Over the last few weeks I’ve gotten involved in hiring for two startups, a public agency and a non profit. Part of each conversation was getting asked to help them put together a “job spec.”
I had them leave with a pie chart.
There must be something in the air. In the last week I had four separate groups through the ranch all wanting to talk either about hiring a senior exec or a senior exec looking for a new job. Having sat through these job discussions as an entrepreneur, board member, and now an interested observer, here’s what I concluded:
Decide whether you’re hiring someone to help search for the business model or to help execute a business model you’ve already found (same is true is you’re looking for a job – are you going to be searching or executing?) Are you looking for a visionary or an operating executive?
If you’re hiring an operating executive (CEO, VP, Executive Director, etc.)
Don’t start with the candidate (board member x has a great VP of sales he knows, founder y wants this CEO he met at a conference, etc.)
Don’t even start with the job spec
Since I’ve always been a visual guy, job specs with their long lists of job requirements always left me cold. My eyes would glaze over at these recruiter/board wish lists. I wished there was a way to see them at a glance. (Just to be clear this isn’t the entire hiring process, just a way to visually begin the discussion.) So here’s my suggestion: Start with a Pie Chart.
Draw a pie chart.
List all the job specs as slices
Adjust the width of the pie segments by importance. (Extra credit if you get the current CEO or internal candidate to help you write/draw the slices and weight their importance. Everyone involved in the hire gets to have an opinion on the slices and weights, but the person/group making the hiring decision gets to decide which ones to include.)
Now that you have this spec, evaluate each candidate by showing his/her competence in each slice by length
Easy as pie!
Are you hiring for search or execution skills?
Show the job requirements visually as a pie chart
Prioritize each requirement by the width of the pie
Show your assessment of each candidate’s competencies by the length of the slices
Now with the data in front of you, the conversation about hiring can start
Hermione Way of TheNextWeb grabbed me for a short interview below that covers the challenges and opportunities of startups outside of Silicon Valley and the never ending discussion of the “new bubble.” (Skip the first minute.)
If you have trouble seeing/playing the video click here.
Listen to the post here:
We’re now in the second Internet bubble. The signals are loud and clear: seed and late stage valuations are getting frothy and wacky, and hiring talent in Silicon Valley is the toughest it has been since the dot.com bubble. The rules for making money are different in a bubble than in normal times. What are they, how do they differ and what can a startup do to take advantage of them?
First, to understand where we’re going, it’s important to know where we’ve been.
Paths to Liquidity: a quick history of the four waves of startup investing.
The Golden Age(1970 – 1995):Build a growing business with a consistently profitable track record (after at least 5 quarters,) and go public when it’s time.
Dot.com Bubble (1995-2000): “Anything goes” as public markets clamor for ideas, vague promises of future growth, and IPOs happen absent regard for history or profitability.
Lean Startups/Back to Basics(2000-2010): No IPO’s, limited VC cash, lack of confidence and funding fuels “lean startup” era with limited M&A and even less IPO activity.
The New Bubble: (2011 – 2014): Here we go again….
(If you can’t see the slide presentation above, click here.)
If you “saw the movie” or know your startup history, and want to skip ahead click here.
1970 – 1995: The Golden Age VC’s worked with entrepreneurs to build profitable and scalable businesses, with increasing revenue and consistent profitability – quarter after quarter. They taught you about customers, markets and profits. The reward for doing so was a liquidity event via an Initial Public Offering.
Startups needed millions of dollars of funding just to get their first product out the door to customers. Software companies had to buy specialized computers and license expensive software. A hardware startup had to equip a factory to manufacture the product. Startups built every possible feature the founding team envisioned (using “Waterfall development,”) into a monolithic “release” of the product taking months or years to build a first product release.
The Business Plan (Concept-Alpha-Beta-FCS) became the playbook for startups. There was no repeatable methodology, startups and their VC’s still operated like startups were simply a smaller version of a large company.
The world of building profitable startups ended in 1995.
