Monday, December 26, 2011

Stepping Back: 5 Questions To Yourself Ask Yourself About Your Startup

Every year (or quarter) it is worth taking a step back from the day to day emotional roller coaster that is a startup.  It is worth making the time to reset your directions and ask the "big picture" questions that can drive the success or failure of your business.

Questions to ask yourself:

1. Do I Have The Right Team In Place?  
  • Your business has undoubtedly changed in 2012.  Are there holes in your team you should fill?  
  • What sort of org do you want in each quarter of 2012 and how do you proactively get there?  
  • Are there people on the team who are underperforming or a bad fit?  How do you remove these people from your team and when do you do it? (Hint: don't wait)

2. Do I Have The Capital I Need?
  • When do you run out of money?  Do you have at least 18 months of cash left?
  • Should you raise money in 2012?
    • What milestones do you need to reach in order to raise money (if that is your plan)?  
    • Who do you want to raise money from?  How do you build buzz and relationships with that person now?
  • Can you reach profitability in 2012?  What are the tradeoffs to doing so (e.g. shrink the team?  ramp sales?  roll out new pricing)?

3. What Should I Be Doing Less Of?  Or More Of?
  • What are things that you spend time on that did not help you in 2012?
    • Can you stop doing these things?  If not, can you outsource them?
  • Where did your team waste the most time in 2011?
    • How do you make sure they spend time effectively in 2012?
    • What was the biggest barrier to productivity for your team this past year?
  • In hindsight, what were the activities in 2011 that created the most value for your business?  
    • How do you make sure your team spends its time on the most important things? 

4. How Is My Product Doing?
  • What do users love about your product?  What are 1-2 things you can do to build on this momentum?
  • What do users hate about your product?  Do you need to fix these things?
  • How much traction does your product have?   Where does distribution come from?  
  • If you are early stage, are you working on the right product?  When do you decide the product is working/not working and what do you do about it?

5. What Can I Do To 10X My Business This Year?  
  • Is there a market shift happening that you can exploit in 2012? (e.g. Android penetration?  Rise of Pinterest for distribution to commerce sites?  Something else?)
  • How can you think bigger and bolder in 2012?  What are 1-2 big audacious product / partnership / other goals you should swing for?
  • How do you focus on the big swings despite everything else you are doing?  

Any other questions you think are worth asking?  Let me know in the comments section.

You can follow me on Twitter here.

Other posts you might like:

Monday, December 5, 2011

How To Choose A Board Member

A number of companies I know have closed series A or B rounds recently.  The entrepreneurs' next step after closing a venture round is often to finalize the structure of the company's board, including choosing the independent board member(s).

The members of your board are the most important people you will ever "hire" for the company.  For an early stage company, your board will often:
1. Select the CEO of the company.  This means the board may be able to fire you from the company you started.  Part of the board's job is to hold the CEO accountable for deadlines, plans, and deliverables.
2. Block or push for major events in the company's life (future fundraises, acquisitions, selling the company etc.)
3. Provide great strategic advice or become pain in the butt, medling overhead.
4. Help with recruiting senior executives or key hires.
5. Teach you about nuts and bolts of the business, or processes as you scale.  Depending on the stage of the company and the sophistication of the founders and their executive team, board members may help you understand the process to set e.g. your first financial or strategic plans, coach you on how to manage larger and larger multi-functional teams, or other nuts and bolts of building the business.

For later stage boards, board members will be involved with compensation committee, financial audits, etc.  So the board of a company may evolve quite a bit from an early stage company to a public one.  This post is focused on smaller startups (e.g. 5-200 people in size).

A great board member can add enormous value and truly be helpful to the company.  A terrible board member can truly screw a great company up.  Most board members are neither great nor terrible - but this post will hopefully help you avoid the terrible ones.

If your co-founder is your husband/wife, then your VC is your mother-in-law and the independent board member is like your father-in-law.  Just as you can't contract the mob to off your father-in-law, it will be hard to remove a director once you add one, so you should choose your board very carefully.

While some series A investors won't push for the independent seat to be filled for a while (and in some cases at all), others will push for a faster addition to the board.  Steps to choosing a board member:

1. Write a job spec.
This is one of the most important people you will hire.  You should write up what you would optimally want for a board member as a check list or hiring spec.  This should include:
a. Experience.
  • Operating experience.  Do you want someone who has operated a company at a certain scale or has started a company herself?   Can they share process or management best practices with you?  What can you learn from them?
  • Market experience.  Is there specific domain or market expertise you care about at the board level?  Are they in the information flow in ways that will give you a competitive advantage?  Can they provide intros to people in the market who can help you a lot?
  • Functional experience.  Do you want specific functional experience? (e.g. an ex CFO or VP International Sales)?
Depending on your existing board and experiences as a founder, you may or may not care about market experience, functional experience, or operating experience.   Or you may be willing to trade these off as it will be hard to find the perfect person.

b. Involvement with other early stage companies (optimally as a Founder).  People who have not seen a company go from 2 people in a coffee house to a multi hundred person company aren't used to all the bumps in the road that an early stage company experiences.  Things will take longer and will be rougher then expected.  And, unlike a large established company, momentum won't exist.  At an early stage startup, each bit of execution in an act of sheer will rather than an act of momentum.

Optimally, if there is just 1 independent board slot, the independent board member would be a current or former entrepreneur.

Other successful entrepreneurs will be able to relate more closely to a founder's emotional state and provide advice based on their own experiences.  They will understand both the newbie nature of being a founder/CEO and be open to answering "stupid questions" without condescension/judgment.  They will have first hand knowledge of how to build a business as well as understand the bumps that are coming along the way are inevitable.  Finally, successful entrepreneurs can serve as a counterweight to the VC board members in a way that benefits the company, and hence also benefits the VC (see below).

c. Personal rapport and attitude.
This is REALLY important.  You as the founder(s) should have great personal rapport with the independent board member.   They should be someone you feel you can trust, who you would feel good about calling at midnight on a Friday, and someone you think will be able to help you and your co-founder grow both the company, but optimally also grow personally.

The independent board member should be someone you feel comfortable calling up to ask a dumb, newbie question about your business.  They should be someone that if circumstances were different, you would be excited to start a company with them.

Things to avoid on this one:
  • The condescending grey-haired operating executive who sees you as a "bunch of kids" & who views herself as part of the "adult supervision".  This typically leads to the founder getting fired as CEO and some visionless "operator" coming in to derail the company long term.
  • The micro-manager who confuses being on the board and being your boss.
  • People doing it for the potential financial reward rather then impact/excitement about helping you build a business.
  • People doing it to "join a board" so they increase their own personal stature.
d. Alignment of vision.
Does the independent board member understand where you want to take the business?  Are they aligned with that vision and direction?   You want a common view of where the industry will evolve, and someone who will support that vision rather then second guess it.  Similarly, you want someone who will take a long term view to building a great company (if that is your intent), rather then a focus on a short term flip.

