The Startup Journey

Brad Feld points to an article by Dennis Jaffe (Saybrook Graduate School) and Pascal Levensohn (Levensohn Venture Partners) titled "After The Term Sheet: How Venture Boards Influence The Success Or Failure Of Technology Companies." "Written in 2003, this is one of the best articles I've ever seen of the issues and dynamics surrounding the board of a venture backed company," Feld says. I agree. An Extract: The Board, and the roles and behavior of its members, evolve with the venture in three developmental stages: • Start-up/Seed: An embryonic Board assembles as soon as capital is invested and VCs join the Board as preferred shareholders. Their first joint task is to recruit talented employees and define their roles. The optimal size of a start-up Board is between three and five people.This breaks down into one management representative and two venture investors, or two management representatives and three venture investors. • Early Commercialization: A typical...

Fred Wilson has great advice on what entrepreneurs need to do to protect from investor deal fatigue: Bring new investors into the syndicate every time you raise money. The investors who wrote the checks in the A round might be tired by the E round, but the D round investors will have fresh legs. Third, start with a low valuation and slowly and carefully build it in each investment. The investors will be less tired if they see the value of their investment increasing in each round. But if you start at too high of a price and then get stuck there or worse, go down, then you are in for trouble. There is nothing worse than a tired investor with a paper loss on his or her hands. Arun Natarajan is the Editor of TSJ Media, which tracks venture capital activity in India and Indian-founded companies worldwide. View sample issues of TSJ Media's Venture Intelligence India newsletters and reports.

Fred Wilson has great advice on how start-ups should plan for their next round of financing: So how do you go about hoping for the best and preparing for the worst? I think its best to start with the downside scenario. What happens if your company can’t get anyone to step up and do the financing on terms that are acceptable? Well there are a couple approaches to this. The first is to do the financing when you don’t really need the money. That’s a great strategy. Maybe you’ve got nine months of cash left in the bank. Maybe you go out and talk to three or four potential investors to see if you can get something done with them on terms you’d like. If you can’t, you stop the process, go back to work, and come back to market in another six months. If you don’t have that luxury, then you need to turn to your existing investors as your downside scenario. There are a couple of ways to think about this. The first is to get the existing investors to tell you on what terms they’d be willing to d...

Adam Shah has some good tips for recruiting - especially on interviewing and checking references: # recruiting. [Apr'04] Recruiting is the single biggest determinant for success, with the people you hire literally being the DNA of the company. The challenge of recruiting is often under-appreciated by people who've never been responsible for it. First, you need to "sell" people on joining your venture, which isn't easy. Remember the old adage "good help is hard to fine"-- that's because smart, reliable, hard-working, no-nonsense people are never without work, so you have to lure them away. Here's some basic tips: (1) strategize: list reasons why people would join your venture instead of others, including reasons they wouldn't. Then, use this to source candidates. For example, when talking with recruiters, let them know these things. When considering how to source candidates, emphasize channels that tend to fit your criteria. (2) treat hiring ...

Adam Shah has some good advice: Before getting too excited about your latest idea, ask yourself if it's a project, a product or a company. A project is some useful and innovative tool or service, but unlike a product, it's unclear if anybody will enough pay for it to justify its manufacture (and delivery, i.e. through channels) -- much less whether this is still true in the presence of substitutes and knockoffs. Products are projects that are sellable-- they have financing, designs that incorporate feedback from prospects or customers ("people who can pay enough"), reasonable quality controls and processes, legal representation, etc. A company is a product with headroom: infrastructure to grow, a fleshed-out management team, the ability to create multiple products, etc. Since companies can be tiny and have one product, the real distinction between "product" and "company" is whether the financial returns of the product justifies the corporate struc...

Adam Shah has a good "must read" list, including: # High Tech Startup . Some financial and legal subtleties of the game. It is worth noting that the normal rules of business simply don't apply, and you need startup specialists to help you in HR, accounting, legal, office management-- and of course, financing. Nesheim's book explains many of the important details. # Crossing the Chasm . How to get a general-purpose, new technology to be embraced by a mainstream audience. This is the startup playbook, read by virtually everyone in silicon valley. # Selling the Wheel . A light-hearted, fictional account of how the wheel was brought to market. A great complement to the Moore books above -- but an easier, faster read. Arun Natarajan is the Editor of TSJ Media, which tracks venture capital activity in India and Indian-founded companies worldwide. View sample issues of TSJ Media's Venture Intelligence India newsletters and reports.