August 1995 – March 2000: The Dot.Com Bubble With Netscape’s IPO, there was suddenly a public market for companies with limited revenue and no profit. Underwriters realized that as long as the public was happy snapping up shares, they could make huge profits from the inflated valuations. Thus began the 5-year dot-com bubble. For VC’s and entrepreneurs the gold rush to liquidity was on. The old rules of sustainable revenue and consistent profitability went out the window. VC’s engineered financial transactions, working with entrepreneurs to brand, hype and take public unprofitable companies with grand promises of the future. The goals were “first mover advantage,” “grab market share” and “get big fast.” Like all bubbles, this was a game of musical chairs, where the last one standing looked dumb and everyone else got absurdly rich.
Startups still required millions of dollars of funding. But the bubble mantra of get “big fast” and “first mover advantage” demanded tens of millions more to create a “brand.” The goal was to get your firm public as soon as possible using whatever it took including hype, spin, expand, and grab market share – because the sooner you got your billion dollar market cap, the sooner the VC firm could sell their shares and distribute their profits.
Just like the previous 25 years, startups still built every possible feature the founding team envisioned into a monolithic “release” of the product using “Waterfall development.” But in the bubble, startups got creative and shortened the time needed to get a product to the customer by releasing “beta’s” (buggy products still needing testing) and having the customers act as their Quality Assurance group.
The IPO offering document became the playbook for startups. With the bubble mantra of “get big fast,” the repeatable methodology became “brand, hype, flip or IPO”.
2001 – 2010: Back to Basics: The Lean Startup After the dot.com bubble collapsed, venture investors spent the next three years doing triage, sorting through the rubble to find companies that weren’t bleeding cash and could actually be turned into businesses. Tech IPOs were a receding memory, and mergers and acquisitions became the only path to liquidity for startups. VC’s went back to basics, to focus on building companies while their founders worked on building customers.
Over time, open source software, the rise of the next wave of web startups, and the embrace of Agile Engineering meant that startups no longer needed millions of dollars to buy specialized computers and license expensive software – they could start a company on their credit cards. Customer Development, Agile Engineering and the Lean methodology enforced a process of incremental and iterative development. Startups could now get a first version of a product out to customers in weeks/months rather than months/years. This next wave of web startups; Social Networks and Mobile Applications, now reached 100’s of millions of customers.
Startups began to recognize that they weren’t merely a smaller version of a large company. Rather they understood that a startup is a temporary organization designed to search for a repeatable and scalable business model. This meant that startups needed their own tools, techniques and methodologies distinct from those used in large companies. The concepts of Minimum Viable Product and the Pivot entered the lexicon along with Customer Discovery and Validation.
The playbook for startups became the Agile + Customer Development methodology with The Four Steps to the Epiphany and Agile engineering textbooks.
Rules For the New Bubble: 2011 -2014 The signs of a new bubble have been appearing over the last year – seed and late stage valuations are rapidly inflating, hiring talent in Silicon Valley is the toughest since the last bubble and investors are starting to openly wonder how this one will end.
The bubble is being driven by market forces on a scale never seen in the history of commerce. For the first time, startups can today think about a Total Available Market in the billions of users (smart phones, tablets, PC’s, etc.) and aim for hundreds of millions of customers. And those customers may be using their devices/apps continuously. The revenue, profits and speed of scale of the winning companies can be breathtaking.
The New Exits
Rules for building a company in 2011 are different than they were in 2008 or 1998. Startup exits in the next three years will include IPO’s as well as acquisitions. And unlike the last bubble, this bubble’s first wave of IPO’s will be companies showing “real” revenue, profits and customers in massive numbers. (Think Facebook, Zynga, Twitter, LinkedIn, Groupon, etc.) But like all bubbles, these initial IPO’s will attract companies with less stellar financials, the quality IPO pipeline will diminish rapidly, and the bubble will pop. At the same time, acquisition opportunities will expand as large existing companies, unable to keep up with the pace of innovation in these emerging Internet markets, will “innovate” by buying startups. Finally, new forms of liquidity are emerging such as private-market stock exchanges for buying and selling illiquid assets (i.e. SecondMarket, SharesPost, etc.)
Order of Battle Each market has a finite number of acquirers, and a finite number of deal makers, each looking to fill specific product/market holes. So determining who specifically to target and talk to is not an incalculable problem. For a specific startup this list is probably a few hundred names.
Wide Adoption Startups that win in the bubble will be those that get wide adoption (using freemium, viral growth, low costs, etc) and massive distribution (i.e. Facebook, Android/Apple App store.) They will focus on getting massive user bases first, and let the revenue follow later.
