomes late and then never. Price quotes shift without warning. Sharply upward, of course. Quality suffers. They leak proprietary information. They don’t execute well your planned deliveries.

Have you noticed the pattern? The surprises are mostly negative. Bad news. Trouble. Like little children, startups get into a lot of trouble a lot of the time.

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More tomorrow.

How to Manage a Real Startup: Nr 3 in a series

This is a draft of a chapter of my new book. Your comments are welcome.

CHAPTER 1

Doing a startup is like building a bicycle while you are riding it. Awkward, demanding, risky, exciting, fun and rewarding. Nothing else is like it. There is no school that teaches that.

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                   (Chapter 1 continued)

“Okay, we got our idea, wrote a plan with an unfair advantage, and raised our seed money. What’s next?” you ask.

“Woops! Surprise!” That’s what is next! The unexpected will arrive one moment after the seed round is in the bank. The written plan rapidly starts to become obsolete. You discover a similar startup. At first you have to update a few paragraphs. Days later your engineers tell you they their build plan is going to take twice as long to complete the first prototype. Whole chapters must be altered. A key employee does not show up for work. He has decided to join another company. Nothing is wrong. That’s just life in a startup. CEOs of giant multi-nationals expect plans to be predictions that are delivered on target, on time. Startup CEOs see plans as good intentions that are altered as the company progresses daily. There is a huge difference in what is required of a CEO to succeed in a startup.

Serial entrepreneurs and their investors know the original plan is organic, changing daily as execution runs into blocks, barriers and battering rams of the stealth startups that were lying in ambush along the planned path to victory. And the startup awakens giants like Google and aggressive public growth companies around the globe, each saying “Me-too, here we come!” They disturb the new market that the startup thought it has all to itself. Key employees leave. Customers-to-be delay signing and others cancel big contracts. The startup’s product completion is delayed. Its performance has to be double what has been agreed on. It is going to cost double what was anticipated. And so it goes in the daily life of the entrepreneur. Serial entrepreneurs expect the unexpected. That’s normal for startups.

Upset and off balance because of surprises, your startup now must quickly regain control of its destiny. Fast alterations of the plan are made immediately. That is what execution are like in a new enterprise.

EXAMPLE NEWCO: Anthony emailed “I just got a hitch in negotiations. We’ll do a 1:30 p.m. Tuesday board conference call, California time. That’s 5:30 a.m. for me, Wednesday. I’ll be in Seoul and must be with customers by 9:00 a.m. We need the board of directors to agree on a response to the new terms that I just received on my Blackberry on the way to the airport. I’ll be back in the States on Friday. Meanwhile Ron will continue pushing the deal along there. I continue to believe completing this product acquisition is critical to overtaking XYZ Corp., our prime competitor. They are beginning to lose customers to us on the high end of the market. We have gained momentum. That is all good news. But we all know our marketing people find we are vulnerable in the low cost segment. The acquisition we have been discussing will cover that base nicely if we decide to do it.” None of this was in the original business plan of Anthony’s Newco. That’s how execution in a new enterprise works.

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More tomorrow.

How to Manage a Real Startup: Nr 2 in a series

This is a draft of a chapter of my new book. Your comments are welcome.

CHAPTER 1

Doing a startup is like building a bicycle while you are riding it. Awkward, demanding, risky, exciting, fun and rewarding. Nothing else is like it. There is no school that teaches that.

===============

                   (Chapter 1 continued)

Some say “Execution is everything.” Because without doing it (the business plan), there is no world-class company. Dreams must become reality. They must be executed.

But there also must be an idea to get things started. A good idea. One that can be shaped into a business worth financing. An idea that can be altered and changed into a world-class new enterprise that becomes an initial public offering on NASDAQ within half a decade. The good idea is the starting point for the startup race run for the IPO, the gold medal goal of which dreams are made.

A good idea can be shaped into an unfair advantage. If not, stop immediately. Don’t try to force it. Seed funding a bad idea will result in disaster during execution. It will be like trying to fix a deformed child after it is born. It is impossible. Go find another idea. When you are confident that idea can be converted into an unfair advantage, then do the execution well and you’ll have a good chance of emerging as a world-class winner.