Look at their background - what has happened to the companies they have started or run?  Did they sell early, and if so why?  What other choices have they made in their career, and how thoughtful are they in hindsight about these decisions?

e. Raw intelligence.
This is self explanatory.  Some folks, such as Marc Andreessen, Reid Hoffman, and Vinod Khosla, are known for their raw horse power.  Notably, the former two took board seats or made investments prior to become full time VCs.

f. Entrepreneur friendly (or long-term relationship).  
A number of VCs will suggest "friend of the (venture) firm" as your independent board member.  These people will often owe the VC more then they will ever owe your company, and when shit hits the fan will vote with the VC.  In other words, the "independent" board seat will in reality be an investor board seat, and you will lose control of the company.

Signs that someone is a "friend of the firm" (FOF):
  • They have worked at multiple companies backed by the VC
  • They sit on a few boards with the same VCs
  • They are likely to get placed in their next job by the VC (e.g. VP of sales who wants to become CEO as their next job)
The best scenario is to find someone that your VC respects, but that you know is an entrepreneur at heart or will be more entrepreneur friendly.  Optimally, you will have a pre-existing, long term relationship with this person that will help you trust each other as the company inevitably hits a hard spot.

Given the importance of rapport and trust in the board relationship, you should make sure to get to know people (optimally over a few months or longer) before adding them to your board.  As such, you should push back if your investor is trying to get you to quickly add an FOF.

g. Respected by the Investors / VC
Part of the independent board member's role will be to remind the VC board member that they should be voting in the company's best interest (rather than the investor's own best interest).  They should have the confidence and insights to push back on the VC when it makes sense to do so.  The independent should help keep the VC "honest".  This does not mean the independent should rubber stamp the entrepreneur/CEOs every whim.  Rather, they are there to do what is best for the company and to remind the VC that their purpose should be the same.

This is easiest to accomplish if both the VC and the entrepreneur respect the independent board member.  This means both of you should spend a lot of time with candidates for your board before adding them.

Once you have defined what you want, discuss it with your investor and get agreement on the spec.  This helps you call bullshit on them (e.g. when they offer up a Friend of the Firm with no relevant background) and for them to call bullshit on you and keep you honest (when you suggest your best friend from High School).

Make a prioritized list of people you would most like to add to the board.  If you do not know them directly, contact them via your investors/advisors or on LinkedIn or AngelList.  A lot of people will reply to a random ping on LinkedIn or AngelList if it seems serious and you have e.g. good backers/investors.  Your investors may have good suggestions for this list as well.

You will have a lot of pressure from your investors to finalize the board.  You should push back on this and make sure you take the time (many months) to find a great person to join.  Just as you would not rush to hire a crappy engineer "just to fill the spot", with a board member (who will be more of a pain to remove than a bad employee) this becomes even more important.

Some questions to ask/discuss with the potential board member:
  • Ask them to discuss key directions for the co.  Do they align with the vision and approach you want to take?  Do they have key insights or interesting feedback?
  • Ask them how they will help the company.  Where will they pitch in?  What are they good/bad at providing?
  • What are their goals/aspirations?  What do they want to do with their career or life?  How does the role on your board impact this?
  • Ask them to do something for you.  Try to put them to work and see if they will help with something relevant that they are experience in.
What do people who have worked with them think of them?  Are they high integrity?  What are the helpful at?  If they are already on boards, what do the entrepreneurs they work with think of them?

Optimally you will take a "common nominates, preferred stock approves" style approach to adding the independent board member.  Just like with the Supreme Court where the President nominates the Justices and Congress approves the nomination, the balance of power lies with the nominator (thanks to Naval Ravikant for this analogy).

To sum it all up, choosing your board members will be one of things that could impact the future of the company substantially.  You should be thoughtful about who you are adding and why, and work with your investors to take the time to be thoughtful about who you add.  Once someone is on your board, they are very hard to remove.

Many thanks to Josh Hannah, Naval Ravikant, Sam Altman, and David King for providing feedback on a draft of this post.

Any other things you used to select the right board member?  Let me know in the comments section.

You can follow me on Twitter here.

Other fundraising posts:

Thursday, November 17, 2011

How To Reply to Angel Investor Intro Emails

I have had a lot of entrepreneurs ask me for introductions to various investors.  In some cases the entrepreneurs use their reply to the intro email as a mechanism to gain social proof, emphasize urgency, and to reduce the friction to meeting the investor and closing their round (see e.g. VentureHacks for great tips).

Unfortunately, a lot of otherwise savvy entrepreneurs don't follow up with investors well.  You have to remember that every thing you do can signal to an investor a lack of urgency/interest in your company, the fact that you are taking your startup casually,  desperation, or a lack of ability to follow through.  Also, if you don't create urgency or a sense that the investor may miss out on something interesting, then the angel may drag their feet in meeting with you, extending the time of your fundraise.

This post is focused on the small tactics that go a long way upon receiving an introduction.

Example Of a Bad Reply To An Investor Intro 
"Thanks Ivan Introducer for the intro! 
Hiya Angela Angel,
It is great to meet you!  Love to connect!  Let me know what works!
Elizabeth Entrepreneur"

Example of a Good Reply (tailored to an angel round with a lead)

"[moving the person who made the intro to BCC][1]
Hi Angela Angel, 
It is great to meet you.  As introducer said, we are in the midst of a round led by well-known investor and other well known angel is also investing[2].  We have seen really solid traction with user growth of X up Y%. [3]  See below for team bios/key stats [7] 
Our round is coming together quickly so the sooner we can talk the better[4].  Are you free to chat at one of the following times?[5] 
Monday 2pm-3pm;  5pm
Tuesday 1:30pm-3pm, 6:30pm 
We can also try to move things around to accommodate you - we have heard great things about you as a social media investor (in particular your investments in Tumblr and Pinterest)[6] so would love to connect before we close the round. 
Elizabeth Entrepreneur
Team bios [7]
Elizabeth Entrepreneur
-2008-2010 Tech lead at Facebook for newsfeed
-CS, MS degrees from Berkeley
-Side project getting 100,000 visits a month 
Carl Co-founder

What Is The Difference?
I added numbers to footnote the important parts of the email.
1. Move the introducer to BCC.  They don't want to be on the 15 emails it takes to schedule the meeting.
2. Put social proof up front.  All these great investors are part of the round!  Angela angel will want to be part of the club and invest too.  It also means you are more legit than the other random companies trying to talk with the same investor.
3. If you have good traction or a key stat, explain it in 1-2 lines.  This is additional proof that they need to rush to talk to you.
4. Put polite pressure to chat very soon.  You need to emphasize things are on a fast track for you.  If things are moving slowly it suggests no one is interested in your round, which means this investor won't be interested either.
5. Add specific times.  This reduces the friction to scheduling as if you leave it open ended it (a) does not convey urgency and sets up the timeframe within which you will meet and (b) makes the investor work harder to figure things out.  Don't put the burden on them to suggest a time
6. Explain why the investor is relevant.  This helps them understand why they are a good fit for the company.  It also extends the the timeframe you can wait to meet with them if needed without looking desperate (e.g. if the can only meet in two weeks, their experience justifies you waiting for them as they are uniquely awesome for your company, rather then because you dont have other options).  
7. Add team bios (2-3 lines, bulleted per team) + any key stats (if no good stats, just included bios).  People will want to know who you are and why to meet with you.  In some cases, even if the idea is bad they will still want to meet with you if you have a strong background.  This will give you a chance in person to convince them to invest.

