buffy.eecs.berkeley.edu/Advising/CS/Peer/resources/joiningastartup.html -> www.eecs.berkeley.edu/Peer/resources/joiningastartup.html
What the venture capitalists are looking for, so should you 27 III. Introduction I have given the following speech many times, very often in a re-recruiting effort for engineers in my current company. I have founded two software startup companies, one mildly successful, and one a disappointment. As with any advice from any one but your Mother, take it or leave it. What the venture capitalists are looking for, so should you 1. Financing If there is a red flag in ANY of the above categories, forget it. If your gut (or someone you trust) tells you that ANY ONE of the Founders is a bozo, forget it and walk away. I was asked to join a startup where one of the founders had been in 5 previous failed attempts. I believe you learn from your successes, and successful people try to apply successful techniques to tackle problems in other domains. In a startup, there are thousand ways to fail, and only a few ways to succeed. Even if I learn from my previous mistakes, there are still a lot of ways to fail, and only a few ways to succeed. There are numerous cases where the "product" is ahead of its time. A good example was Gene Amdahl trying to build "wafer-scale-integration" at Trilogy, a $100 Million drop in the proverbial bit-bucket. You are typically NOT selling technology, you are selling products and services == solutions. Also, make sure you have a technology edge, that is either patentable or very hard to duplicate. Too often it is not the first one in the game, but a follower who does a better job at building or marketing the product. Visicalc was the first spreadsheet, but Lotus was the one that cornered the market. MANY Internet businesses have low cost of entry, but can also be duplicated in a short amount of time. How many yellow page directory services companies are there? When your technological edge evaporates, it comes down to marketing and branding. While seemingly obvious, knowing and understanding your market/customer base has baffled numerous ventures over time. A good example was pen-top computing, where millions were poured down the drain, and no customers were willing to pony up. Today, many of the Internet startups face the SAME dilemma. Competition What is different about this company and its competitors? Financing You want to make sure you have enough money/resources to build AND market your solution. Many companies have gone down simply due to lack of funds. Another common problem is the unexpected second, third, or bridge financing which keeps your company afloat, but typically comes at a high dilution factor. Make sure you know, up front, the financing AND business plan. What is the burn rate (rate at which company spends per month)? What is the valuation of the company on the next financing? They drive expensive cars, spend other people's money, and can destroy your dreams in a microsecond. On the other hand, they have the money, and hopefully much more. Never partner with a venture firm that ONLY wants to invest money. The only exception to this rule is you are SURE that is ALL you need from them, AND you can cut a much better deal. A good venture capitalist will help you: * open the door to potential customers * help you create strategic partnerships * help you find senior management 3. These guys must wade through hundreds of business plans. NDA's (non-disclosure-agreements) do not prevent them from talking. The only reason a venture capitalist will keep his mouth shut is if you are a HOT ticket and YOU are the best vehicle for delivery. All venture capitalists care about is ROI (return on investment). If you are joining a startup, ask if you can talk to the senior investors/venture capitalists. Be sure to ask them the following: * What are the biggest risks facing this company? Acquisition/merger Ask the founders about THEIR desired outcome. You will learn a lot about their motivation in the answer. Some want to build a long-lasting enterprise with quality products and services. Some want in and out with as much financial return as possible in as short a time as possible. Otherwise, they may attain their goals while you are left holding the bag. Stock equity It amazes me that engineers with the ability to build complex systems can be so bamboozled when it comes to "stock equity" in a startup. I am hoping we go IPO in two years at 20 dollars a share. What percentage of the company does 50000 shares represent today? What expected dilution will I see in my percentage in the next financing? What is the expected valuation of the company in the next financing? Another interesting discussion revolves around the proverbial IPO price of the company. When the Founders offer you 1/2 of 1 percent, and then tell you the company will go public at 200 Million dollars, they did NOT pick that IPO price out of a hat. Perform an expected value calculation on possible outcomes for the company. Break down possible outcomes by percentage and valuation, multiple them out, add them up, and that is the expected value for the company. Then multiply THAT result by your percentage to see what YOUR expected value is. Be sure to halve that number, because you will undoubtedly be diluted by at least a factor of 2. Finally, don't forget the "WHEN" factor in your equation. Will you get your windfall in 6 months, 1 year, 2 years? Depending on inflation and expected returns on investment, being given X dollars today has a significantly higher present value than X dollars given to you two years from now (assuming you don't drop it at the craps table). You were given 1/2 of 1 percent which got diluted by a factor of 2. One more thing -- don't forget that you will be taxed on the sale of this stock. Wait a minute, that's 78 thousand dollars after 4 years of vesting, not the 1 million dollars you were "promised" during your negotiation. I even failed a job interview because the VP of Engineering wanted me to say that "fun" was an important part of why I wanted the job. Fun is playing tennis, guitar, drinking beer, fishing, (and perhaps a few other things). Working 24 hours a day, 7 days a week, is not fun, at least not in the long run. As one of a small number, you have a great deal of impact on the outcome of the company. There is usually far less politics and bureaucracy in a startup. You will focus your entire energy on getting your product out. Does the startup fit your personality, lifestyle, financial situation, and career goals a. Your role You may be asked to do many different tasks in a startup, If you like multiplexing, good! If you like a steady, supported environment, this is not the place for you. It is an interesting dilemma, because you are sacrificing the present for a chance to buy your time in the future. I was offered a position recently where I thought I had a shot at 2 Million dollars. My wife asked me, "Is 2 Million worth the time TODAY away from your children". Your financial situation If you are living paycheck to paycheck, mortgage to mortgage, this may not be the place for you. While ANY job is at risk, startup jobs are more prone to delayed paychecks, firing, lay-off, or simply going out of business. I worked for 1 year with deferred salary in my last startup. Not that it mattered too much, since we paid each other 55K/year during that time. Career choices Question to ask yourself include: * What do I want out of life/my career? It is like the famous mathematical problem entitled "The Secretary Problem". Obviously 1 is not enough (he/she may be the worst candidate). Many people pick the first one that comes along, largely because they know someone, AND it is "better" than their current position. Futures/Conclusion In a follow-on, I will provide you with a handy-dandy set of metrics for "quantifying" and "researching" the various issues involved in your startup evaluation. I will attempt to help you answer questions like: * How do you arrive at your percentages and values for your expected value calculation? Unfortunately, this is a little like using the last weeks football scores to determine this weeks betting spreads. I will produce a calculator/spreadsheet (Java applet, what else) to assess your chances, factoring in: * cu...
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