An insider’s guide to tech startups This talk is an introduction to the world of venture-backed tech startups -- a howto guide. 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 relativity… • I was an academic migrant laborer (PhD Berkeley, research fellow Harvard, Asst. Prof. Yale, now at U Oregon). • 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 science. • Graduates of Caltech, Harvard, Berkeley, Yale, Carnegie-Mellon, U Oregon, IIT (India) • 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 consulting) • 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 one. • Ready? Fundraising • VCs really are dumb about technology. (But not about everything.) • 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 everything.) • 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 fundraising. 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: $3M). (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… www.robotgenius.net Robot Genius, Inc. 1504 Franklin St. Suite 308 Oakland, CA 94612 QuickTime™ and a TI FF (Uncompressed) decompressor are needed to see this picture. Good Luck!