Hopefully, the person who introduced you already covered items 2 through 5 or 6 in either their intro, or in the email asking if the investor will talk to you.  If the intro explicitly included 2-3, you can skip mentioning it yourself, but you should keep the other elements in.

You can follow me on Twitter here.

Other fundraising posts:

Friday, November 11, 2011

Holy Crap! The NY Startup Scene

Every few months I take a weekend to step back and make myself a list of startups doing impressive things.

One of the things that struck me was the extent that startups coming out of NYC were included on the list for the first time.  It used to be that NY mainly about AdTech and SEO-farm focused "new media" startups.  These companies were often pretty underwhelming.   Nowadays, NYC is definitely undergoing a web renaissance with clusters in social media and commerce.

4 Reasons The NYC Startup Scene Changed
1. Access to Capital.
There is a lot more capital available in NYC today than there has been historically, and it is now provided on "West Coast Terms".

It used to be that NY and Boston was known for ex-Banker VCs who wore ties and penny loafers and asked entrepreneurs to go on a 5 year vest.  NYC has seen an influx of capital in terms of both thoughtful local VCs (such as First Round and Union Square) and angel funds (e.g. Founders Collective, Lerer Ventures), but also a larger number of traditionally West Coast focused VCs have been increasingly willing to fund NYC based companies.  This includes everyone from Accel (*, BirchBox, Bauble Bar), Andreessen Horowitz (Foursquare, Canvas), to Sequoia (Tumblr, etc.) and more recently Greylock (Tumblr).

Almost every NYC startup I know of now makes a trip out west to fundraise, and West Coast angels and VCs have become increasingly comfortable investing across the country.  In parallel, some West Coast VCs are moving to the East Coast . For example, Accel recently opened a NYC office, and one of the sharpest investors I know - Alex Kinnier, recently joined NEA on the East Coast.

Capital is now chasing the best companies no matter where they are (as long as they are in the Bay Area or NY :)

2. Anchor Companies.
In 2002 I somehow ended up with almost an hour 1:1 meeting with Don Valentine, the founder of Sequoia Capital, and the VC who personally funded Apple, Cisco, EA, Oracle and other titans of tech.  Valentine and I spoke about the difference between Boston (which I had just moved from) and Silicon Valley.  

He pointed out that one advantage Silicon Valley had over the East Coast was its preponderance of "anchor companies".  These companies are large tech companies that recruit and import a large number of highly talented people from all over the world.  These talented people then either go on to found their own companies, or to poach management or other talent from the existing anchor companies.  In other words, the fact that Google and VMWare and Intel and Cisco have tens of thousands of engineers each enables the creation and *scaling* of amazing startups with high talent density themselves nearby (e.g. I have seen one estimate that about 1/3 of Facebook's engineers are from Google - which means hundreds of people have switched from Google to Facebook in a short time span).  

In contrast, the number of "anchor companies" on the East Coast has traditional been pretty low (I don't consider IT departments of big investment banks as "anchors" as these organizations are not product focused).  This started to change as companies such as Google built large engineering/product offices in NYC, and has allowed companies to find talent more quickly.  For example, a pretty big chunk of the early Foursquare engineering team is ex-Google, while the COO  of Etsy is also from Google.  This increase in web product/engineering talent density in NYC helps change the dynamic and allows East Coast companies to scale to a larger size without the need to open a West Coast engineering office.

In parallel, NYC has started to get some smaller anchor companies for competencies such as commerce and more recently, social media.

3. Increased Ease of Development.
The cost and speed of development has dropped dramatically.  From AWS to Django and Ruby to all the various APIs and platforms (Twilio, Stripe, etc.) a single engineer can build an enormous amount.  This means a small team can wholesale execute a great product (see e.g. the early days of Tumblr, or stand-alone 1 person teams such as Instapaper.)

This lower bar to development means that despite its sparser engineering and product talent pool, NY startups can get up and running with fewer people and still pull off amazing things.

4. A Social, Design Commerce Focused Environment
People who chose to live in NYC are in an environment that is more art, design, and media influenced than SF, which jives well with the webs shift to social media.  It is not a surprise that companies such as Tumblr and Foursquare have thrived in NY.  Similarly, many big brands and traditional commerce companies are based in NY, which has been a boon to companies such as Gilt Group.

List of Some NYC Startups
Here are some of the startups I think are doing some of the more interesting things based in NYC:

A. Social Media

B. Commerce

Hopefully, some of these startups will get large enough to act as anchor companies and reinforce the cycle of startup creation.  If these companies end up with early exits, they will never hit the scale and talent competencies that will allow them to contribute to the next entrepreneurial startups.

You can follow me on Twitter here.

*I believe is actually HQ'd in Jersey

Friday, November 4, 2011

Series A Crunch: Why Fewer Companies Are Successfully Raising Series A Rounds

Update:  Data from TechCrunch supports the post below.  CrunchBase has seen a 33% increase in the number of seeds reported and a 9.6% drop in the number of series A's reported.   In 2008 the ratio of seeds/series A reported were 1:1, in 2011 the ratio was ~2:1
One big shift in the startup scene over the last 18 months is the sheer volume of startups getting started and seed funded.  If we use Y-Combinator as a proxy for the broader ecosystem (which is probably directionally correct, although YC growth may be overall higher due to increased branding as well as e.g. Start Fund and other activities) then we see the following:


At the same time, the percentage of startups closing seed rounds seems reasonably static to me (it may even be up).  This means there are many more companies getting founded and then funded at the seed round.  However, the number of legitimate VCs doing series A rounds has not increased.

This has led to a crunch at the series A level, where more and more startups are unable to successfully raise a series A.

Reasons for the Series A Crunch
1. The bar has gone up significantly for what constitutes a company that can raise series A.  This is due in part to valuations going up (so series A are now often $5-10 million raises instead of $3-7 million) but I think it is largely due to the large supply of startups.

2. More startups means that there are more startups doing "merely OK" all competing for the same dollars.  It also means there may be slightly more startups with high traction (e.g. if 1 in 100 get lots of traction, and there are 2X more startups, there are 2X more startups with high traction), which means the high traction startups will soak up most of the investment dollars.

