Startup Advice

Do you have a right to work for free?

downloadOver my career I’ve worked for several employers and in each case local, state and federal governments had a say in my wages and my benefits. Eventually most of my employers came to the conclusion I’d be happier working for myself or as Donald Trump would say, “You’re fired!” Since then I’ve started several companies and in each case I was fortunate because the government had no problem with me not getting paid. In fact, in EVERY case I worked for free to get my company started – sometimes for two years. More recently I’ve been hearing more and more rhetoric about how we need to protect ‘workers’ from themselves and that’s got me really concerned for entrepreneurs and small business owners. We need to allow them the chance to fail – just as we need to allow them the chance to succeed.

CJ0M4amUYAA2xR-This week Hillary Clinton railed against the sharing economy and the entrepreneurs and business owners who are taking advantage of the opportunity it provides. Uber has given millions of people across the globe the ability to start their own businesses. They can work when and where they want. They have total freedom. In fact 60% of them work for Uber’s competitors as well. This ‘ride-sharing’ economy that Uber pioneered is become more and more perfect in matching consumers and small business owners, but the biggest concern for politicians like Mrs. Clinton is the fact that these ‘workers’ fall outside of their control. Entrepreneurs and business owners can decide how much to charge and how many hours per day to work. Progressives fought for decades to have the ability to dictate the number of hours a worker could work and how much they could be paid. They will fight hard to preserve this power.

It makes me sick to hear venture capitalists like Fred Wilson (whom I have always had great respect for) take Mrs. Clinton’s side in this debate. What the New York Business Journal failed to mention was that Fred is an investor in two of Uber’s primary competitors. He’s been a longtime critic of Uber suggesting they demonstrated, “ruthless execution combined with total arrogance“. If politicians had their way the only car you could order would be Yellow®. If Uber’s success is any measure both consumers and drivers prefer their cars to be black.

I’m of the view that every American citizen should have the ability to free themselves from the bonds of their employers and their government. If my 13 year old can start his own business, everyone should have that right. I truly believe that. Allowing entrepreneurs the freedom to fail is a TOTAL requirement of entrepreneurship. Mr. Wilson and Mrs. Clinton have forgotten this important concept. If our safety nets are fool proof; if we prevent people from taking the sort of risks that result in failure will anyone have a chance of real success: we’re ALL doomed to fail. Imagine having to pitch your startup idea to your local city counsel for approval. Uber, Lyft, Postmates, TaskRabbit and Instacart are amazing experiments. Some of them will succeed and some will fail, but we should let entrepreneurs and small business owners do business with these companies as they choose. We shouldn’t let the government intervene. We shouldn’t let the Democrats reclassify entrepreneurs, small business owners and contractors as ‘workers’. We ALL work, but the ‘worker’ is a term better associated with Marx and not Reagan.

Ten Startup Tips for First Time Entrepreneurs

10 startup tips

Here, in no particular order, are my ten tips for first-time entrepreneurs.

