An insider’s guide to tech startups by donovantatehe


									   An insider’s guide to tech
This talk is an introduction to the world of
  venture-backed tech startups -- a howto

If it motivates some students or faculty in
    the audience to seriously consider starting
    a company, I will have achieved my goal!
Structural factors limit innovation at large companies.

   Rigid organization and bureacracy -- big companies’
   strength is large scale execution, not innovation.

   Legacy commitments may prevent adoption of new
   technology or business models. e.g., VOIP and Bells.

   Incentive structures: politics and subjectivity distort
   connection between performance and reward.

“Agency problem” (not just CEOs, but rank and file)

Problem? or Opportunity?
Startups are small, have no legacy commitments and a
pure ISO* compensation structure. Agency problem
reduced considerably.

Consequently, innovation comes disproportionately
from startup sector.

*Incentive Stock Options
Currently, US VC funding is about $5 B per annum,
dominated geographically by the bay area (Silicon Valley,
but also companies like biotechs, Pixar, etc.) with S.
California and Boston a distant second and third.

What is Venture Capital (VC)? A pool of risk capital
earmarked for investment in small companies,
usually technology companies. Venture capitalist
compensation: 2/20, with many funds managing well over
$100 M per partner. (Note: most startups fail -- returns
are disproportionately from the few successes.)

Typical VC investors: wealthy individuals, university
endowments, pension funds.
 Steve’s excellent adventure: what I saw
during and after the tech bubble (2000-3)
• Day job: theoretical physicist.
• At Caltech, my engineer buddies all talked about
starting companies while I was studying general
• I was an academic migrant laborer (PhD Berkeley,
research fellow Harvard, Asst. Prof. Yale, now at U
• But something strange happened along the way -- I
started a Silicon Valley software company with some
former students.
Secure Extranet Appliance
      security made simple
             SafeWeb, Inc.
• 32 employees, 25 technical.
• 10 PhDs from physics and computer
• Graduates of Caltech, Harvard, Berkeley,
  Yale, Carnegie-Mellon, U Oregon, IIT
• Venture capital funding: $11.5 M
• Customers: Google, EMC, Schlumberger,
  WHO, U.S. Navy, CIA, NSA
              SEA Tsunami
Creates encrypted connection between remote
Web browser and intranet using SSL encryption.

SSL VPN: new product category, vs. IPSEC VPN
Cost effective: no remote client on user machine
SEA Network Diagram
                   Do it yourself!
    In today’s world, entrepreneurs drive innovation
•     Start Preparing NOW by developing critical skills (5
      minute MBA ;-)
•      Practice “Fermi problems” for business: estimate cash
      flows, margins, costs, etc. (like in management
•     Negotiation is an art. Practice.
•     Communication skills:
      •   SELLING (not just for used car salesmen)
      •   Be CLEAR and CONCISE (bandwidth is limited)
      •   How to motivate and lead others (self-discipline)
  Tech Startup = complicated machine with
                         many moving parts

Hopefully, a money making machine!
At least, should be an innovation machine…
• People
• Technology
• Capital (fuel -- burn rate, TTL)
• Information (customer feedback, market intelligence)
        Do it yourself!
Key stages in a startup

I. In the beginning
II. Raising money
III. Running the company
IV. Exit
              The kitchen table
• The team: choose people you trust and can work side
by side with through difficult times. Character is
paramount. It’s melodramatic, but imagine you are
going off to war together.
• Due diligence and sanity checks
• The idea: what is the innovation? technology or
business model?
• Business plan: the one you show to VCs, and the real
• Ready?
• VCs really are dumb about technology. (But not about
• Network! Network! Network! (bounded rationality)
• Presentation is everything. Anticipate questions.
• Anticipate Due Diligence issues: demos, references...
• Negotiate hard, but leave something on the table for
everyone. (Find counsel that has done VC deals.)
• Valuation is not the only issue: preferences,
employment contracts, vesting, etc.
             Dealing with VCs
• VCs really are dumb about technology. (But not about
• They are going to be on your board and part of your
life at every stage of the company’s development
• You must manage their expectations
• You must meet as many as you can as you are always
          Managing your equity stake
• Keep your eye on the ball – how much $$$ will you end up with?
• Every dollar raised dilutes your stake in the company.
• Preferred hurdle – unless you beat this, you will only get peanuts.
• Example:
Founding 40% (2 founders, plus 20% employee pool)
Round A 20% (VCs buy 50% stake; $3M at $3M “pre-money”)
Round B 14% (VCs buy 30% more; $6M at $14M pre)
Company acquired for $30M. Your take: about $4M (after tax:
(If sold for less than $9M, zero for you! But, maybe you’ll get a
carve-out  )
  Managing and Leading Teams
• Managing is an art. Hiring decisions are among the most
important, and firing someone is one of the most painful
experiences you will go through.
• You are going to be managing under stress. DO NOT transmit
the pressure you are under to your employees.
• Tech teams are totally different from business teams.
• The more your team understands and accepts your vision, the
less managing you will have to do. Transparency is key.
• Always take the time to build relationships with and within your
team. In war, people die for their buddies, not their country.
                  Exit Strategies
• By the time you get here, you will have forgotten everything on
this slide, so this is just for fun.
• Unfortunately, I have no personal experience with IPOs, so I
can only tell you about acquisitions.
• Everything takes longer than you think it will – building the
product, proving out the market (sales), getting a deal done, etc.
• Keep your accounting and legal records clean and organized
(including patents). Avoid litigation like the plague.
• Be very, very careful when negotiating personal employment
agreements, non-competes, etc.
Do it again! The plight of the serial entrepreneur…

Robot Genius, Inc.

1504 Franklin St.
Suite 308

Oakland, CA 94612
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Good Luck!

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