Archive for February 10th, 2008|Daily archive page

The Pmarca Comprehensive guide to Startups, part 1,2,3,4,5,6,7,8, and 9


The Pmarca Guide to Startups, part 1: Why not to do a startup

  • Jun 18, 2007

In this series of posts I will walk through some of my accumulated knowledge and experience in building high-tech startups.

My specific experience is from three companies I have co-founded: Netscape, sold to America Online in 1998 for $4.2 billion; Opsware (formerly Loudcloud), a public software company with an approximately $1 billion market cap; and now Ning, a new, private consumer Internet company.

But more generally, I’ve been fortunate enough to be involved in and exposed to a broad range of other startups — maybe 40 or 50 in enough detail to know what I’m talking about — since arriving in Silicon Valley in 1994: as a board member, as an angel investor, as an advisor, as a friend of various founders, and as a participant in various venture capital funds.

This series will focus on lessons learned from this entire cross-section of Silicon Valley startups — so don’t think that anything I am talking about is referring to one of my own companies: most likely when I talk about a scenario I have seen or something I have experienced, it is from some other startup that I am not naming but was involved with some other way than as a founder.

Finally, much of my perspective is based on Silicon Valley and the environment that we have here — the culture, the people, the venture capital base, and so on. Some of it will travel well to other regions and countries, some probably will not. Caveat emptor.

With all that out of the way, let’s start at the beginning: why not to do a startup.

Startups, even in the wake of the crash of 2000, have become imbued with a real mystique — you read a lot about how great it is to do a startup, how much fun it is, what with the getting to invent the future, all the free meals, foosball tables, and all the rest.

Now, it is true that there are a lot of great things about doing a startup. They include, in my experience:

Most fundamentally, the opportunity to be in control of your own destiny — you get to succeed or fail on your own, and you don’t have some bozo telling you what to do. For a certain kind of personality, this alone is reason enough to do a startup.

The opportunity to create something new — the proverbial blank sheet of paper. You have the ability — actually, the obligation — to imagine a product that does not yet exist and bring it into existence, without any of the constraints normally faced by larger companies.

The opportunity to have an impact on the world — to give people a new way to communicate, a new way to share information, a new way to work together, or anything else you can think of that would make the world a better place. Think it should be easier for low-income people to borrow money? Start Prosper. Think television should be opened up to an infinite number of channels? Start Joost. Think that computers should be based on Unix and open standards and not proprietary technology? Start Sun.

The ability to create your ideal culture and work with a dream team of people you get to assemble yourself. Want your culture to be based on people who have fun every day and enjoy working together? Or, are hyper-competitive both in work and play? Or, are super-focused on creating innovative new rocket science technologies? Or, are global in perspective from day one? You get to choose, and to build your culture and team to suit.

And finally, money — startups done right can of course be highly lucrative. This is not just an issue of personal greed — when things go right, your team and employees will themselves do very well and will be able to support their families, send their kids to college, and realize their dreams, and that’s really cool. And if you’re really lucky, you as the entrepreneur can ultimately make profound philanthropic gifts that change society for the better.

However, there are many more reasons to not do a startup.

First, and most importantly, realize that a startup puts you on an emotional rollercoaster unlike anything you have ever experienced.

You will flip rapidly from a day in which you are euphorically convinced you are going to own the world, to a day in which doom seems only weeks away and you feel completely ruined, and back again.

Over and over and over.

And I’m talking about what happens to stable entrepreneurs.

There is so much uncertainty and so much risk around practically everything you are doing. Will the product ship on time? Will it be fast enough? Will it have too many bugs? Will it be easy to use? Will anyone use it? Will your competitor beat you to market? Will you get any press coverage? Will anyone invest in the company? Will that key new engineer join? Will your key user interface designer quit and go to Google? And on and on and on…

Some days things will go really well and some things will go really poorly. And the level of stress that you’re under generally will magnify those transient data points into incredible highs and unbelievable lows at whiplash speed and huge magnitude.

Sound like fun?

Second, in a startup, absolutely nothing happens unless you make it happen.

This one throws both founders and employees new to startups.

In an established company — no matter how poorly run or demoralized — things happen. They just happen. People come in to work. Code gets written. User interfaces get designed. Servers get provisioned. Markets get analyzed. Pricing gets studied and determined. Sales calls get made. The wastebaskets get emptied. And so on.

A startup has none of the established systems, rhythms, infrastructure that any established company has.

In a startup it is very easy for the code to not get written, for the user interfaces to not get designed… for people to not come into work… and for the wastebaskets to not get emptied.

You as the founder have to put all of these systems and routines and habits in place and get everyone actually rowing — forget even about rowing in the right direction: just rowing at all is hard enough at the start.

And until you do, absolutely nothing happens.

Unless, of course, you do it yourself.

Have fun emptying those wastebaskets.

Third, you get told no — a lot.

Unless you’ve spent time in sales, you are probably not familiar with being told no a lot.

It’s not so much fun.

Go watch Death of a Salesman and then Glengarry Glen Ross.

That’s roughly what it’s like.

You’re going to get told no by potential employees, potential investors, potential customers, potential partners, reporters, analysts…

Over and over and over.

And when you do get a “yes”, half the time you’ll get a call two days later and it’ll turn out the answer has morphed into “no”.

Better start working on your fake smile.

Fourth, hiring is a huge pain in the ass.

You will be amazed how many windowshoppers you’ll deal with.

A lot of people think they want to be part of a startup, but when the time comes to leave their cushy job at HP or Apple, they flinch — and stay.

Going through the recruiting process and being seduced by a startup is heady stuff for your typical engineer or midlevel manager at a big company — you get to participate vicariously in the thrill of a startup without actually having to join or do any of the hard work.

As a founder of a startup trying to hire your team, you’ll run into this again and again.

When Jim Clark decided to start a new company in 1994, I was one of about a dozen people at various Silicon Valley companies he was talking to about joining him in what became Netscape.

I was the only one who went all the way to saying “yes” (largely because I was 22 and had no reason not to do it).

The rest flinched and didn’t do it.

And this was Jim Clark, a legend in the industry who was coming off of the most successful company in Silicon Valley in 1994 — Silicon Graphics Inc.

How easy do you think it’s going to be for you?

Then, once you do get through the windowshoppers and actually hire some people, your success rate on hiring is probably not going to be higher than 50%, and that’s if you’re good at it.

By that I mean that half or more of the people you hire aren’t going to work out. They’re going to be too lazy, too slow, easily rattled, political, bipolar, or psychotic.

And then you have to either live with them, or fire them.

Which ones of those sounds like fun?

Fifth, God help you, at some point you’re going to have to hire executives.

You think hiring employees is hard and risky — wait until you start hiring for VP Engineering, VP Marketing, VP Sales, VP HR, General Counsel, and CFO.

Sixth, the hours.

There’s been a lot of talk in Silicon Valley lately about work/life balance — about how you should be able to do a startup and simultaneously live a full and fulfilling outside life.

Now, personally, I have a lot of sympathy for that point of view.

And I try hard in my companies (well, at least my last two companies) to do whatever I can to help make sure that people aren’t ground down to little tiny spots on the floor by the workload and the hours.

But, it’s really difficult.

The fact is that startups are incredibly intense experiences and take a lot out of people in the best of circumstances.

And just because you want people to have work/life balance, it’s not so easy when you’re close to running out of cash, your product hasn’t shipped yet, your VC is mad at you, and your Kleiner Perkins-backed competitor in Menlo Park — you know, the one whose employees’ average age seems to be about 19 — is kicking your butt.

Which is what it’s going to be like most of the time.

And even if you can help your employees have proper work/life balance, as a founder you certainly won’t.

(In case you were wondering, by the way, the hours do compound the stress.)

Seventh, it’s really easy for the culture of a startup to go sideways.

This combines the first and second items above.

This is the emotional rollercoaster wreaking havoc on not just you but your whole company.

It takes time for the culture of any company to become “set” — for the team of people who have come together for the first time to decide collectively what they’re all about, what they value — and how they look at challenge and adversity.

In the best case, you get an amazing dynamic of people really pulling together, supporting one another, and working their collective tails off in pursuit of a dream.

In the worst case, you end up with widespread, self-reinforcing bitterness, disillusionment, cynicism, bad morale, contempt for management, and depression.

And you as the founder have much less influence over this than you’ll think you do.

Guess which way it usually goes.

Eighth, there are lots of X factors that can come along and whup you right upside the head, and there’s absolutely nothing you can do about them.

Stock market crashes.

Terrorist attacks.

Natural disasters.

A better funded startup with a more experienced team that’s been hard at work longer than you have, in stealth mode, that unexpectedly releases a product that swiftly comes to dominate your market, completely closing off your opportunity, and you had no idea they were even working on it.

At best, any given X factor might slam shut the fundraising window, cause customers to delay or cancel purchases — or, at worst, shut down your whole company.

Russian mobsters laundering millions of dollars of dirty money through your service, resulting in the credit card companies closing you down.

You think I’m joking about that one?

OK, now here’s the best part:

I haven’t even talked about figuring out what product to build, building it, taking it to market, and standing out from the crowd.

All the risks in the core activities of what your company actually does are yet to come, and to be discussed in future posts in this series.

The Pmarca Guide to Startups, part 2: When the VCs say “no”

  • Jun 20, 2007

This post is about what to do between when the VCs say “no” to funding your startup, and when you either change their minds or find some other path.

I’m going to assume that you’ve done all the basics: developed a plan and a pitch, decided that venture financing is right for you and you are right for venture financing, lined up meetings with properly qualified VCs, and made your pitch.

And the answer has come back and it’s “no”.

One “no” doesn’t mean anything — the VC could just be having a bad day, or she had a bad experience with another company in your category, or she had a bad experience with another company with a similar name, or she had a bad experience with another founder who kind of looks like you, or her Mercedes SLR McLaren’s engine could have blown up on the freeway that morning — it could be anything. Go meet with more VCs.

If you meet with three VCs and they all say “no”, it could just be a big coincidence. Go meet with more VCs.

If you meet with five, or six, or eight VCs and they all say no, it’s not a coincidence.

There is something wrong with your plan.

Or, even if there isn’t, there might as well be, because you’re still not getting funded.

Meeting with more VCs after a bunch have said no is probably a waste of time. Instead, retool your plan — which is what this post is about.

But first, lay the groundwork to go back in later.

It’s an old — and true — cliche that VCs rarely actually say “no” — more often they say “maybe”, or “not right now”, or “my partners aren’t sure”, or “that’s interesting, let me think about it”.

They do that because they don’t want to invest in your company given the current facts, but they want to keep the door open in case the facts change.

And that’s exactly what you want — you want to be able to go back to them with a new set of facts, and change their minds, and get to “yes”.

So be sure to take “no” gracefully — politely ask them for feedback (which they probably won’t give you, at least not completely honestly — nobody likes calling someone else’s baby ugly — believe me, I’ve done it), thank them for their time, and ask if you can call them again if things change.

Trust me — they’d much rather be saying “yes” than “no” — they need all the good investments they can get.

Second, consider the environment.

Being told “no” by VCs in 1999 is a lot different than being told “no” in 2002.

If you were told “no” in 1999, I’m sure you’re a wonderful person and you have huge potential and your mother loves you very much, but your plan really was seriously flawed.

If you were told “no” in 2002, you probably actually were the next Google, but most of the VCs were hiding under their desks and they just missed it.

In my opinion, we’re now in a much more rational environment than either of those extremes — a lot of good plans are being funded, along with some bad ones, but not all the bad ones.

I’ll proceed under the assumption that we’re in normal times. But if things get truly euphoric or truly funereal again, the rest of this post will probably not be very helpful — in either case.

Third, retool your plan.

This is the hard part — changing the facts of your plan and what you are trying to do, to make your company more fundable.

To describe the dimensions that you should consider as you contemplate retooling your plan, let me introduce the onion theory of risk.

If you’re an investor, you look at the risk around an investment as if it’s an onion. Just like you peel an onion and remove each layer in turn, risk in a startup investment comes in layers that get peeled away — reduced — one by one.

Your challenge as an entrepreneur trying to raise venture capital is to keep peeling layers of risk off of your particular onion until the VCs say “yes” — until the risk in your startup is reduced to the point where investing in your startup doesn’t look terrifying and merely looks risky.

What are the layers of risk for a high-tech startup?

It depends on the startup, but here are some of the common ones:

Founder risk — does the startup have the right founding team? A common founding team might include a great technologist, plus someone who can run the company, at least to start. Is the technologist really all that? Is the business person capable of running the company? Is the business person missing from the team altogether? Is it a business person or business people with no technologist, and therefore virtually unfundable?

Market risk — is there a market for the product (using the term product and service interchangeably)? Will anyone want it? Will they pay for it? How much will they pay? How do we know?

Competition risk — are there too many other startups already doing this? Is this startup sufficiently differentiated from the other startups, and also differentiated from any large incumbents?

Timing risk — is it too early? Is it too late?

Financing risk — after we invest in this round, how many additional rounds of financing will be required for the company to become profitable, and what will the dollar total be? How certain are we about these estimates? How do we know?

Marketing risk — will this startup be able to cut through the noise? How much will marketing cost? Do the economics of customer acquisition — the cost to acquire a customer, and the revenue that customer will generate — work?

Distribution risk — does this startup need certain distribution partners to succeed? Will it be able to get them? How? (For example, this is a common problem with mobile startups that need deals with major mobile carriers to succeed.)

Technology risk — can the product be built? Does it involve rocket science — or an equivalent, like artificial intelligence or natural language processing? Are there fundamental breakthroughs that need to happen? If so, how certain are we that they will happen, or that this team will be able to make them?

Product risk — even assuming the product can in theory be built, can this team build it?

Hiring risk — what positions does the startup need to hire for in order to execute its plan? E.g. a startup planning to build a high-scale web service will need a VP of Operations — will the founding team be able to hire a good one?

Location risk — where is the startup located? Can it hire the right talent in that location? And will I as the VC need to drive more than 20 minutes in my Mercedes SLR McLaren to get there?

You know, when you stack up all these layers and look at the full onion, you realize it’s amazing that any venture investments ever get made.

What you need to do is take a hard-headed look at each of these risks — and any others that are specific to your startup and its category — and put yourself in the VC’s shoes: what could this startup do to minimize or eliminate enough of these risks to make the company fundable?

Then do those things.

This isn’t very much fun, since it will probably involve making significant changes to your plan, but look on the bright side: it’s excellent practice for when your company ultimately goes public and has to file an S1 registration statement with the SEC, in which you have to itemize in huge detail every conceivable risk and bad thing that could ever possibly happen to you, up to and including global warming.

Some ideas on reducing risk:

Founder risk — the tough one. If you’re the technologist on a founding team with a business person, you have to consider the possibility that the VCs don’t think the business person is strong enough to be the founding CEO. Or vice versa, maybe they think the technologist isn’t strong enough to build the product. You may have to swap out one or more founders, and/or add one or more founders.

I put this one right up front because it can be a huge issue and the odds of someone being honest with you about it in the specific are not that high.

Market risk — you probably need to validate the market, at a practical level. Sometimes more detailed and analytical market research will solve the problem, but more often you actually need to go get some customers to demonstrate that the market exists. Preferably, paying customers. Or at least credible prospects who will talk to VCs to validate the market hypothesis.

Competition risk — is your differentiation really sharp enough? Rethink this one from the ground up. Lots of startups do not have strong enough differentiation out of the gate, even after they get funded. If you don’t have a really solid idea as to how you’re dramatically different from or advantaged over known and unknown competitors, you might not want to start a company in the first place.

Two additional points on competition risk that founders routinely screw up in VC pitches:

Never, ever say that you have no competitors. That signals naivete. Great markets draw competitors, and so if you really have no competition, you must not be in a great market. Even if you really believe you have no competitors, create a competitive landscape slide with adjacent companies in related market segments and be ready to talk crisply about how you are like and unlike those adjacent companies.

And never, ever say your market projections indicate you’re going to be hugely successful if you get only 2% of your (extremely large) market. That also signals naivete. If you’re going after 2% of a large market, that means the presumably larger companies that are going to take the other 98% are going to kill you. You have to have a theory for how you’re going to get a significantly higher market share than 2%. (I pick 2% because that’s the cliche, but if you’re a VC, you’ve probably heard someone use it.)

Timing risk — the only thing to do here is to make more progress, and demonstrate that you’re not too early or too late. Getting customers in the bag is the most valuable thing you can do on this one.

Financing risk — rethink very carefully how much money you will need to raise after this round of financing, and try to change the plan in plausible ways to require less money. For example, only serve Cristal at your launch party, and not Remy Martin “Black Pearl” Louis XIII cognac.

Marketing risk — first, make sure your differentiation is super-sharp, because without that, you probably won’t be able to stand out from the noise.

Then, model out your customer acquisition economics in detail and make sure that you can show how you’ll get more revenue from a customer than it will cost in sales and marketing expense to acquire that customer. This is a common problem for startups pursuing the small business market, for example.

If it turns out you need a lot of money in absolute terms for marketing, look for alternate approaches — perhaps guerilla marketing, or some form of virality.

Distribution risk — this is a very tough one — if your plan has distribution risk, which is to say you need a key distribution partner to make it work, personally I’d recommend shelving the plan and doing something else. Otherwise, you may need to go get the distribution deal before you can raise money, which is almost impossible.

Technology risk — there’s only one way around this, which is to build the product, or at least get it to beta, and then raise money.

Product risk — same answer — build it.

Hiring risk — the best way to address this is to figure out which position/positions the VCs are worried about, and add it/them to the founding team. This will mean additional dilution for you, but it’s probably the only way to solve the problem.

Location risk — this is the one you’re really not going to like. If you’re not in a major center of entrepreneurialism and you’re having trouble raising money, you probably need to move. There’s a reason why most films get made in Los Angeles, and there’s a reason most venture-backed US tech startups happen in Silicon Valley and handful of other places — that’s where the money is. You can start a company wherever you want, but you may not be able to get it funded there.

You’ll notice that a lot of what you may need to do is kick the ball further down the road — make more progress against your plan before you raise venture capital.

This obviously raises the issue of how you’re supposed to do that before you’ve raised money.

Try to raise angel money, or bootstrap off of initial customers or consulting contracts, or work on it after hours while keeping your current job, or quit your job and live off of credit cards for a while.

Lots of entrepreneurs have done these things and succeeded — and of course, many have failed.

Nobody said this would be easy.

The most valuable thing you can do is actually build your product. When in doubt, focus on that.

The next most valuable thing you can do is get customers — or, for a consumer Internet service, establish a pattern of page view growth.