  1. Recruit a co-founder. You don’t want to go through the startup process alone. Your first job as a founder/co-founder is to find someone who shares your vision and is willing to take the same risks you’re taking. If you can’t convince anyone to join you, you should seriously reconsider starting a company. 
  2. Be frugal. Don’t rent an office, buy furniture, a phone system or office supplies. Conserve your cash for as long as possible. Leverage co-working spaces.
  3. Go through a startup accelerator. Apply to ALL of them. Being accepted by an accelerator is great social proof that you might be onto something. It is a great signal for investors. 
  4. Don’t worry about dilution or percentage of ownership. Raise as much money as fast as possible. Never worry about valuation or dilution. Startups are basically zero sum, you’re either going to hit a homerun or fail. Negotiating the downside is just a waste of time. Get a reasonable deal and move on. Time is far more valuable than money in the startup world. Get the money in the bank and start building your company.
  5. Don’t be creative when it comes to raising money or organizing your company. You want your company to look like every other company startup investors have seen. Incorporate in Delaware as C-corp. Raise money in the form of a convertible note or a preferred equity offering. Do a seed round, an angel round and a Series A – don’t skip a step even if you don’t need the money. You need the social proof when you’re hiring employees, getting press and raising money from investors. Trust me, don’t get fancy here.
  6. Hire employees slowly and fire them fast. Take your time. Find the best people you can. Never make a rash decision. On the other hand, fire fast. The moment you’re convinced someone isn’t right for the team, terminate them. Don’t feel bad. This is a startup and everyone knows that startups aren’t about safety, they’re all about risk.
  7. Build relationships with investors BEFORE you ask them to invest. Get to know them. Ask them for advice. Tell them what your plan is and what steps you’re going to take. Follow up with them letting them know each time you achieve one of the goals you set for yourself. Build credibility with the investor and when it is time to raise that Series A you’re much more likely to get an investment from an investor who knows you than one you just met.
  8. Communicate with your board and your investors regularly. You should be emailing your board members individually each week. Giving them updates, but more importantly tell them how they can help you. Reach out to your investors in the same way each month. Stay on top of your board and investors or they’ll stay on top of you.
  9. Know your numbers. So many entrepreneurs don’t know how many months of cash they have left in the bank. You should know how much money is in your bank account down to the penny. You should sign every check, every time. Understand your burn rate and keep your board and investors in the loop so they aren’t surprised one day that you’ve only got three months of cash left. 
  10. Celebrate the little wins. Startups are hard. They are a rollercoaster of emotions. When you get a win like a new hire or a new customer, take a step back and celebrate with the team. Celebrate when you have a great meeting with an investor. Celebrate when he gives you a term sheet. Celebrate when he funds. Your team is going to need the encouragement to be able to deal with all the negative stuff that is bombarding them constantly. 

Sand Hill Road: The VC Address of Choice

 

My first visit to Sand Hill Road was in the late 90s when I was raising money for my first startup, LayerOne. Sand Hill Road, located in Menlo Park, is the address of choice for venture capital firms. The price per square foot of space is the highest in an area known for sky-high rents – hovering between $110 and $150 per foot. The first venture capital firm to move to Sand Hill Road was Kleiner Perkins Caufield & Byers in 1972, since then companies such as Microsoft, Amazon.com, Facebook, Twitter, Instagram and Skype have raised money from Sand Hill Road investors. In fact, almost every major silicon valley startup has raised money from one or more Sand Hill Road venture capital firms as seen below (from Bloomberg).

SandHillRoadInvestments

 

My father raised capital from Sand Hill road in the late 90s and early 00s for his companies as did I. Many are predicting the demise of Sand Hill Road as more and more venture capital firms move to downtown Palo Alto and South Park. They suggest that Sand Hill Road is where your ‘father’ raised venture capital. Which in my case is true. The truth is that for a VC the “economies of agglomeration” rule – you want, no, need to be near your peers in the venture capital game.

When I’m in fund raising mode I book a room at the Rosewood Sand Hill (directly across the street from most of the VCs). They have a car service that will drop you off and pick you up from each of your meetings. No where else in the world can you schedule 6 meetings in one day with 6 different venture capital firms. If you head south from the Camino Real on Sand Hill Road the first venture firm you’ll run into is Kholsa Ventures and then Lightspeed Venture Partners, GGV Capital, Shasta Ventures, Accel-KKR, August Capital Management, Mayfield Fund, Greylock Partners, Interwest Partners, Kleiner Perkins, KKR, Sequoia Capital, Makena Capital, Silver Lake, NEA, DFJ, Andreessen Horowitz and Menlo Ventures to name a few.

More and more firms are moving to San Francisco to be closer to the ‘cool kids’, but there is no denying that a visit to Sand Hill Road is a requirement for any startup serious about raising venture capital.

To Taylor, Love Alexander (UPDATED)

This not about me, but

UPDATE: Since writing this post Apple’s Eddie Cue announced that the company would not require artists to forgo their cut of subscription revenue during customer’s free 90 day trial. Did Apple just cave or did they call Taylor’s bluff? I tend to think the latter. Apple’s number crunchers must have calculated how much the various anti-trust lawsuits will cost the company and figured that having Taylor Swift on board was worth the cost. Taylor Swift is VERY popular. Now the only question, will Taylor let Apple stream her latest album – she’s going to lose millions, but with Apple ‘caving’ to her demands I can’t see how she can’t. 