Guy Kawasaki explains why in his Forbes.com Q&A column: What stops someone who already has the money from implementing your idea? Time, expertise and passion to name three factors. Venture capitalists don't want to be entrepreneurs. They want to invest in entrepreneurs. They don't want to do the work, they want to find people to do the work. The deal they want is: I give you money, you create something great. ...Here's another way to look at it. If merely telling someone your idea means that it can be ripped off, then you hardly have a defensible product. If secrecy is your main weapon, then it will be hard to find investors. By the way, what happens when you ship? Are you going to ask every customer to sign a nondisclosure too? There is no way to force a nondisclosure agreement with any potential investor whose money you'd want. If you can get an investor to sign it, just to learn what you're doing, then that's dumb money. Even if you get a nondisclosure a...

Extracts from a recent IBD Network event on Venture Capital (held at Menlo Park, CA) featuring Ron Weissman, Apax Partners (as Moderator); Raj Atluru, Draper Fisher Jurvetson; Tim Chang, Gabriel Venture Partners; and Venky Ganesan, Globespan Capital Partners: 1. An idea that fits with one of the VC's investment theses 2. A rock star team 3. A business model that is highly capital-efficient 4. The VC having good chemistry with the team 5. The ability for the VC to really add value (helping with liquidity events, or helping to hire talent) Arun Natarajan is the Editor of TSJ Media, which tracks venture capital activity in India and Indian-founded companies worldwide. View sample issues of TSJ Media's Venture Intelligence India newsletters and reports.

Don't smell like you're trying to get liquidity. That's not very attractive. Pursue your core business, grow smartly, and others (VCs or potential acquirers) will see what an integral part your business could play that will benefit them, and that's where you will find yourself - cutting the deals. - Michael Markson, VP, Business Development, Topix.net in IBD Network Arun Natarajan is the Editor of TSJ Media, which tracks venture capital activity in India and Indian-founded companies worldwide. View sample issues of TSJ Media's Venture Intelligence India newsletters and reports.

David Beisel , a VC and former entrepreneur, explains: For example, I know of one firm that formally assigns both an “advocate” partner and a “skeptic” partner to evaluate a potential investment. Others will consider an investment less formally. Some will write diligent investment memorandums based on specific, itemized checklists to ensure that all basis have been covered. Others rely on more of an intuitive approach to evaluation. Some have regularly-scheduled investment meetings, while others will convene when a deal is “hot.” Some firms have a formal voting process, while others are consensus-driven. Arun Natarajan is the Editor of TSJ Media, which tracks venture capital activity in India and Indian-founded companies worldwide. View sample issues of TSJ Media's Venture Intelligence India newsletters and reports.

Jeff Bussgang explains: Well, a critical thing for an entrepreneur when fundraising is to find a firm that's going to fit their capital profile. After all, if a VC is trying to force too much money down the entrepreneur's throats, it will mean more dilution than they'd like. And not having deep pockets means there's a risk of getting caught short just at the moment when a few extra million might be needed to get to the next level. Thus, the Goldilocks Rule applies to VCs and fund size: not too big, and not too small, but just right. How much capital does fund X really want to put in behind each company? The marketing materials may say one thing (I once saw a VC claim they would do deals from $50K to $50M!), but the reality is there's a sweet spot that every firm has and if you are in their sweet spot, you're better off than if you're not. The nature of that sweet spot comes down to the size of their current fund, not their total capital under manageme...

Seth Godin on why "Small is the new big": Enron (big) got audited by Andersen (big) and failed (big.) The World Trade Center was a target. TV advertising is collapsing so fast you can hear it. American Airlines (big) is getting creamed by Jet Blue (think small). BoingBoing (four people) has a readership growing a hundred times faster than the New Yorker (hundreds of people). Today, little companies often make more money than big companies. Little churches grow faster than worldwide ones. Little jets are way faster (door to door) than big ones. Today, Craigslist (18 employees) is the fourth most visited site according to some measures. They are partly owned by eBay (more than 4,000 employees) which hopes to stay in the same league, traffic-wise. They’re certainly not growing nearly as fast. Small means the founder makes a far greater percentage of the customer interactions. Small means the founder is close to the decisions that matter and can make them, quickly. Small is the ...