All the VCs I know tell me times are getting more and more busy for them.  They are seeing way more series A deals coming through their doors, but they are funding the same number of deals.  This means fewer startups are successfully closing A rounds.  Those startups that do close round are often further along then the average series A company was 2-3 years ago.

Return of the Bridge Rounds
So what do all these startups do that can not raise a series A?  A subset sell as a team buy, a few go out of business, but an increasing number are going out for a bridge round.  Basically, instead of raising $5 million, I am seeing post-seed startups raise anywhere from $500K to $1.5 millon, at a valuation somewhere between a series A and a seed valuation, with the hope that the additional capital will give them time to gain more traction or scale their business.

Q1 and Q2 of 2012 Will Likely Be Very Competitive For Series A
Many companies who raised a bridge round plan to go raise a series A sometime next year.  Unfortunately, the environment may get even more competitive at that time.  Given the ramp in new startups in early to mid 2011, Q1 and Q2 of 2012 may be even more competitive.  You will not only have the startups seed funded in 2011 raising a round, but also all the startups from 2010 who raised bridge rounds - all competing for the same dollars.

If you add in the risk of a European financial crisis, then early next year may be a tough time indeed to raise a round if you are in the "middling" zone of traction (versus those that will flame out or be team buys).  In contrast, companies with great traction, or a well connected celebrity entrepreneur, will still get chased by all the various VCs as usual.

Some Tips For Raising a Bridge Round
Given the likely high competition for series A dollars in early 2012, if you plan to raise a bridge round I would suggest:
1. Raise enough money to buy you real runway.  Make sure you have the runway to hit the milestones needed to raise a series A.  It will be harder to raise another bridge, and it is always easiest to raise money all at once then have to go out fundraising again 6 months later.  If you think you need $500K, think about raising $750K or $1 million to have extra runway in case it is needed.

2. Diversify your investors.
Adding new investors to the mix may both up the valuation you get for the bridge, as well as expand your network for the series A.

3. Include some insiders from your first round if you can (and if they have been useful).
Having 1-2 existing investors re-up into your bridge will convince new investors to participate at a higher valuation.  However, if you can not get existing investors in a bridge at a good valuation, or you do not think they have been helpful, feel free to exclude them from the bridge round and focus only on new investors.

You can follow me on Twitter here.

Other fundraising related blogs:
Questions VCs Will Ask You
How To Raise A Successful VC Round
Differences Between Funding Rounds: Series Seed, A, B, C...
Financing Approaches Most Likely To Kill Your Company
Put Your Investors To Work For You
Party Rounds: How to Get A High Valuation For Your Seed Startup
20 Questions To Ask Yourself Before Raising Money
VC Economics: Why VCs Could Care Less About Your $50 Million Exit 
The 7 Types Of Angel Investors

*Update: this graph has been updated with data from Harj Taggar, one of the partners from YC.  Many thanks to Harj for the info.

Tuesday, September 20, 2011

Hire For The Ability To Get Shit Done

I have found that the two biggest causes of having to fire an employee at an early stage startup are a lack of culture fit, and the inability to Get Shit Done.  I don't care how smart someone is - if they are unable to work hard and crank out a large amount of high quality work, they will weigh down your startup.

Inability to get things done may manifest itself in multiple ways including:
  • Lack of urgency.  Used to a large company environment where its OK if things take a few weeks longer.
  • Easily distracted.  Heavy procrastinator.
  • Lazy / doesn't work hard.  Some very smart people are basically lazy.  Don't tolerate this.
  • Starts but never finishes things.
  • Lack of follow through - makes commitments but does not follow up.
  • Argumentative. Arguing incessantly about how to do something rather then just doing it.
  • Slow.  Taking a long time to code (or do) something simple.
  • Perfectionist.  Tendency to overdesign something and to spend 4 weeks building the perfect implementation versus 1 week building the thing that "just works" for 95% of the time.  Sometimes the edge cases need to be covered, but in most raw startups this is not the case.  On the business side this manifests as someone heavy on analysis, low on "doing".
Unfortunately, this is the fault of the entrepreneur and of the hiring process - too few hiring processes focus on the ability to Get Shit Done (GSD).

Screening for the ability to Get Shit Done.
Here are some ways I have used in the past to check for the ability to Get Shit Done:
  • Coding exercise.  As part of our hiring process at Mixer Labs, we would often give people a half day coding exercise.  We would see what tools they used,  how they worked with the team, but also how productive they were.  What was the final output of the half day, and how did that compare to other candidates?  We had a few candidates that went from "did OK on interviews" to "wow, that person is great" when we saw the output of the exercise (and vice versa).
  • Personality.
    • Follow through.  Did the candidate respond to every email from me quickly?  Did they follow through on everything they said they would do?
    • Excellence.  Do they spend the time to become good at anything they adopt as a hobby?  Larry and Sergey at Google would famously ask about people's random hobbies to test whether they were the type of people who focused on excellence and depth of understanding.
    • Proactivity.   Do they suggest the right next steps without prompting?  Do they go above and beyond in the interview and come in ahead of time with e.g. a 5 page analysis of where the company should head?
  • Homework.  We would give non-engineering candidates a simple task to complete between phone screen and onsite.  E.g. "Come back in 3 days with a 1-page marketing plan for our product."  If they did not finish this on time, or they came back with little insight / shoddy work we would not move forward with them.
  • Ask the candidate.  I would often straight out ask people how effective they were at GSD, and how did they compare to their peers?  It was surprising how honest some (very smart) people would be on this.  E.g. "I am average compared to other engineers".  For an early stage startup, average is not enough.
  • Reference checks.  Ask about people's Get Shit Done ability in multiple different ways during reference checks:
    • What %ile of getting stuff done is this person?
    • How does this person compare re: GSD to their peers?
    • Give me an example of how this person was proactive?
    • How proactive is X versus their peers?  What %ile is this for your company?  For all people of Y-function you have worked with?
    • How hard does X person work?
    • When has X person been unable to follow through on a commitment?  When has X not come through on a commitment, no matter how small?
    • How fast does X accomplish tasks?
    • How frequently does X go above and beyond what they are asked for?
With the simple steps above you should be able to optimize for people who are proactive, have good follow through, and Get Shit Done in addition to the other screens for raw intelligence, culture fit, and functional knowledge.

Other hiring blogs:

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Tuesday, September 6, 2011

12 Year Old Steve Jobs Meets Bill Hewlett (of HP)

I was eating pho with a friend the other night and he pointed out how grateful he was to be living in the one spot on the planet where it was easiest to contribute to the creation of the products and services that are driving massive technological change across the planet.  This is a big picture, technology-as-a-force-for-awesomeness perspective I had not been reminded of in some time (with all the noise of who is filing to go public, what are all the 65 companies in the last YC batch doing, etc.).