Execution is critical to startup success. “Execute or you will be!” say serial entrepreneurs. It’s a life or death game for startups and their investors. Deadly serious. It’s hard to do. Very hard to do well. The best plans poorly executed become funerals. End of life.

Chief Executor. That’s the real job of the CEO. Do it. The plan. Well. Very well. Very fast. On-the-fly, as the company is conceived, given birth and fed and nurtured until it becomes a world-class name. Branded a success. The gorilla of a new market. Lead by the Chief Executor. CEX.

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More tomorrow.

How to Manage a Real Startup: Nr 1 in a series

CHAPTER 1

Doing a startup is like building a bicycle while you are riding it. Awkward, demanding, risky, exciting, fun and rewarding. Nothing else is like it. There is no school that teaches that.

Startup school does not exist. How to build a startup is learned in the school of hard knocks. You just have to do it to learn it. Like learning to ride a bicycle. That’s one reason there are so many entrepreneurs. They are all trying and thus learning on the job. You can take school courses about starting a new business. You can study entrepreneurship at MBA colleges. But you don’t need a diploma to get started. You just need to begin with idea and a will to give it a try.

Starting a startup is easy. But finishing strong is very hard. Most startups die along the way. Their path toward success, financial health and sustainability takes them into dangers that are most often lethal.

The second time is much easier than the first. Once you learn to build and ride the startup bicycle you never forget how. Like winning the Tour de France, the second time is not easier. You just get the chance to get better each time. You again have the special opportunity to build a great business. Along the trail, your wisdom grows. Given care and attention, your character will also grow. And you will add to those intangibles that make life worth living: meaning and purpose in life. You also have better odds of making a pile of money. And this time you know how to have more fun while doing your next startup.

So you start with an idea. Expand it into a plan. Attract the first people. Modify the plan. Raise the seed round of funding and start building the company. That’s execution. It started with an idea that was given birth with execution on the idea.

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That is the beginning of the series on How to Manage a Real Startup. Your comments are welcome, here or in emails to me.

High Tech Start Up - What has NOT changed? (Number 6 of a series)

What has not changed since the last update of High Tech Start Up was issued in 2000? Here is what I have found has continued with little modification.

Your comments are welcome, as I am in the process of drafting the update to the book.

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1.       When a founder of a startup is raising a round of venture capital, creating a competition for the shares of the startup is the best way to increase the valuation of the new enterprise and to reduce dilution for founders and employees. That competition is enhanced by careful planning of the strategy for the capital-raising campaign. However, such deliberate planning is noticeably absent among most founders of high tech companies, especially those started by engineers doing their first enterprise.

2.       Venture boom-to-bust cycles have become a way of life. The boom times of the personal computer of the 1980s ended. Biotech arrived and ended. The Internet boom arrived in the 1990s and ended in 2000.  Social networking superseded Internet search and targeted advertising. It was been followed by the Web 2.0 era and of course something dubbed Web 3.0 is expected to follow. Green technologies are already a large wave, as is aging health care solutions for the aging populations in countries around the world.

3.       Waves of rampant startup popularity (“I have to do a startup!”) greatly impact the financial return on investment of venture capital firms. In the bust days, VC firms fail and close their doors, returning nothing to their investors. A few individual VCs cash in their chips, buy a jet and go golfing around the world. Other venture firms survive and grow even more powerful, adding large chunks of cash to be invested and increasing the number of partners in their firms.

4.       The boom-bust cycles have generated a hierarchy of venture firms. The “top tier” firms are now VC giants like New Enterprise Associates and Sequoia Capital. The second tier firms are linked to the top tier, doing inter-related deal making between friends ("deal flow") and conducting the inevitable venture capital politics in a very private world (“back channel chats”).

5.       As booms turned into busts, VC portfolio returns drop as low as zero and are often single digit ROIs. Gone were the wildly high returns on investment above 60 percent per annum in the hyper-heated days of the boom.

