The Good, The Bad, and the Ugly of Tech Startups (TBC)
How to start, fund, and grow a tech startup. Basic Overview. Part 1.
By George Garrick, November 2013 Copyright G2 Consultants LLC
Founding and Growing a Tech Company • Me – a liNle background • Careers – the pros/cons of your own startup • Audience show of hands – what stage are you in ? • GeRng started -‐ early • IniUal funding • Your Funding Pitch • Stages of Funding • Funding mistakes • Board of Directors • Advisors and mentors • CEO – go the whole way or bring in a pro • Culture and work ethic • CompensaUon & Hiring • Publicity and Awareness • Founder conflict • Common pi[alls, roadbumps, tough decisions • Pivots • Patents and IP • AccounUng and Records • Exit – IPO, Sale, Shutdown, Limbo
Some GG Startup Experiences Years Company Type of Biz Revenue Situation Outcome1981-‐1996 (15 years)
IRI (Information Resources) Enterprise data/software/services From $2MM to $300MM
Growth. Hired as VP, eventual CEO-‐NA
IPO, growth, private, still operating
1993 AC Nielsen Enterprise data/software/services $300 millionHired as CEO to turnaround Sustaining
1996-‐1997
Misc startup investments, boards, advisories Enterprise and Consumer NA
Learning about Internet and startups in Silicon Valley
1998-‐1999Flycast Communications Internet Ad Network From $2 to $40MM
Hired as CEO to revitalize and grow.
Raised about $25 million. $500MM IPO, sale for $2.3B
2000-‐2001Chicago: Misc startup investments, boards Misc NA
2002-‐2003Placeware Web Conferencing Enterprise: Early SaaS $50MM
Hired as CEO to revitalize and grow. Acquired by Microsoft
2004-‐2005 Wine.con E-‐Commerce $20-‐30MM
Growth stagnated. No understanding of business model, no customer acquisition programs
Raised $20MM. Hostile takeover.
2006-‐2008Jingle Networks (800-‐FREE411) Consumer 411 service From 0 to $20 million Startup. Hired as CEO.
Raised $75 million. Eventual acquisition by Marchex.
2009-‐2011 Offerpal/TapjoySocial/Mobile app distribution and monetization.
About $100 million but pivoted from Social to Mobile apps, renamed and repositioned.
Hired to take public. Turned into a turnaround/pivot following founder disaster.
Company raised $70 million. Transitioned from CEO to Exec Chair to independend board. Doing well with over $100MM revenues.
2011-‐2012 Social Shield Consumer service -‐ protection Under $5MMAssigned to fix, then sustain or sell in 1 year.
Organized an exit to Avira. Investors heppy.
2012 Brand.net Digital advertising network About $20MM.Interim CEO to save an aborted exit.
Sold to Valassis. Investors happy.
Happy
Some GG Board/Investor Experiences
Company Type of Biz OutcomeBizrate/Shopzilla Ecommerce ratings and search engine High value acquisition by NewscorpResponsys Integrated new media marketing services -‐ Chicago Still operating today, venture backedDigital Impact Campaign Management in Digital IPO in 1999. Acquired by Axciom. SurePayroll Simplified web based payroll system for SMB Eventual sale for $115M -‐ ChicagoTopica Email community organized by topic, manages lists Still operatingNetcentives Real world incentives (airline miles) fror Internet Did not succeed.Instill Supply chain data monitoring for Food Service Eventually acquired by iTradeNetworkDriveway Early online backup and storage services Still operating Personiva Automatic home video processing/categorization Product worked well, insufficient market.Angara Website and web page optimization Did not succeed as a third party service. Too easy to DIY.M-‐Factor Forecsting analytics for CPG companies Still in business with new management -‐ founder passed suddenlyGator/Claria Behavioral data tracking for re-‐targeting of ads Almost acquired by Microsoft, ran into privacy issuesComscore Audience monitoring/analysis for the Internet Co founding board member. Successful IPO, doing well todayMarket6 Data processing/analytics/forecasting for retail Still in business, early stage with new managementQik Live video conferencing via smartphones High value acquisition by SkypePlaydom Social/Mobile Gaming production/distribution High value acquisition by DisneyAdify Ad network for verticals High value acquisition by Cox CommunicationsSuite.is Social media custom production services Currently in growth stage, seeking funding, doing well -‐ ChicagoExitround M&A platform for smaller companies Recently seed funded -‐ doing very well initially
Pros/Cons of Your Own Startup • Some Pros
– Control of your own desUny (at least >50%) – Feeling of personal achievement – Opportunity to make money and get famous – Fun but can be lonely and stressful – A lot of quesUons at family gatherings
• Some Cons – Lots of risk. 90%+ will fail. Some founders fail repeatedly. – Usually always at a resource disadvantage – No job security, long hours, liNle/no HR benefits – Can’t “build a career” and work up the ladder – A lot of quesUons at family gatherings
What Stage Are You In? • Have a startup, generaUng revenue • Have an operaUng startup, pre-‐revenue • In the process of puRng a company together • Have an idea but haven’t done much yet • Thinking about starUng a company
GeRng Started -‐ Early • Product or service. Enterprise or consumer. – At least have a short writeup. PPT preferred over Word.