Visibility During the the Lean Startup era, the advice was clear; focus on building the company and avoid hype. Now that advice has changed. Like every bubble this is a game of musical chairs. While you still need irrational focus on customers for your product, you and your company now need to be everywhere and look larger than life. Show and talk at conferences, be on lots of blogs, use social networks and build a brand. In the new bubble PR may be your new best friend, so invest in it.
We’re in a new wave of startup investing – it’s the beginning of another bubble
Rules for liquidity for startups and investors are different in bubbles
Pay attenton to what those rules are and how to play by them
Unlike the last bubble this one is not about selling “vision” or concepts.
You have to deliver. That requires building a company using Agile and Customer Development
Startups that master speed, tempo and Pivot cycle time will win
Over the last year I’ve been lucky enough to watch the corporate equivalent at a major U.S. corporation – starting a new technology division bringing disruptive technology to market at General Electric.
One of GE’s new divisions – GE’s Energy Storage – has been given the charter to bring an entirely new battery technology to market. This battery works equally well whether it’s below freezing or broiling hot. It’s high density, long life, environmentally friendly and can go places other batteries can’t.
This is a new division of a large, old company where one would think innovation had long been beaten out of them. You couldn’t be more wrong. The Energy Storage division is acting like a startup, and Prescott Logan its General Manager, has lived up to the charter. He’s as good as any startup CEO in Silicon Valley. Working with him, I’ve been impressed to watch his small team embrace Customer Development (and Business Model Generation) and search the world for the right product/market fit. They’ve tested their hypotheses with literally hundreds of customer interviews on every continent in the world. They’ve gained as good of an insight into customer needs and product feature set than any startup I’ve seen. And they’ve continuously iterated and gone through a few pivots of their business model. (Their current initial markets for their batteries include telecom, utilities, transportation and Uninterrupted Power Supply (UPS) markets.) And they’ve being doing this while driving product cost down and performance up.
A leader of Customer Development — think of it as a Product Manger running a product line who knows how to get out of the building and not write MRD’s but listen to customers.
A Sales Closer – a salesman who can make up the sales process on the fly and bring in deals without a datasheet, price list or roadmap. They will build the sales team that follows.
If you’ve been intrigued by the notion of customer development in an early stage startup —getting out of the building to talk to customers and working with an engineering team that’s capable of being agile and responsive – yet backed by a $150 billion corporation, this is the opportunity of a lifetime. (The good news/bad news is that you’ll spend ½ your time on airplanes listening to customers.)
If you have 10 years of product management or sales experience, and think that you have extraordinary talent to match the opportunity, submit your resume by: 1) Clicking on Customer Development or Sales Closer, and 2) Emailing your resume to Prescott Logan at email@example.com Tell him you want to sign up for the adventure.
Honor and recognition in event of success.
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If you’re a visiting dignitary whose country has a Gross National Product equal to or greater than the State of California, your visit to Silicon Valley consists of a lunch/dinner with some combination of the founders of Google, Facebook, Apple and Twitter and several brand name venture capitalists. If you have time, the President of Stanford will throw in a tour, and then you can drive by Intel or some Clean Tech firm for a photo op standing in front of an impressive looking piece of equipment.
The “official dignitary” tour of Silicon Valley is like taking the jungle cruise at Disneyland and saying you’ve been to Africa. Because you and your entourage don’t know the difference between large innovative companies who once were startups (Google, Facebook, et al) and a real startup, you never really get to see what makes the valley tick.
If you didn’t come in your own 747, here’s a guide to what to see in the valley (which for the sake of this post, extends from Santa Clara to San Francisco.) This post offers things to see/do for two types of visitors: I’m just visiting and want a “tourist experience” (i.e. a drive by the Facebook / Google / Zynga / Apple building) or “I want to work in the valley” visitor who wants to understand what’s going on inside those buildings.
I’m leaving out all the traditional stops that you can get from the guidebooks.
Hackers’ Guide to Silicon Valley Silicon Valley is more of a state of mind than a physical location. It has no large monuments, magnificent buildings or ancient heritage. There are no tours of companies or venture capital firms. From Santa Clara to South San Francisco it’s 45 miles of one bedroom community after another. Yet what’s been occurring for the last 50 years within this tight cluster of suburban towns is nothing short of an “entrepreneurial explosion” on par with classic Athens, renaissance Florence or 1920’s Paris.