6.       Mixed sources of venture funding have become a way of life. Institutional investors (pension funds, university endowments) continue to be the primary source of VC capital that is invested in startups via the venture capital firms. But alternative sources continue to endure and be used by creative entrepreneurs. One standard source of venture funds comes from large public corporations. The business development staffs of the multi-nationals became very active in the Internet boom and have continued investing. Examples include corporations like Qualcom, Cisco and Intel. There continues to be growing funding from non-American sources, notably Asian. Angel investors grew, became organized (into “bands”) and were prominent in the early years of the Internet. Most disband during bust periods, but reappear as others have step in to take their place when the new waves start to rise. The infamous “friends family and fools” funding, as well as bootstrap funding, have continued in popularity since the earliest startup days in the 1970s.

7.       Internal startups in some form within established public corporations are more frequent. Google fosters entrepreneurial innovation with their “20 percent of time working on your project” theme. Others have sponsored an entrepreneurial spirit by creating internal incubators for startups. The fundamental goal is to encourage startup thinking while retaining an uninterrupted focus on the parent company’s bread-and-butter business. For internal startups to be successful, special attention must be paid to the unique characteristics of such new enterprises, particularly freedom to take large risks, compensation solutions that can make individuals rich, and the management of a caustic emotion: jealousy.

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And that completes this series!

Next will be a series on How To Manage a New Venture Backed Enterprise.

High Tech Start Up - What has NOT changed? (Number 5 of a series)

What has not changed since the last update of High Tech Start Up was issued in 2000? Here is what I have found has continued with little modification.

Your comments are welcome, as I am in the process of drafting the update to the book.

==================================

1.       Waves of technology and fads are inevitable. They are like the endless waves in the ocean: they rise, start moving, peak and finally crash on the beach. Each of the waves triggers a rush of many individuals eager to catch the newest wave before it dies out. VCs and entrepreneurs anxious to surf the new wave climb on their boards and try to ride the wave to success. After the wave crashes, the survivors start looking for the next wave.

2.       During booms, the entrepreneur calls the shots. During the bust, investors dictate terms. This boom-bust phenomenon favored the entrepreneur during the ride to the height of the Internet era just as it did in the ancient days of the personal computer and biotech boom eras. Yet whatever the wave, venture capitalists still typically end up owning the vast majority of the stock of a startup, generally in excess of two-thirds of the company.

3.       Mergers and acquisitions of startups increase when the market for initial public offerings cools off. Some VC firms aim for the gold: the initial public offering. Yet others are known for preferring early sale of startups to risking waiting for the IPO.

4.       The giant pools of capital that invest in the stock of public corporations have a varying interest in new issues. The result is a series of rises and falls in the attractiveness of IPO stocks. In general, windows (measured in months) open and close for IPOs and are dependent on whether or not there is a strong supporting economic that generates a strong market for stocks in general.

5.       Institutional investors continue to dominate the market for IPOs, with individuals confined to watch the upward jump in price per share on the day of the IPO from the sidelines until after the first day of trading.

6.       Pricing of private rounds of venture capital by investors follows the same financial guidelines and measurements used to price securities of publicly traded companies.  Investors translate risks and rewards into acceptable levels of expected return on investment, which becomes the basis for the dilution of founders’ shares.

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More tomorrow.

High Tech Start Up - What has NOT changed ? (Number 4 of a series)

What has not changed since the last update of High Tech Start Up was issued in 2000? Here is what I have found has continued with little modification.

Your comments are welcome, as I am in the process of drafting the update to the book.

==================================

1.       Startups with a CEO experienced with managing a new enterprise greatly increase their chances of getting a startup funded at a high valuation. A close second is having a complete management team ready to go to work, with experienced people for each of the key functions.

2.       Venture capitalists expect to replace the first CEO at some time in the future when the business becomes too complex for that CEO to manage. Therefore VCs will tell the first CEO that he must be willing to step aside for a new, more experienced leader when the business begins to grow rapidly.

3.       Star CEOs are not mandatory but do increase the company valuation and reduce chances of not getting funded. There is no doubt that successful managers are eagerly sought by VCs to lead their companies. The more high profile they are (in their industry) the better.