The whole theory of venture capital is that VCs are investing in risk — another term for venture capital is “risk capital” — but the reality is that VCs will only take on so much risk, and the best thing you can do to optimize your chances of raising money is to take out risk.

Peel away at the onion.

Then, once you’ve done that, recraft the pitch around the new facts. Go do the pitches again. And repeat as necessary.

And to end on a happy note, remember that “yes” can turn into “no” at any point up until the cash hits your company’s bank account.

So keep your options open all the way to the end.

The Pmarca Guide to Startups, part 3: “But I don’t know any VCs!”

  • Jun 25, 2007

In my last post in this series, When the VCs say “no”, I discussed what to do once you have been turned down for venture funding for the first time.

However, this presupposes you’ve been able to pitch VCs in the first place. What if you have a startup for which you’d like to raise venture funding, but you don’t know any VCs?

I can certainly sympathize with this problem — when I was in college working on Mosaic at the University of Illinois, the term “venture capital” might as well have been “klaatu barada nikto” for all I knew. I had never met a venture capitalist, no venture capitalist had ever talked to me, and I wouldn’t have recognized one if I’d stumbled over his checkbook on the sidewalk. Without Jim Clark, I’m not at all certain I would have been able to raise money to start a company like Netscape, had it even occured to me to start a company in the first place.

The starting point for raising money from VCs when you don’t know any VCs is to realize that VCs work mostly through referrals — they hear about a promising startup or entrepreneur from someone they have worked with before, like another entrepreneur, an executive or engineer at one of the startups they have funded, or an angel investor with whom they have previously co-invested.

The reason for this is simply the math: any individual VC can only fund a few companies per year, and for every one she funds, she probably meets with 15 or 20, and there are hundreds more that would like to meet with her that she doesn’t possibly have time to meet with. She has to rely on her network to help her screen the hundreds down to 15 or 20, so she can spend her time finding the right one out of the 15 or 20.

Therefore, submitting a business plan “over the transom”, or unsolicited, to a venture firm is likely to amount to just as much as submitting a screenplay “over the transom” to a Hollywood talent agency — that is, precisely nothing.

So the primary trick becomes getting yourself into a position where you’re one of the 15 or 20 a particular venture capitalist is meeting with based on referrals from her network, not one of the hundreds of people who don’t come recommended by anyone and whom she has no intention of meeting.

But before you think about doing that, the first order of business is to (paraphrasing for a family audience) “have your stuff together” — create and develop your plan, your presentation, and your supporting materials so that when you do meet with a VC, you impress her right out of the gate as bringing her a fundable startup founded by someone who knows what he — that’s you — is doing.

My recommendation is to read up on all the things you should do to put together a really effective business plan and presentation, and then pretend you have already been turned down once — then go back to my last post and go through all the different things you should anticipate and fix before you actually do walk through the door.

One of the reason VCs only meet with startups through their networks is because too many of the hundreds of other startups that they could meet with come across as amateurish and uninformed, and therefore not fundable, when they do take meetings with them. So you have a big opportunity to cut through the noise by making a great first impression — which requires really thinking things through ahead of time and doing all the hard work up front to really make your pitch and plan a masterpiece.

Working backwards from that, the best thing you can walk in with is a working product. Or, if you can’t get to a working product without raising venture funding, then at least a beta or prototype of some form — a web site that works but hasn’t launched, or a software mockup with partial functionality, or something. And of course it’s even better if you walk in with existing “traction” of some form — customers, beta customers, some evidence of adoption by Internet users, whatever is appropriate for your particular startup.

With a working product that could be the foundation of a fundable startup, you have a much better chance of getting funded once you do get in the door. Back to my rule of thumb from the last post: when in doubt, work on the product.

Failing a working product and ideally customers or users, be sure to have as fleshed out a presentation as you possibly can — including mockups, screenshots, market analyses, customer research such as interviews with real prospects, and the like.

Don’t bother with a long detailed written business plan. Most VCs will either fund a startup based on a fleshed out Powerpoint presentation of about 20 slides, or they won’t fund it at all. Corollary: any VC who requires a long detailed written business plan is probably not the right VC to be working with.

Next: qualify, qualify, qualify. Do extensive research on venture capitalists and find the ones who focus on the sector relevant to your startup. It is completely counterproductive to everyone involved for you to pitch a health care VC on a consumer Internet startup, or vice versa. Individual VCs are usually quite focused in the kinds of companies they are looking for, and identifying those VCs and screening out all the others is absolutely key.

Now, on to developing contacts:

The best way to develop contacts with VCs, in my opinion, is to work at a venture-backed startup, kick butt, get promoted, and network the whole way.

If you can’t get hired by a venture-backed startup right now, work at a well-regarded large tech company that employs a lot of people like Google or Apple, gain experience, and then go to work at a venture-backed startup, kick butt, get promoted, and network the whole way.

And if you can’t get hired by a well-regarded large tech company, go get a bachelor’s or master’s degree at a major research university from which well-regarded large tech companies regularly recruit, then work at a well-regarded large tech company that employs a lot of people like Google or Apple, gain experience, and then go to work at a venture-backed startup, kick butt, get promoted, and network the whole way.

I sound like I’m joking, but I’m completely serious — this is the path taken by many venture-backed entrepreneurs I know.

Some alternate techniques that don’t take quite as long:

If you’re still in school, immediately transfer to, or plan on going to graduate school at, a large research university with well-known connections to the venture capital community, like Stanford or MIT.

Graduate students at Stanford are directly responsible for such companies as Sun, Cisco, Yahoo, and Google, so needless to say, Silicon Valley VCs are continually on the prowl on the Stanford engineering campus for the next Jerry Yang or Larry Page.

(In contrast, the University of Illinois, where I went to school, is mostly prowled by mutant cold-weather cows.)

Alternately, jump all over Y Combinator. This program, created by entrepreneur Paul Graham and his partners, funds early-stage startups in an organized program in Silicon Valley and Boston and then makes sure the good ones get in front of venture capitalists for follow-on funding. It’s a great idea and a huge opportunity for the people who participate in it.

Read VC blogs — read them all, and read them very very carefully. VCs who blog are doing entrepreneurs a huge service both in conveying highly useful information as well as frequently putting themselves out there to be contacted by entrepreneurs in various ways including email, comments, and even uploaded podcasts. Each VC is different in terms of how she wants to engage with people online, but by all means read as many VC blogs as you can and interact with as many of them as you can in appropriate ways.

See the list of VC bloggers on my home page, as well as on the home pages of various of those bloggers.

At the very least you will start to get a really good sense of which VCs who blog are interested in which kinds of companies.

At best, a VC blogger may encourage her readers to communicate with her in various ways, including soliciting email pitches in certain startup categories of interest to her.

Fred Wilson of Union Square Ventures has even gone so far as to encourage entrepreneurs to record and upload audio pitches for new ventures so he can listen to them on his IPod. I don’t know if he’s still doing that, but it’s worth reading his blog and finding out.

Along those lines, some VCs are aggressive early adopters of new forms of communication and interaction — current examples being Facebook and Twitter. Observationally, when a VC is exploring a new communiation medium like Facebook or Twitter, she can be more interested in interacting with various people over that new medium than she might otherwise be. So, when such a new thing comes out — like, hint hint, Facebook or Twitter — jump all over it, see which VCs are using it, and interact with them that way — sensibly, of course.

More generally, it’s a good idea for entrepreneurs who are looking for funding to blog — about their startup, about interesting things going on, about their point of view. This puts an entrepreneur in the flow of conversation, which can lead to interaction with VCs through the normal medium of blogging. And, when a VC does decide to take a look at you and your company, she can read your blog to get a sense of who you are and how you think. It’s another great opportunity to put forward a fantastic first impression.

Finally, if you are a programmer, I highly encourage you, if you have time, to create or contribute to a meaningful open source project. The open source movement is an amazing opportunity for programmers all over the world to not only build useful software that lots of people can use, but also build their own reputations completely apart from whatever day jobs they happen to have. Being able to email a VC and say, “I’m the creator of open source program X which has 50,000 users worldwide, and I want to tell you about my new startup” is a lot more effective than your normal pitch.

If you engage in a set of these techniques over time, you should be able to interact with at least a few VCs in ways that they find useful and that might lead to further conversations about funding, or even introductions to other VCs.

I’m personally hoping that the next Google comes out of a VC being sent an email pitch after the entrepreneur read that VC’s blog. Then every VC on the planet will suddenly start blogging, overnight.

If none of those ideas work for you:

Your alternatives in reverse (declining) order of preference for funding are, in my view: angel funding, bootstrapping via consulting contracts or early customers, keeping your day job and working on your startup in your spare time, and credit card debt.

Angel funding — funding from individuals who like to invest small amounts of money in early-stage startups, often before VCs come in — can be a great way to go since good angels know good VCs and will be eager to introduce you to them so that your company goes on to be successful for the angel as well as for you.

This of course begs the question of how to raise angel money, which is another topic altogether!

I am not encouraging the other three alternatives — bootstrapping, working on it part time, or credit card debt. Each has serious problems. But, it is easy to name highly successful entrepreneurs who have followed each of those paths, so they are worth noting.

Closing link:

Finally, be sure to read this page on Sequoia Capital’s web site.

Sequoia is one of the very best venture firms in the world, and has funded many companies that you have heard of including Oracle, Apple, Yahoo, and Google.

On that page, Sequoia does entrepreneurs everywhere a huge service by first listing the criteria that they look for in a startup, then the recommended structure for your pitch presentation, and then finally actually asks for pitches “over the transom”.

I have not done a thorough review of other VC web sites to see who else is being this open, but for Sequoia to be offering this to the world at large is a huge opportunity for the right startup. Don’t let it pass by.

[Editorial note: This will be the last VC-related post in this series for a while. From now on I plan to focus much more on how to make a startup successful.]The Pmarca Guide to Startups, part 4: The only thing that matters

  • Jun 25, 2007

This post is all about the only thing that matters for a new startup.

But first, some theory:

If you look at a broad cross-section of startups — say, 30 or 40 or more; enough to screen out the pure flukes and look for patterns — two obvious facts will jump out at you.

First obvious fact: there is an incredibly wide divergence of success — some of those startups are insanely successful, some highly successful, many somewhat successful, and quite a few of course outright fail.

Second obvious fact: there is an incredibly wide divergence of caliber and quality for the three core elements of each startup — team, product, and market.

At any given startup, the team will range from outstanding to remarkably flawed; the product will range from a masterpiece of engineering to barely functional; and the market will range from booming to comatose.

And so you start to wonder — what correlates the most to success — team, product, or market? Or, more bluntly, what causes success? And, for those of us who are students of startup failure — what’s most dangerous: a bad team, a weak product, or a poor market?

Let’s start by defining terms.

The caliber of a startup team can be defined as the suitability of the CEO, senior staff, engineers, and other key staff relative to the opportunity in front of them.

You look at a startup and ask, will this team be able to optimally execute against their opportunity? I focus on effectiveness as opposed to experience, since the history of the tech industry is full of highly successful startups that were staffed primarily by people who had never “done it before”.

The quality of a startup’s product can be defined as how impressive the product is to one customer or user who actually uses it: How easy is the product to use? How feature rich is it? How fast is it? How extensible is it? How polished is it? How many (or rather, how few) bugs does it have?

The size of a startup’s market is the the number, and growth rate, of those customers or users for that product.

(Let’s assume for this discussion that you can make money at scale — that the cost of acquiring a customer isn’t higher than the revenue that customer will generate.)

Some people have been objecting to my classification as follows: “How great can a product be if nobody wants it?” In other words, isn’t the quality of a product defined by how appealing it is to lots of customers?No. Product quality and market size are completely different.

Here’s the classic scenario: the world’s best software application for an operating system nobody runs. Just ask any software developer targeting the market for BeOS, Amiga, OS/2, or NeXT applications what the difference is between great product and big market.


If you ask entrepreneurs or VCs which of team, product, or market is most important, many will say team. This is the obvious answer, in part because in the beginning of a startup, you know a lot more about the team than you do the product, which hasn’t been built yet, or the market, which hasn’t been explored yet.

Plus, we’ve all been raised on slogans like “people are our most important asset” — at least in the US, pro-people sentiments permeate our culture, ranging from high school self-esteem programs to the Declaration of Independence’s inalienable rights to life, liberty, and the pursuit of happiness — so the answer that team is the most important feels right.

And who wants to take the position that people don’t matter?

On the other hand, if you ask engineers, many will say product. This is a product business, startups invent products, customers buy and use the products. Apple and Google are the best companies in the industry today because they build the best products. Without the product there is no company. Just try having a great team and no product, or a great market and no product. What’s wrong with you? Now let me get back to work on the product.

Personally, I’ll take the third position — I’ll assert that market is the most important factor in a startup’s success or failure.


In a great market — a market with lots of real potential customers — the market pulls product out of the startup.

The market needs to be fulfilled and the market will be fulfilled, by the first viable product that comes along.

The product doesn’t need to be great; it just has to basically work. And, the market doesn’t care how good the team is, as long as the team can produce that viable product.

In short, customers are knocking down your door to get the product; the main goal is to actually answer the phone and respond to all the emails from people who want to buy.

And when you have a great market, the team is remarkably easy to upgrade on the fly.

This is the story of search keyword advertising, and Internet auctions, and TCP/IP routers.

Conversely, in a terrible market, you can have the best product in the world and an absolutely killer team, and it doesn’t matter — you’re going to fail.

You’ll break your pick for years trying to find customers who don’t exist for your marvelous product, and your wonderful team will eventually get demoralized and quit, and your startup will die.

This is the story of videoconferencing, and workflow software, and micropayments.

In honor of Andy Rachleff, formerly of Benchmark Capital, who crystallized this formulation for me, let me present Rachleff’s Law of Startup Success:

The #1 company-killer is lack of market.

Andy puts it this way:

  • When a great team meets a lousy market, market wins.
  • When a lousy team meets a great market, market wins.
  • When a great team meets a great market, something special happens.

You can obviously screw up a great market — and that has been done, and not infrequently — but assuming the team is baseline competent and the product is fundamentally acceptable, a great market will tend to equal success and a poor market will tend to equal failure. Market matters most.

And neither a stellar team nor a fantastic product will redeem a bad market.

OK, so what?

Well, first question: Since team is the thing you have the most control over at the start, and everyone wants to have a great team, what does a great team actually get you?

Hopefully a great team gets you at least an OK product, and ideally a great product.

However, I can name you a bunch of examples of great teams that totally screwed up their products. Great products are really, really hard to build.

Hopefully a great team also gets you a great market — but I can also name you lots of examples of great teams that executed brilliantly against terrible markets and failed. Markets that don’t exist don’t care how smart you are.

In my experience, the most frequent case of great team paired with bad product and/or terrible market is the second- or third-time entrepreneur whose first company was a huge success. People get cocky, and slip up. There is one high-profile, highly successful software entrepreneur right now who is burning through something like $80 million in venture funding in his latest startup and has practically nothing to show for it except for some great press clippings and a couple of beta customers — because there is virtually no market for what he is building.

Conversely, I can name you any number of weak teams whose startups were highly successful due to explosively large markets for what they were doing.

Finally, to quote Tim Shephard: “A great team is a team that will always beat a mediocre team, given the same market and product.”

Second question: Can’t great products sometimes create huge new markets?


This is a best case scenario, though.

VMWare is the most recent company to have done it — VMWare’s product was so profoundly transformative out of the gate that it catalyzed a whole new movement toward operating system virtualization, which turns out to be a monster market.

And of course, in this scenario, it also doesn’t really matter how good your team is, as long as the team is good enough to develop the product to the baseline level of quality the market requires and get it fundamentally to market.

Understand I’m not saying that you should shoot low in terms of quality of team, or that VMWare’s team was not incredibly strong — it was, and is. I’m saying, bring a product as transformative as VMWare’s to market and you’re going to succeed, full stop.

Short of that, I wouldn’t count on your product creating a new market from scratch.

Third question: as a startup founder, what should I do about all this?

Let’s introduce Rachleff’s Corollary of Startup Success:

The only thing that matters is getting to product/market fit.

Product/market fit means being in a good market with a product that can satisfy that market.

You can always feel when product/market fit isn’t happening. The customers aren’t quite getting value out of the product, word of mouth isn’t spreading, usage isn’t growing that fast, press reviews are kind of “blah”, the sales cycle takes too long, and lots of deals never close.

And you can always feel product/market fit when it’s happening. The customers are buying the product just as fast as you can make it — or usage is growing just as fast as you can add more servers. Money from customers is piling up in your company checking account. You’re hiring sales and customer support staff as fast as you can. Reporters are calling because they’ve heard about your hot new thing and they want to talk to you about it. You start getting entrepreneur of the year awards from Harvard Business School. Investment bankers are staking out your house. You could eat free for a year at Buck’s.

Lots of startups fail before product/market fit ever happens.

My contention, in fact, is that they fail because they never get to product/market fit.

Carried a step further, I believe that the life of any startup can be divided into two parts: before product/market fit (call this “BPMF”) and after product/market fit (“APMF”).

When you are BPMF, focus obsessively on getting to product/market fit.

Do whatever is required to get to product/market fit. Including changing out people, rewriting your product, moving into a different market, telling customers no when you don’t want to, telling customers yes when you don’t want to, raising that fourth round of highly dilutive venture capital — whatever is required.

When you get right down to it, you can ignore almost everything else.

I’m not suggesting that you do ignore everything else — just that judging from what I’ve seen in successful startups, you can.

Whenever you see a successful startup, you see one that has reached product/market fit — and usually along the way screwed up all kinds of other things, from channel model to pipeline development strategy to marketing plan to press relations to compensation policies to the CEO sleeping with the venture capitalist. And the startup is still successful.

Conversely, you see a surprising number of really well-run startups that have all aspects of operations completely buttoned down, HR policies in place, great sales model, thoroughly thought-through marketing plan, great interview processes, outstanding catered food, 30″ monitors for all the programmers, top tier VCs on the board — heading straight off a cliff due to not ever finding product/market fit.

Ironically, once a startup is successful, and you ask the founders what made it successful, they will usually cite all kinds of things that had nothing to do with it. People are terrible at understanding causation. But in almost every case, the cause was actually product/market fit.

Because, really, what else could it possibly be?

[Editorial note: this post obviously raises way more questions than it answers. How exactly do you go about getting to product/market fit if you don't hit it right out of the gate? How do you evaluate markets for size and quality, especially before they're fully formed? What actually makes a product "fit" a market? What role does timing play? How do you know when to change strategy and go after a different market or build a different product? When do you need to change out some or all of your team? And why can't you count on on a great team to build the right product and find the right market? All these topics will be discussed in future posts in this series.]