Palo Alto – The Beating Heart 1 Start your tour in Palo Alto. Stand on the corner of Emerson and Channing Street in front of the plaque where the triode vacuum tube was developed. Walk to 367 Addison Avenue, and take a look at the HP Garage. Extra credit if you can explain the significance of both of these spots and why the HP PR machine won the rewrite of Valley history.
Walk to downtown Palo Alto at lunchtime, and see the excited engineers ranting to one another on their way to lunch. Cram into Coupa Café full of startup founders going through team formation and fundraising discussions. (Noise and cramped quarters basically force you to listen in on conversations) or University Café or the Peninsula Creamery to see engineers working on a startup or have breakfast in Il Fornaio to see the VC’s/Recruiters at work.
Mountain View – The Beating Heart 2 Head to Mountain View and drive down Amphitheater Parkway behind Google, admiring all the buildings and realize that they were built by an extinct company, Silicon Graphics, once one of the hottest companies in the valley (Shelley’s poem Ozymandias should be the ode to the cycle of creative destruction in the valley.) Next stop down the block is the Computer History Museum. Small but important, this museum is the real deal with almost every artifact of the computing and pre-computing age (make sure you check out their events calendar.) On leaving you’re close enough to Moffett Field to take a Zeppelin ride over the valley. If it’s a clear day and you have the money after a liquidity event, it’s a mind-blowing trip.
Lunch time on Castro Street in downtown Mountain View is another slice of startup Silicon Valley. Hang out at the Red Rock Café at night to watch the coders at work trying to stay caffeinated. If you’re still into museums and semiconductors, drive down to Santa Clara and visit the Intel Museum.
Sand Hill Road – Adventure Capital While we celebrate Silicon Valley as a center of technology innovation, that’s only half of the story. Startups and innovation have exploded here because of the rise of venture capital. Think of VC’s as the other equally crazy half of the startup ecosystem.
You can see VC’s at work over breakfast at Bucks in Woodside, listen to them complain about deals over lunch at Village Pub or see them rattle their silverware at Madera. Or you can eat in the heart of old “VC central” in the Sundeck at 3000 Sand Hill Road. While you’re there, walk around 3000 Sand Hill looking at all the names of the VC’s on the building directories and be disappointed how incredibly boring the outside of these buildings look. (Some VC’s have left the Sand Hill Road womb and have opened offices in downtown Palo Alto and San Francisco to be closer to the action.) For extra credit, stand outside one of the 3000 Sand Hill Road buildings wearing a sandwich-board saying “Will work for equity” and hand out copies of your executive summary and PowerPoint presentations.
Drive by the Palo Alto house where Facebook started (yes, just like the movie) and the house in Menlo Park that was Google’s first home. Drive down to Cupertino and circle Apple’s campus. No tours but they do have an Apple company store which doesn’t sell computers but is the only Apple store that sells logo’d T-shirts and hats.
San Francisco – Startups with a Lifestyle Drive an hour up to San Francisco and park next to South Park in the South of Market area. South of Market (SoMa) is the home address and the epicenter of Web 2.0 startups. If you’re single, living in San Francisco and walking/biking to work to your startup definitely has some advantages/tradeoffs over the rest of the valley. Café Centro is South Park’s version of Coupa Café. Or eat at the American Grilled Cheese Kitchen. (You’re just a few blocks from the S.F. Giants ballpark. If it’s baseball season take in a game in a beautiful stadium on the bay.) And four blocks north is Moscone Center, the main San Francisco convention center. Go to a trade show even if it’s not in your industry.
The Valley is about the Interactions Not the Buildings Like the great centers of innovation, Silicon Valley is about the people and their interactions. It’s something you really can’t get a feel of from inside your car or even walking down the street. You need to get inside of those building and deeper inside those conversations. Here’s a few suggestions of how to do so.
If you want the ultimate startup experience, see if you can talk yourself into carrying someone’s bags as they give a pitch to a VC. Be a fly on the wall and soak it in.
If you’re trying to get a real feel of the culture, apply and interview for jobs in three Silicon Valley companies even if you don’t want any of them. The interview will teach your more about Silicon Valley company culture and the valley than any tour.