4.       At least $100 billion and some estimate $1 trillion is committed to the global pool of venture capital. In the “venture capital firms” where the money is put exclusively into startups, it is managed by more than 2,000 actively venturing individuals in over 500 firms, mostly in the US, mainly in Silicon Valley, with a few in Europe and with Asian pools growing rapidly especially in China and India, with Korea and Vietnam recently emerging as hot spots for aggressive VCs.

5.       The degree of competition between venture capital firms continues to be intense. Because VCs are subject to the ups and downs, successes and failures of the fresh waves of startup investing, the number of new VC firms rises with each wave and decreases as the related bubble pops. The surviving firms emerge, raise raise fresh capital and start investing in the next new wave.

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More tomorrow.

High Tech Start Up - What has NOT changed ? (Number 3 of a series)

What has not changed since the last update of High Tech Start Up was issued in 2000? Here is what I have found has continued with little modification.

Your comments are welcome, as I am in the process of drafting the update to the book.

==================================

1.       Investors in venture capital pools aim to earn a financial return that is the equivalent of an annual interest rate in excess of 25 percent per year. That is the same as getting $10 for each $1 the investor put into the startup. Compared with other ways to invest, startup investing is expected to earn about 8 percent points more than if it had been invested in all the stocks of the companies making up the Standard and Poors 500 company index.

2.       The 10 percent of the startups that succeed compensate for the other 90 percent of the poorer performing companies in the venture capitalist’s investment portfolio. In essence, the successful founders subsidizing (paying for) the substandard performance or bankruptcies of the unsuccessful investments.

3.       Cash compensation for the CEO and Vice Presidents of startups remains moderately below levels offered by larger multi-national corporations in spite of the scarcity of startup talent. Technical talent for new enterprises is paid near or at the going rate for such employees, regardless of company size or country.  

4.       There is a hot market for scarce top quality CEOs and vice presidents in developing countries. For instance, McKinsey (consultants for giant corporations) has issued a study that suggests there are less than 5,000 managers in China experienced enough to lead a global enterprise. Others agree about China and other developing countries. I know an angel funding a startup in Rwanda who has been looking tree years for a good CEO. The point is simple: there is a global shortage of talent able to lead a world-class startup. As you could expect, such core management talent is paid much more than fellow countrymen (who manage small businesses) and in fact this talent pool receives cash compensation that places them in the top quartile for startups in the United States.

5.       The median annual starting salary for a founder CEO in the U.S. in 2008 was about $800,000. The bottom of the range in 2008 was around $100,000 for a seed stage startup founded by a first time entrepreneur. And $250,000 was not uncommon for a later stage CEO.

6.       Incentive-based (major milestone achievements) cash bonuses are common and increased total compensation potential to as much as $300,000 for the CEO by the time the company went public.

7.       The vice president of sales in a hot startup often earns more cash compensation than the CEO. This occurs when incentive compensation plans (commissions) are linked to sales that exceed those of the business plan. Experienced startup CEOs are not upset, rather they are very happy when the incentive driven sales personnel are happy because that indicates the company is “on a roll” and very successful.

8.       Of the startups that get to an initial public offering, the median company takes at least three and typically five years or more to get to the public offering stage. Internet-centric and biotech companies have been able to go public based on their 'stories', that is, without earning profits by the time of the initial public offering. In the aftermath of the Internet boom-to-bust, investors have been avoiding doing IPOs of companies that are not profitable. As of 2008 IPO markets for story stocks have not yet returned (but battle scarred veterans of Wall Street and Sand Hill Road expect that to occur once again when the next inevitable bubble arrives).

9.       Venture debt, equipment lease financing and leasing of facilities and leasehold improvements have proven to be reliable and competitively priced sources of capital to augment equity that is raised to finance a startup. Recessions prove to be good times for startups to negotiate for favorable lease terms.

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More tomorrow.

High Tech Start Up - What has NOT changed ? (Number 2 of a series)

What has not changed since the last update of High Tech Start Up was issued in 2000? Here is what I have found has continued with little modification.

Your comments are welcome, as I am in the process of drafting the update to the book.

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Much has remained the same. Tried and true methods and lessons still work well. Add them to what is new and you’ve got what it takes to convert an idea into a world-class new enterprise. That is what is discussed in depth later in this book. For now let’s look the time-tested lesson about typical high tech startups—many of them contrary to popular stereotypes.

