Preventing Startup Fratricide - Who to Trust

I know that this sounds paranoid – I don’t think someone is out to get me (well maybe). In business you have to watch your back and often it is hard to know the people you can trust.  There are individuals motivated by the wrong purposes. Intentions are not always clear and frequently hidden.

I found through the years that it is often hard to tell the good from the bad and the ugly if you are not careful. For this reason, you need to de-risk your venture with the best possible hires, independent board members and investors. It is often easy to settle for the money at hand or to forget the importance of a truly independent director or a first class executive. If your goal is to surround yourself with the best people for a particular type of venture, your bad hires/relationships will be mitigated. You will not be perfect, but you will have enough rational thought in your company to prevent internal destruction. At that point, only the market can defeat you or you defeat it.

Too many companies are destroyed internally before they can succeed in the market through maneuvering, politics and irrational behavior. You can see all these traits in many organizations and they are greatly magnified/ intensified in a startup. This issue is why the best investors invest in people as much as ideas. Everyone will say that they invest in people/ teams  - it is easy to say and hard to really mean.

Sometimes you have to receive a few prior scares to see things clearly. What I have said here is not new - many people in the investment community and startup world say it. However, companies still run into trouble every day because they don’t mean it.

Here are the rules:

1.     Every executive hire matters a lot – hire the best you can find and don’t settle. Speed matters, but hires matter more than speed. This is the “speed” exception for a startup because in most cases speed is of the utmost importance.

2.     Make sure your investors and directors meet the same quality as your hires. If you would not want to hire them, why take their money or put them in a position of influence? Speed once again matters less than quality.

3.     If you hire the best and work with the best, trust is not something you need to focus on as much. Rational thought will prevail and you will be free to live or die in the market without the fear of fratricide.

fratricide [ˈfrætrɪˌsaɪd ˈfreɪ-]

n

1. the act of killing one's brother

2. a person who kills his brother

3. (Military) Military the destruction of or interference with a nuclear missile before it can strike its target caused by the earlier explosion of a warhead at a nearby target

[from Latin frātricīda; see frater¹, -cide]

 Neal

Angel Versus Venture

I have met with numerous founders over the last year. The one thing I have encouraged all of them is to closely consider how to finance their companies.  The repeated question is should they angel or venture finance and who are the best investors?

I deeply believe that almost every founder should try to bootstrap his/her company until some meaningful customer traction is achieved. A couple ventures ago, I made the mistake in taking money early before a business model or product was established.  Bottom line - raising money early gives you less time, less ownership and less flexibility.

When you take money, the price and pressure changes. On the venture side, you need to build to a large meaningful exit to make the economics work for all involved and this is not a bad thing. Your personal economics can be very compelling if you can reach a large outcome in a venture company. On the other side, you can have the flexibility to sell for $15 million and have a similar economic outcome in an angel-financed company.

So how do you know what to do?

1.     I submit that for most companies in the founding stages, you don’t know. I think every company should start the same way –founder dollars and sweat equity until some pertinent traction is achieved. At this point, you are in the best position to negotiate with investors (angel or venture).

2.     After initial momentum, you have to ask yourself realistically does this company have a big enough market and the need for large capital to the point where a smaller piece of the pie will result in much better economics than going it alone? If you are raising money to meet payroll or ease your personal economic burden, you are doing it for the wrong reasons.

3.     To take on venture, you must be comfortable with not selling the company for 10-15 million and be confident enough in your decision.

4.     As you raise more money, you lose more control. This is a very uncomfortable thing for a founder. If your dream is big enough, you may have to lose control to gain critical mass. However, having a company with traction from the beginning will mitigate the dramatic loss of control. Also, don’t just take money from the venture person with the best terms. All venture people (as with angels) are not created equal. If your company is desirable, you will have a competitive situation and you should take your time to find the best fit by speaking with other successful founders. Venture firms will do due diligence on you – you must also do it on them. All money is green, but investor behavior can make or break your dream.

I could write a book on this topic, but the key ideas on when to seek venture versus angel are pretty simple:

·    Build it yourself first to prove it is real then consider all the factors above when making the decision to continue or change investment paths. Don’t forget with whom you invest often matters more than the best terms.

Neal

Giant

I have been a little busy so I have not updated my blog in a bit. I will have some good news about AffirmTrust to share at some point in the near future and will write about when to angel versus venture fund a company.

However, today I am inspired to write about something else.  I feel that the strongest attribute we have in America is the entrepreneur. We innovate more than any other nation. At our core, we are a country of risk takers and dreamers. The very spirit of being an entrepreneur is different than what most people understand.

Those who innovate, create jobs not take jobs. They see a product, a market or a vision in way everyone else misses. The ideas are bigger than the money they take on or the risk they take. Great entrepreneurship is often born out of failure and ridicule by those who take jobs. Think about the failure then success of Apple and others. Nothing comes easy for the inventor as the world is changed over time by their ideas and often it is not an easy journey.

I believe that those who take risks, see things differently and innovate through cycles of failure and success are giants because they cause meaningful change. By its nature innovation is not always received well at first - it is different and the people who innovate are different.