Go to at least three tech-oriented Meetups or Plancast events in the Valley or San Francisco (Meetup is a deep list. Search for “startup” meetup’s in San Francisco, Palo Alto and Santa Clara.)
Education is what remains after one has forgotten everything he learned in school Attributed to Albert Einstein, Mark Twain and B.F. Skinner
There are 4633 accredited, degree-granting colleges and universities in the United States. This weekend I had dinner last night with one of them – a friend who’s now thePresident of Philadelphia University. He’s working hard to reinvent the school into a model for 21st century Professional education.
The Silo Career Track One of the problems in business today is that college graduates trained in a single professional discipline (i.e. design, engineering or business) end up graduating as domain experts but with little experience working across multiple disciplines.
In the business world of the of the 20th century it was assumed that upon graduation students would get jobs and focus the first years of their professional careers working on specific tasks related to their college degree specialty. It wasn’t until the middle of their careers that they find themselves having to work across disciplines (engineers, working with designers and product managers and vice versa) to collaborate and manage multiple groups outside their trained expertise.
This type of education made sense in design, engineering and business professions when graduates could be assured that the businesses they were joining offered stable careers that gave them a decade to get cross discipline expertise.
20th Century Professional Education Today, college graduates with a traditional 20th century College and University curriculum start with a broad foundation but very quickly narrow into a set of specific electives focused on a narrow domain expertise.
Interdisciplinary and collaborative courses are offered as electives but don’t really close the gaps between design, engineering and business.
Interdisciplinary Education in a Volatile, Complex, and Ambiguous World The business world is now a different place. Graduating students today are entering a world with little certainty or security. Many will get jobs that did not exist when they started college. Many more will find their jobs obsolete or shipped overseas by the middle of their career.
This means that students need skills that allow them to be agile, resilient, and cross functional. They need to view their careers knowing that new fields may emerge and others might disappear. Today most college curriculum are simply unaligned with modern business needs.
Over a decade ago many research universities and colleges recognized this problem and embarked on interdisciplinary education to break down the traditional barriers between departments and specialties. (At Stanford, the D-School offers graduate students in engineering, medicine, business, humanities, and education an interdisciplinary way to learn design thinking and work together to solve big problems.) This isn’t as easy as it sounds as some of the traditional disciplines date back centuries (with tenure, hierarchy and tradition just as old.)
Philadelphia University Integrates Design, Engineering and Commerce At dinner, I got to hear about how Philadelphia University was tackling this problem in undergraduate education. The University, with 2600 undergrads and 500 graduate students, started out in 1884 as the center of formal education for America’s textile workers and managers. The 21st century version of the school just announced its new Composite Institute for industrial applications.
(Full disclosure, Philadelphia University’s current president, Stephen Spinelli was one of my mentors in learning how to teach entrepreneurship. At Babson College he was chair of the entrepreneurship department and built the school into one of the most innovative entrepreneurial programs in the U.S.)
Philadelphia University’s new degree program, Design, Engineering and Commerce (DEC) will roll out this Fall. It starts with a core set of classes that all students take together; systems thinking, user-centric design, business models and team dynamics. These classes start the students thinking early about customers, value, consumer insights, and then move to systems thinking with an emphasis on financial, social, and political sustainability. They also get a healthy dose of liberal arts education and then move on to foundation classes in their specific discipline. But soon after that Philadelphia University’s students move into real world projects outside the university. The entire curriculum has heavy emphasis on experiential learning and interdisciplinary teams.
The intent of the DEC program is not just teaching students to collaborate, it also teaches them about agility and adaptation. While students graduate with skills that allow them to join a company already knowing how to coordinate with other functions, they carry with them the knowledge of how to adapt to new fields that emerge long after they graduate.
I think this school may be pioneering one of the new models of undergraduate professional education. One designed to educate students adept at multidisciplinary problem solving, innovation and agility.
College and business will never be the same.
Most colleges and Universities are still teaching in narrow silos
It’s hard to reconfigure academic programs
It’s necessary to reconfigure professional programs to match the workplace
Innovation needs to be applied to how we teach innovation
For its first few decades Silicon Valley was content flying under the radar of Washington politics. It wasn’t until Fairchild and Intel were almost bankrupted by Japanese semiconductor manufacturers in the early 1980’s that they formed Silicon Valley’s first lobbying group. Microsoft did not open a Washington office until 1995.