The Pmarca Guide to Startups, part 5: The Moby Dick theory of big companies

  • Jun 27, 2007

“There she blows,” was sung out from the mast-head.”Where away?” demanded the captain.

“Three points off the lee bow, sir.”

“Raise up your wheel. Steady!” “Steady, sir.”

“Mast-head ahoy! Do you see that whale now?”

“Ay ay, sir! A shoal of Sperm Whales! There she blows! There she breaches!”

“Sing out! sing out every time!”

“Ay Ay, sir! There she blows! there — there — THAR she blows — bowes — bo-o-os!”

“How far off?”

“Two miles and a half.”

“Thunder and lightning! so near! Call all hands.”

– J. Ross Browne’s Etchings of a Whaling Cruize, 1846

There are times in the life of a startup when you have to deal with big companies.

Maybe you’re looking for a partnership or distribution deal. Perhaps you want an investment. Sometimes you want a marketing or sales alliance. From time to time you need a big company’s permission to do something. Or maybe a big company has approached you and says it wants to buy your startup.

The most important thing you need to know going into any discussion or interaction with a big company is that you’re Captain Ahab, and the big company is Moby Dick.

“Scarcely had we proceeded two days on the sea, when about sunrise a great many Whales and other monsters of the sea, appeared. Among the former, one was of a most monstrous size. … This came towards us, open-mouthed, raising the waves on all sides, and beating the sea before him into a foam.”– Tooke’s Lucian, “The True History”

When Captain Ahab went in search of the great white whale Moby Dick, he had absolutely no idea whether he would find Moby Dick, whether Moby Dick would allow himself to be found, whether Moby Dick would try to immediately capsize the ship or instead play cat and mouse, or whether Moby Dick was off mating with his giant whale girlfriend.

What happened was entirely up to Moby Dick.

And Captain Ahab would never be able explain to himself or anyone else why Moby Dick would do whatever it was he’d do.

You’re Captain Ahab, and the big company is Moby Dick.

“Clap eye on Captain Ahab, young man, and thou wilt find that he has only one leg.””What do you mean, sir? Was the other one lost by a whale?”

“Lost by a whale! Young man, come nearer to me: it was devoured, chewed up, crunched by the monstrousest parmacetty that ever chipped a boat! — ah, ah!”

– Moby Dick

Here’s why:

The behavior of any big company is largely inexplicable when viewed from the outside.

I always laugh when someone says, “Microsoft is going to do X”, or “Google is going to do Y”, or “Yahoo is going to do Z”.

Odds are, nobody inside Microsoft, Google, or Yahoo knows what Microsoft, Google, or Yahoo is going to do in any given circumstance on any given issue.

Sure, maybe the CEO knows, if the issue is really big, but you’re probably not dealing at the CEO level, and so that doesn’t matter.

The inside of any big company is a very, very complex system consisting of many thousands of people, of whom at least hundreds and probably thousands are executives who think they have some level of decision-making authority.

On any given issue, many people inside the company are going to get some kind of vote on what happens — maybe 8 people, maybe 10, 15, 20, sometimes many more.

When I was at IBM in the early 90’s, they had a formal decision making process called “concurrence” — on any given issue, a written list of the 50 or so executives from all over the company who would be affected by the decision in any way, no matter how minor, would be assembled, and any one of those executives could “nonconcur” and veto the decision. That’s an extreme case, but even a non-extreme version of this process — and all big companies have one; they have to — is mind-bendingly complex to try to understand, even from the inside, let alone the outside.

“… and the breath of the whale is frequently attended with such an insupportable smell, as to bring on a disorder of the brain.”– Ulloa’s South America

You can count on there being a whole host of impinging forces that will affect the dynamic of decision-making on any issue at a big company.

The consensus building process, trade-offs, quids pro quo, politics, rivalries, arguments, mentorships, revenge for past wrongs, turf-building, engineering groups, product managers, product marketers, sales, corporate marketing, finance, HR, legal, channels, business development, the strategy team, the international divisions, investors, Wall Street analysts, industry analysts, good press, bad press, press articles being written that you don’t know about, customers, prospects, lost sales, prospects on the fence, partners, this quarter’s sales numbers, this quarter’s margins, the bond rating, the planning meeting that happened last week, the planning meeting that got cancelled this week, bonus programs, people joining the company, people leaving the company, people getting fired by the company, people getting promoted, people getting sidelined, people getting demoted, who’s sleeping with whom, which dinner party the CEO went to last night, the guy who prepares the Powerpoint presentation for the staff meeting accidentally putting your startup’s name in too small a font to be read from the back of the conference room…

You can’t possibly even identify all the factors that will come to bear on a big company’s decision, much less try to understand them, much less try to influence them very much at all.

“The larger whales, whalers seldom venture to attack. They stand in so great dread of some of them, that when out at sea they are afraid to mention even their names, and carry dung, lime-stone, juniper-wood, and some other articles of the same nature in their boats, in order to terrify and prevent their too near approach.”– Uno Von Troil’s Letters on Banks’s and Solander’s Voyage to Iceland In 1772

Back to Moby Dick.

Moby Dick might stalk you for three months, then jump out of the water and raise a huge ruckus, then vanish for six months, then come back and beach your whole boat, or alternately give you the clear shot you need to harpoon his giant butt.

And you’re never going to know why.

A big company might study you for three months, then approach you and tell you they want to invest in you or partner with you or buy you, then vanish for six months, then come out with a directly competitive product that kills you, or alternately acquire you and make you and your whole team rich.

And you’re never going to know why.

The upside of dealing with a big company is that there’s potentially a ton of whale meat in it for you.

Sorry, mixing my metaphors. The right deal with the right big company can have a huge impact on a startup’s success.

“And what thing soever besides cometh within the chaos of this monster’s mouth, be it beast, boat, or stone, down it goes all incontinently that foul great swallow of his, and perisheth in the bottomless gulf of his paunch.”– Holland’s Plutarch’s Morals

The downside of dealing with a big company is that he can capsize you — maybe by stepping on you in one way or another and killing you, but more likely by wrapping you up in a bad partnership that ends up holding you back, or just making you waste a huge amount of time in meetings and get distracted from your core mission.

So what to do?

First, don’t do startups that require deals with big companies to make them successful.

The risk of never getting those deals is way too high, no matter how hard you are willing to work at it.

And even if you get the deals, they probably won’t work out the way you hoped.

“‘Stern all!’ exclaimed the mate, as upon turning his head, he saw the distended jaws of a large Sperm Whale close to the head of the boat, threatening it with instant destruction; — ‘Stern all, for your lives!'”– Wharton the Whale Killer

Second, never assume that a deal with a big company is closed until the ink hits the paper and/or the cash hits the company bank account.

There is always something that can cause a deal that looks like it’s closed, to suddenly get blown to smithereens — or vanish without a trace.

At day-break, the three mast-heads were punctually manned afresh.”D’ye see him?” cried Ahab after allowing a little space for the light to spread.

“See nothing, sir.”

– Moby Dick

Third, be extremely patient.

Big companies play “hurry up and wait” all the time. In the last few years I’ve dealt with one big East Coast technology company in particular that has played “hurry up and wait” with me at least four separate times — including a mandatory immediate cross-country flight just to have dinner with the #2 executive — and has never followed through on anything.

If you want a deal with a big company, it is probably going to take a lot longer to put together than you think.

“My God! Mr. Chace, what is the matter?” I answered, “we have been stove by a whale.”– “Narrative of the Shipwreck of the Whale Ship Essex of Nantucket, Which Was Attacked and Finally Destroyed by a Large Sperm Whale in the Pacific Ocean” by Owen Chace of Nantucket, First Mate of Said Vessel, New York, 1821

Fourth, beware bad deals.

I am thinking of one high-profile Internet startup in San Francisco right now that is extremely promising, has great technology and a unique offering, that did two big deals early with high-profile big company partners, and has become completely hamstrung in its ability to execute on its core business as a result.

Fifth, never, ever assume a big company will do the obvious thing.

What is obvious to you — or any outsider — is probably not obvious on the inside, once all the other factors that are involved are taken into account.

Sixth, be aware that big companies care a lot more about what other big companies are doing than what any startup is doing.

Hell, big companies often care a lot more about what other big companies are doing than they care about what their customers are doing.

Moby Dick cared a lot more about what the other giant white whales were doing than those annoying little people in that flimsy boat.

“The Whale is harpooned to be sure; but bethink you, how you would manage a powerful unbroken colt, with the mere appliance of a rope tied to the root of his tail.”– A Chapter on Whaling in Ribs and Trucks

Seventh, if doing deals with big companies is going to be a key part of your strategy, be sure to hire a real pro who has done it before.

Only the best and most experienced whalers had a chance at taking down Moby Dick.

This is why senior sales and business development people get paid a lot of money. They’re worth it.

“Oh! Ahab,” cried Starbuck, “not too late is it, even now, the third day, to desist. See! Moby Dick seeks thee not. It is thou, thou, that madly seekest him!”– Moby Dick

Eighth, don’t get obsessed.

Don’t turn into Captain Ahab.

By all means, talk to big companies about all kinds of things, but always be ready to have the conversation just drop and to return to your core business.

Rare is the startup where a deal with a big company leads to success, or lack thereof leads to huge failure.

(However, see also Microsoft and Digital Research circa 1981. Talk about a huge whale.)

Closing thought:

Diving beneath the settling ship, the whale ran quivering along its keel; but turning under water, swiftly shot to the surface again, far off the other bow, but within a few yards of Ahab’s boat, where, for a time, the whale lay quiescent.”…Towards thee I roll, thou all-destroying but unconquering whale; to the last I grapple with thee; from hell’s heart I stab at thee; for hate’s sake I spit my last breath at thee. Sink all coffins and all hearses to one common pool! and since neither can be mine, let me then tow to pieces, while still chasing thee, though tied to thee, thou damned whale! THUS, I give up the spear!”

The harpoon was darted; the stricken whale flew forward; with igniting velocity the line ran through the grooves; — ran foul. Ahab stooped to clear it; he did clear it; but the flying turn caught him round the neck, and voicelessly as Turkish mutes bowstring their victim, he was shot out of the boat, ere the crew knew he was gone.

– Moby Dick

The Pmarca Guide to Startups, part 6: How much funding is too little? Too much?

  • Jul 3, 2007

In this post, I answer these questions:

How much funding for a startup is too little?

How much funding for a startup is too much?

And how can you know, and what can you do about it?
The first question to ask is, what is the correct, or appropriate, amount of funding for a startup?

The answer to that question, in my view, is based my theory that a startup’s life can be divided into two parts — Before Product/Market Fit, and After Product/Market Fit.

Before Product/Market Fit, a startup should ideally raise at least enough money to get to Product/Market Fit.

After Product/Market Fit, a startup should ideally raise at least enough money to fully exploit the opportunity in front of it, and then to get to profitability while still fully exploiting that opportunity.

I will further argue that the definition of “at least enough money” in each case should include a substantial amount of extra money beyond your default plan, so that you can withstand bad surprises. In other words, insurance. This is particularly true for startups that have not yet achieved Product/Market Fit, since you have no real idea how long that will take.

These answers all sound obvious, but in my experience, a surprising number of startups go out to raise funding and do not have an underlying theory of how much money they are raising and for precisely what purpose they are raising it.
What if you can’t raise that much money at once?

Obviously, many startups find that they cannot raise enough money at one time to accomplish these objectives — but I believe this is still the correct underlying theory for how much money a startup should raise and around which you should orient your thinking.

If you are Before Product/Market Fit and you can’t raise enough money in one shot to get to Product/Market Fit, then you will need get as far as you can on each round and demonstrate progress towards Product/Market Fit when you raise each new round.

If you are After Product/Market Fit and you can’t raise enough money in one shot to fully exploit your opportunity, you have a high-class problem and will probably — but not definitely — find that it gets continually easier to raise new money as you need it.
What if you don’t want to raise that much money at once?

You can argue you should raise a smaller amount of money at a time, because if you are making progress — either BPMF or APMF — you can raise the rest of the money you need later, at a higher valuation, and give away less of the company.

This is the reason some entrepreneurs who can raise a lot of money choose to hold back.

Here’s why you shouldn’t do that:
What are the consequences of not raising enough money?

Not raising enough money risks the survival of your company, for the following reasons:

First, you may have — and probably will have — unanticipated setbacks within your business.

Maybe a new product release slips, or you have unexpected quality issues, or one of your major customers goes bankrupt, or a challenging new competitor emerges, or you get sued by a big company for patent infringement, or you lose a key engineer.

Second, the funding window may not be open when you need more money.

Sometimes investors are highly enthusiastic about funding new businesses, and sometimes they’re just not.

When they’re not — when the “window is shut”, as the saying goes — it is very hard to convince them otherwise, even though those are many of the best times to invest in startups because of the prevailing atmosphere of fear and dread that is holding everyone else back.

Those of us who were in startups that lived through 2001-2003 know exactly what this can be like.

Third, something completely unanticipated, and bad, might happen.

Another major terrorist attack is the one that I frankly worry about the most. A superbug. All-out war in the Middle East. North Korea demonstrating the ability to launch a true nuclear-tipped ICBM. Giant flaming meteorites. Such worst-case scenarios will not only close the funding window, they might keep it closed for a long time.

Funny story: it turns out that a lot of Internet business models from the late 90’s that looked silly at the time actually work really well — either in their original form or with some tweaking.

And there are quite a few startups from the late 90’s that are doing just great today — examples being OpenTable (which is about to go public) and TellMe (which recently sold itself to Microsoft for $800 million), and my own company Opsware — which would be bankrupt today if we hadn’t raised a ton of money when we could, and instead just did its first $100 million revenue year and has a roughly $1 billion public market value.

I’ll go so far as to say that the big difference between the startups from that era that are doing well today versus the ones that no longer exist, is that the former group raised a ton of money when they could, and the latter did not.
So how much money should I raise?

In general, as much as you can.

Without giving away control of your company, and without being insane.

Entrepreneurs who try to play it too aggressive and hold back on raising money when they can because they think they can raise it later occasionally do very well, but are gambling their whole company on that strategy in addition to all the normal startup risks.

Suppose you raise a lot of money and you do really well. You’ll be really happy and make a lot of money, even if you don’t make quite as much money as if you had rolled the dice and raised less money up front.

Suppose you don’t raise a lot of money when you can and it backfires. You lose your company, and you’ll be really, really sad.

Is it really worth that risk?

There is one additional consequence to raising a lot of money that you should bear in mind, although it is more important for some companies than others.

That is liquidation preference. In the scenario where your company ultimately gets acquired: the more money you raise from outside investors, the higher the acquisition price has to be for the founders and employees to make money on top of the initial payout to the investors.

In other words, raising a lot of money can make it much harder to effectively sell your company for less than a very high price, which you may not be able to get when the time comes.

If you are convinced that your company is going to get bought, and you don’t think the purchase price will be that high, then raising less money is a good idea purely in terms of optimizing for your own financial outcome. However, that strategy has lots of other risks and will be addressed in another entertaining post, to be entitled “Why building to flip is a bad idea”.

Taking these factors into account, though, in a normal scenario, raising more money rather than less usually makes sense, since you are buying yourself insurance against both internal and external potential bad events — and that is more important than worrying too much about dilution or liquidation preference.
How much money is too much?

There are downside consequences to raising too much money.

I already discussed two of them — possibly incremental dilution (which I dismissed as a real concern in most situations), and possibly excessively high liquidation preference (which should be monitored but not obsessed over).

The big downside consequence to too much money, though, is cultural corrosion.

You don’t have to be in this industry very long before you run into the startup that has raised a ton of money and has become infected with a culture of complacency, laziness, and arrogance.

Raising a ton of money feels really good — you feel like you’ve done something, that you’ve accomplished something, that you’re successful when a lot of other people weren’t.

And of course, none of those things are true.

Raising money is never an accomplishment in and of itself — it just raises the stakes for all the hard work you would have had to do anyway: actually building your business.

Some signs of cultural corrosion caused by raising too much money:

  • Hiring too many people — slows everything down and makes it much harder for you to react and change. You are almost certainly setting yourself up for layoffs in the future, even if you are successful, because you probably won’t accurately allocate the hiring among functions for what you will really need as your business grows.
  • Lazy management culture — it is easy for a management culture to get set where the manager’s job is simply to hire people, and then every other aspect of management suffers, with potentially disastrous long-term consequences to morale and effectiveness.
  • Engineering team bloat — another side effect of hiring too many people; it’s very easy for engineering teams to get too large, and it happens very fast. And then the “Mythical Man Month” effect kicks in and everything slows to a crawl, your best people get frustrated and quit, and you’re in huge trouble.
  • Lack of focus on product and customers — it’s a lot easier to not be completely obsessed with your product and your customers when you have a lot of money in the bank and don’t have to worry about your doors closing imminently.
  • Too many salespeople too soon — out selling a product that isn’t quite ready yet, hasn’t yet achieved Product/Market Fit — alienating early adopters and making it much harder to go back when the product does get right.
  • Product schedule slippage — what’s the urgency? We have all this cash! Creating a golden opportunity for a smaller, scrappier startup to come along and kick your rear.

So what should you do if you do raise a lot of money?

As my old boss Jim Barksdale used to say, the main thing is to keep the main thing the main thing — be just as focused on product and customers when you raise a lot of money as you would be if you hadn’t raised a lot of money.

Easy to say, hard to do, but worth it.

Continue to run as lean as you can, bank as much of the money as possible, and save it for a rainy day — or a nuclear winter.

Tell everyone inside the company, over and over and over, until they can’t stand it anymore, and then tell them some more, that raising money does not count as an accomplishment and that you haven’t actually done anything yet other than raise the stakes and increase the pressure.

Illustrate that point by staying as scrappy as possible on material items — office space, furniture, etc. The two areas to splurge, in my opinion, are big-screen monitors and ergonomic office chairs. Other than that, it should be Ikea all the way.

The easiest way to lose control of your spending when you raise too much money is to hire too many people. The second easiest way is to pay people too much. Worry more about the first one than the second one; more people multiply spending a lot faster than a few raises.

Generally speaking, act like you haven’t raised nearly as much money as you actually have — in how you talk, act, and spend.

In particular, pay close attention to deadlines. The easiest thing to go wrong when you raise a lot of money is that suddenly things don’t seem so urgent anymore. Oh, they are. Competitors still lurk behind every bush and every tree, metaphorically speaking. Keeping moving fast if you want to survive.

There are certain startups that raised an excessive amount of money, proceeded to spend it like drunken sailors, and went on to become hugely successful. Odds are, you’re not them. Don’t bet your company on it.