It also reminded me of how much I love Silicon Valley.

Here are 3 of the many reasons I love Silicon Valley:

1. Steve Jobs (at the age of 12) meeting Bill Hewlett (CEO of HP).  When Steve Jobs was a kid, he grew up in Mountain View.  HP was right around the corner and at the time was being run by Bill Hewlett, one of its co-founders.

To quote the HP website:
When he was in eighth grade, Steve Jobs decided to build a frequency counter for a school project and needed parts. Someone suggested that he call Bill Hewlett. Finding a William Hewlett in the telephone book, the 12-year-old Jobs called and asked, "Is this the Bill Hewlett of Hewlett-Packard?" "Yes," said Bill. Jobs made his request. Bill spent some time talking to him about his project. Several days later, Jobs went to HP and picked up a bag full of parts that Bill had put together for him. Subsequently, Jobs landed a summer job at HP. He later went on to co-found Apple Computer. 

Think of how amazing this is.  The founder and CEO of one of the major companies of the time, Bill Hewlett, got on the phone with a random 12-year-old he had never heard of.  He then proceeded to personally make sure to assemble the bag of HP parts the kid needed.

I wonder if this explains why decades later Steve Jobs was then so welcoming to the 10-year-old kid with an Apple logo shaved in the back of his head, who also contacted him out of the blue.  You can read the story here.

To me, this sums up the ethos that pervades Silicon Valley during non-bubble times - people helping each other out of the love of technology and the impact it has on the world.  People recognizing and nurturing talent even if it comes in an unexpected form (e.g. an eventual hippie-esque college drop-out obsessed with fonts starting Apple computer).  And once successful, people realizing they need to give back in turn when they are the person who can help others.

2. Netscape in a Strip Mall;  Taking a Baseball Bat to a Lamborghini
I remember feeling pretty exuberant the first time I landed in Silicon Valley back in 2000.  I flew into the San Francisco airport and immediately drive down to see all the great companies I had read about and/or whose products I had used.  As I drove down the 101S and related roads I saw the signs for Netscape, Intel, Yahoo!, eBay, Cisco etc. (this is back before Google, Facebook, and Twitter became the next wave).

The thing that stood out most for me was, well, how understated all the buildings were for these major tech companies.  They basically looked like one or two story strip malls.  If you compare this to the opulent, wood-paneled, 100-story buildings most of the Fortune 500 has, you realize how the culture of a technology company is often focused on building a great product, rather then building the perception of importance.  Great technology companies are too busy doing the important, to worry about looking important.

When Google was about to go public, I attended an engineering all-hands led by Wayne Rosing, Google's former SVP Eng who ran the whole Google eng organization (he was also the eng director at Apple who led the development of the Lisa Computer, Apple's precursor to the Mac).  Wayne said something along the lines of "Once we go public, if I so much as see someone drive a Lamborghini into our parking lot, I am going to take a baseball bat to it."  Wayne's message as I read it was "Keep your heads down doing good work- this is just one step in the long evolution of a our company.  Don't get showy - we still have lots to accomplish.  And lets not screw up our culture in parallel with gross displays of wealth - this is just a dumb distraction from our mission."

The people I am most impressed by in Silicon Valley still share these values.  Reid Hoffman, for example, (now worth billions post LinkedIn, and Zynga and Facebook investments) still drives a Toyota.

3. Drop Outs and Immigrants.  
Most Silicon Valley startup stories sound like the punchline to a joke.  E.g. "An Indian, a Jew, and a boy from the Midwest walk into an empty office space..." and the next thing you know a great company is born.   Many of the great technology companies were started by people who dropped out of college or grad school (Microsoft, Facebook, Google, Apple, Dell, etc.).  Cultures that, at their best, ignore a person's origin and education level, tend to create the most innovation.  The best ideas tend to rise to the top.

Summary: Silicon Valley Values
I guess to sum it all up, to me Silicon Valley as an ideal has the following values:
1. Understated
2. Focused on changing the world through technology
3. Egalitarian
4. Giving back to the community - Entrepreneurs and technologists helping one another out

I hope we don't lost sight of these values in the current boom cycle.

You can follow me on Twitter here.

Monday, August 29, 2011

What Is Your Startup Acquisition Offer Really Worth?

I have helped more than a dozen entrepreneurs think through their exits.  There are a large number of non-financial issues to consider when selling your company (your role, manager, network, impact to your employees, etc.).  This post focuses solely on how to go about making a financial assessment for the entrepreneur.  

In particular, I focus on items that impact the *real* versus perceived value of the deal.

1. How Long Will You Really Stick Around?
How long is your vesting period?  E.g. suppose you have 2 offers:

Offer 1: $10 million vesting over 4 years.
Offer 2: $3 million vesting over 1 year.

Offer 2 is actually much better for the entrepreneur who only plans to stick around for 1 year, even though Offer 1 is much higher in total value over time.  

This suggests as an entrepreneur you should never go somewhere you think you will be miserable, even if it seems to pay more over multiple years.  Entrepreneurial people tend to quit more often and more easily, so don't mislead yourself on how long you can stick out working for someone else.

2. How Much Upside Does the Acquirer's Stock Have?
If you are getting stock offers, how much is the stock likely to be worth?  Does it still have 10X in it?  Selling to Google or Facebook when it was valued internally at $10 billion is much different from selling to Google or Facebook today.  A $50 million acquisition can suddenly become a $500 million acquisition if the acquirer's stock appreciates dramatically.

3. Are You Getting Options Or Stock?
You need to exercise options, which means you pay money to convert the option into stock.  For a later stage company this can be e.g. 1/3 the price of the common stock.  In other words, $30 million in options may be worth $20 million in stock (assuming it costs you $10 million to exercise the stock).

Ask the acquirer what their strike price is, if they are largely compensating you with options.

4. Taxes.
How tax efficient is the acquisition?  Will your acquisition be treated as long term capital gains versus e.g. cash compensation?  This can change the value of the deal dramatically.

5. Is the Offer Net Cash?
Suppose you have $1 million in the bank and you are acquired for $10 million.  Who gets to keep the cash?   If the acquirer keeps it, you just subsidized the deal to the tune of $1 million.  I.e. the real value of the deal is only really $9 million and the acquisition is worth 10% less.  You should ask for the cash to be dividended out to your shareholders or use this point as part of the negotiation.

6. Other Intangibles (these matter most if the acquisition price is low):
a. Vacation Transfer.  You have not taken a vacation over the last 4 years and on your company's vacation policy have accrued 6 weeks of vacation.  This should either transfer over or get paid out.  (6 weeks of vacation is either an extra 1.5 months of free vesting for you, or if you cash it out could be a reasonable sum depending on your salary)
b. Vacation Accrual.  Some companies have seniority tied to vacation policy - e.g. if you have worked at the company for 4 years you get an extra week or two of vacation.  Negotiate the transfer of this seniority for you and your employees.