Fast forward to today. The words “startup,” “entrepreneur,” and “innovation” are used fast, loose and furious by both parties in Washington. Last week the White House announced Startup America, a public/private initiative to accelerate accelerate high-growth entrepreneurship in the U.S. by expanding startups access to capital (with two $1 billion programs); creating a national network of entrepreneurship education, commercializing federally-funded research and development programs and getting rid of tax and paperwork barriers for startups.
What’s not to like?
My observation. Startup America is a mashup of very smart programs by very smart people but not a strategy. It made for a great photo op, press announcement and impassioned speeches. (Heck, who wouldn’t go to the White House if the President called.) It engaged the best and the brightest who all bring enormous energy and talent to offer the country. The technorati were effusive in their praise.
I hope it succeeds. But I predict despite all of Washingtons’ good intentions, it’s dead on arrival.
Dead On Arrival I got a call from a recruiter looking for a CEO for the Startup America Partnership. Looking at the job spec reminded me what it would be like to lead the official rules committee for the Union of Anarchists.
There are three problems. First, an entrepreneurship initiative needs to be an integral part of both a coherent economic policy and a national innovation policy – one that creates jobs for Main Street versus Wall Street. It should address not only the creation of new jobs, but also the continued hemorrhaging of jobs and entire strategic industries offshore.
Second, trying to create Startup America without understanding and articulating the distinctions among the four types of entrepreneurship (described later) meanswe have no roadmap of where to place the bets on job growth, innovation, legislation and incentives.
Third, the notion of a public/private partnership without giving entrepreneurs a seat at the policy table inside the White House is like telling the passengers they can fly the plane from their seats. It has zero authority, budget or influence. It’s the national cheerleader for startups.
The Four Types of Entrepreneurship “Startup,” “entrepreneur,” and “innovation” now means everything to everyone. Which means in the end they mean nothing. There doesn’t seem to be a coherent policy distinction between small business startups, scalable startups, corporations dealing with disruptive innovation and social entrepreneurs. The words “startup,” “entrepreneur,” and “innovation” mean different things in Silicon Valley, Main Street, Corporate America and Non Profits. Unless the people who actually make policy (rather than the great people who advise them) understand the difference, and can communicate them clearly, the chance of any of the Startup America policies having a substantive effect on innovation, jobs or the gross domestic product is low.
1. Small Business Entrepreneurship Today, the overwhelming number of entrepreneurs and startups in the United States are still small businesses. There are 5.7 million small businesses in the U.S. They make up 99.7% of all companies and employ 50% of all non-governmental workers.
Small businesses are grocery stores, hairdressers, consultants, travel agents, internet commerce storefronts, carpenters, plumbers, electricians, etc. They are anyone who runs his/her own business. They hire local employees or family. Most are barely profitable. Their definition of success is to feed the family and make a profit, not to take over an industry or build a $100 million business. As they can’t provide the scale to attract venture capital, they fund their businesses via friends/family or small business loans.
2. Scalable Startup Entrepreneurship Unlike small businesses, scalable startups are what Silicon Valley entrepreneurs and their venture investors do. These entrepreneurs start a company knowing from day one that their vision could change the world. They attract investment from equally crazy financial investors – venture capitalists. They hire the best and the brightest. Their job is to search for a repeatable and scalable business model. When they find it, their focus on scale requires even more venture capital to fuel rapid expansion.
Scalable startups in innovation clusters (Silicon Valley, Shanghai, New York, Bangalore, Israel, etc.) make up a small percentage of entrepreneurs and startups but because of the outsize returns, attract almost all the risk capital (and press.) Startup America was focussed on this segment of startups.
3. Large Company Entrepreneurship Large companies have finite life cycles. Most grow through sustaining innovation, offering new products that are variants around their core products. Changes in customer tastes, new technologies, legislation, new competitors, etc. can create pressure for more disruptive innovation – requiring large companies to create entirely new products sold into new customers in new markets. Existing companies do this by either acquiring innovative companies or attempting to build a disruptive product inside. Ironically, large company size and culture make disruptive innovation extremely difficult to execute.
