An insiders guide to tech startups

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An insiders 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!
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• 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?

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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
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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.
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Steves 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.

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Secure Extranet Appliancesecurity made simple
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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

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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
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SEA Network Diagram
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Do it yourself!
In todays 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)

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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)

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Do it yourself!

• Key stages in a startup
• In the beginning
• Raising money
• Running the company
• Exit

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The kitchen table

• The team choose people you trust and can work
  side by side with through difficult times.
  Character is paramount. Its 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?

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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.

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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 companys
  development
• You must manage their expectations
• You must meet as many as you can as you are
  always fundraising.

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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 youll get a carve-out ? )

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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.

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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.

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Do it again! The plight of the serial
entrepreneur
www.robotgenius.net

• Robot Genius, Inc.?
• 1504 Franklin St.?Suite 308?
• Oakland, CA 94612

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Good Luck!