Anything else you think makes a big impact?  Let me know what you think in the comments!

You can follow me on Twitter here.

Monday, August 22, 2011

5 Reasons To Sell Your Startup

Many entrepreneurs get really distracted when Google or Facebook or another acquirer approaches them and asks if they want to get acquired.  I frequently (a) ask - why do you want to exit?  and (b) suggest the entrepreneur stop talking to the potential acquirers - this is usually a huge distraction that does not lead anywhere.  [aside - I wrote another blog to be posted soon on moments when you should NEVER sell your company]

When most entrepreneurs approach me for advice on how to exit their startups, I usually first ask if there is a reason they should do so.  I think the following are legitimate reasons to exit a startup:

1. You are exhausted and dont want to keep going.
Sometimes you just don't have it in you to keep going.  The startup has been rough on you.  Your significant other left you.  You can't sleep anymore.  You show up at work without energy every day, and feel like you are clawing your way from morning to morning without end.

We all have periods like this as entrepreneurs (I think many entrepreneurs are a little bit manic depressive) but if you find that the startup has drained you to the point where the manic part is totally gone and doesn't feel like it will ever return, and nothing (vacations, new boyfriend/girlfriend, hiring someone to delegate to, etc.) can't fix it, it may be time to stop what you are doing and try a startup again at a later date when you have recharged.

Startups take a lot of energy and relentlessness.  If you lost both of these things, it may become impossible to roll the boulder up the hill singlehandedly anymore.

2. The founding team is about to blow up.
You and your co-founder can no longer stand the sight of one another.  You roll your eyes whenever she speaks (or vice versa) and spend long pointless days arguing.  Who is responsible for what is eroding or you can no longer do your own part effectively.

First you should talk things through and try to work it out with your co-founder.  Have a mature conversation on it.  Often you can work it out.  If this does not work, you can pull in a mentor, advisor, or investor to help work it through.  If you find things have truly eroded to the point where you can not work together anymore you need to either:
a. Leave the company (or have your co-founder leave)
b. Sell the company if you think (a) will kill the company for some reason

3. The acquirer is willing to "pay ahead" substantially.
Most disruptive companies end up with offers that look very large at the time that in hindsight don't properly value the company's potential.  E.g. Amazon's $100 million bid for Google and then Yahoo!'s conversation with Google that valued it at $1 to $5 billion.

That said, there are a number of times where an acquirer is willing to pay substantially more then a startup is likely to be worth.  Reasons for this may include:
a. The acquirers equity value will likely grow substantially faster then yours will (e.g. any company Google bought in 2003 or the early team buys Facebook made).  For example a $50 million acquisition by Facebook when it was worth $5 billion would appreciate into a $500 million deal value at current valuations. 
b. The acquirer can get more value out of your company than you can.  For example, if their larger sales force can ramp sales of your product much faster than you can you may be worth more as part of their company than as a stand alone.
c. You are in a hot space or the acquirer is desperate.  Sometimes you are just in a hot market, so people will pay for you much more then you will ever be worth - especially if they are desperate (see e.g. AOL buying Bebo for $750 million).

So the big question you should ask yourself is whether you are Facebook or Bebo? :)

4. You are about to get massively crushed by a competitor.
Sometimes there is a competitor in your market who has dirty tactics or uses a truly unlevel playing field to crush its competitors.  An example of this is the way Microsoft used to bundle multiple products into its O/S for free.  This both (a) created instant massive distribution for these products and (b) often killed its competitors by giving away the product for free, when the competitor used to charge for it.  This dried up the competitor's revenue stream leading them into a downward spiral, or the arms of an acquirer.

A great case example of Microsoft tactics lies in Microsoft versus Netscape.  Netscape was eventually bought by AOL for >$4 billion.

5. You need financial security or regular cash flow.
A family member gets sick.  You are about to have kids and can't afford it.  You need to support your family members.  There are a number of instances in which having liquidity can go a long way.  There are often alternate means of liquidity (a loan with your shares as collateral, secondary stock sales, etc.) but if all else fails, an exit into a larger company may both generate cash for you as well as provide you with a stable, higher paying job.

Any other thoughts on reasons to sell your company?  Let me know in the comments.

You can follow me on Twitter here.

Friday, August 5, 2011

Startups: Give Your Family Stock In Your Company

One of the things I regret not doing when I set up Mixer Lab (since acquired by Twitter) was that I did not gift any stock to my family members when incorporating.

When you set up your company, the stock is really cheap (e.g. 0.0001 cents per share or the like).  This is your opportunity to give your family, spouse, or other loved ones the equivalent of a tax free gift that could have a major financial impact long term (i.e. the taxes they will need to pay on the gift at this point could be either zero or very low in dollar terms).

More Tax Efficient For Your Family
Say for example you gave each of your parents and your siblings 0.25% of the company.  If the company sells for $100 million this translates into $250,000 for each of them*, taxed most likely as capital gains.  In contrast, if you were to just give a gift equivalent to $250,000 after the company exit the money gets taxes twice - first it is capital gains for you, then it is taxed (heavily) as a gift for them.

This becomes much more dramatic if you have a very large exit - e.g. at $1 billion the 0.25% gift could be worth $2.5 million - which means you have not only provided long term financial independence to yourself, but also for the set of people you care about.

Voting Rights
If you are concerned that the e.g. 0.5% of equity you divide amongst your loved ones will dilute your ability to control the company over time, you can ask your lawyer to give you voting proxy rights over the shares.  This means as part of the gift, the family assigns the vote associated with the shares to you.  So, you still effectively have the same voting block as you did before the gift.

Ask your lawyer (and tax accountant) for more details on the above as some things are pretty case by case.

Any other things people wish they had done when they first set up their company?

*Assuming no dilution from funding rounds - I am trying to keep the math simple)

Wednesday, June 15, 2011

You Should Read Every Word of Every Legal Doc (Especially Funding Docs)

Reid Hoffman was one of my company's (Mixer Labs, acquired by Twitter) investors. One piece of advice he gave me was to read every word of every contract I signed on behalf of Mixer Labs (including the crazy ALL CAPS parts and legalese). This is one of the better pieces of advice I received.

One of the most important set of contracts you will ever sign in the life of your startup are your financing documents. I am surprised by the number of entrepreneurs who depend on their lawyers to read through and decide on key business points of their funding rounds. I will often ask an entrepreneur who is running into an issue about a key issue impacted by their prior funding rounds or employment agreements and their answer will be "I don't know".