There are a lot more startups that raised an excessive amount of money, burned through it, and went under.

Remember Geocast? General Magic? Microunity? HAL? Trilogy Systems?


The Pmarca Guide to Startups, part 7: Why a startup’s initial business plan doesn’t matter that much

  • Jul 31, 2007

A startup’s initial business plan doesn’t matter that much, because it is very hard to determine up front exactly what combination of product and market will result in success.

By definition you will be doing something new, in a world that is a very uncertain place.  You are simply probably not going to know whether your initial idea will work as a product and a business, or not.  And you will probably have to rapidly evolve your plan — possibly every aspect of it — as you go.

(The military has a saying that expresses the same concept — “No battle plan ever survives contact with the enemy.”  In this case, your enemy is the world at large.)

It is therefore much more important for a startup to aggressively seek out a big market, and product/market fit within that market, once the startup is up and running, than it is to try to plan out what you are going to do in great detail ahead of time.

The history of successful startups is quite clear on this topic.

Normally I would simply point to Microsoft, which started as a programming tools company before IBM all but forced Bill Gates to go into the operating system business, or Oracle, which was a consultancy for the CIA before Larry Ellison decided to productize the relational database, or Intel, which was a much smaller company focused on the memory chip market until the Japanese onslaught of the mid-80’s forced Andy Grove to switch focus to CPUs.

However, I’ve recently been reading Randall Stross’s marvelous book about Thomas Edison, The Wizard of Menlo Park.

Edison’s first commercially viable breakthrough invention was the phonograph — the forerunner to what you kids know as the record player, the turntable, the Walkman, the CD player, and the IPod.  Edison went on, of course, to become one of the greatest inventors and innovators of all time.

As our story begins, Edison, an unknown inventor running his own startup, is focused on developing better hardware for telegraph operators.  He is particularly focused on equipment for telegraph operators to be able to send voice messages over telegraph lines.

Cue the book:

The day after Edison had noted the idea for recording voice messages received by a telegraphy office, he came up with a variation.  That evening, on 18 July 1877, when [his lab's] midnight dinner had been consumed… [Edison] turned around to face [his assistant Charles Batchelor] and casually remarked, “Batch, if we had a point on this, we could make a record of some material which we could afterwards pull under the point, and it would give us the speech back.”

As soon as Edison had pointed it out, it seemed so obvious that they did not pause to appreciate… the suggestion.  Everyone jumped up to rig a test… within an hour, they had the gizmo set up on the table… Edison sat down, leaned into the mouthpiece… [and] delivered the stock phrase the lab used to test telephone diaphragms: “Mary had a little lamb.”

…Batchelor reinserted the beginning of the [strip on which the phrase had been recorded]… out came “ary ad ell am.”  “It was not fine talking,” Batchelor recalled, “but the shape of it was there.”  The men celebrated with a whoop, shook hands with one another, and worked on.  By breakfast the following morning, they had succeeded in getting clear articulation from waxed paper, the first recording medium — in the first midnight recording session.

…The discovery was treated suprisingly casually in the lab’s notebooks…

It was a singular moment in the modern history of invention, but, in the years that would follow, Edison would never tell the story the way it actually unfolded that summer, always moving the events from July 1877 to December.  We may guess the reason why: in July, he and his assistants failed to appreciate what they had discovered.  At the time, they were working feverishly to develop a set of working telephones to show their best prospect… Western Union… There was no time to pause and reflect on the incidental invention of what was the first working model of the phonograph…

The invention continued to be labeled in the notebooks with the broader rubric “speaking telegraph”, reflecting the assumption that it would be put to use in the telegraph office, recording messages.  An unidentified staff member draw up a list of possible names for the machine, which included: tel-autograph, tel-autophone, “chronophone = time-announcer = speaking clock”, “didaskophone = teaching speaker = portable teacher”, “glottophone = language sounder or speaker”, “climatophone = weather announcer”, “klangophone = bird cry sounder”, “hulagmophone = barking sounder”…

…In October 1877, [Edison] wrote his father that he was “at present very hard up for cash,” but if his “speaking telegraph” was successful, he would receive an advance on royalties.  The commercial potential of his still-unnamed recording apparatus remained out of sight…

[A description of the phonograph in Scientific American in early November] set off a frenzy in America and Europe.  The New York Sun was fascinated by the metaphysical implications of an invention that could play “echoes from dead voices”.  The New York Times predicted [in an eerie foreshadowing of their bizarre coverage of the Internet in the mid-1990's] that a large business would develop in “bottled sermons”, and wealthy connoisseurs would take pride in keeping “a well-stocked oratorical cellar.”

…Such was the authority of Scientific American’s imprimatur that all of this extraordinary attention was lavished not on the first working phonograph made for public inspection, but merely a description supplied by Edison’s assistant.

By late November, Edison and his staff had caught onto the phonograph’s commercial potential as a gadget for entertainment… a list of possible uses for the phonograph was noted [by Edison and his staff], assembled apparently by free association: speaking toys (dogs, reptiles, humans), whistling toy train engines, music boxes, clocks and watches that announced the time.  There was even an inkling of the future importance of personal music collections, here described as the machine for the whole family to enjoy, equipped with a thousand [music recordings], “giving endless amusement.”

…The first actual model, however, remained to be built… On 4 December 1877, Batchelor’s diary laconically noted, “[staff member John Kruesi] made phonograph today”; it received no more notice than the other entry, “working on speaking tel”, the invention [for telegraph operators] that continued to be at the top of the laboratory’s research agenda…

…On 7 December 1877, [Edison] walked into the New York office of Scientific American, placed a small machine on the editor’s desk, and with about a dozen people gathered around, turned the crank.  “How do you do?” asked the machine, introducing itself crisply.  “How do you like the phonograph?”  It itself was feeling quite well, it assured its listeners, and then cordially bid everyone a good night…

…Having long worked within the world of telegraphic equipment, [Edison] had been perfectly placed to receive the technical inspiration for the phonograph.  But that same world, oriented to a handful of giant industrial customers, had nothing in common with the consumer marketplace…

The story goes on and on — and you should read the book; it’s all like this.

The point is this:

If Thomas Edison didn’t know what he had when he invented the phonograph while he thought he was trying to create better industrial equipment for telegraph operators…

…what are the odds that you — or any entrepreneur — is going to have it all figured out up front?

The Pmarca Guide to Startups, part 8: Hiring, managing, promoting, and firing executives

  • Aug 28, 2007

One of the most critical things a startup founder must do is develop a top-notch executive team. This is a topic that could fill a whole book, but in this post I will provide specific guidelines on how to hire, manage, promote, and fire executives in a startup based on my personal observations and experiences.

For the purposes of this post, definitions: An executive is a leader — someone who runs a function within the company and has primary responsibility for an organization within the company that will contribute to the company’s success or failure. The difference between an executive and a manager is that the executive has a higher degree of latitude to organize, make decisions, and execute within her function than a manager. The manager may ask what the right thing to do is; the executive should know.

The general theory of executives, like managers, is, per Andy Grove: the output of an executive is the output of her organization. Therefore, the primary task of an executive is to maximize the output of her organization. However, in a startup, a successful executive must accomplish three other critical tasks simultaneously:

  • Build her organization — typically when an executive arrives or is promoted into her role at a startup, she isn’t there to be a caretaker; rather she must build her organization, often from scratch. This is a sharp difference from many big company executives, who can spend their entire careers running organizations other people built — often years or decades earlier.
  • Be a primary individual contributor — a startup executive must “roll up her sleeves” and produce output herself. There are no shortage of critical things to be done at a startup, and an executive who cannot personally produce while simultaneously building and running her organization typically will not last long. Again, this is a sharp difference from many big companies, where executives often serve more as administrators and bureaucrats.
  • Be a team player — a startup executive must take personal responsibility for her relationships with her peers and people throughout the startup, in all functions and at all levels. Big companies can often tolerate internal rivalries and warfare; startups cannot.

Being a startup executive is not an easy job. The rewards are substantial — the ability to contribute directly to the startups’s success; the latitude to build and run an organization according to her own theories and principles; and a meaningful equity stake that can lead to personal financial independence if the startup succeeds — but the responsibilities are demanding and intense.


First, if you’re not sure whether you need an executive for a function, don’t hire one.

Startups, particularly well-funded startups, often hire executives too early. Particularly before a startup has achieved product/market fit, it is often better to have a highly motivated manager or director running a function than an executive.

Hiring an executive too quickly can lead to someone who is really expensive, sitting there in the middle of the room, doing very little. Not good for the executive, not good for the rest of the team, not good for the burn rate, and not good for the company.

Hire an executive only when it’s clear that you need one: when an organization needs to get built; when hiring needs to accelerate; when you need more processes and structure and rigor to how you do things.

Second, hire the best person for the next nine months, not the next three years.

I’ve seen a lot of startups overshoot on their executive hires. They need someone to build the software development team from four people to 30 people over the next nine months, so they hire an executive from a big company who has been running 400 people. That is usually death.

Hire for what you need now — and for roughly the next nine months. At the very least, you will get what you need now, and the person you hire may well be able to scale and keep going for years to come.

In contrast, if you overhire — if you hear yourself saying, “this person will be great when we get bigger” — you are most likely hiring someone who, best case, isn’t that interested in doing things at the scale you need, and worst case, doesn’t know how.

Third, whenever possible, promote from within.

Great companies develop their own executives. There are several reasons for this:

  • You get to develop your best people and turn them into executives, which is great for both them and you — this is the single best, and usually the only, way to hold onto great people for long periods of time.
  • You ensure that your executives completely know and understand your company culture, strategy, and ethics.
  • Your existing people are the “devil you know” — anyone new coming from outside is going to have flaws, often really serious ones, but you probably won’t figure out what they are until after you’ve hired them. With your existing people, you know, and you minimize your odds of being shocked and appalled.

Of course, this isn’t always possible. Which segues us directly into…

Fourth, my list of the key things to look at, and for, when evaluating executive candidates:

  • Look for someone who is hungry and driven — someone who wants a shot at doing “their thing”. Someone who has been an up and comer at a midsized company but wants a shot at being a primary executive at a startup can be a great catch.
  • Flip side of that: beware people who have “done it before”. Sometimes you do run into someone who has been VP Engineering at four companies and loves it and wants to do it at a fifth company. More often, you will be dealing with someone who is no longer hungry and driven. This is a very, very big problem to end up with — be very careful.
  • Don’t disqualify someone based on ego or cockiness — as long as she’s not insane. Great executives are high-ego — you want someone driven to run things, driven to make decisions, confident in herself and her abilities. I don’t mean loud and obnoxious, I mean assured and determined, bleeding over into cocky. If a VC’s ideal investment is a company that will succceed without him, then your ideal executive hire is someone who will succeed without you.
  • Beware hiring a big company executive for a startup. The executive skill sets required for a big company vs a startup are very different. Even great big company executives frequently have no idea what to do once they arrive at a startup.
  • In particular, really beware hiring an executive from an incredibly successful big company. This is often very tempting — who wouldn’t want to bring onboard someone who sprinkles some of that IBM (in the 80’s), Microsoft (in the 90’s), or Google (today) fairy dust on your startup? The issue is that people who have been at an incredibly successful big company often cannot function in a normal, real world, competitive situation where they don’t start every day with 80% market share. Back in the 80’s, you often heard, “never hire anyone straight out of IBM — first, let them go somewhere else and fail, and then hire them”. Believe it.
  • This probably goes without saying, but look for a pattern of output — accomplishment. Validate it by reference checking peers, reports, and bosses. Along the way, reference check personality and teamwork, but look first and foremost for a pattern of output.

Fifth, by all means, use an executive recruiter, but for sourcing, not evaluation.

There are some executive recruiters who are actually really good at evaluation. Others are not. It’s beside the point. It’s your job to evaluate and make the decision, not the recruiter’s.

I say this because I have never met a recruiter who lacks confidence in his ability to evaluate candidates and pass judgment on who’s right for a given situation. This can lull a startup founder into relying on the recruiter’s judgment instead of really digging in and making your own decision. Betting that your recruiter is great at evaluation is not a risk you want to take. You’re the one who has to fire the executive if it doesn’t work out.

Sixth, be ready to pay market compensation, including more cash compensation than you want, but watch for red flags in the compensation discussion.

You want someone focused on upside — on building a company. That means, a focus on their stock option package first and foremost.

Watch out for candidates who want egregious amounts of cash, high bonuses, restricted stock, vacation days, perks, or — worst of all — guaranteed severance. A candiate who is focused on those things, as opposed to the option package, is not ready to do a startup.

On a related note, be careful about option accceleration in the event of change of control. This is often reasonable for support functions such as finance, legal, and HR where an acquirer would most likely not have a job for the startup executive in any of those functions. But this is not reasonable, in my view, for core functions such as engineering, product management, marketing, or sales. You don’t want your key executives focused on selling the company — unless of course you want them focused on selling the company. Make your acceleration decisions accordingly.

Seventh, when hiring the executive to run your former specialty, be careful you don’t hire someone weak on purpose.

This sounds silly, but you wouldn’t believe how often it happens. The CEO who used to be a product manager who has a weak product management executive. The CEO who used to be in sales who has a weak sales executive. The CEO who used to be in marketing who has a weak marketing executive.

I call this the “Michael Eisner Memorial Weak Executive Problem” — after the CEO of Disney who had previously been a brilliant TV network executive. When he bought ABC at Disney, it promptly fell to fourth place. His response? “If I had an extra two days a week, I could turn around ABC myself.” Well, guess what, he didn’t have an extra two days a week.

A CEO — or a startup founder — often has a hard time letting go of the function that brought him to the party. The result: you hire someone weak into the executive role for that function so that you can continue to be “the man” — consciously or subconsciously. Don’t let it happen to you — make sure the person you hire into that role is way better than you used to be.

Eighth, recognize that hiring an executive is a high-risk proposition.

You often see a startup with a screwed up development process, but “when we get our VP of Engineering onboard, everything will get fixed”. Or a startup that is missing its revenue targets, but “when we get our VP of sales, reveue will take off”.

Here’s the problem: in my experience, if you know what you’re doing, the odds of a given executive hire working out will be about 50/50. That is, about 50% of the time you’ll screw up and ultimately have to replace the person. (If you don’t know what you’re doing, your failure rate will be closer to 100%.)

Why? People are people. People are complicated. People have flaws. You often don’t know what those flaws are until after you get to know them. Those flaws are often fatal in an executive role. And more generally, sometimes the fit just isn’t there.

This is why I’m so gung ho on promoting from within. At least then you know what the flaws are up front.


First, manage your executives.

It’s not that uncommon to see startup founders, especially first-timers, who hire executives and are then reluctant to manage them.

You can see the thought process: I just hired this really great, really experienced VP of Engineering who has way more experience running development teams than I ever did — I should just let him go do his thing!

That’s a bad idea. While respecting someone’s experience and skills, you should nevertheless manage every executive as if she were a normal employee. This means weekly 1:1’s, performance reviews, written objectives, career development plans, the whole nine yards. Skimp on this and it is very easy for both your relationship with her and her effectiveness in the company to skew sideways.

This even holds if you’re 22 and she’s 40, or 50, or 60! Don’t be shy, that will just scare her — and justifiably so.

Second, give your executives the latitude to run their organizations.

This is the balancing act with the previous point, but it’s equally important. Don’t micromanage.

The whole point of having an executive is to have someone who can figure out how to build and run an organization so that you don’t have to. Manage her, understand what she is doing, be very clear on the results you expect, but let her do the job.

Here’s the key corollary to that: if you want to give an executive full latitude, but you’re reluctant to do so because you’re not sure she can make it happen, then it’s probably time to fire her.

In my experience it’s not that uncommon for a founder or CEO to be uncomfortable — sometimes only at a gut level — at really giving an executive the latitude to run with the ball. That is a surefire signal that the executive is not working out and probably needs to be fired. More on that below.

Third, ruthlessly violate the chain of command in order to gather data.

I don’t mean going around telling people under an executive what to do without her knowing about it. I mean, ask questions, continually, at all levels of the organization. How are things going? What do you think of the new hires? How often are you meeting with your manager? And so on.

You never want the bulk of your information about a function coming from the executive running that function. That’s the best way to be completely and utterly surprised when everything blows up.

Here’s the kicker: a great executive never minds when the CEO talks to people in her organization. In fact, she loves it, because it means the CEO just hears more great things about her.

If you have an executive who doesn’t want you to talk to people in her organization, you have a bad executive.


This will be controversial, but I am a big fan of promoting talented people as fast as you can — promoting up and comers into executive roles, and promoting executives into bigger and broader responsibilities.

You can clearly overdo this — you can promote someone before they are ready and in the worst case, completely screw up their career. (Seen it. Done it.) You can also promote someone to their level of incompetence — the Peter Principle. (Seen it. Done it.)

However, life is short, startups move fast, and you have stuff to get done. You aren’t going to have the privilege of working with that many great, talented, high-potential people in your career. When you find one, promote her as fast as you can. Great for her, great for the company, and great for you.

This assumes you are properly training and managing her along the way. That is left as an exercise for the reader.

The surest sign someone is ready for promotion is when they’re doing a great job running their current team. Projects are getting done, team morale is good, new hires are top quality, people are happy. Time to promote some people into new challenges.

I’m a firm believer that most people who do great things are doing them for the first time. Returning to my theory of hiring, I’d rather have someone all fired up to do something for the first time than someone who’s done it before and isn’t that excited to do it again. You rarely go wrong giving someone who is high potential the shot.

This assumes you can tell the high potential people apart from everyone else. That too is left as an exercise for the reader.


First, recognize the paradox of deciding to fire an executive.

The paradox works like this:

It takes time to gather data to evaluate an executive’s performance. You can’t evaluate an executive based on her own output, like a normal employee — you have to evaluate her based on the output of her organization. It takes time for her to build and manage her organization to generate output. Therefore, it takes longer to evaluate the performance of an executive than a normal employee.

But, an executive can cause far more damage than a normal employee. A normal employee doesn’t work out, fine, replace him. An executive doesn’t work out, it can — worst case — permanently cripple her function and sometimes the entire company. Therefore, it is far more important to fire a bad executive as fast as possible, versus a normal employee.

Solution? There isn’t one. It’s a permanent problem.

I once asked Andy Grove, one of the world’s all-time best CEOs, about this. He said, you always fire a bad executive too late. If you’re really good, you’ll fire her about three months too late. But you’ll always do it too late. If you did it fast enough that it wasn’t too late, you wouldn’t have enough data, and you’d risk being viewed as arbitrary and capricious by the rest of the organization.