• Alone or co-‐founder? Other people. • Legal structure and records • Business model – financial • Company goals • Where to locate? (incubator or independent) • Cap structure • Make sure you are actually building something, not just pretending and thinking
IniUal Funding • Make sure you have something to invest in, and that you are SURE
– Idea, founding team, product, launch strategy, story • Know how much you need and how much you are willing to sell
– Rule of thumb – 18 months of operaUng cash minimum – Enough runway to your next funding point !
• Spend on product – not salaries, rent, professional fees • Sources – pros and cons (all easily searchable)
– Friends and family (tricky, unpredictable) – Angels – Incubators/co-‐working spaces (can be distracUons) – Seed funds – Clients – Strategic or financial investors – Current employer (moonlight on your startup while working)
• What you will need – Strong idea or product – Compelling pitch – Credibility of some kind, or some history – An introducUon (usually)
Your Funding Pitch • What do you need?
– Great demo, even if screen captures or fabricated – Vision & Team – Understanding of compeUtors
• If there are none yet, there will be – Milestones for first 60, 120, 180 days – Plans for using funds – MoneUzaUon strategy
• If you don’t know, ok, just don’t be dismissive • Have thoughts, or some other highly compelling alternaUve
– TwiNer (massive user growth, usage and loyalty)
• Understand investor expectaUons – Board – Deal structure – How/when they will make money
Forbes Top Accelerator
s and Incubators
Stages of Funding -‐ approx • Seed funding – the essenUals, get to a prototype
– Open a converUble note – difficult to set valuaUon – Don’t need Board, but could have one
• Series A – from prototype to launch or pre-‐launch – IniUal ValuaUon will be set – know your goals – will have Board
• Series B – should be in the market in some form – Growth – ValuaUon should increase
• Series C – growth – ValuaUon should increase
• Do not be greedy on valuaUon! Doesn’t maNer. – Unless you are the next Instagram or Dropbox
• Always raise enough to have runway to next stage – Stay at least 6 months ahead of cash runout when fundraising
Later Stages of Funding – Series A+ • Typically VCs – Lots of types, lots of philosophies – Early success, meeUng milestones and targets
• Prior VC will help but may or may not “lead” – Open like to have another VC set valuaUon – Prior investors usually have “pro-‐rata” rights – Limit number of investors, esp non VCs – Usually new angels don’t come in in later rounds
Funding Mistakes (Bad and Ugly) • Raising too liNle – raise more if you can, within limits
– “Raise when you can, not when you need to” • Onerous terms – unless you are high risk
– Retain as much control as possible – Joint selecUon of independents – Preferences and ratchets – Structure of voUng
• VoUng rights – Never allow an investor to have a “blocking” right – Try to get preferred stock voUng in total not by class
• Usually preferred will control the voUng, but good VCs will typically back the founders/execs if you are doing well
• Do plenty of reference checks and research. Not just ones they give you.
Board of Directors • Have a strategy and a design in mind
– First VC investor may have a heavy hand – Typically CEO/founder(s), 1-‐2 independents, 1 from each investor – eventually only 1 exec board member
• VERY important to have good relaUonships. Not just money. Philosophy, chemistry, rapport
• IniUally meeUngs are monthly • Important that YOU run the meeUng. Try not to let an
investor take control • Send decks out days or a week early • Have 1-‐1 calls with each member prior to the meeUng • NO SURPRISES.