I have run into all sorts of people, but I can see a true difference in the entrepreneur – often misunderstood but frequently redeemed. There is a cycle I call Icarus Phoenix where the inventor idealistically flies too close to the sun on wings of wax betting on the wrong things or wrong people. He/ She falls to earth only to rise again for another try to soar on solid wings.

The bonus in all of this hard work is that it is fun for the entrepreneur to strive to become a giant.  I don’t mean you have to impact the world like Bill Gates or Steve Jobs to be a giant; you just need to impact it.

In our country and especially New England and California, we have an abundance of Giants.

To create a successful company = Courage

I have been reminded recently about how great it is to make a company. There are so many people who dream of doing their own thing or creating technology, but just don’t know where to start. Honestly, it is not that complicated, but it takes courage. Most of the courage is financial and the other is just faith in yourself. Many will never take the leap.

The one thing I wish to impart to my children is that you can do anything. It is a struggle and people and circumstances will let you down. However, for those who get back up and brush themselves off, you can achieve and create meaningful things at a young age  - or any age.

I was fortunate enough to go through US Army Ranger school as a young man. I learned that the mind often fails before the body. If you can strengthen your mind, you can accomplish a lot more than you thought possible.

This is short blog post, but one that has been reaffirmed for me this year.

Neal

Betting the farm – the classic startup mistake (among others)

Please forgive any typos – I decided that if I am going to blog, I am going to make mistakes.

Many people think startups are all about risk. On the contrary, they are mostly about risk mitigation. The overall idea may be risky; however, the execution needs to mitigate risk. Some ways to mitigate risk are:

•    Hire/ work with an experienced team of founders who have made successful startups.

•   Go after an existing market with a new idea or tie the foundation of the company to a product people are buying today.

• In a cloud or Saas model, iterate in production and don’t spend time doing six month releases like an old software company. You don’t want to find out six months later that you were wrong – better to find out in a few weeks and change course.

• Make sure your investors (whether angel or venture) know the market, use the product and are connected in the ecosystems that service your industry.

Hire the right people

Early startups are an art and not a science. You can use science to measure and be helpful. However, the benchmark metrics you are using at first are likely the wrong ones and will dramatically change as you discover your correct way to market. You should hire people who can deal with uncertainty and who do not get lost (freak out) under the pressure of constant iteration/change. The best solution is to find people who have successfully maneuvered a real startup before (not a $15M or $20M, but a $0M).

These tenets hold true for investors as well. I have found that the best investors will roll up their sleeves with you, use the product and give you room to maneuver. If an investor starts pushing 50 metrics on your brand new venture – get out now or find a new investor.  The best investors know it is more an art at early stage. Zenas Hutcheson (Managing Partner at Vesbridge Venture Capital) has referred to a successful startup CEO as an artist – to this I can’t agree more.

Go after an existing market

If you can tie your service/ product to existing market where people are buying similar services, you will mitigate risk. At GeoTrust, we attacked the existing ecommerce security market that was dominated by VeriSign. We innovated around the distribution model and took it from days to minutes.

At another company, I tried to tie a new innovative service into a platform that sold services that people were buying today. I was not willing to bet the farm on the new innovative service until I had the evidence it would work through customer traction and solid technology partnerships. I had seen early in my career (at a company where I was a product manager) where we had spent six months on a release of a service in a new innovative market to launch and find the volume was not there. The result was the company could not recover the loss of money, time and confidence.  We had great excitement around the release, but reality set in after three months that we had made a terminal error. This is the classic bet the farm maneuver. Today, I know that betting the farm is not an experienced startup move – you might as well buy a lottery ticket.

Iterate in Production

This is counter-intuitive to old school development. In a startup time is your enemy. From the moment you start, it is only a matter of time until bankruptcy unless you figure things out. If you are running a cloud service or saas model, you are putting out frequent releases and receiving frequent customer feedback. You cannot do major scientific surveys and six month release cycles. Your best feedback is real time in production from paying customers. As quickly as you make errors, you can generally correct them. I am not saying don’t QA. However, I am saying that a 70% solution delivered today is way better than a 100% solution delivered a year from now in startup life.

Get the right investors

This is a hard one for a cash strapped startup. This becomes especially hard when picking venture investors. I firmly believe that spending time to get the right investor syndicate will let you create art.  When you give up control of your company, you should know whom you are dealing with on the other side. Would you ever knowingly hand over your future to someone who would mess it all up? I think for most of us the answer is no – so how can you mitigate risk here. I would try these steps.

• Does the investor understand that early stage is more art than science?
• Is the investor willing to work late nights with you on your art?
• Is the investor highly recommended from “real”, successful early stage CEO’s/ founders?
• Has the investor ever tried your product/ signed up and used it himself/herself during due diligence. I am not talking about someone else in the firm – I mean the partner sitting at the table?
• Are the investors truly connected or are they 5 levels down like inception?
• Would the investor bet the farm or even know what that means?

I hope these tips are found useful. I am going to write next time about when to angel finance versus venture finance.