Taylor Swift wrote a love letter to Apple suggesting their decision to give consumers a free 90 trial of their stream service was “shocking and disappointing.” Artists who choose to participate in Apple’s launch must similarly agree to let consumers listen to their music for free during the 90 day free trial. She readily admits that she’s got plenty of money and could afford to forgo her cut of the streaming fees for 90 days, but she is looking out for the ‘little guys’ – the musicians who are just getting started. Of course she knows this argument is total B.S. as most artists, especially new artists or bands get paid next to nothing for their recordings.

The proliferation of ‘360 deals’ are prima facia evidence that most musicians make almost nothing from their recordings anymore. Musicians make their money almost exclusively from live performance and merchandise. Like many technology startups who leverage the ‘freemium model’ musicians basically give their recordings away (the cost to do so is almost nothing with digital distribution) to sell more tickets and merch. Of course some artists, like Taylor, have much better deals that a new band just starting out could get.

Given Taylor’s very favorable recording contract, she stands to lose millions if her latest album were to be available on Apple’s new streaming service even for 90 days. Taylor is grandstanding for the ‘little guy’ so that she won’t lose out on her unique market advantage. I respect her decision, but am bothered by her willingness to create a red herring. The truth is that Apple was precluded by the Justice Department from giving consumers a free 90 day trial while paying the artists as explained by Apple Insider, “Apple has billions of dollars available to pay artists substitute royalties during users’ free streaming trail, but were it to do so, the company would quickly find itself at the wrong end of global antitrust complaints. In many markets, “dumping” free or loss leader products would be considered anti-competitive.”

To make up for the 90 day free trial Apple has offered artists a MUCH bigger payout than their competitors like Spotify, Rdio and Pandora, while charging a similar monthly rate to consumers. By giving consumers a free 90 day trial Apple and the artists are giving the service a fighting chance. If successful Apple streaming service might create a lucrative marketplace for the little guy. Ironically, if Taylor were to just cave in and let her music stand next to other artists during the free trial period she would help create the very marketplace that could REALLY make a difference – allow smaller artists to make living on their music.

You can decide to live in a scarce or abundant world.

the-power-of-intentionThe other day a friend was telling me about a book she is reading called “The Power of Intention.” She was explaining how the book described that many people have a scarcity-driven world view. The idea that there just isn’t enough to go around, i.e. the world is zero sum.

Many of our ancestors here in the U.S. just didn’t accept the idea that scarcity had to rule their lives, instead they decided that they could live lives of abundance. The old world view was that the pie was finite, the new world view was that the pie could get bigger or was infinite (and I am not talking about zero-point energy).
For me this has been proven through our experience with open source software. Architel needed a trouble ticket system to run it’s business. We didn’t want to spend $50,000 to $100,000 on a boxed solution that would require a yearly investment of $10,000 to $30,000 per year for software licensing and support. Instead we decided to build a software program specifically tailored to meet Architel’s needs. If we had a scarcity-driven view of the world we would have locked the software up on our servers and used it to competitive advantage. Instead, viewing the world from abundance, we released the software to anyone interested enough to download it. Over 100 people/companies per day downloaded the software over the course of six months. Since then hundreds of companies have requested that we customize it, host it or manage it for them resulting in a completely new line of business we call SimpleTicket.

Since many people and much of the world lives in a zero sum world of scarcity it is important to realize how they play. The most popular method of play is called minimax, i.e. the idea that one should minimize the maximum possible loss. (remember War Games?) Wikipedia explains better than I can:

\sup_\theta R(\theta,\tilde{\delta}) = \inf_\delta \sup_\theta R(\theta,\delta)A simple version of the algorithm deals with games such as tic-tac-toe, where each player can win, lose, or draw. If player A can win in one move, his best move is that winning move. If player B knows that one move will lead to the situation where player A canwin in one move, while another move will lead to the situation where player A can, at best, draw, then player B’s best move is the one leading to a draw. Late in the game, it’s easy to see what the “best” move is. The Minimax algorithm helps find the best move, by working backwards from the end of the game. At each step it assumes that player A is trying to maximize the chances of A winning when he plays, while on the next turn player B is trying to minimize the chances of A winning (i.e., to maximize B’s own chances of winning).