Advisors and Mentors • Open useful to have board of advisors, or formal advisors. – Esp if you need connecUons or advice – Takes work and Ume, and stock -‐ tradeoff
• If you haven’t run a company, get an experienced mentor – Could be an independent board member, or advisor
• Mentor should not be a VC investor – Conflicts of interest
CEO – Go the whole way? • Depends on you, the needs of the role, and what your board wants. – Keep an eye out for signs and indicaUons
• Most young founders cannot take it all the way – Just lack the experience for issues in HR, legal, credibility, financing, etc.
– Or prefer to work on product or development. As you hit 50+ people, and/or if you are doing well, “admin” and “PR” takes up 50% or more of your Ume
• One soluUon is an experienced COO. Your mentor can help you with this and your investors will have a POV
Culture and Work Ethic • Set this from the start • Mix in some fun • Look at what other startups and “great workplaces” do and have
• Doesn’t cost a lot • Make sure everyone contributes • Have open communicaUons, at least iniUally – Friday apernoon all-‐hands meeUng – Occasional celebraUons
CompensaUon and Hiring • Depends on your stage and needs, and where you are located • Ignore market surveys and averages – do what you need to
get the best people for the posiUon • Open a stock vs. cash tradeoff • Use wriNen goals and objecUves – distribute them down • I recommend an incenUve piece to cash comp
– Scale by performance and level in company • VPs/Exec Team will typically end up with 1-‐2% of equity aper
company is fully funded – need to “gross up” in the beginning – Depends on how big you are, and your success liklihood
• Consider avoiding equity for lower levels – Not meaningful individually, but can add up to a lot in total – Talk to mentor/board members (comp commiNee)
Publicity and Awareness • Very important, esp free PR and website
– But make sure you have a story if not a product – Funding, recruiUng, partners/clients, M&A, personal
• Get to know the reporters and bloggers who follow the category and your compeUtors – Corporate Blogs aren’t necessarily good unless you are famous
• Look bigger and more successful than you are – Customer acquisiUon/growth is the best metric
• Establish presence at conferences – pick them relaUve to stage of your company
• PR firm can help a lot. Not that expensive but for later stage companies. Use early money to build product.
• CulUvate banker and analyst relaUonships early – Can help with intros, references, and eventually exit
Founder Conflict • If mulUple founders, make sure you are on the same page in all the important areas – WriNen business plan (short is fine)
• Frequent meeUngs – divide up the responsibiliUes – Must have good communicaUon
• If signs of conflict, discuss/resolve early • Use board/mentor • Do NOT allow it to persist – source of many failures
Pi[alls, Roadbumps, Tough Decisions • Have wriNen, board-‐approved goals and roadmap which
are shared with employees – Push these down as far as you can
• Take acUon sooner rather than later, keep board in loop • Changing out an early employee, or friend • A poor aRtude or work ethic • Disconnect with the board – resolve sooner not later • Running out of cash – geRng ahead of yourself • Not meeUng your goals, revenues, release dates • Sudden or unilateral move by a compeUtor or other force
Pivots • A change in your primary product or service, or direcUon of – Eg Moving from a social app to a mobile app
• Know what your core assets and competencies are • Keep ahead of the market in your thinking • IdenUfy other companies who could affect your success – Watch them closely – Get to know their CEOs
• Always have a back up or two, to your “worst case” scenarios – and have those scenarios!
Patents and IP • Sound cool but usually don’t have much value and take up a lot of Ume and money – Some investors will favor it – Depends a lot on your business and tech
• Get advice early on whether it’s worth it • In a worst case outcome, may be of value to a larger company
AccounUng and Records • Important to have good records from the start – If you are successful, you’ll need them – Really a pain to reconstruct them
• IniUally Quickbooks or equivalent is fine • Balance usefulness and importance with Ume and effort
• Can outsource accounUng, HR and legal for quite a while
Exit – “The End” • Can be good, bad, or ugly • Have a goal from the start on where you want to take
the company, and try and manage to that – Very difficult to manage toward a “large” acquisiUon – If you manage toward an IPO you are managing toward a potenUal large acquisiUon
– Easier to manage to a small acquisiUon if you can spot and fill a niche, and if there are a lot of buyers
– Very difficult to “sell” a company pro-‐acUvely, but someUmes you have to do it – hard to be distressed but portray that you are not
– Don’t want to end up in “limbo” unless you want a lifestyle company, but you have to consider your investors
• Always try to stay on same page as board • Be paUent – it usually takes a long Ume