Overview
The vast majority of start-ups fail. Roughly speaking one in ten have a shot at the proverbial IPO and even then an IPO can mean nothing. We often forget that an IPO with a low stock price means nothing to anyone involved except maybe to the preferred shareholders. Having worked at about 7 start-ups, I thought I'd share my experience with the hope of helping the techie entrepreneurial crowd. I am biased!
None of this shared information guarantees any success whatsoever. Rather it should definitely help you identify the true dud. I am certain some duds have made it to the big time, but if you play the percentages like anything else, numbers don't lie.
This topic is near and dear to my heart. Many technologists align themselves with early stage companies, excited about the technology and hope only to end up with lots of software that does stuff, but nothing you can put in the bank. Read the following with a grain of salt.
If the idea doesn't make sense to you, it probably won't to anybody else
We've all met the savvy business types that can sell any idea. While most software engineers can conquer millions of search requests all happening at once or write sorting algorithms that simply boggle the mind, most still get hood winked by slick talking MBAs. Most engineers at a certain level can build anything. Anyone who doubts that can search the net and find the tons of absolutely brilliant ideas out there. Many are free! I am amazed at what the open source market has produced. When listening to an idea, it must make sense to you first. Many times the technology is held out as a carrot. "You can build it with anything you want." Don’t let your excitement about the technology get in the way of sound judgement. You should understand the business model thoroughly before giving 1 to 5 years of your life to a project. Many business types think if you get a 30" monitor and cokes in the fridge you'll work until your fingers turn numb and they hope you don't ask too many questions about the financials or the model. Ask yourself if anyone you know would use the product or service or would buy it. What's the market size? Give it the same analysis you would a complex design.
Structure good contracts
Most CTOs or Chief Architects get pulled into a company as a founder and get offered about 3% in some type of equity. In many cases this is a fair offer given that you are not a founding member of the team. That said if you are this is a complete rip off! Consider the task at hand in a nutshell. You will design the technology; code it; setup the company site including phones, switches and email; manage a staff often including product management, QA and any support; manage the ISP; jump through hoops not to use licenses; work very late hours, etc. Why sell yourself short? Know your value and ask for it. If you aren't a founder, tie deliveries to bonuses. Try to get a sum of money or equity by hitting key milestones. Investors and founders value people who value themselves so don't be afraid. Remember only 1 in 10 have a shot!
If you are a founding member, get everything in writing up front. This seems like a no-brainer, but tons of trust and excitement have often resulted in huge disappointments. Many startups get bootstrapped with small amounts of cash from the CEO and/or angel investors. As soon as the company takes a round of investment capital, you are likely to be diluted. Even with anti-dilution clauses (almost no one gets this anymore) funny things happen. You are still better off with a contract in hand. Show this contract to a lawyer.
Technology != Commodity;
If you are a CTO of a billiards company, you will not be able to maximize your opportunity. I used a billiards company because it sounds ridiculous. The point is work where the technology you develop is valued. What you do should produce revenue. What you work on should be why investors invest. What you produce should not be perceived as a commodity. Business types often describe technology in such a way to devalue the effort. If it’s not really technology it shouldn’t take so long right? This means that what would take 6 months can be done in 2 weeks right? Don’t believe the hype and don’t take the job. If you are a true techie and work where this is the case, blow the dust off your resume. The best deals are given to those that are between the investor and his or her money.
The business model should not be "Go public!"
Many entrepreneurs are fixated on going public. A sure way to fail is for a company to focus on the exit strategy before developing a good product and service and understanding their audience. Run for the hills if being presented with an idea in a coffee shop and before the coffee is made, the exit strategy is brought up. Companies that win understand their market and can adapt when the market changes. These same companies also understand what they should measure. Conventional wisdom suggests that companies should have 3 things they measure constantly to determine the health of the business.
Sure everyone wants to know the exit. Why else would you join a start-up? This does not debunk the fundamentals of business and sound execution. Good companies have vision, plans and a way to execute. Strong leadership can sometimes compensate for what isn’t written down, but you need one or the other. Start-up and plan don’t have to be mutually exclusive.
Look for what investors look for in a company
I've had the pleasure of working with lots of investors who are worth all sorts of money made all sorts of ways. I approach them like a student and ask tons of questions. I often ask, "what makes you invest and take a risk in a company?" More often than not they are investing in the management team and/or the person - usually the CEO - who presented them with the idea. Yes the idea might be sexy, but at the end of the day they are investing in the team. That said evaluate the team for your self. Is the CEO execution oriented? Does he just have a good idea or do you think he can deliver? Has he delivered before? Does he have people who will challenge him on the board? Does the model make sense? Can he tell you his vision of the company in 5 years?
I can’t stress enough the importance of a good board. If the board is unable to help the company or they are simply friends of the CEO, it’s probably a bad idea. Many companies when raising money lean on the board for connections and all sorts of partnerships. You also want a board strong enough to keep the CEO in check. If you are taking such a position meet the board and get comfortable with them. If you are unable to meet the board run for the hills again. Relationships are king and you need your own relationship not the filtered version provided by the CEO.
Every investor meeting or opinion is not an emergency
Successful companies are true to their products and most of all their customers. Think of the products you like or the websites you visit regularly. Good products take focus dedication and a keen ear pointed towards the user. After all they matter most at the end of the day. There is a thing called good solid product development! Why do I point out the obvious? In many cases early stage companies chase their tails based on what some investor thinks or some article they just read. If a company has started with the proper research and was able to get money based on that idea, develop that idea. Proper research should prevent any company from having the rug pulled from under them such that they need to switch models or product on one particular day. While new ideas are good to vet, they should work within the overall product model. Companies like Google and Symantec spend lots of effort matching a product to a market and understanding their users. I’ve worked for both.
If you work for a company where technology counts and you are the expert, it’s your job to protect investor interests by developing the right product the right way.
Pay attention to who the CEO hires
Good leaders hire to their weakness. They understand the value of having a domain expert assist in propelling the business forward. This should be the reason they are hiring you! If the IQ among your peers seems to be low, run for the hills! I’ve been in several situations where CEO’s have hired positions to have a check mark on an investor presentation, including CTO. Typically this character assumes they know your job and everyone else’s better. Every position is trivialized except of course the CEO position. I strongly suggest that you interview your peers and get an in depth understanding of their background. See what they know about the value of delivering technology. Smart business people will understand that there is a huge difference in value between companies that develop real technology and those that shift weekly producing only demo ware.