Minimax doesn’t even allow for the concept that two people could win.  If you don’t have a framework to allow for abundance you will continue to “work backward” from the result you assume most likely.  Isn’t this crazy?  Win, lose or draw?  Thats it? I don’t think so.  If you were to take a look at my office library you would find more than 20 titles on game theory. Only one of them even comes close to explaining why abundance works – it is called the Bible (John 6:5-15)…

Startup Founders, You’re Going to Get Fired

firing-startup-foundersThere is a dirty little secret in the startup world and if you promise not to tell anyone I’m going to share it with you this afternoon. Deal? Startup founders are completely insane. Seriously, they are total nut jobs. Anyone who thinks they can take an idea born from their head, hire a team, build a product and raise millions of dollars is crazy. The second dirty little secret is that these lunatics are the ONLY people willing to take the risks necessary to change the world. VCs know both of these secrets.

Time and time again I watch VCs fire founders who are obviously insane for being insane. Of course these same VCs funded these lunatics in the first place. The very same traits that helped the entrepreneur come up with the original idea, attract the right team and investor are the very same reasons an investor will use to oust that same entrepreneur after the first year. Sadly the Americans with Disabilities Act doesn’t offer startup founders any sort of protection.

The irony is that in corporate America, CEOs who do well keep their jobs, but the in the startup world when founders do REALLY well they almost always get replaced. Investors want to find someone who can effectively manage the opportunity for growth the founder and their investment created.

So how do you fire a startup founder? Fund him and then wait. You’ll be able to find a great reason to fire him soon enough. Steve Jobs, crazy in his own right, said it best,

“Here’s to the crazy ones, the misfits, the rebels, the troublemakers, the round pegs in the square holes… the ones who see things differently — they’re not fond of rules… You can quote them, disagree with them, glorify or vilify them, but the only thing you can’t do is ignore them because they change things… they push the human race forward, and while some may see them as the crazy ones, we see genius, because the ones who are crazy enough to think that they can change the world, are the ones who do.”

There are countless examples of investors easing or pushing out founders out of the companies they founded. You might have heard about Tinder the UBER popular mobile dating application. From the start, this little company was run by crazy 20-somethings Sean Rad, Justin Mateen and Whitney Wolfe. Their emails and texts to one another posted all over the internet give you a glimpse into the craziness of these three founders. Today IAC, the investor in Tinder, is slowly easing them out of the company for being crazy, BUT the folks at IAC who funded these kids always knew these people were lunatics. They chose to ignore the craziness in the hope they’d build something fantastic – and Sean, Justin and Whitney did just that.

So how can startup founders become the exception (think Gates and Ellison) and not the rule (guys like me)? The easiest option is to talk to a healthcare professional and get a prescription for Prozac. This will likely help a great deal. If you’re not into mind altering drugs you could use Chris Yeh‘s eight step plan to keep your job:

  1. Don’t get caught by surprise.
  2. Start planning your defenses early.
  3. Get everything in writing.
  4. Constantly work the key players.
  5. Realize that you are dispensable.
  6. The best defense is a good offense.
  7. Don’t sign anything during the coup attempt.
  8. Counterattack.

Startup Founders: Leverage Your Board of Directors

Once a startup founder has raised outside capital, regardless of stage or amount, it is time to think about building a lasting relationship with his investors. Here are my top four tips:

  1. COMMUNICATE regularly with each investor/director by sending a monthly progress/update email. Spend 30 minutes detailing all your accomplishments, challenges and go-forward plans. You don’t want to wait until your next board meeting or until they email you asking what the hell is going on.
  2. ASK each investor/director for help each month. Think about how each investor/director can help you – perhaps with a product launch, a candidate for employment or a business development deal. If you keep them busy they will be a LOT less likely to get in your ‘business’. One of two things will happen – you will get much needed help or he will hide from you.
  3. MEET (in person or via phone) with each director PRIOR to each board meeting. Show him your agenda and ask him if there is anything he’d like discussed at the meeting. If there are controversial issues to be discussed determine where he stands. If he’s on your side enlist him to meet one-on-one with directors who might not be on board yet PRIOR to the board meeting.
  4. DOCUMENT each interaction with your investor/director. The day after your board meetings email an overview of what happened and what decisions were made to each director. You will approve the minutes at the next board meeting, but you’d be surprised how time can change your perception of history. Do the same thing EVERYTIME you engage with your investor/director – a quick followup email detailing what was accomplished and what everyone has committed to do is VERY important.

