Nesheim Online

SHOULD YOU JOIN A STARTUP NOT YET TO IPO?

"Should I join a startup that is three or more years away from IPO? It is selling its first products, growing quickly and wants me to help open a new market for the startup."

That's essentially the question I addressed yesterday with a business development specialist.

What we talked about can help you make a wise decision when you are faced with such a career decision:

• How large are the odds that this startup can emerge before IPO as the Gorilla of a new space? We dug into the market, competition, and what the company's unfair advantage was composed of. The Conclusion: This startup has what it takes to become First To Get It Right in a New Market Category.
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• Is the core team ("top management) able to lead the startup through the next growth phase and get it IPO ready? We dug into the LinkedIn and other readily available material, Googling and reading about each person. The Conclusion: This core team has deep and successful prior experience with high technology product breakthroughs, building new businesses and startups.
  
  
• Are the investors of high quality? This was simple, the About web page touted the names of the VCs and Partners. I knew the firms and of their reputations. The Conclusion: The money comes from among the world's most respected venture firms.
  
  
• Is the cash in the bank sufficient for several years before requiring another VC round? Again this was easy to find on VentureBeat and other Googled sources. The B Round had been completed less than six months ago for a tens of millions of dollars financing. However we still needed to know the burn rate (use of cash per month) to know how long that huge financing would last (the company must build its own factory in order to produce its products with its new proprietary technology). The Conclusion: The cash in the bank is probably good for at least two years, but in the next interviews the candidate will inquire more about this issue. The reason for the sensitivity with this matter is because this candidate has been asked to start opening a new market for the products, one that has a very large order per customer and takes years to close on a deal (currently the startup is selling a lot of high volume, lower priced products to retail product producers).
  
  
• How supportive of your challenging assignment is your boss and his/her boss? We reviewed the reporting ladder, discussed responses about this issue (after his first round of interviews), and speculated on what each of the bosses would want/expect of the candidate. The Conclusion: The right people want very much to have the doors opened for the startup to enter this new market.
  
  
• Is the level of job risk for the candidate reasonable? The candidate explained his contemplation of this issue, what he would be leaving behind (compensation, stock, track record, employer relations, etc.). And his answers to my questions told me he had a reasonbly realistic grasp of the risk he would be taking by terminating a fine employer and moving on to a much more relatively higher risk startup. The Conclusion: The candidate had his head out of the clouds and had removed his rosy glasses, leaving him with a clear understanding of what he was seriously about to do with his career.
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• Are your dreams of freedom and creativity and joy-filled-living realistic? In this discussion this issue was premature. But it is very important to test before making your decision. Too often escaping from a job and joining a startup is like jumping out of the frying pan and into the fire. Be realistic: startups are a lot of chaos and hard work. And not all founding CEOs are angelic, or what you need to thrive in the new job. The startup's culture may be right for some but hell for you.

There are a lot more questions we discussed, including compenation (cash and stock options), but the above are more important to be sure about.

BOTTOM LINE: Be deliberate about your decision to join a startup. Then you have a chance to make the Big Leap with your eyes open. And remember that the startup you are going to join will look to you to add something important to help the new enterprise build its unfair advantage.

I wish you The Best on your Adventure!

THREE BASIC HARD-KNOCK SCHOOL LESSONS FOR STARTUP CEOS

Streetsmart CEOs learn lessons from the struggles of others.

Here are three for your brain to cogitate on today:

1. Never sell Swiss Army knives. The new Galaxy Note is a "phone-tablet hybrid" making its debut. What are reviewers saying about the device? Here are one harsh declaration: "makes you look like your're talking into a piece of toast." And it is seen as "all of the above", meaning it is mixing smart phone with tablet with mobile device. In other words, it combines a lot of gadgets into one device. What is a Swiss Army knife used for? After opening all the gadgets, the user sets it on the desk and soon it is a great paperweight. Period. End of wonder. What does your product need? That is simple: it must have Focus + Wow! One thing done with wonder. You win. Swiss Army knife products lose.
2. Winning Number 2 companies (Chimpanzees) have to be radically different to thrive. RIM's Blackberry is a great example. What does it need to do? Not be better than or similar to the iPhone. No. Instead be crisply different. Let Apple sell to kids. Rim is "For adults only" or "Industrial strength". RIM's security is much stronger than Apple's. Corporations prefer that. So contrast the adult phone with the kid's phone. And thrive as a strong Number 2, a healthy Chimp existing in the shadow of a strong Gorilla. And try to pick a market for your startup that is not yet dominated by a Gorilla. In an early emerging startup market, if you begin to fall behind a leader, remember to strive to be clearly different.
3. Confidense with how your business model can make money trumps jumping off the cliff blindfolded. Pinterest has $37.5 million of venture capital invested in it. It's VCs are bragging that the startup's "monetization strategy isn't in the oven and i's not even off the baking table." Do you believe that? I don't. And neither do the VCs. They did not invest with their eyes closed. It is simple to calculate right now the amount of regular users needed by Pinterest to generate the annual revenue needed to create the huge value required for an IPO needed by the VCs to get rich. That is simple arithmetic, a simple Excel model to build. Sure, the precise method by which the company sets up the ads will be a work-in-action (think Facebook's on-going experiments and slap-backs by the privacy-sensitive Facebookers). So get out Excel and build your Business Model for your new enterprise. Investors (and smart potential employees) will be asking you "How will your startup make money?" The stronger your answer, the lower the risk and the higher the value of your startup will be to investor and talented employees. It's worth the hard work.

BOTTOM LINE: Watch, read, and listen to other entrepreneurs and innvators. Study the marketing wars. Then apply what you learn to your startup. It's how the Great Ones rose to success. It became part of their unfair advantage. You can do it too!

I wish you The Best on your Adventure!

"PROVE IT!!" IS THE NEW STARTUP MANTRA: Back to the Future circa 1970

"Prove it and then we'll consider investing."

"I want to see how the app catches on before I jump ship."

"We will get this thing launched and then figure out how to make it sensational."

Those are comments I've heard often from investors and talented people as 2012 begins to emerge.

To me they signal we have arrived in a fresh startup era, one that reminds me of the "good old days of the 1970s." Back then software startups were getting hot (and got even hotter when the personal computer ushered in the 1980s boom). Investors (not yet dubbed "venture capitalists") were cautious, wanting to see the software running before signing the check. That process launched a wave of successful startups running large applications and new databases. It became a tsunami as the PC followed Apple's arrival.

Central to the process was "Proof of Concept" followed by "First Product Launch". After those two steps, investors signed checks.

Today, I find many two and three man techie teams coding at night and on weekends. Often working remotely from each other, their friendships link them to the focused effort: get this thing up and running, then we'll find some seed money.

The good news for entrepreneurs is that this process opens the door for more ownership (percent). You take the risk for the earliest phase of the new enterprise and thus keep those seed round shares for yourself (e.g. Zuckerberg with Facebook.).

The bad news is that you have to finance the early stage by yourself. That reduces the number of people willing to join you. And it slows development time to market. And it makes it likely that you'll find a lot of competitors emerging the same way.

I'm back from Cornell University where I again saw this phenomena at work. It is here to stay. So plan on it.

BOTTOM LINE: We are in a fresh modification of the traditional process of launching a new enterprise. Investors are expecting to put money into potentially large deals only after they have shown success with an infant product or service. The "success" of the initial launch is what attracts the people with the money. It is tricky to do, partially because you need some friends to join you without being paid. Serial entrepreneurs know how to do this. You can figure it out. So get started, it will be a solid first step on your way to building an unfair competitive advantage.

I wish you The Best on your Adventure!