Don't Depend on Your Lawyer to Make Decisions for You.
Often, if you ask a lawyer about e.g. a key funding term, they will say "oh yes, the term as written as 'standard'". You should never accept this at face value. Here is a common conversation I would have with my lawyer (who, by the way, was fantastic):
Me: "What do you think of term X?"
Lawyer: "Term X is standard".
Me: "What do you mean by 'standard'?"
Lawyer: "Well, 40% of the time it is written this way, and then 30% of the time it is written this worse way, and another 30% of the time it is written this more entrepreneur friendly way"
Me: "OK, lets put in the more entrepreneur friendly way".
Lawyer: "OK cool"

If I had just let these sorts of things go, our overall situation at the end of our funding rounds would have been much weaker as entrepreneurs.

Plan For the Worst Case Scenario and Clean Up Loose Ends
Given that a lot of entrepreneurs don't read their financing docs, they often don't understand what will happen in different circumstances.
  • Some example questions on convertible notes: What happens if your convertible note does not convert after 1 year? Does it convert into common on preferred? What happens under acquisition? Can you buy out the note of a badly behaving investor? Etc. etc.
  • Some example questions for equity rounds: What actions can your investors block under what circumstances (funding rounds, acquisitions, etc.)? If you hire a CEO for your company, does she get one of the common board seats or is a new seat created for the CEO? (this can strongly impact board control)
These are the types of issues that can later come back and really impact your company (e.g. loss of board control) if you do not think about them up front.

You won't think of these issues up front unless you read through all the docs.

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Monday, June 6, 2011

Our 10 Step Engineering Hiring Process at Mixer Labs

Before my company, Mixer Labs, was acquired by Twitter, I spent a big chunk of every day on hiring.  A lot of entrepreneurs I help out ask about the process we used to hire a very strong engineering team and so I thought I would share the steps we would take in this post.

1. Resume screen.
We would source people from friends, engineering meetups, LinkedIn, basically anywhere we could find someone who seemed good.  I think of approximately 100 resumes or profiles we looked at closely we hired 1 person.

2. Phone screen 1 - culture fit and "reasonable to set up technical call"
After choosing a subset of profiles or referrals to follow up on, I would do an initial "culture fit / is this person worth talking to" phone call or a "sell" call to people not actively looking.  In some cases people did not want to leave their job (if I was reaching out to them), or they might be a bad fit to begin with.  I would screen for things like:
  • What motivates this person?  What do they care about?
  • What are they exceptional at?
  • Do they think of themselves as a generalist engineer or a specialist (e.g. FE, mobile, etc.)?  We were looking for generalists.
  • Do they seem like a really strong engineer?
  • Are they excited to join a startup?
  • Will they be a good culture fit?
I would simultaneously try to sell the person on the opportunity, to get them excited about our company. Remember, all interviews go both ways as the candidate is also interviewing you as an employer.

These interviews would literally take 15-30 minutes and I set expectations up fron that the call would take 15-20 minutes (if someone is asked to block 15 minutes on their calendar, they usually block 30 minutes anyhow, so we never ran out of time).  These short blocks of time minimized the time spent on this first screen and often I would know within 5-10 minutes if the person was worth a second conversation.

I would meet the really promising people in person for a coffee if they were somebody I was trying to convince to leave a comfortable existing job.

Of 100 people we started with, maybe 15-20 people got an initial phone calls or coffees.

3. Phone screen 2 - engineering interview.
This second phone screen focused more on engineering questions and ensuring the person was strong technically and merited an in person interview.  This would take 30-45 minutes and be performed by a rotating set of engineers on our team.  Different engineers had different filters / set points (e.g. some were much harder "graders" then others, so I would take this into account when scheduling in person interviews, asking the candidate to do an additional phone screen (if they seemed marginal), or dinging them.

Of the 100 people we started with, 7-8 would probably make it through the phone screen to an in person interview.

4. In person interviews.
People would come in and be interviewed by each member of the technical team for ~45 minutes.  We would sometime put an extra 15 minute buffer for engineers who tended to take longer with candidates.
  • We asked the interviewers not to let each other know what they thought of the candidate as they came out of the interview, so the next interviewer would not go in biased.  Studies have shown that sharing your opinion of person A with person B (if B has not met A) biases the interactions B will then have with A.
  • I asked each interviewer what they thought of the candidate over IM immediately after each interview (basic thumbs up or down).  If enough people gave a thumbs down, I would cut off the rest of the interviews to save engineering time.  I.e. the time of our engineering team was too precious to waste on candidates that had people think they were not strong enough for the team.
Before we had multiple engineers on the team, we would ask out strongest technical friends to come by and interview people to help us.  This allowed us to ensure we always had ~4 engineers interview every candidate, even if we were just 2 founders to start with.  As we scaled to past 4 people, we still had every engineer on the team met every hire.

If one of our team had worked directly with the engineer before, we would skip them past phone screens directly to an in person interview.  We had *everyone* interview with everyone on the team, even truly exceptional engineers we had worked with in person before.

Of the 100 people we started with, 2-4 made it through the in person interview.

5. Discuss the candidate
We had each person write down their thoughts of the candidate before we discussed them and then asked each person for their opinion.  We also asked people how they would rank the candidate against all the other candidates we had interviewed.  I.e. below a certain bar they were not worth considering further.

For a while, we used to graph the stack ranked interview feedback vs years of experience to look for outliers who are stronger then average.  We would pursue these outliers aggressively.

6. Half to full day work with team
We asked a subset of the people we moved forward with to come in to work with the team for a half day or full day to test their working style, how much they could get done in a day, design/engineering choices they would make, and also whether they were interested enough in us to actually take the time off to meet with us.

We would always give the candidate the same coding problem, and we would always through away they code at the end.  The purpose was to test their skills and fit, rather then have something productive come of the day.  At the end of the day, we would all gather around and the engineer would show us his or her work.

3 out of 4 people who came in to work with us we moved forward with to the beer test.  In some cases, having someone come in to work with us made us more excited about them as a candidate (i.e. it was someone we were going to ding based on interviews, whom we kept due to their performance coding).  They may have been medium on the in person interviews, but great coders who just got a lot done and were good to work with.

7. "Beer test"
We would take candidates out for dinner or beers to see if they were a good culture fit.  I.e. would our team enjoy having the person around, drinking beer with them etc.  In a small organization culture fit is paramount.

We actually dinged a really exceptional engineer that made a lot of grossly off color comments in the beer test.  He was one of the strongest engineers we met, but felt he would be a bad fit culturally, and this only came out during the beer test.

1-2 out of ~100 people whose profiles we started with would make it through the beer test to be given an offer.

8. Reference checks
We would check ~5 reference per candidate.  Only one candidate who made it to the reference check phase got dinged because of his references (we actually always tried to back channel to references the candidate did not provide, and in this case the engineer had some politically driven conflicts with others, so we decided not to hire him).  As a small organization we did not want to take the culture risk, although that engineer went on to thrive elsewhere.

Great reference checking will be the subject of a future post.

9. Offer
We would make the offer to the candidate in person or on the phone, depending on our prior relationship to the candidate.  I may get into more details on making an offer in a future blog post.