Second, the minute you have a bad feeling in your gut, start gathering data.

Back to the point on ruthlessly violating the chain of command — get to it. Talk to everyone. Know what’s going on. Unless you’re paranoid — and, shockingly, I have met paranoid founders and CEOs, and not counting Andy Grove — you need to gather the data because you’re going to need to fire the executive — if you’re good, in about three months.

In the meantime, of course do everything you can to coach and develop and improve the executive. If it works out, that’s great. If not, get ready.

A few specific things I think are critical to look for:

  • Is the executive hiring? If there are open headcount slots and nobody’s coming in the door, you have a problem. Just as bad is when the new hires aren’t very good — when they’re bringing down the average quality of the organization.
  • Is the executive training and developing her people? Often in a startup, an executive is hired to take over a function that’s already been started, at least in rudimentary form. The people in that function should be noticeably better at their jobs, and highly respectful of the executive’s skills, within the first several months at the very least. If not, you have a problem.
  • What do the other executives think? Great executives are often imperfect but their peers always respect them. If your other executives are skeptical of a new executive after the first few months, you have a problem.
  • Is it painful for you to interact with the executive? Do you try to avoid or cancel your 1:1’s? Does talking to her give you a headache? Do you often not understand what point she’s trying to make or why she’s focused on such an odd issue? If the answer to any of these questions is yes, you have a problem.

Third, fire crisply.

Firing an executive sucks. It’s disruptive to the organization. It creates a lot of work for you — not least of which is you’ll have to go find someone else for the job. And, it risks making you look bad, since you’re the one who hired the person in the first place.

And it always seems to happen at a critical time in your startup’s life, when the last thing you need is a distraction like this.

Nevertheless, the only thing to do is do it, do it professionally, make clear to the organization what will happen next, and get on down the road.

In my opinion the two most common mistakes people make when they fire executives both fall in the category of pulling one’s punches, and I highly recommend avoiding them:

  • Long transition periods — tempting, but counterproductive. Confusing, demoralizing, and just plain weird. Instead, make a clean break, put a new person in charge — even if only on an acting basis — and get moving.
  • Demotion as an alternative to firing (or, alternately, “I know, we’ll hire her a boss!”). Hate it. Great people don’t deal well with getting demoted. There is an occasional exception. Unless you are positive you have such an exception, skip it, and move directly to the conclusion.

Fourth, don’t feel guilty.

You’re not beheading anyone.

Anyone who got a job as an executive at a startup is going to have an easy time getting the next job. After all, she can always paint you as a crazy founder, or inept CEO.

More often than not, when you fire an executive, you are doing her a favor — you are giving her a chance to find a better fit in a different company where she will be more valued, more respected, and more successful. This sounds mushy, but I mean it. And if she can’t, then she has a much deeper problem and you just dodged a huge bullet.

And on that cheery note, good luck!

The Pmarca Guide to Startups, part 9: How to hire a professional CEO

  • Aug 30, 2007


If you don’t have anyone on your founding team who is capable of being CEO, then sell your company — now.

The Pmarca Guide to Career Planning – Part 1, 2, and 3


The Pmarca Guide to Career Planning, part 1: Opportunity

The first rule of career planning: Do not plan your career.

The world is an incredibly complex place and everything is changing all the time. You can’t plan your career because you have no idea what’s going to happen in the future. You have no idea what industries you’ll enter, what companies you’ll work for, what roles you’ll have, where you’ll live, or what you will ultimately contribute to the world. You’ll change, industries will change, the world will change, and you can’t possibly predict any of it.

Trying to plan your career is an exercise in futility that will only serve to frustrate you, and to blind you to the really significant opportunities that life will throw your way.

Career planning = career limiting.

The sooner you come to grips with that, the better.

The second rule of career planning: Instead of planning your career, focus on developing skills and pursuing opportunities.

I’ll talk a lot about skills development in the next post. But for the rest of this post, I’m going to focus in on the nature of opportunities.

Opportunities are key. I would argue that opportunities fall loosely into two buckets: those that present themselves to you, and those that you go out and create. Both will be hugely important to your career.

Opportunities that present themselves to you are the consequence — at least partially — of being in the right place at the right time. They tend to present themselves when you’re not expecting it — and often when you are engaged in other activities that would seem to preclude you from pursuing them. And they come and go quickly — if you don’t jump all over an opportunity, someone else generally will and it will vanish.

I believe a huge part of what people would like to refer to as “career planning” is being continuously alert to opportunities that present themselves to you spontaneously, when you happen to be in the right place at the right time.

  • A senior person at your firm is looking for someone young and hungry to do the legwork on an important project, in addition to your day job.
  • Your former manager has jumped ship to a hot growth company and calls you three months later and says, come join me.
  • Or, a small group of your smartest friends are headed to Denny’s at 11PM to discuss an idea for a startup — would you like to come along?

I am continually amazed at the number of people who are presented with an opportunity like one of the above, and pass.

There’s your basic dividing line between the people who shoot up in their careers like a rocket ship, and those who don’t — right there.

The second bucket of opportunities are those you seek out and create. A lot of what will follow in future posts in this series will discuss how to do that. However, let me say up front that I am also continually amazed at the number of people who coast through life and don’t go and seek out opportunities even when they know in their gut what they’d really like to do. Don’t be one of those people. Life is way too short.

The world is a very malleable place. If you know what you want, and you go for it with maximum energy and drive and passion, the world will often reconfigure itself around you much more quickly and easily than you would think.

Now, I’m not proposing that you simply ping pong from opportunity to opportunity randomly. You can have a strategy. And here’s how I think that strategy should work.

People who manage money professionally don’t think about individual investments in isolation; they think of those investments as part of an overall portfolio. Each investment has its potential return — the benefit you get from owning it — and its potential risks — the things that can go wrong. A portfolio, then, is a set of investments, and the portfolio assumes the return and risk characteristics of all of the investments blended together.

Viewed in that context, it is often logical to have individual investments within a portfolio that are far more risky than one would normally find comfortable — if the potential return is good enough. Or, investments that are far less risky and have far less return potential than one would normally want — to protect one’s downside. The risk of any individual investment is not important; what is important is how the risks — and the potential returns — of all of the investments combine in the overall portfolio.

I believe you should look at your career as a portfolio of jobs/roles/opportunities. Each job that you take, each role that you choose to fill, each opportunity you pursue, will have a certain potential return — the benefits you can get from taking it, whether those benefits come in the form of income, skill development, experience, geographic location, or something else. Each job will also have a certain risk profile — the things that could go wrong, from getting fired for not being able to handle the job’s demands, to having to move somewhere you don’t want to, to the company going bankrupt, to the opportunity cost of not pursuing some other attractive opportunity.

Once you start thinking this way, you can think strategically about your career over its likely 50+ year timespan.

For example, when you are just out of school and have a low burn rate and geographic flexibility, you can take jobs with a certain return/risk profile. If you get married and have kids, you will take jobs with a different return/risk profile. Later, when your kids grow up and you are once again free to move about and you don’t have to worry about tuition payments and a mortgage on a big house in a great school district, but you now have far more experience than you did when you were first starting out, you can take jobs with a third return/risk profile.

Most people do not think this way. They might occasionally think this way, but they don’t do it systematically. So when an opportunity pops up, they evaluate it on a standalone basis — “boy, it looks risky, I’m not sure I should do it”. What you should automatically do instead is put it in context with all of the other risks you are likely to take throughout your entire career and decide whether this new opportunity fits strategically into your portfolio.

Let’s dig into the concept of risk a little more.

I’m not talking about the form of risk that you think of when you think of stepping out into the crosswalk and getting run over by an Escalade. I’m talking about the form of risk that financial professionals deal with (see the classic book Against the Gods: The Remarkable Story of Risk for more on this), and startup entrepreneurs deal with, and that you deal with any time you make any decision. There are a set of potential downsides to almost any decision — but they can be analyzed, and often quantified, and thereby brought under control.

Which is important, because in life, there is generally no opportunity without risk. Doing the legwork on that extra project for the senior person at your firm? You risk exhausting yourself and doing your day job poorly. Joining your former manager at that hot growth company? Maybe it tanks six months later and then your current employer won’t rehire you. Join those smart friends at Denny’s and start a new company with them? Maybe it completely fails, and you have to explain why you were so foolish at every job interview you do for the rest of your life. There are always real and legitimate reasons why people often pass on opportunities — they see the risks and they wish to avoid them.

The issue is that without taking risk, you can’t exploit any opportunities. You can live a quiet and reasonably happy life, but you are unlikely to create something new, and you are unlikely to make your mark on the world.

To quote Aaron Brown — a legendary Morgan Stanley derivatives trader and poker expert — from his extraordinary book The Poker Face of Wall Street, when talking about hiring traders at an investment bank:

What I listen for is someone who really wanted something that could be obtained only through taking the risk, whether that risk was big or small.

It’s not even important that she managed the risk skillfully; it’s only important that she knew it was there, respected it, but took it anyway.

Most people wander through life, carelessly taking whatever risk crosses their path without compensation, but never consciously accepting extra risk to pick up the money and other good things lying all around them.

Other people reflexively avoid every risk or grab every loose dollar without caution.

I don’t mean to belittle these strategies; I’m sure they make sense to the people who pursue them. I just don’t understand them myself.

I do know that none of these people will be successful traders.

…or successful at anything important in life.

So, when you are presented with an opportunity, carefully analyze its risks, but:

  • Do so within the context if your likely lifetime portfolio of risks…
  • And do so realizing that taking risk can be a good thing when it leads to pursuing the best opportunities.

All that said, here are some of my opinions about the kinds of risks you should take and when:

  • When you are just out of school — and assuming that you are relatively free to move and have a low burn rate — is when you should optimize for the rate at which you can develop skills and acquire experiences that will serve you well later. You should specifically take income risk in order to do that. Always take the job that will best develop your skills and give you valuable experiences, regardless of its salary. This is not the time in your career to play it safe.
  • When you have family obligations — a spouse, two and a half kids, a dog, and a picket fence — that’s obviously the time to crank back on the income risk and instead take a little risk that you might not learn as much or advance as quickly or join that hot new startup. However, even this is not black and white! In Silicon Valley, for example, it can still make a lot of sense for a young parent to take a risk on a hot new startup because it will usually be easy to get another job if the startup fails — especially if one has developed more useful skills and experiences along the way.
  • There may be times when you realize that you are dissatisfied with your field — you are working in enterprise software, for example, but you’d really rather be working on green tech or in a consumer Internet company. Jumping from one field into another is always risky because your specific skills and contacts are in your old field, so you’ll have less certainty of success in the new field. This is almost always a risk worth taking — standing pat and being unhappy about it has risks of its own, particularly to your happiness. And it is awfully hard to be highly successful in a job or field in which one is unhappy.
  • Likewise with geography risk. You start out in one city — say, working at a software company in Philadelphia — and you’re doing well. You get the opportunity to jump to a faster growing software company in Silicon Valley. Should you take the risk of moving geographies — to a place where you don’t know anybody, and where the cost of living is higher? Almost certainly — the additional risks of not having an extensive personal network and of tolerating a lower standard of living for some period of time are almost certainly overcome by the upside of being at a better company, relocating yourself to the heart of your industry, and setting yourself up to exploit many more great opportunities over the next decades.
  • Working for a big company is, I believe, much risker than it looks. I’ll talk about this more in the next post, but people who work at big companies are subject to impersonal layoffs at any time, and often forego the opportunity to develop skills and gain experiences as rapidly as they would at someplace smaller and faster growing. And then five or ten years pass, and you realize your skills and experiences are only relevant for jobs at other big companies — and then you have a real problem.
  • Finally, pay attention to opportunity cost at all times. Doing one thing means not doing other things. This is a form of risk that is very easy to ignore, to your detriment.

Those are just a few examples. You will run into specific return/risk situations that nobody can predict ahead of time. When you do, just sit down and tease apart the risks — and think hard about whether, in the context of your overall career portfolio, they are really so scary that they justify passing on the return potential of a great opportunity. They often won’t.

One more quote, this time from Nassim Nicholas Taleb in The Black Swan:

Seize any opportunity, or anything that looks like opportunity. They are rare, much rarer than you think…

Many people do not realize they are getting a lucky break in life when they get it. If a big publisher (or a big art dealer or a movie executive or a hotshot banker or a big thinker) suggests an appointment, cancel anything you have planned: you may not see such a window open up again.

Of course, if you really are high-potential, you’re naturally going to be seeking out risks in your career in order to maximize your level of achievement, so you’re thinking, c’mon, Andreessen, get to the next point. For which, see the next post!

The Pmarca Guide to Career Planning, part 2: Skills and education

  • Oct 1, 2007

[Please read my opening disclaimers. Note especially that these are only personal views; I am not trying to malign anyone else's choice of career or education path. These are simply the things I would want to be told if I were entering college today.]

This post discusses skills acquisition throughout your lifetime, including your formal education. So I will start with college and move on from there.

What should I study in college?

Some people argue that college will be your one chance in life to pursue your passion — to spend four years doing nothing but studying whatever you love the most, whether that’s Renaissance literature or existential philosophy.

I disagree.

If you intend to have an impact on the world, the faster you start developing concrete skills that will be useful in the real world, the better — and your undergrad degree is a great place to start. Once you get into the real world and you’re primed for success, then you can pursue your passion.

A typical liberal arts degree will be almost useless on its own. So you usually won’t have the option of immediately entering the workforce in a high-impact way when you graduate, and you’ll have to go get a useful graduate degree.

And even if you are already planning to get a useful graduate degree, you are much better off combining it with a substantive undergraduate degree — thereby becoming a “double threat”. More on this in a bit.

Which undergraduate degrees are useful in the real world?

Typically, those that have a technical element of some form — that teach you how to do something substantive.

Engineering degrees obviously qualify. The current myth that engineering and computer science degrees are less useful because all the jobs are going to India and China is silliness; ignore it.

Hard science degrees — physics, chemistry — also clearly qualify, as do mathematics and economics.

Why do I take this stance?

  • Technical degrees teach you how to do something difficult and useful that matters in the real world. Even if you don’t end up actually doing what the degree teaches you how to do, going through the experience of learning how to do it will help you go through other serious learning experiences in your career. Complexity and difficulty will not faze you.
  • Plus, technical degrees teach you how think like an engineer, a scientist, an economist, or a mathematician — how to use reason, logic, and data. This is incredibly useful in the real world, which generally demands rigorous thinking on the path to doing anything big.
  • Plus, technical degrees indicate seriousness of purpose to future employers and partners. You get coded right up front as someone who is intent on doing real things.

Graduating with a technical degree is like heading out into the real world armed with an assault rifle instead of a dull knife. Don’t miss that opportunity because of some fuzzy romanticized view of liberal arts broadening your horizons.

What graduate degrees are useful in the real world?

Generally, if you have a useful undergrad degree, I think graduate degrees are overrated. You can usually hit the workforce in a real job with just an undergraduate degree and progress rapidly according to your own ability and energy from there.

Of course, you’re hearing this from someone who could barely stand to stay in school long enough to finish undergrad, so take that for what it’s worth.

If you don’t have a useful undergrad degree, then a useful graduate degree is definitely a great idea. Business, math, economics, science — something practical, substantive.

Quite a few people in business have paired a liberal arts undergrad degree with an MBA. They seem to do just fine. But I think that’s a missed opportunity — much better would be an MBA on top of an engineering or math undergraduate degree. People with that combination are invaluable, and there aren’t nearly enough of them running around.

As far as PhD’s are concerned — some of my best friends have PhD’s. However, most of the people who have a huge impact on the world — outside of pure research and education — do not have PhD’s. Draw from that whatever conclusion you think makes sense.

What college or university should I go to?

Try very very hard to go to one of the best colleges or universities in the world for your chosen field.

Don’t worry about being a small fish in a big pond — you want to always be in the best pond possible, because that’s how you will get exposed to the best people and the best opportunities in your field.

If you can’t start out in one of the top schools for your field, then work your butt off and get great grades and transfer as fast as you possibly can into a top school.

And if you can’t do that — if you end up getting your undergrad at a school that’s not one of the top in your field — then strongly consider pursuing a graduate degree in your field at a great school for your field.

In this way, even if your only option is starting out at a community college, by the time you finish 4-6 years of education, you can vault yourself into the top tier of your field.

What should I do while I’m in school?

I’m a huge fan of gaining practical experience in school by working during the school year, and then doing as many internships and co-op programs as you can.

Particularly at research universities — where you want to be — there are lots of on-campus jobs that will give you highly valuable work experience. Take a job that will teach you something useful and practical — the two obvious examples are working for a professor in your field with an active research program who needs undergrads to do some of the work, and being a staff member at a campus computer lab or research lab.

And then aggressively pursue internship and co-op programs — to get real-world working experience at companies in your field, before you even graduate. Target the best companies in your field, and go after the opportunities early and often.

If you do this right, by the time you graduate even with just an undergrad degree, you can have a year and a half of real working experience at high-quality companies plus another four years of practical experience from an on-campus job under your belt.

Plus, you will be implicitly demonstrating to future employers how determined you are to succeed and how hard you are willing to work.

In contrast, almost any other way you can spend your time while in school aside from getting reasonably good grades is a mistake.

How should I think about skills development once I’m out of school?

You should view graduating from school as just the beginning of your development of a whole portfolio of useful skills.

One of the single best ways you can maximize the impact you will have on the world and the success you will have in your career is by continuously developing and broadening your base of skills.

My favorite way of thinking about this is:

Seek to be a double/triple/quadruple threat.

Scott Adams — the creator of Dilbert — nails it:

If you want an average successful life, it doesn’t take much planning. Just stay out of trouble, go to school, and apply for jobs you might like. But if you want something extraordinary, you have two paths:

  1. Become the best at one specific thing.
  2. Become very good (top 25%) at two or more things.

The first strategy is difficult to the point of near impossibility. Few people will ever play in the NBA or make a platinum album. I don’t recommend anyone even try.

The second strategy is fairly easy. Everyone has at least a few areas in which they could be in the top 25% with some effort. In my case, I can draw better than most people, but I’m hardly an artist. And I’m not any funnier than the average standup comedian who never makes it big, but I’m funnier than most people. The magic is that few people can draw well and write jokes. It’s the combination of the two that makes what I do so rare. And when you add in my business background, suddenly I had a topic that few cartoonists could hope to understand without living it.

…Get a degree in business on top of your engineering degree, law degree, medical degree, science degree, or whatever. Suddenly you’re in charge, or maybe you’re starting your own company using your combined knowledge.