BusinessWeek has an interesting article on how entrepreneurs should prepare for growth: Doing it all may be encoded in entrepreneurial DNA, but it's hardly the best way to manage a growing company. Entrepreneurs risk burning out and taking down their businesses and their personal lives with them. ...Managing growth successfully comes down to getting the right help at the right time. At the outset, it's important for entrepreneurs to develop relationships with professionals such as accountants and lawyers, then make sure the right hires come on when they're most needed. As the company grows, it may be wise to explore partnering or outsourcing -- or even stepping back from the helm of your company. ...It's important to keep an eye on the future, even if you're working out of a spare bedroom. "Start out acting like a big company from the beginning," advises Marty Schmidt, president of Solution Metrix, a small business consultancy in Boston. At a minimum, cre...

Rick Segal of J.L. Albright Partners has some interesting tips on how entrepreneurs can check out VCs they plan to do business with: Ask different questions. The purpose, like the above, is to get insight into who you are dealing with so, go down a list of things like: A. What's your favorite blog? B. What kind of laptop do you have? C. Which cell phone do you favor? D. Do your kids do the SMS thing? E. What do you hate about serving on boards?... ...Show up unannounced to the firm just to drop by. See what kind of reaction you get. Think about it. We are family, working close together, long term relationship, blaah blaah. Right. Show up unannounced, ask to use an office, the phone, grab a free pop, whatever, but note the vibe, it will be telling. Arun Natarajan is the Editor of TSJ Media, which tracks venture capital activity in India and Indian-founded companies worldwide. View sample issues of TSJ Media's Venture Intelligence India newsletters and repo...

Will Price reports from Microsoft's VC Summit in Mountain View on what MSFT - according to its CEO Steve Ballmer - looks for when it considers acquiring a company: * technical innovation with impact * protected IP (patent portfolio) * market understanding * engineering excellence * alignment with sales capacity (can you sell it?, do you know how to sell it?) * timing and tenaciousness * understanding of value chain and how to partner to win Arun Natarajan is the Editor of TSJ Media, which tracks venture capital activity in India and Indian-founded companies worldwide. View sample issues of TSJ Media's Venture Intelligence India newsletters and reports.

Jeff Cornwall points out quite rightly that "in the rush of meeting orders and collecting enough cash for payroll, many entrepreneurs don't take enough time to celebrate accomplishments." But why is celebrating important? Celebrating on-going accomplishments is a way of building a positive, growth-oriented, and hopefully 'fun' culture within your business. Arun Natarajan is the Editor of TSJ Media, which tracks venture capital activity in India and Indian-founded companies worldwide. View sample issues of TSJ Media's Venture Intelligence India newsletters and reports.

Advice from a recent panel discussion organized by IBD Network on prepating your company for M&A: * Don't... o ... run your company without contemplation of a sale o ... sell from weakness, not from strength o ... be piggy: don't expect to double the initial bid o ... tip your toes in the M&A pond: be in or be out * Issues that make buyers walk away from a deal: the buyer's lack of comfort that may not stem from anything as dramatic as fraud or misrepresentation, but from a feeling that the seller's processes are not solid * Valuation o Sellers tend to use public market comparables or deal comparables: they are easily obtained and tend to increase the valuation o Buyers prefer to use multi-year discounted cash flow (DCF) analyses * Structuring deals o Buyers do small deals for cash, not for shares; if they want IP or a team, they will structure the deal as an asset purchase ...

Wonder why VCs place more emphasis "on the secondary stuff" - like what you and your other team members have done before - rather than your actual product or service? Kevin Laws has an interesting explanation and analogy - to the mating behavior of peackocks!: Are you really worth $2 million more the day your first two customers write $10,000 checks? No, you’re worth $20,000 more. However, both a bad company and a good company can claim that they will sign up two paying customers in the next month. Only the good company can actually show you the checks a month later. Before you had the check, you were facing the “uncertainty discount” – you might be a bad company (or more likely, a well intended but overconfident company). That’s why VCs pattern match on credibility factors when deciding to spend more time with a company rather than diving directly into the details. When having such a wide selection of available mates, sorting out the good from the bad can be a matter of loo...

Business Week has a nice article explaining how a sales person can refuse to pay the bribe - and still make the sale. Arun Natarajan is the Editor of TSJ Media, which tracks venture capital activity in India and Indian-founded companies worldwide. View sample issues of TSJ Media's Venture Intelligence India newsletters and reports.

There's an interesting debate on this topic at the alarm:clock blog . Arun Natarajan is the Editor of TSJ Media, which tracks venture capital activity in India and Indian-founded companies worldwide. View sample issues of TSJ Media's Venture Intelligence India newsletters and reports.