Insiders Guide to Startups

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Insiders Guide to Startups

• My background
• 2) Do it yourself! (prepare now)
• 3) Key stages in a startup
• a) in the beginning
• b) raising money
• c) running the company
• d) exit

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Stephen Hsu, PhD 1991

• Geek background Physics major, arrived here
  for graduate school at 19.
• Day job theoretical physicist.
• 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
  tenured at U Oregon). Quantum field theory,
  anyone?
• But something strange happened along the way

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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, 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!
(Berkeley needs to produce more entrepreneurs)

• Start Preparing NOW by developing critical
  skills
• 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! But, at least
should be an innovation machine

• People
• Technology
• Capital (fuel)
• Information (customer feedback, market
  intelligence)

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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. To be melodramatic, you
  are going 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 of money 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.
• Donate some of your money to Berkeley!

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Good Luck!