Capitalism rewards things that are both rare and valuable. You make yourself rare by combining two or more “pretty goods” until no one else has your mix…

It sounds like generic advice, but you’d be hard pressed to find any successful person who didn’t have about three skills in the top 25%.

The fact is, this is even the secret formula to becoming a CEO. All successful CEO’s are like this. They are almost never the best product visionaries, or the best salespeople, or the best marketing people, or the best finance people, or even the best managers, but they are top 25% in some set of those skills, and then all of a sudden they’re qualified to actually run something important.

You can apply this principle to the degrees you can choose to get in school.

I already talked about combining an undergrad engineering degree with an MBA. I’ll hire as many of those people as I possibly can.

An MBA plus a law degree can be a great combination — and probably far more useful than either of those degrees by themselves.

Or even combine two undergrad degrees — computer science plus physics, say, or physics plus economics.

You can also apply this principle to skills that you develop once you leave school.

Let me cite as examples five skills that you can develop once you leave school that, in combination with your degree or degrees and your other skills, can help maximize your potential:

First, communication.

Back to Scott Adams:

I always advise young people to become good public speakers (top 25%). Anyone can do it with practice. If you add that talent to any other, suddenly you’re the boss of the people who have only one skill…

At least one of the skills in your mixture should involve communication, either written or verbal.

The great thing about communication is that most people are terrible at it, because they never take it seriously as a skill to develop.

This is particularly true of engineers and technical people, who often quaintly believe that the world works logically and that people will automatically recognize the quality of things.


Of course, communication is critically important because it’s how you convey information and concepts to lots of people in ways that will cause them to change their behavior.

This is one good argument for certain liberal arts undergrad degrees, such as English. But you don’t need specific college training to be a good communicator — you can learn communication many other ways, including by doing, by practicing, by taking classes (how about a class in standup comedy? I’m serious!), and by reading a lot. And communication in combination with some other useful skill is much more powerful than communication alone.

An engineer or a finance person or a lawyer who can communicate is hugely more valuable than one who cannot.

And in the long run, you are going to have a very hard time ever changing the world if you can’t communicate really well.

Second, management.

If at all possible, learn how to manage people.

The best way is to learn from a great manager.

Early in your career, make sure you are working for a great manager — you’ll know her when you see her in action — and then ask her to teach you how to do it.

And then give it a shot — ask for and get responsibility for a team of people whom you manage.

Even if your career path won’t involve managing lots of people, being able to manage will give you a highly valuable tool that you can pull out whenever you need it, instead of forcing you to always be reliant on other people to manage.

Worst case, you’ll understand a lot more about why companies work the way they do and why people are the way they are. Which is hugely helpful when you set about doing something new.

Third, sales.

Learn how to sell.

I don’t mean, learn how to sell someone a set of steak knives they don’t need — although I hear that can be quite an education by itself.

I mean, learn how to convince people that something is in their best interest to do, even when they don’t realize it up front.

Think of this as the art of being able to interact with people such that they will do what you want, predictably and repeatedly, as long as you are making sense and offering them something they should want.

This is another terribly underrated skill, at least among people who aren’t professional salespeople. But it’s an incredibly general skill that can be helpful not only in your career but throughout your entire life. Knowing how to sell can also help you recruit, raise money, talk to investors, create business partnerships, deal with reporters and analysts, and more — even, God help you, in your marriage and with your kids.

Spending a year or more in an actual salesforce can be a superb idea even if you have no intention of making your career in sales. John Doerr once told me that the year he spent “carrying a bag” in sales at Intel in the late 70’s was the most valuable year of his life in terms of skills development — skills he now uses every day as one of the world’s most successful venture capitalists. If you’ve ever had John Doerr try to talk you into something, you’ll know what he means.

Fourth, finance.

A strong level of financial literacy — financial theory, understanding financial statements, budgeting and planning, corporate structure, how equity and debt markets work — will be a huge boost for almost any career.

Again, this is a more general skill that it appears to be — having financial skills will also help you in your personal life, as well as in any nonprofit organizations in which you participate.

And if you ever want to start your own company, being financially literate will be a huge help.

If you’re, for example, a programmer working at a tech company and you don’t know anything about finance, go find a finance person and offer to teach her all about software in return for her teaching you all about finance.

Otherwise, finance is something you can easily learn by taking classes, or by reading books.

Also, make an investment in yourself by reading the Financial Times and the Wall Street Journal every day. Read those two papers cover to cover for five years and you’ll know a lot of what you need to know. (This recommendation will be even more practical once Rupert Murdoch makes the Wall Street Journal web site free. The Financial Times just announced its web site is becoming free for casual readers. But even still, if I were you, I’d get paper subscriptions to those two papers, and every day take an hour and sit in a corner and read them cover to cover — except of course for the Journal‘s op-ed pages; those will rot your brain.)

Fifth, international.

Time spent on the ground in other countries and in other cultures will pay off in many different ways throughout your career.

If your company, or university, offers you the opportunity to spend a year in another country, it’s probably a pretty good idea to take it.

Personally I’d incline towards spending that time in younger, faster growing market economies — like China, India, South Korea, or Argentina — versus older, slower growing market economies like France or Germany. But almost any international exposure is likely to be helpful.

This is another of those skills where there’s both a pragmatic benefit — you will have experience on the ground with people in a specific country — and a general benefit — you will know how to think more broadly than the average American, or American president, who has never been out of the country.

There aren’t very many interesting businesses anymore that don’t have a strong international element — in fact, many American companies now generate the majority of their revenue and profit outside the US. Having a global perspective can only help you maximize your future opportunities.

Any final thoughts on education?


If you’re in college now, or about to graduate from college, and you come from an upper middle class background — especially if you are going to an Ivy League school — take the time to read a provocative essay David Brooks wrote several years ago called “The Organization Kid”.

Some excerpts:

I asked several [Ivy League] students to describe their daily schedules, and their replies sounded like a session of Future Workaholics of America: crew practice at dawn, classes in the morning, resident-adviser duty, lunch, study groups, classes in the afternoon, tutoring disadvantaged kids in Trenton, a cappella practice, dinner, study, science lab, prayer session, hit the StairMaster, study a few hours more…

[N]owhere did I find any real unhappiness with this state of affairs; nowhere did I find anybody who seriously considered living any other way. These super-accomplished kids aren’t working so hard because they are compelled to… It’s not the stick that drives them on, it’s the carrot. Opportunity lures them… [I]n a rich information-age country like America, promises of enjoyable work abound — at least for people as smart and ambitious as these. “I want to be this busy,” one young woman insisted, after she had described a daily schedule that would count as slave-driving if it were imposed on anyone…

That doesn’t mean that these leaders-in-training are money-mad (though they are certainly career-conscious). It means they are goal-oriented. An activity — whether it is studying, hitting the treadmill, drama group, community service, or one of the student groups they found and join in great numbers — is rarely an end in itself. It is a means for self-improvement, résumé-building, and enrichment. College is just one step on the continual stairway of advancement, and they are always aware that they must get to the next step (law school, medical school, whatever) so that they can progress up the steps after that…

They’re not trying to buck the system; they’re trying to climb it, and they are streamlined for ascent…

Kids of all stripes [today] lead lives that are structured, supervised, and stuffed with enrichment… Today’s elite kids are likely to spend their afternoons and weekends shuttling from one skill-enhancing activity to the next. By the time they reach college, they take this sort of pace for granted…

In short, at the top of the meritocratic ladder we have in America a generation of students who are extraordinarily bright, morally earnest, and incredibly industrious. They like to study and socialize in groups. They create and join organizations with great enthusiasm. They are responsible, safety-conscious, and mature. They feel no compelling need to rebel — not even a hint of one. They not only defer to authority; they admire it. “Alienation” is a word one almost never hears from them. They regard the universe as beneficent, orderly, and meaningful. At the schools and colleges where the next leadership class is being bred, one finds not angry revolutionaries, despondent slackers, or dark cynics but the Organization Kid.

Now, if your parents are middle class, or lower middle class, and you’re attending a state school or a local college, and you’re working your way through school in order to pay for tuition, you can stop reading now; you probably don’t have anything to worry about. But if you read Brooks’ essay and recognize yourself, read on.

The good news is that Brooks’ fundamental thesis is correct: kids graduating from top colleges and universities today are in many ways better prepared for achievement and success than ever before. As a group, you are better educated, better trained, more motivated, and more serious than many of your predecessors. And that is fantastic.

The risk, however, is this:

If you have lived an orchestated existence, gone to great schools, participated in lots of extracurricular activities, had parents who really concentrated hard on developing you broadly and exposing you to lots of cultural experiences, and graduated from an elite university in the first 22 or more years of your life, you are in danger of entering the real world, being smacked hard across the face by reality, and never recovering.

What do I mean? It’s possible you got all the way through those first 22 or more years and are now entering the workforce without ever really challenging yourself. This sounds silly because you’ve been working hard your whole life, but working hard is not what I’m talking about. You’ve been continuously surrounded by a state of the art parental and educational support structure — a safety net — and you have yet to make tough decisions, by yourself, in the absence of good information, and to live with the consequences of screwing up.

In my opinion, it’s now critically important to get into the real world and really challenge yourself — expose yourself to risk — put yourself in situations where you will succeed or fail by your own decisions and actions, and where that success or failure will be highly visible.

By failure I don’t mean getting a B or even a C, but rather: having your boss yell at you in front of your peers for screwing up a project, launching a product and seeing it tank, being unable to meet a ship date, missing a critical piece of information in a financial report, or getting fired.

Why? If you’re going to be a high achiever, you’re going to be in lots of situations where you’re going to be quickly making decisions in the presence of incomplete or incorrect information, under intense time pressure, and often under intense political pressure. You’re going to screw up — frequently — and the screwups will have serious consequences, and you’ll feel incredibly stupid every time. It can’t faze you — you have to be able to just get right back up and keep on going.

That may be the most valuable skill you can ever learn. Make sure you start learning it early.The Pmarca Guide to Career Planning, part 3: Where to go and why

  • Oct 3, 2007

When picking an industry to enter, my favorite rule of thumb is this:

Pick an industry where the founders of the industry — the founders of the important companies in the industry — are still alive and actively involved.

This is easy to figure out — just look at the CEO, chairman or chairwoman, and board of directors for the major companies in the industry.

If the founders of the companies are currently serving as CEO, chairman or chairwoman, or board member of their companies, it’s a good industry to enter. It is probably still young and vital, and there are probably still opportunities to exploit all over the place, either at those companies or at new companies in that industry.

If not — if the industry’s founders are dead, or old and out of touch — beware. That industry is now dominated by companies that are being run by second or third or even fourth generation managers who inherited their companies pre-built, and are serving as caretakers.

If you are young and want to have an impact, you want to be in an industry where there is a lot of growth and change and flux and opportunity.

As an industry ages, the vitality drains out until all that’s left is a set of ossified remnants in the form of oligopolostic entities of which you would find being a part to be completely soul-killing.

The exception comes when an industry has gotten so old and ossified that the clear opportunity exists to up-end it and introduce a new order, a new way of doing things, and therefore a new set of companies.

In some industries this happens routinely — e.g. every 10-20 years. This is the case in technology, for example, and financial services.

It doesn’t seem to happen ever in certain other industries which I won’t name for fear of being permanently cut off from my necessary supply of oil, gas, music, and movies.

If you’re going to enter an old industry, make sure to do it on the side of the forces of radical change that threaten to up-end the existing order — and make sure that those forces of change have a reasonable chance at succeeding.

Second rule of thumb:

Once you have picked an industry, get right to the center of it as fast as you possibly can.

Your target is the core of change and opportunity — figure out where the action is and head there, and do not delay your progress for extraneous opportunities, no matter how lucrative they might be.

Never worry about being a small fish in a big pond. Being a big fish in a small pond sucks — you will hit the ceiling on what you can achieve quickly, and nobody will care. Optimize at all times for being in the most dynamic and exciting pond you can find. That is where the great opportunities can be found.

Apply this rule when selecting which company to go to. Go to the company where all the action is happening.

Or, if you are going to join a startup or start your own company, always make sure that your startup is aimed at the largest and most interesting opportunity available — the new markets that are growing fast and changing rapidly.

Also apply this rule when selecting which city to live in. Go to the city where all the action is happening.

For technology, at least in the US, this is Silicon Valley. For entertainment, this is Los Angeles. For politics, Washington DC. For coffee, Seattle. For financial services, New York — unless you are convinced that there are equally compelling opportunities someplace else, like London or Hong Kong or Shanghai.

In my opinion, living anywhere other than the center of your industry is a mistake. A lot of people — those who don’t live in that place — don’t want to hear it. But it’s true. Geographic locality is still — even in the age of the Internet — critically important if you want to maximize your access to the best companies, the best people, and the best opportunities. You can always cite exceptions, but that’s what they are: exceptions.

No one cares who the top filmmaker in Chicago is — hell, people often don’t even care who the top filmmaker in New York is, and quite a lot of films get made out of New York. On the other hand, the top 50 filmmakers in Los Angeles are all very important people in their industry.

Let’s flavor all of the above with a little nuance:

“Current importance” may not be the same as “greatest change”.

Whenever you believe that the currently dominant companies, or cities, are not the places of greatest change and opportunity, you have a decision to make.

Perhaps New York, while clearly the financial services capital of the world, is not the place of greatest opportunity for someone new. Perhaps, for you, that would be Dubai, or Buenos Aires, or Prague, or Macau.

And perhaps Goldman Sachs, Morgan Stanley, Lehman Brothers, Citigroup, and JP Morgan Chase, while clearly the most important financial services companies in the world, are not the companies of greatest opportunity for someone new. Perhaps, for you, that’s a totally different kind of financial services company, like Paypal.

Then you have a decision to make — whether to tilt a little conservative and stick with the currently most important place and companies under the rationale that they are still the major agents of change in the industry, or tilt aggressive and go someplace or to some firm that’s up and coming and might represent disruptive change and therefore even greater opportunity.

Either way, to quote Pink Floyd, “set the controls for the heart of the sun” — be sure you’re heading where the action is, where the biggest opportunities in your field are, as you’ve chosen to think about it. Don’t fart around in second and third tier companies that don’t have a clear mission to dominate their markets.

Third rule:

In a rapidly changing field like technology, the best place to get experience when you’re starting out is in younger, high-growth companies.

(This is not necessarily true in older and more established industries, but those aren’t the industries we’re talking about.)

There are a bunch of great things that you get when you go to a younger, high-growth company:

  • You’ll get to do lots of stuff. There will be so much stuff to do in the company that you’ll be able to do as much of it as you can possibly handle. Which means you’ll gain skills and experience very quickly.
  • You’ll probably get promoted quickly. Fast-growing companies are characterized by a chronic lack of people who can step up to all the important new leadership jobs that are being created all the time. If you are aggressive and performing well, promotions will come quickly and easily.
  • You’ll get used to being in a high-energy, rapidly-changing environment with sharp people and high expectations. It’s like training for a marathon while wearing ankle weights — if you ever end up going to a big company, you’ll blow everyone away. And if you ever go to a startup, you’ll be ready for the intensity.
  • Reputational benefit. Having Silicon Graphics from the early 90’s, or Netscape from the mid-90’s, or eBay from the late 90’s, or Paypal from the early 00’s, or Google from the mid-00’s on your resume is as valuable as any advanced degree — it’s a permanent source of credibility.

In contrast to going to a big company: working for a big company teaches you how to work for big companies. The way things work at a big company is usually unique to big companies. So, working for a big company is often a statement that you plan to spend your career at big companies — and lots of people are very happy doing that, but I doubt that’s your intention or you wouldn’t be reading this post.

In contrast to going to a startup: when you are first starting your career, you should realize that raw startups are highly variable in terms of the experiences you will have. Some can be great, but many are very poorly managed and go nowhere. You will probably be better off going somewhere that’s already succeeding, gain skills and experience, and then go to a startup.

In contrast to going to a mediocre small or mid-sized company that’s not growing: those are great places to go if you don’t want to go anywhere yourself. If you find yourself stuck in one, either figure out how to get the company unstuck and on a fast growth path, or get yourself unstuck.

There is a caveat to all this, which is as follows:

Don’t just be a “summertime soldier” — don’t go someplace because it’s already successful, and then bail when things get tough.

Any hiring manager for the rest of your career will be able to read that on your resume just by looking at the dates.

High-growth companies virtually always hit speed bumps, or even huge potholes. Stuff goes wrong. Going through the experience of gutting through the hard parts and coming out the other end will be a key part of your real-world education and will serve you very well down the road, especially if you ever start your own company.

Then, once you’ve racked up killer skills and experiences at a high-growth company, feel free to go to a startup.

Picking which startup to join probably deserves its own post. However, in a nutshell, look for one where you understand the product, see how it might fit into a very large market, and really like and respect the people who are already there.

Or, start your own company.

If your startup fails, try another one. If that one fails, get back into a high-growth company to reset your resume and get more skills and experiences. Then start another company. Repeat as necessary until you change the world.

Finally, every job you take and every role you fill will always be a tactical opportunity and a strategic opportunity.

The tactical opportunity is obvious: kick ass and take names — gain skills and experiences that will be valuable to you in the future, and do so well that everyone you work with is singing your praises for decades to come.

The strategic opportunity is less obvious and often overlooked.

Every job, every role, every company you go to is an opportunity to learn how a business works and how an industry works.

Learn everything you can about the business and the industry in which you find yourself.

Think strategically: how would I start a firm like this today? Or, if I were starting a company in this industry today, how would it be different than this firm? Why is this firm and other firms in this industry doing what they do? What are the assumptions underneath their behavior? Should those assumptions be changing? How might this industry work differently? Which customers are being underserved? What new technologies might change things completely? How were things working 10 years ago, versus today, versus 10 years from now? And, my favorite: if the creators of this industry were starting out today, what would they be doing now?

In FX’s great new series Damages, a young attorney named Ellen Parsons has gone to work for a famous law firm called Hewes and Associates, run by the legendary, ruthless, and amoral Patty Hewes. Ellen, rattled by the intensity of her experience at Hewes and Associates, asks her mentor Hollis Nye what she should do:

Hollis Nye: My advice to you, Ellen, is to stop trying to figure Patty out. You’ll never change her, but she’ll change you.

Ellen: How?

Nye: By giving you access to how she thinks. You signed up for this; now, keep your head down, and do the work. That’s why you’re there, isn’t it?

Ellen: Yes.

Nye: Then don’t be shortsighted. Start using her. Learn everything you can, then get the hell out of there before it’s too late.

Ellen: How exactly will I know when that is?

Nye: Ah. That’s for another walk.

…and another post.