10. Close
Of the people we made offers too, about 2/3 to 3/4 of them accepted.  Most of the people who did not join Mixer Labs, tended to stay with their existing employer.  We would use a number of tools to close the candidate, including e.g. having them meet with our investors to get our investors view of why we were a good company, or we would invite the candidate to events we had at the company, such as our speaker series (even when tiny, we invited CEOs and other industry execs or entrepreneurs in to our company to give talks on their experiences.  This was a really cool company perk everyone enjoyed).

Hiring is a numbers game
All numbers quite rough (e.g. 100 profiles to 1 hire is more or less what happened with us but I am pulling all the numbers from memory so they are rough estimates.  I actually had big spreadsheets with all the details but can not find them) - but hiring is very much a big numbers game.  You need to set up a funnel and optimize each step.  

All else being equal, we chose to optimize for false negatives over false positives.   We kept our bar really high, and due to this grew (painfully) slowly.  But it is was worth it as we ended up with a pretty extraordinary team.

Does your company do something differently that works really well?  Let me know in the comments what you do differently - I always love to hear how people approach hiring and what works and does not work.

You can follow me on Twitter here.


Tuesday, May 31, 2011

Android First - A New Trend In Mobile Development

In a past post on TechCrunch I talked about how to build a mobile team.  More recently, I have seen a number of companies building apps "Android First".  I.e. while developers used to always build for iPhone first, I have seen more and more companies (such as Heyzap and Taskos) starting off with Android first, and then expanding to iPhone from there.  In some cases, companies end up focusing exclusively on Android due to the large, relatively (to iPhone) uncrowded opportunity, for example, Papaya Mobile.

Why Android First?
  • Ease of distribution = fast iteration.  With android, you can do over the air (OTA) downloads.  This means you are not locked in to going through an official app store for distribution.  This may change as carriers decide to launch their own app stores in certain countries.  However, on average the bar to launching and distributing an app on Android is much lower then on iOS.   This openness helps to accelerate app development and distribution, and makes developers less beholden to Apple policies.
  • Large user base.  Android's installed base has sky rocketed in the last few quarters and it is now larger then iPhone.  While the handset numbers have accelerated, the number of apps and the categories covered are still weak relative to iOS.  This creates opportunities for developers.
  • Lack of competition.  Every time my girlfriend pulls out her Android phone, I ask her about apps I love for the iPhone and she has none of them.  Developers have been focused on iPhone, and Android has lagged for a number of categories (e.g. games). This means there is a lot of white space to build new apps for the android platform in areas that feel more crowded or saturated on iPhone.  Coupled to a large and fast growing userbase, this makes Android an attractive platform to develop for.
  • Worse Design = easier to stand out.  Android is a less mature platform than iPhone, and has looser enforcement of UI principles.  This means a well designed app stands out more on Android relative to iPhone, making differentiation on Android easier as an app developer.  Taskos is an example of an application with really nice design on Android.
  • Less enforcement.  Apple is much more aggressive about policing apps that may compete with its native applications.  On Android, given the ease of downloading any app, developers can build e.g. an iTunes competitor and still distribute it without being blocked by Google.
There are obvious downsides to developing for Android (e.g. less mature advertising ecosystem, increasing fragmentation of the OS, fewer early hipster adopters, etc.).  That said, I think there will be more and more "Android First" companies, and this is a really exciting and interesting trend in the mobile world.

What are the key differences / advantages / disadvantages of Android First development?  Let me know in the comments.

You can follow me on Twitter here.

Update:  Some other examples of Android first apps from the comments:
Kismet, Lightbox, Texty

Monday, May 2, 2011

4 Ways Startups Fail

1. Run out of money
The number one reason a company fails is it runs out of money.  Many of the "acqua-hires" by Facebook and Google are teams who ran out of cash looking for a home.  They did not sell their company as a talent buy.  They literally just get hired in with standard employment packages.  One common variant of this are the various seed companies that raise a $1 million seed round and hire up a 6-7 person team prior to getting to product market fit.  The company burns through the cash in a year, and then tries to shop itself to Google, FB, etc.  If the sale falls through, the company shuts down and the employees get hired individually by various companies.  This scenario is most common on teams with a large number of business founders - e.g. if you have 3 business founders and 3 engineers, the engineers may leave early on with trouble and the residual value of the team is low or none which means the company does not get an exit at all and the founders disperse to look for jobs.
Ways to mitigate:
  • Run lean.  Only hire up the team when you are confident you will be able to make money or raise more money.  
  • Raise more cash then you need when you can.
  • Bootstrap the company or charge for the product from day one.
  • Focus on having an engineering heavy team from day 1 to increase the odds of a talent buy if all else fails.

2. Team implosion
Lack of clear decision making?  Founders constantly fighting?  Hiring a bunch of jerks that irritate everyone?  A lot of companies end up imploding due to bad team dynamics leading to a lack of clear direction, internal infighting and backstabbing, and a terrible working environment.
Ways to mitigate:
  • Make sure you and your co-founders have clearly defined roles and there is a single person ultimately in charge who can call the shots.  
  • Make sure you and your co-founders can communicate openly, have mature and frank discussions (can you give each other constructive feedback?), and are aligned on where you want to take the company (does one person want to sell early and the other wants to build a long term global business?).  
  • Have a high bar for culture and team fit for early hiresCorrect hiring mistakes quickly.

3. Living dead company / lifestyle business.
Depending on your perspective this is either a great outcome (a small, lifestyle, tech business) or a terrible outcome ("living dead" startup with little or no equity value).  VCs and hyperambitious founders think of companies that reach a certain scale, but never become a breakout success as the worst form of failure. Rather then fail fast and be able to move on to something else, the entrepreneur is locked into a company on a slow to nonexistent trajectory.  The company spins off enough cash to stay alive and pay salaries, but not enough to grow at a meaningful rate.  Additional funding is not available as the company is viewed as a small cash business.  The entrepreneur feels like she can never leave ("I owe it to the employees and investors to stick around") and the VCs are stuck with a board seat that takes up a big chunk of their time.
Ways to mitigate:

4. Bad board / investors.
Stupid things a bad board member or investor may encourage a startup to do:
  • Raise and burn lots of unnecessary cash leading to too high a valuation to exit and too much dilution for the founders to be incentivized.
  • Fire the founders and hire a "professional CEO"who takes the product/company down the wrong path.
  • Block an exit even when it makes sense, and watch the company get crushed by the larger player who tried to buy them 6 months before.
Ways to mitigate:
  • Do due diligence on your investors.  Ask other entrepreneurs, angels what their experience with the investor or board member was like in the past.
  • Don't add people to your board until you know them well.
  • Bootstrap your company or raise angel money without giving up a board seat (harder to do with a venture round).

Let me know in the comments what other failure modes you think are common for startups.

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