1.       People remain the top concern for investors. Serial entrepreneurs agree. They look for years to find the people to lead a new enterprise. Experience has painfully taught them that startup success depends on people. All the rest is secondary in importance.

2.       On the average, a venture capitalist continues to finance less than 6 out of every 1000 business plans received each year. Unsolicited business plans are not read by investors. You must get an introduction by a person respected by investors. Smaller venture firms finance less than 4 in 1000 that they receive.

3.       Venture capital investors own at least 67 percent of the startup by the time it goes public. It is statistically rare to find VCs owning less than that by IPO day.

4.       The personal costs of doing a startup can be exceedingly high, affecting families and friends as well as individuals. Fear and burnout are common for first-time entrepreneurs.   However, those costs must be balanced with the alternative: working for politically-riddled global giants who are prone to lay off thousands without notice when business turns sour. The startup rewards of personal and professional satisfaction and the potential financial paybacks can be far more gratifying than the rewards of working for a slow-moving, uninspiring large corporation.

5.       Bankruptcies occur for 60 percent of the companies that succeed in getting venture capital. The bad and unfortunate continue to die in large numbers within 3 years of birth.

6.       Mergers or liquidations occur in 30 percent of startup companies. In liquidations the pieces are sold and employees start looking for a good job in a company that can meet payroll regularly. In a merger, the employees attain a bit of wealth (through a “carveout” which is a special compensation arrangement with the buying corporation). The best people leave shortly thereafter. For the rest, their employment eventually ends as the acquired organization is absorbed into the giant and the startup ceases to exist as a stand-alone entity.

7.       Founder CEOs can expect to own less than 10 percent of their high tech companies after the initial public offering.  It remains far below the 51 percent that naive first-timers expect to retain as founders. The rare exceptions do occur (Google and Facebook are examples) and are what the media eagerly write about. They are rare.

8.       A vice president’s stock is worth about one third of what the CEO is worth at the time of the initial public offering.

9.       The average worth of the stock for all employees (not including vice presidents and other key employees) on the date of the initial public offering is about $100,000.

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More tomorrow.

High Tech Start Up - What has NOT changed ? (Number 1 of a series)

What has not changed since the last update of High Tech Start Up was issued in 2000? Here is what I have found has continued with little modification.

Your comments are welcome, as I am in the process of drafting the update to the book.

==========================================================================================

Much has remained the same. Tried and true methods and lessons still work well. Add them to what is new and you’ve got what it takes to convert an idea into a world-class new enterprise. That is what is discussed in depth later in this book. For now let’s look the time-tested lesson about typical high tech startups—many of them contrary to popular stereotypes.

1.       The chances are 6 in 1,000,000 that an idea for a high tech business eventually becomes a successful company that goes public. It was lower – around 3 in one million -- in the years following the peaking of the Internet boom in 2000. Chances of going IPO remain lottery odds.

2.       Fewer than 10 percent of the funded startups go public. Amazingly small, still too small in my opinion. Pauses in the IPO market (e.g. 2007 – 2008) make the chances to go IPO even smaller. The numbers for Internet era startups were running less than 7 percent as of the end of 2008.

3.       Boom periods such as the Internet boom-to-bust years produce (mostly paper) billionaires and a lot of bankruptcies (some VCs saw most of their investments go out of business). When the bubbles burst they bust a lot of startups, founders, and their investors.

4.       Successful venture capitalists rise from the startup ranks, typically coming from successful venture-backed new enterprises. Since 2000, some large venture firms have layers of partners, from junior to senior. Associates starting work directly out of MBA school rarely make it to VC partner.

5.       Business plans remain typically poorly prepared and thus are not well received by venture capitalists. Most founders rely on PowerPoint presentations and a short Executive Summary to get their money. This leaves unprepared presenters vulnerable to tough questions.

6.       “Unfair advantage” and “sustainable competitive advantage” are missing in most business plans—but are considered by investors to be critical if the high tech startup is to have an acceptable chance of succeeding. Plans lacking such an advantage rarely receive venture funding from experienced, successful venture capitalists.

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More tomorrow.