Top 10 Tips For Entrepreneurs Pitching VCs


Top 10 Tips For Entrepreneurs Pitching VCs

After sitting through 20+ pitches as a “VC” and having given 10 times that from the “sell-side” of the table, I figure it’s time to throw my hat in the ring along with all those offering advice to entrepreneurs pitching VCs. In B-school, we had a thing for “top 10″ lists, so please forgive the following format:

10. Get someone you know to introduce you. Everyone knows this, but it’s worth repeating. I’ve seen a lot of CEOs/CFOs with lists of VC funds they are pitching and the status of each (a sort of “fundraising pipeline”). But I’ve yet to see one of these spreadsheets with the most important two columns: (a) who’s going to introduce us to this fund and (b) what’s their relationship to the fund, i.e. how does the fund view them. Ideally the person making the intro is someone who’s made money for the fund in one capacity or another. Do yourself a favor and add these columns to your spreadsheet.

9. Don’t bring the whole company. Who and how many folks to bring obviously depends upon circumstances, but ideally it’s the CEO and one other key executive (e.g. founder, VP Sales, CTO, etc.). Any more than that you’re fighting for air time or looking like moss on a rock, neither of which help the cause. The best pitch I’ve seen so far was given by the CEO alone (to a group of more than a dozen).

8. Arrive early and set up your stuff. Every shop has a different A/V setup. Great entrepreneurs come prepared…wireless modem, memory stick, Ethernet cable, hard copy screen shots… Woe to the entrepreneur who starts off the meeting with a bunch of VCs sitting around and yelling “press function-F7!” 

7. Introduce yourself by describing how you’ve made money for shareholders. Less than 5% of the management teams I’ve seen have figured this one out. The best intros are ones where multiple people on the management team can say, “I was CXO of Lightning-in-a-Bottle, Inc. for 3 years and we raised umpteen million returning numberteen-X to investors.” That’s what VCs call an “A-team.” Every exec worth their salt should be able to come up with some version of this such as, “I was VP whatever at Blue Chip, Inc. and generated a 5X return on capital with my insert project name” although too many of the later on the team will get a “B” label from savvy investors. At all costs, entrepreneurs should avoid what 95% of us do and launch into an intro with, “I worked at…” and then proceed to name drop 5 companies that are successful but which everyone knows probably had little to do with said executive.

6. Tailor the pitch to the audience. When the VCs are introducing themselves, great entrepreneurs are doing more than just listening; they are qualifying the prospect. Entrepreneurs should take the VC intro part of the meeting to ask a few questions with the goal of understanding the VC’s perspective…how much do they know about my market, my company, competitors, etc.? Armed with this, the team can tailor the presentation to the audience.

5. The slide presentation should be at maximum 10 slides. Do the math: 10Art_of_the_start minutes for  introductions, 3 minutes per slide (30 minutes) for the presentation, 10 minutes for a demo and 10 minutes for Q&A…that’s your meeting. Bring all the slides you want, but a great presentation only needs 10. Guy Kawasaki has a great book called Art of the Start which talks more about this (and gives a description of what a 10-slider looks like). A lot of folks send 40-page drafts to me with the caveat that they “are working on cutting it down.” I recommend starting the other way around. Start with 3 slides: what’s the market, what’s the solution and how does it work. Then add slides to fill in the holes until the magic number of 10 is reached.

4. When a potential investor asks a question, answer it. It’s rare that the response, “Good  question! If you could just hold that thought until slide 36, I’ll address that point.” The trick to understanding why is to realize that, when asking questions, smart investors are really trying to get a feel for what the CEO is like, how they think on their feet, perform under pressure, listen, relate to investors and what it would be like to work with the entrepreneur in question. So every time a VC asks a question, the entrepreneur should think to themselves, “oh, she just asked me what it’s like to work with me” and then respond.

3. Don’t hide bad news. Entrepreneurs are by definition optimists, but there is a well known fine line between genius and insanity. I’ve seen a lot of entrepreneurs, including myself, paint themselves into a corner instead of proactively defining holes or unknowns in their business plan as manageable risks. Savvy investors bucket these folks as “first-timers” or “green.” 

2. Be concise

1. Practice, practice, practice! I’ve heard many CEOs say, “gee, that’s the first time I’ve seen that slide…John (VP of whatever) do you want to walk us through this one?” It sounds silly, but for those of us not gifted with Bill Clinton-like stage presence, we should practice the full pitch at least 50 times, ideally in front of a video camera and a live crowd. A lot of entrepreneurs “practice” with their first 10, 20 or more VC pitches, but that is really a disservice to all involved. If a CEO can develop a total comfort with the presentation (slides and delivery) then that comfort level shows through and they have a chance of really connecting with their potential partner/investor.

Hiring Your First Salesperson


Hiring Your First Salesperson

I was recently asked about this topic by a talented first-time founder/CEO and decided to post this excerpt from my response.

So you want to hire your first salesperson?  As founder of your company, you have raised some initial capital, recruited your initial development team and even gotten your product to a beta level.  Now, you’re talking to customers and starting to sell in earnest.  This is a pretty important milestone and decision for you and the company.  Here’s a couple of tips based off my own experience.

  • If your background isn’t in sales, then you should find someone whose background is to help you hire the right person. Salespeople interview well so if you don’t know how to cut through that you’re in for a ride. But the key is to find someone who’s hired 100+ sales people and sales managers in their career and leverage their experience. Put them on your advisory board and interact with them frequently.  You might even retain them as a “buyers agent” to help with recruiting.  Ask them to do actual interviews and help source candidates as well.
  • When in doubt, “hire junior.”  Except in rare cases, it is probably premature to hire a VP of Sales that you’ll keep for 2+ years. You want someone who’ll be out in the field selling and bringing back customer feedback (and sales!) probably more of the former in the first year. Terry Gold wrote a good blog post on this some time back.
  • Depending upon how far along the product is, you may also want someone who doesn’t fit the classic sales mold. Ideally, the person who you hire will come back and help translate why the “customer said no/not now” (or “yes” for that matter) into new product features/pricing/packaging. Someone who has product experience or maybe even someone who once worked on a help desk for a product selling into similar firms could work.
  • Read and re-read the “Sales Learning Curve” by Mark Leslie. While it’s not directly relevant to every company, the principals are the best I have seen on how to bring a new product to market and who to recruit to do that.
  • In terms of structuring compensation, be careful not to apply a classic sales compensation package. If you hire someone with a comp package of $70K times two with commission on sales, you’ll end up getting pulled in a direction you may not want to go. In my experience, the right compensation package is a base plus discretionary bonus that gets them to an on-target earnings you both are comfortable with. You’ll want to agree with them to review the metrics every 3-6 months. Put them in writing. To pull this off will require establishing some trust between you and your new hire. Take the time to develop it.
  • I would stay away from hiring through traditional job boards for this position. Assuming you don’t know someone already, I’d place an ad on LinkedIN jobs and also spend a bunch of time doing searches on LinkedIN for people who might be a fit or who may know someone who would. You will want to upgrade your LinkedIN account so you can do searches and send intro notes (costs a couple hundred per year for a biz account, I think).  Network with sales people you admire. Call some of your customers/beta users and ask them who are the sales people or companies whom they admire. I found this to be a great source of candidates early on.

10 Things To Consider Before Joining a Startup


10 Things To Consider Before Joining a Startup

So you’ve decided to consider joining a startup.  Whether this is your first time or the most recent in a string of many, there are several things to consider, particularly when compared with an opportunity at a larger, more mature company.  For purposes of this post, by startup I mean a company that is small (less than 50 people), has little or no revenue, is not profitable, may or may not have outside investors and is unproven in the marketplace.  So, here are some tips for candidates considering making the plunge:

10.  Calibrate your expectations.  Unlike mature organizations with an HR department, formal recruiting programs and on-the-job training, your startup probably doesn’t have any of these.  The recruitment process will seem jerky, but that’s probably because the people you are interviewing with just pulled an all-nighter preparing an investor pitch, writing some code or otherwise doing something that, in their ideal world, you would have been helping them with.  Mature companies can afford to have people dedicated to recruiting but you won’t find that in most early stage startups so it’s best to reset your expectations now before you get disillusioned.

9.  Discuss the move with your family and friends.  The beauty and bane of startups is that they are an emotional roller coaster ride.  One week you’ll have launched a new release, signed your biggest new account, landed some great press and then, the next week, you’re firefighting production bugs and trying to keep your customers while running out of cash.  Even if that sounds like fun to you, your friends, spouse and children might call it something else.  While resetting your own expectations, it’s best to discuss your thought process with those around you and use the opportunity to educate them as well.  The more you do this up front, the easier it will be down the road, particularly when the company hits an inevitable rough patch.  In this case, it’s better to ask for permission rather than forgiveness.

8.  Get to know the team.  For early stage companies, odds are there is really not much behind the curtain other than some (hopefully) smart, motivated people.  Joining the company means that you will probably be spending more time with your coworkers than you will with family and friends so my advice is to get to know them.  If you’re not invited to a social situation as part of the recruiting process, invite yourself.  Are these the kind of people you’d like to hang out with outside of work?  Do they seem to get along well with each other?  Have they created a work environment that suits you?  At my last company, I purposefully left the foosball table in the lobby (originally because we didn’t have any other space) in part to send a message.  What messages are you seeing?

7.  Do your homework. While this advice applies to all companies, I think a lot more diligence is warranted when considering joining a startup.  Almost like a VC, you want to understand the market, the competition, the company history, the product, etc.  Do as much diligence as you can.  Ideally you want to independently find customers, former employees, competitors, partners, etc.  Talk to as many as you can.  I recommend using LinkedIn to help with this process.  If you are persistent, you can find out a lot about the company and the market.  Not only will this help with your interviews, it will help you come to an informed decision on whether to join or not should you be offered the job.

6.  Expect the unexpected.  In early stage companies, you’re probably going to be interviewing with people who are a level or two higher in the organization that you would in a more mature company.  If you’re interviewing for a VP role, you might meet with a board member; if you’re interviewing for a developer position, you might meet with the CEO or founder.  I know one founder who often used to ask candidates if they had ever been in a fist fight.  Sometimes I would conduct an interview over a game of foosball.  The senior folks in the company have probably gone through a lot of VC pitches and know how to dish it out as well as receive it.  If you go in expecting to be pushed off balance, you’ll be better prepared.  The goal of this, I guess, is to get you to drop your guard and see how you think on your feet.

5.  Surprise them.  The parallel to my previous point is for you to take the opportunity to test the folks you’re interviewing with.  It doesn’t necessarily have to be something big or shocking.  For example, when someone worked at a large organization previously, I like to ask them about how the company is organized to get a feel for their responsibilities in the position (which isn’t typically obvious from the title…I think almost everyone at Goldman is a vice president, for example).  Anyway, I recall a candidate who after a couple of questions, jumped up to the white board and started diagramming the org chart for the firm.  I was impressed not only with her confidence but with her ability to communicate simply and concisely.  So, my advice is to surprise them.

4.  Check references.  I confess that I’ve never seen anyone do this, but I would be impressed if someone did.  Every good company serious about hiring someone asks them for a few references.  I’d recommend responding, “but of course!  Would you also mind if I checked a few references on the firm as well?”

3.  Be prepared to discuss compensation.  Odds are that by working for a startup you will be making less in cash and other compensation than if you went to work for a more mature company.  That’s partially offset by a “lottery ticket” in terms of equity options, but I’d argue that the best reason to take the hit is for psychic reward.  That aside, you should familiarize yourself with vocabulary and mechanics of stock options.  There are a ton of resources on the web.  For senior positions in a startup, there are some really good comparables available in this study conducted by Prof. Noam Wasserman at HBS.  Everyone has a different strategy on this, but mine is to be straightforward and, when asked about compensation, to respond, “here’s what I need to keep the lights on.”  If you and the company do well, then you’ll certainly be making a lot more in a short period of time so haggling over a few pennies up front is really not worth it.

2.  Act as if you are an investor, because you are.  In light of the aforementioned hit to compensation, you will be, in fact, an investor in the company should you join.  The most successful team mates I’ve had in a startup really viewed themselves and acted like they owned the whole company.  Not from an ego perspective, but by continually asking, “is this the right thing I should be doing for the business?” and then acting upon that.  Thinking like an owner causes you to see the forest through the trees and when strategy is changing that is critical for success.  If it’s not in your DNA to do this, I’d suggest startups aren’t the right career path.

1.  Build a culture you enjoy. So you’ve decided to join.  What you’ll find is that in a company this small, you can have a major impact on the company culture (something not possible in a more mature company).  Whatever level you join at, you can have a big impact.  If you’re annoyed by meetings that start late or run on too long, probably others are (or will be) too so you can take it upon yourself to change things.  This is the beauty of startups, you can do so much more than your “job.”  Start a weekend ultimate frisbee group or create a company book club.  All of these things will make you more successful at the company and the company more successful…not to mention more enjoyable along the ride!

Business Models


Business Models

It’s time to take up that new year’s resolution to post more often and crank out my q1 post.

There’s been some discussion in the tech blogosphere about startups and their need to have a clear business model, and some confusion from entrepreneurs about why it’s ok for some businesses not to have known business models when they are expected to show three year pro-formas and be grilled about their model during any investor pitch.

I generally believe that for many technology companies, you need not necessarily have any idea how you will make money when you get started, and if you show good progress on the product and customer adoption, you need not make any commitments to a business model for some time. You do need to intimately understand where you sit in the proverbial value chain and what your position there means for your company, but you don’t need to know precisely how you will extract value. In fact, I’ll go farther and say that focusing on business model too early can hurt a company’s prospects. When asked about Google’s lack of a clear business model when he backed the company, John Doerr is said to have responded “With this kind of traffic, we’ll figure it out”. It’s hard for some people to make sense of this when juxtaposed against their own experience pitching VC’s, during which an obviously best-guess business model is grilled and questioned. What’s going on here?

I have said before in this blog (or if not here, then certainly in my own mind) that I think all startups should think of the long road in front of them in three phases: during phase 1, you need to be passionate about the product (or service); during phase 2, you need to be passionate about your customers (*and* the product); during phase 3, you need to be passionate about revenue (*and* customers *and* the product). That may sound like some statement out of a “7 Habits of Highly Successful Startups” manual, but what does it really mean?

First, it’s important to remember that you (you being the startup or entrepreneur) have limited resources. In the beginning, you are the most limited in terms of resources but the least limited in terms of range of motion. It’s easier to innovate and change directions in the early days, but it’s harder to do nine things at once. This is probably the founding team’s favorite part of the lifecycle of the company. Everything is possible, and you can really focus on building the most awesome product/service possible, nimbly making changes in direction on the fly and rolling out different or new capabilities easily while simultaneously shutting down capabilities that seem to make no sense as part of the evolving vision. This is one reason I hate to see very early stage companies sign a big customer before the product is baked. You are encumbered by product commitments and customer support before you truly know what the market wanted. You have to be passionate about a customer and the product when you should be laser focused on the product. The customer’s needs and your goals vis a vis the market may diverge. In an effort to show progress, however, the marquee customer is attractive in the belief it will help attract investment (and this may indeed be true). In a previous life before FeedBurner, my founders and I made the mistake of signing a big name customer to a paid monthly contract before we really knew what the product’s place in the market should be. Won’t ever do that again.

So, you grow, and the product gets to the point where it’s usable and people start climbing in the bus, and if you’re really lucky, it’s growing like a weed and customer adoption is rampant. So, now we come to this curious world in which some people start to say “sure it’s great, but what’s the business model” while other people are saying “don’t worry about the model right now, grow grow grow” (which is in turn interpreted by the first group as either “forgetting what happened in the bubble” or greedy or just stupid). I strongly believe that while you are growing in this phase, and expanding your initial team, you need only be passionate about the product and passionate about the customer. So, what does it mean to be passionate about the customer? Come closer and pay attention because I might not say what you think i’m going to say. If you ask a customer what being passionate about the customer means, you might generally hear “great customer service”. This is not necessarily what I mean in the business sense. Passionate about the customer means that you are doing everything in your power to a) get more customers and b) make sure that your existing customers have little reason to want to stop using your product (what’s referred to as “churn” in the antiseptic parlance that is preferred by some). Is great customer service one way to accomplish this? It can be, yes. What are some other mechanisms by which you can be passionate about the customer? Well, if you want to minimize churn, your product needs to be as usable and bug-free as possible. Nothing offers the competition an opportunity to show its stripes like your product not working. I think of response time, for example, as part of the passionate about the customer bucket, not the passionate about the product bucket. Slow response times can reduce new customer growth and give existing customers reason to try out a competitive offering.

It is absolutely critical, however, that you not make the fatal mistake of interpreting “passionate about the customer” with a mindset of being in reaction to a specific customer or customers. What the heck does “in reaction to a specific customer” mean? Ted Rheingold, the founder of Dogster and Catster, likes to say “the customer that emails you all the time is not all your customers”. If you have a thousand customers, and you think that you are being passionate about the customer because you immediately respond to the two customers that repeatedly send emails like “YOUR SERVICE IS ACTING LIKE A *$#@! !!! PLEASE FIX THIS NOW. WHY CANT YOU PEOPLE GET A CLUE AND GROW THE !@#$! UP???”, then you aren’t being passionate about the customer, you’re just feeding the raccoons. It is really really hard to get this through your head. You want to help everybody that’s using your service. Here are a couple people that seem to want to use your service but repeatedly complain like this…if you are trying to help them, then you must be passionate about your customers. Instead, all you’re really doing here is causing your team and company a lot of aggravation. I’ll use a stupid analogy for those of you who play golf. When you make a bad shot, your inclination on the next shot is to think specifically about fixing that thing you just did wrong and think about making sure you don’t do those two specific things wrong again. Of course, this is a recipe for disaster. The right way to play the game is to have a very consistent approach to every shot, irrespective of what just happened on the very last shot. So it is with an approach to being passionate about the customer. You need to understand what things you are going to do, how you are going to communicate with ALL your customers, etc. in order to maximize the number of new customers that will try your service, and at the same time minimize the number of people who you give a reason to try something else. Maybe this includes responding immediately to all caps emails that contain > 50% vulgarity, maybe it means ignoring those. Maybe it means being in reaction to every blog post you see, maybe it means never responding to any of those but frequently letting your community of customers know what’s going on at HQ. Maybe it means using your constrained resources to do no communication at all and focus 100% on having the fastest and most highly available service. That’s for you to figure out. We happened to be of the “hypercommunication with customers” mindset and practice at FeedBurner, but I know of wildly successful internet companies that had absolutely no customer feedback mechanism and yet almost never lost a customer because the service just worked.

