Reality Entrepreneurship

Last Thursday I took a half day off from work to attend a seminar held by UW’s “Center for Innovation and Entreprenurship.” The seminar featured three presenters, a three-panel forum, and a reception. Below the fold are my notes and quick thoughts.

“Confessions of a Serial Entrepreneur,” Scott Lipsky, currently at Highside Capital. He’s had tours at Amazon, Barnes & Noble, AQuantive, and GalleryPlayer.

Official blurb: The ‘job’ of the entrepreneur: defining the idea, garnering resources, identifying customers, launching the firm, preparing for growth. Where do ideas come from — and how do you distinguish the brilliant from the awful? Traits of successful entrepreneurs, and misconceptions of first-time entrepreneurs.

Takeaways:

Structure compensation and options so early people are encouraged to leave at an appropriate time.

Companies that grow to beyond 80-100 people are transitioning from “pioneer” (find new areas) to “settler” (improve infrastructure) management. 30-50 people is usually the point where haphazard management shows up. If processes are in place, you’ll make it past this first “bump.”

Everyone should be replaceable. If a prima donna cannot help an organization learn, remove them early
VCs expect 9 out of 10 companies to be failures, but aim for a 30x return to offset this. Typically they want to own 15-30%, enough to reap the reward, but not so much that you become disengaged

Bad hires will kill a startup. It’s better not to hire than to hire poorly. (A players hire As. B players hire Cs.)

Focus on ability, not pedigree. — this is harder than it seems. People hire what they’re familiar with, whether that’s a school or church.

On Funding: when in the angel round, take all you can get. Any time you spend fund raising is time you’re not developing your organization. Don’t get greedy: often new CEOs will walk away from a deal because they refuse to cede 51% equity. “51% of nothing is…. nothing.”

Keep focus. It’s tempting to increase the number of products or pursue any opportunity that will yield money. Startups don’t starve, they drown. VCs consider your product viable when you have three separate, paying reference customers

Press coverage is a distraction, don’t use it unless your message is meaningful.

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“Reality Check: The Founding Team,” Ralph Derrickson. Ralph is currently CEO at Carena.Official blurb: The core founding team, the experience-management-character equation, three points of view for “the team,” team dynamics, establishing a corporate culture, growing (and constantly reforming) the team, pioneers versus settlers, considerations from the outset.Investor: is this the right entrepreneur?This was the most interesting of the three because he related experiences from each vantage. He also contrasted how much cultures differed at his early companies: Sun (cool technology), NeXT (“this is Steve Jobs’ company”), and Starwave (“no assholes”). He described entrepreneurism as something that cannot be learned or taught, but a condition requiring ongoing therapy.

As an Investor: Is this the right entrepreneur?

• Do they have any relevant experience? Have they done something similar?
• Do they know the market, players and dynamics? Can they sell?
• Any idiot can spend money, can they hire people to help them? Can they manage people? Do they inspire confidence?
• Can they “cough up the furrball” and talk about the real problem? Can they admit they make mistakes?
• Do you trust them?
• Will they step aside if necessary?
• Do they own enough to matter?

As an Entrepreneur: is this the right investor?

• Does the partner — not the firm — know the field? (The partner is the one who has to go to bat for you for funding.) Do they have a track record? Contacts?
• Do they know the difference between being on the board and running a company?
• Will they push you aside? (You can’t fire them; but they can fire you)

As a Manager: is this the right team?

• Management early on is much different than management later. Pioneers find new markets, settlers improve infrastructure. Neither should dismiss the other, but be aware of their strengths.
• Can I work with them? Do I trust them? Can they accelerate or contribute to institutional learning? Can they shape the culture?
• Can they handle a startup?
• VP of sales is the hardest to hire. Salespeople, by nature, tell you what you want to hear. Bad hire would be the most costly. Sales people should be the most highly compensated. A CEO never got fired because sales was overpaid.
• Interviewing is an unnatural act. You never add to a team, you reform it with each new member. Do your own reference checks. Most of the names given are bullshit and should only say good things, what you need to do is ask “who, besides you, could give comment?”
• Combine people with different backgrounds.

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“Reality Check: The Legal Side,” Parag Gheewala, partner at Wilson Sonsini.Official blurb: “The StartMeUp Software Story: preparing to leave your day job, hiring employees and outside consultants, intellectual property, confidentiality, and noncompete issues.” Parag walked through the legal issues as an organization grew. A lot of this was familiar with me, so I was logged in checking email.

• Non-disclosure agreements — these also need cultural enforcement to be effective.
• Employee agreements — laws are different for each state. Online forms will often not apply. For example, in California, you won’t have a non-compete. Washington and Texas have different rules. In Washington, you cannot amend a hiring agreement after an employee has started without offering some consideration (money, shares, etc). [I had this happen to me several years ago and refused to sign the new, more restrictive agreement.]
• Independent contractor agreements — needed to protect the intellectual property and technology. “Work for hire” applies to copyright only and to employees only.
• Assignment agreements for intellectual property
• In-bound license is when a third party vendor’s product is used by you. These licenses should define the scope, financial considerations and termination options.
• Out-bound licenses are from you to another vendor, often done to bring in cash. These also need a defined scope, financials and other obligations. Often there will be an indemnification clause.
• Open source can be embraced – he recommended maintaining a database of what you use, how you use it, licensing information and requirements to conform with the licensing. He didn’t go into specifics about BSD versus LGPL versus GPL/2/3 license structures other than GPL* being a viral-style license. [I had recently pursued commercial licensing of a GPL component. Their proposed licensing structure was so ridiculously out of whack, I didn’t see a reason to continue discussion.]

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After all of this was a three person panel of former alums who were in various stages of starting their organizations:

• Charlie Robbins, of Sea to Ski Property Management
• Brian Johnson of Sticky Drive, LLC
• Peter Dunbar of Talaria

This was very fun because their experiences were recent/current. Once the initial quiet was dissolved, the candor was great. Takeways:

• Pay yourself from the beginning; otherwise, you’re involved in a very expensive and time-consuming hobby
• The business plan was inspirational: the original concept was okay, all of the financials were crap. Trust your gut.
• Bad hires: Admit it and move on. If your business is clean, get rid of bad hires promptly. HR ideal of due process is great in theory, but keeping them around will decimate your early-stage company.
• Ensure duplicity of knowledge (everyone is replaceable, including yourself). When hiring, go have drinks with them to get a better for the fit. First bookkeeper is hardest one to fire because they understand the taxes. Business culture develops life of its own.

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Now playing: Blue October – Into The Ocean