Let me know if you have any ideas to improve your investor/director relationships.

My thoughts on flip-flops

Untitled design(2)This morning I was sitting in Cafe Express with my son wearing my navy blue Adidas flip-flops when I came across an article titled, “Why Men Should Never Wear Flip-Flops.” Normally I am a fan of D Magazine’s Zac Crain, but I felt compelled to take issue with his latest article.

Flip flops don't make the man...In the article Zac suggests that a man who wears flip-flops is saying, “I have completely given up on being a productive member of society.” As a card carrying member of ‘men who wear flip-flops with jeans’ club I must strongly disagree. Frankly, the men I know that are comfortable wearing flip-flops with jeans are some of the most productive people in society. They’re comfortable in their own skin and not terribly concerned about what anyone else thinks about their wardrobe. Instead, these highly intelligent men, are most concerned about comfort and convenience.

Zac seems to be a little behind the times with regard to how well most men take care of their feet. In the article he argues that one of the main reasons men (as opposed to women) shouldn’t wear flip-flops is because they don’t take care of their feet. Again, the men I know who wear flip-flops are frequent customers of retailers like Onyx. Taking care of your feet is important for a man’s overall health. Far from being the “most horrifying thing a man could wear outside of the comfort of his own home” flip-flops are a celebration of health and comfort.

My suggestion? Judge a man by the quality of his pedicure and not the nature of his footwear. The esteem one holds another human being in should not be a function of his choice of shoes. Of course, I respect anyone’s decision NOT to wear flip-flops. Live and let live…

 

Quora Answer of the Day: Private Equity vs Venture

Venture firms fund the future.Private

If you’re not familiar with Quora you should check it out – I simply love the service. Whenever I want to know something I’m unable to find on Google I turn to Quora and ask a few experts for help. In return I answer questions that others pose to me. For example, today someone asked me to answer the following question: “what’s the practical difference between getting funding from a venture capital firm or a private equity firm?” In some cases I’ll be the only person answering the question and in others hundreds of people answer the question. Check it out…

Please don’t ask me to sign your NDA!

Yea, no. I'm not going to sign your
Everyone in Dallas seems to be doing a startup and lots of these people call or email me to share their ideas with me. More than a few of these entrepreneurs ask me to sign an NDA before they are willing to ask for my feedback and/or advice. The quick answer is that I don’t want to sign your NDA. Feel free to solicit free advice from me, but please quit asking me to sign a contract.

Anil Dash wrote a pretty good post titled, “One more time: No NDAs“. Anil points out that a lot of people feel the same way. His reasons were pretty good and worth repeating:

  • When you ask me to sign your NDA, you’re basically saying, in writing, that you don’t trust me. It’s your prerogative to say that, but it’s a pretty lousy context in which to ask for a favor.

  • I have to pay a lawyer to review a document without having any idea why I’m making that investment. No, I won’t “just sign it” without having a lawyer look it over, because it’s a legally binding document whether a lawyer reads it or not.

  • If your idea’s that good, it’s probably not that rare. I hate to be the one to point it out, but protecting your idea in general is a fool’s errand — good execution is hard to find, but good ideas are cheap.

  • I could get screwed through no fault of my own if some other random person walks up to me and blurts out the same idea that you’ve had. Being exposed to the risk of a lawsuit even if I haven’t done anything wrong sucks.

  • If I couldn’t be trusted with your idea, you’d already know about it. There are folks who don’t like me, or who are annoyed by me, but if I’d broken somebody’s trust in regard to their work, I guarantee it’d be just about the first thing you’d find when you Google my name.

  • The biggest value I can probably offer you is that I would talk about what you’re working on. If I honor your NDA, and I meet a great investor or potential employee or valuable partner for your new venture, I wouldn’t be able to tell them about it.

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