So, we come to the point of the whole post: business model. Let’s say you have 20 people in your company working with you. Let’s say your initial product is a big hit, and people are adopting it with such enthusiasm that your growth rate is beyond your wildest dreams. The product is still in its relative infancy, but you’re working out the kinks.
Is it critical that you figure out your business model as soon as possible? No.
Is it critical that you have enough cash to make sure you can grow the business? Yes.
Might it be the case that you can’t get access to capital unless you have a sound business model? Yes.
Is life fair? No.
Don’t you ultimately have to figure out how the heck you’re going to make money? Of course, but….

You’ve got limited resources. It’s still early. It is very likely the case that the first business model you try will not work (or will need to be amended or supplemented with other mechanisms). So, while you should be laser focused on having your company be passionate about product and passionate about customers, you don’t need to be (and in fact you shouldn’t be) passionate about revenue until the business model reveals itself. How the heck does a business model reveal itself? You try different things….the less you worry about fixating on a specific model, the more different things you can try. Maybe it’s an ad model, maybe it’s a free/premium model, maybe it’s a private label model, maybe it’s something else altogether. But leave yourself room to be in that quantum state of “it could be this or it could be that” until you figure out what works. Only then do you have to ramp up sales, finance, sales engineering, etc. and go out to the market with a very specific model. Announcing your model to the market before you really figure out what works forces you into multiple binds….the model may not scale, the model may be wrong, and you’re now in a position where you have very limited resources and you are trying to get your company to be passionate about three things: product, customer, revenue. You also signal to the market and your investors that the clock is now ticking. Didn’t hit your q1 revenue number? Uh oh, you’re now going to be a lot more focused in q2 on figuring out how to hit that revenue target but you’re also still in hyper-growth mode so the product and customer base require everybody’s critical attention. Much better to be internally focused on fostering continued growth and innovation while tinkering around on the side with potential models, knowing that the ultimate model may not present itself for some time.

Conundrum: if this is true, then why do potential investors always drill you on your business model?! Because they want to understand how you think of the company and the business. It will ultimately have to go through these three phases. Does any of your thinking about business models sound even remotely plausible? Is it the case that you are starting a company in an area in which many others have tried and failed? If so, then why do you think yours will work? What you are hearing when potential investors ask you this question is not: “I don’t see how that business model will make the 9 million in top line, with 39% margins that you show on page 10″, instead you are hearing “help me understand how you see this ultimately functioning as a business”. It may be that your answer is “look, we think there is a free/premium model here that works if X and Y are true. However, if A and B are true, and so far that appears to be the case, then it’s more likely that we go go go on product innovation for the next year and then attack this as a private label model when enterprises follow consumers into the market”. Bottom line: Investors are trying to see how you’re thinking about this, not whether you have the right answer.

Conundrum Part II: Our service is free and because we don’t have a business model, should we pursue charging for it as one of the potential models? Uh, I suppose you could, but why would you do that if it’s going to impede growth? Look, there are plenty of great business models based on charging a subscription fee. It’s also the case that we’ve all been burned by “now it’s free, now it’s not” services in the past (think ATM’s, for example….it’s free until we’re all using it, at which point it’s $2 per withdrawal). Nonetheless, it would appear that models in which revenue and earnings accrue to a company as an indirect function of its free use are the models that have the most powerful impact on the Internet today, and you work against that trend at your own peril. This is probably true even where specific industries continue not to admit it. When you add costs to using a product/service, you add friction to customer adoption (he said, stating the obvious). If somebody else comes along and figures out how to make money on such a service by providing it for free, then it’s not so much fun to be you because your competitor’s lack of friction is going to make life harder for you. And time and time again on the Internets, we see that somebody ultimately comes along and figures out how to make a lot of money by offering for free a service for which somebody else is charging.

When do you need to figure out your business model? Before you run out of cash. Sucks to read through that much text for such an unenlightening conclusion, but there you have it.

Be Nice To Assistants


Be Nice To Assistants

Some entrepreneurs are rude to Executive Assistants, treating them as second-class members of a VC team. While assistants aren’t directly involved in the investment decision making process, they do have important influence.

Most VC firms have few employees. As in any small group, there is ‘water cooler’ talk, ensuring that most people know the dirt on lots of topics. Assistants participate in this process.

As a result, when an entrepreneur is rude to an assistant, the professional staff will definitely hear about it. Since the professional staff seeks to back people with good judgment, this can count as a strike against the entrepreneur.

In sum, if you don’t broadly treat people with respect in life (which is preferred), at least be strategic enough to know that every impression you make on someone affiliated with a VC fund will impact the probability of your receiving an investment.

Entrepreneur’s Library


Entrepreneur’s Library


Everything is Miscellaneous, David Weinberg
Lucky or Smart: Secrets To an Entrepreneurial Life, Bo Peabody
The Road to Success: How to Manage Growth, Michael Preston

The Long Tail, Wired
What Is Web 2.0,
Time-wise, internet is now TV’s equal, Media Life
Would You Buy a Used Dot Com from this Man?
Moguls of New Media, the Wall Street Journal
Web advertising rose 30 percent in ’05, Media Life
The End Of E-Mail?, Forbes
Sponsored Link Impressions Show Impressive Growth, eMarketer
What Search Sites Know About You, Wired News.
Publishers versus the Censorbot
Fast Talk: Search Them, FastCompany
A Face Is Exposed for AOL Searcher No. 4417749, the New York Times
You are what you search, Slate
Making a Buck Off Your Pet Trick Videos, The Wall Street Journal
Journalism evolves: no need for the media to run from the blog, Christian Science Monitor
CNN to boost Citizen Journalism Initiative, Reuters
Publishers versus the Censorbot
Youtube’s Rise, Media Guardian
Youtube Chasing Hollywood’s Ad Dollars
Seven open source business strategies for competitive advantage, IT Manager’s Journal
Something Wiki This Way Comes, BusinessWeek
Craigslist vs. Katrina, Wired
We Are the Web, Wired
Is Slashdot the future of media?, Fortune
Viral Marketing and What is Viral marketing?, Draper Fisher Jurvetson
Interactive Social Networking and the Value Framework
CyWorld Attacks!, Business 2.0
The Myth of Disintermediation, Information Week
the Dot Com Bubble Burst and Disintermediation, Internet News
The Myth of Disintermediation, Information Week
the Dot Com Bubble Burst and Disintermediation, Internet News
Massive Drives Interactive Ads, Red Herring
A New Reality in Video Games: Advertisements, The New York Times
Eight Myths About Video Games Debunked, PBS
Virtual Economies Break Out of Cyberspace, GameSpot
The New Wave of Dot Com Riches, CNNfn
The Ad Scientists, Wired
TV Ads on the Cheap for Small Biz
Online Video Ad Market Reaches $225 Million, Poised To Triple, Mediapost
Publicis Acts to Surf the Marketing Waves of the Future, The New York Times

Interactive Advertising Bureau standards
Pew Internet Life studies
Viral and Buzz Marketing Association

The Entrepreneur’s Guide To Raising Venture Capital

The Entrepreneur’s Guide To Raising Venture Capital

My current objective is to create the entrepreneur’s manual for raising venture capital.  The posts below are parts of this manual, organized in the chronological order of the fundraising process.

I generally post on Monday, Wednesday and Friday.

Suggest a topic by commenting on this post.


Venture Trends
The Longtail Of Venture: Why Some Companies Will Continue To Need VC And Other Won’t

Starting Your Company
Your Company Is Who It Hires
First Mover Disadvantage

Picking The VCs
Why VC Websites Stink
The Advantages Of A Local VC
Consider Available Capital When Selecting VCs
Types Of Risks VCs Take

Preparing Your Materials
What An Executive Summary Is
PPT Presentations Are Not Executive Summaries
The Importance Of Geography
Value Proposition/ Pain Point:  Make The Case
Addressable Market:  Not Market Size
Addressable Market:  Making The Estimate
Disruptive Technologies Can Shrink Addressable Markets
Competitive Landscape Overview
Barriers:  Get The Story Right
The Significance Of Patents
Major Achievements
Projections:  Nothing To Stress About
VC Financial Performance Requirements
Overview Of Funding Status
Executive Summary Management Bios
The Significance Of Grey Hair

Getting The Meeting
Why VCs May Call
Why VCs Don’t Sign NDAs
Submitting Your Executive Summary
How Not To Submit An Executive Summary
Why An Executive Summary
Who You Should Submit Your Executive Summary To
Why A VC May Be Slow To Respond
Why You Might Not Get The Meeting
VCs Have Flashback Syndrome
Another Reason You May Be Rejected: Portfolio Concentration
Entrepreneurs Should Ask Why Not
Why VCs May Not Share Insights
Being Invited For A Call
Be Nice To Assistants (Most Recent Post)

The First Meeting
Who You Should Bring To Your First Meeting
Sit On One Side Of The Table
The Objective Of The First Meeting
The Investment Overview Slide
Competition:  Provide Insight
Management:  Competency
Enlisting Your Complements
Management:  Compatibility
Good Management Takes Less Time
Concerns About Successful Entrepreneurs
Build Rapport
Pitch Is Not The Right Word
Proving You Can Execute
Figuring Out The ‘How’
Give Straight Talk
Expect Straight Talk
Present Flexibly
Solve The VC’s Issues
Do Not Stand While Presenting
Do Not Ramble
Do Not Name Drop
Don’t Focus On The Exit
Be Careful About Over-Selling Fundraising Interest
Follow-up Items
The End Of Meeting VC Pitch
Ask Questions At The End Of The Meeting
Ask The VC About Follow-On Investing
What To Do When The Meeting Ends

After The First Meeting
What To Expect After The First Meeting
Why VCs Don’t Always Cut You Loose
What To Do When Your Company Is Being Monitored

How VCs Make Decisions Internally
How To Take Advantage Of The VC Decision Making Process
Creating Momentum
Maintaining Momentum:  Create Urgency
Find A Champion
Make Younger VCs Your Champions
Respond Quickly To Follow-up Questions
VCs Are Not Like Your Parents
Reading VC Interest
Hear Feedback
Submit A Detailed Model
If You Can’t Create Interest Move On
Getting Your Executive Summary Distributed To Other VCs

Why A VC Might Not Share Your Executive Summary With Other VCs

Sharing Your Executive Summary With Anonymous VCs

The Due Diligence Phase
Why VCs Conduct Due Diligence
Why You Should Facilitate Due Diligence
Types Of Due Diligence Meetings
Exploratory Meetings:  Open Your Kimono
Manage VC Expectations About Operating Performance

Sharing Your Cap Table
Signs You’re Close To A Term Sheet
Doing Due Diligence On The VC

An Introductory Guide to Startup Funding


An Introductory Guide to Startup Funding

by Ben Yoskovitz

Getting a startup funded isn’t easy. There’s no shortage of hype, and multiple announcements daily of new companies getting money. And there’s an equal (and growing) amount of chatter about a “new bubble” that we’re entering. Still, raising money is far from a cakewalk.

Most people I’ve spoken to say it takes a solid 4-6 months to raise money. Mark MacLeod, CFO at Mobivox, echoes those thoughts (Mobivox recently raised $11 million dollars.)

Sure, it can happen faster than that. In the hottest startup hubs it might seem like everyone and their brother is getting funded for something. Don’t let that fool you.

You might also think that everyone knows everything about startup funding, but that’s not the case. Recently someone sent in a question asking about the differences between angel and venture financing. With that in mind, I’ve put together a brief, introductory guide to startup funding.

1. Can You Boostrap It? Should You?

Boostrapping means you fund your startup on your own. Scrimp, save and squeeze by on the minimum you can. Guy Kawasaki does a good job of explaining how to bootstrap, and in most cases, every business starts out this way.

The principles behind bootstrapping – watching every penny, weighing spending options versus return on investment, doing more with less – have merit regardless of your funding situation. Companies that raise lots of money tend to overspend (and spend poorly); they forget about running lean & mean.

Sramana Mitra says bootstrapping is becoming sexy again. Certainly, second and third-time entrepreneurs are bootstrapping more; in many cases they can afford it. I think the bigger trend is in small angel/seed financing rounds to help kickstart companies.

The advantage of bootstrapping is simple: you retain control. You’re not diluted (by investors), there are no additional chiefs (read: board of directors, influencers, etc.), you can go at whatever pace you see fit and retain your vision. Bootstrapping gives you control.

But the disadvantage of bootstrapping is a lack of capital (unless you’re rich.) That lack of capital can be a significant constraint. Of course creativity loves constraints but there’s a limit on that. If you can’t afford to keep the business moving forward, you’re in trouble. And first-time bootstrappers frequently under-estimate what things will cost.

A final note on bootstrapping: You might think it’s an “either or” option — bootstrapping vs. raising money — but it’s not. Venture capitalist, Matt Winn makes this point clear in his VC view of bootstrapping.

2. Love Money

I love money, too, but that’s not what I mean. “Love money” is money you get from friends and family.

This is an extremely common way of raising money. From Connecting People I found out that:

“…$100 billion ‘friends and family’ money is used annually to fund 3 million start ups. This compares to only $25 billion through venture capitalists. The average amount invested by friends and family is between $20,000 and $25,000, and further, 58% of the fastest-growing companies in the U.S. started with $20,000 or less.”

If you can get, go for it. The benefit is that it should be easier to get the money (vs. raising from outside sources), and you’ll gain some experience pitching in a friendly environment. The disadvantage is that you run the risk of ruining personal relationships. And, unless your friends and family are wealthy, $20-$25k won’t get you that far.

3. Angel Financing

This is where the real action and opportunity lies for entrepreneurs. We’re seeing the most movement in the angel & seed financing space.

Venture capital firms are moving into the space, developing early stage programs (some already exist like Charles River Venture’s QuickStart Program). And of course, we have the now-famous, Y Combinator which turned the entire early stage funding market on its head. It was followed by a similar program called TechStars (and others.)

And in-between Y Combinator and VCs we’re seeing angel funds pop up like Montreal Startup which attempt to blend the VC and angel worlds into one. Jeff Clavier’s new SoftTech VC II fund is another good example of this — a $12 million dollar fund dedicated to seed funding between $100k-$500k.

VCs are moving into early stage financing to get access to the freshest deals and brightest, new entrepreneurs. It makes complete sense, although they still have to change the way they invest and their mentality towards investment. Bernard Lunn makes the point clearly in his article: New VC Model For Small Scale Financing:

  • Early stage Web 2.0 companies need way less money to get started.
  • The pace that companies get to market and develop is much faster.
  • There’s less risk putting $250k at work versus $2.5 million.

Be wary of the VC that claims they’re interested in early stage financing but has yet to complete a deal. Or the VC that still wants to overload you with paperwork, complex terms and endless amounts of due diligence.

Carl Showalter does a good job of explaining why you don’t need big money from VCs to get started.

Angel and seed financing comes into play before a business has launched its product, or shortly thereafter. It’s the money you need to make it happen out of the gate. Generally, there are a few sources of angel money:

  1. Venture Capitalists. I’ve already mentioned this group. You can expect “heavier” deals by involving VCs, but they’re more accessible than other investors.
  2. Strategic Angels. A strategic angel is someone with industry or domain expertise in what you’re doing. For example, if you’re starting an e-commerce business, Pierre Omidyar would be a very, very strategy investor. In the Web 2.0 world another strategic investor would be Reid Hoffman. Having strategic angels is great, because not only will they provide some cash, they’ll provide expertise, contacts and legitimacy to your fledgling startup.
  3. Non-Strategic Angels. When most people think about angel financing, this is who they think about — wealthy people looking to diversify their portfolios (and perhaps have some fun) by investing in startups. Lots of people fit into this category: businesspeople, doctors, entrepreneurs, etc. If they have money and want to part ways with it for a “piece of the action” they’re potential angel investors. Often, these angels work together in groups – angel networks – to share opportunities. The problem is that it might be hard to find non-strategic angels, even if they might be the easiest to raise money from (since they’re typically the least scrutinizing.) But they don’t often publicize their interest in angel investing, so finding them can be tricky.

A few more points about angel and seed financing:

  • Amounts range from $25,000-$1,000,000. Venture capitalists that play in this area will often look at the $250,000+ range, whereas individual investors will be (typically) less. The higher you go, the closer it gets to a Series A (described below), which means more effort and paperwork to close.
  • The most popular structure for angel and seed financing deals is convertible debt. At least that’s the current trend. I’ll let others (more knowledgeable in this stuff) explain convertible debt.
  • If you’re raising a seed or angel round, keep it as simple as possible. You can’t afford to get buried in process and paperwork at this stage. But please, please, please make sure you understand it fully and you’re comfortable with it. This could very well be the most important money you raise.
  • Just because you’re keeping it simple and only raising a seed round doesn’t mean it won’t take 4-6 months to complete. Craig Hayashi has a nice angel investment timeline you should take a look at.

4. Series A Financing

Series A investments can happen at a fairly early stage – just after launch, for example – depending on how long the company has existed beforehand. A company with lots of technology and heavy intellectual property (IP) might have taken a couple years to get off the ground and already need a Series A when it launches.

But in most cases, a Series A is used once the company has shown some traction and needs more money to expand. It’s the money that will take you to new heights, massive revenues, cash flow positivity and a huge payday via acquisition (or some other exit.) At least, we hope that’s the case!

Series A financing ranges a great deal: think $2 million to $10 million or more. Depends on how much money you need, the valuation you can get for your company and what investors are willing to put in.

Series A financing typically comes from venture capitalists. And at this stage, you’ll want to bring in the strongest partner possible; the VC firm with the most experience in your space, the highest pedigree and the most success stories.

Final Funding Tips

Here are some final thoughts I can leave you with:

  • Be prepared to pitch a lot. Don’t get discouraged. Refine your pitch. You will get better at it.
  • Get organized. This sounds silly, perhaps, but the more organized and professional you look, the more comfortable investors will feel. This is especially true when it comes to presenting financials. Use a real financial model (not the back of a napkin!)
  • Get help. Seek out the advice of mentors, advisers and lawyers. A good lawyer can really help with more complicated deals.
  • Do your own due diligence. You’re about to get into bed with someone, you might want to check what they have under the covers. Don’t be afraid to ask for references. Go ahead and contact other companies your potential investors have put money into. Make sure you’re comfortable; because your investors are going to be major influencers on your company’s success.
  • Never stop fundraising. I’m definitely not in love with the fundraising process, but there’s no point stopping. Keep building relationships with investors, keep nosing around for opportunities. When the time is right to raise more money you don’t want to be starting at zero.

Great Resources on Financing

The best way to get a good deal is to be informed. Here are some necessary resources for anyone looking to raise startup financing:


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