4. Social Entrepreneurship Social entrepreneurs are innovators who focus on creating products and services that solve social needs and problems. But unlike scalable startups their goal is to make the world a better place, not to take market share or to create to wealth for the founders. They may be nonprofit, for-profit, or hybrid.
So What? Each of these four very different business segments require very different educational tools, economic incentives (tax breaks, paperwork/regulation reduction, incentives), etc. Yet as different as they are, understanding them together is what makes the difference between a jobs and innovation strategy and a disconnected set of tactics.
Go take a look at any of the government organizations talking about entrepreneurship and see how many of its leaders or staff actuallystarted a company or a venture firm. Or had to make a payroll with no money in the bank.We’re trying to kick-start a national initiative onstartups, entrepreneurs and innovation with academics, economists and large company executives. Great for policy papers, but probably not optimal for making change.
Rather than having our best and the brightest visit for a day, what we need sitting in the White House (and on both sides of the aisle in Congress) are people who actually have started, built and growncompanies and/or venture firms. (If we’re serious about this stuff we should have some headcount equivalence to the influence bankers have.)
Next time the talent shows up for a Startup America initiative, they ought to be getting offices not sound bites.
Lots of credit in trying to “talk-the-talk” of startups
No evidence that Washington yet understands the types of entrepreneurs and startups; how they differ, and how they can form a cohesive and integrated jobs and innovation strategy
Not much will happen until entrepreneurs and VC’s have a seat at the table
The benefits of customer and agile development and minimum features set are continuous customer feedback, rapid iteration and little wasted code. But over time if developers aren’t careful, code written to find early customers can become unwieldy, difficult to maintain and incapable of scaling. Ironically it becomes the antithesis of agile. And the magnitude of the problem increases exponentially with the success of the company. The logical solution? “Re-architect and re-write” the product.
For a company in a rapidly changing market, that’s usually the beginning of the end.
It Seems Logical I just had lunch (at my favorite Greek restaurant in Palo Alto forgetting it looked like a VC meetup) with a friend who was technical founder of his company and is now its chairman. He hired an operating exec as the CEO a few years ago. We caught up on how the company was doing (“very well, thank you, after five years, the company is now at a $50M run rate,”) but he wanted to talk about a problem that was on his mind. “As we’ve grown we’ve become less and less responsive to changing market and customer needs. While our revenue is looking good, we can be out of business in two years if we can’t keep up with our customer’s rapid shifts in platforms. Our CEO doesn’t have a technology background, but he’s frustrated he can’t get the new features and platforms he wants (Facebook, iPhone and Android, etc.) At the last board meeting our VP of engineering explained that the root of our problems was ‘our code has accumulated a ton of “technical debt,’ it’s really ugly code, and it’s not the way we would have done it today. He told the board that the only way to to deliver these changes is to re-write our product.” My friend added, “It sounds logical to the CEO so he’s about to approve the project.”
Shooting Yourself in the Head
“Well didn’t the board read him the riot act when they heard this?” I asked. “No,” my friend replied, sadly shaking his head, “the rest of the board said it sounded like a good idea.”
With a few more questions I learned that the code base, which had now grown large, still had vestiges of the original exploratory code written back in the early days when the company was in the discovery phase of Customer Development. Engineering designs made back then with the aim of figuring out the product were not the right designs for the company’s current task of expanding to new platforms.
I reminded my friend that I’ve never been an engineering manager so any advice I could give him was just from someone who had seen the movie before.
The Siren Song to CEO’s Who Aren’t Technical CEO’s face the “rewrite” problem at least once in their tenure. If they’re an operating exec brought in to replace a founding technical CEO, then it looks like an easy decision – just listen to your engineering VP compare the schedule for a rewrite (short) against the schedule of adapting the old code to the new purpose (long.) In reality this is a fools choice. The engineering team may know the difficulty and problems adapting the old code, but has no idea what difficulties and problems it will face writing a new code base.
A CEO who had lived through a debacle of a rewrite or understood the complexity of the code would know that with the original engineering team no longer there, the odds of making the old mistakes over again are high. Add to that introducing new mistakes that weren’t there the first time, Murphy’s law says that unbridled optimism will likely turn the 1-year rewrite into a multi-year project.
My observation was that the CEO and VP of Engineering were confusing cause and effect. The customers aren’t asking for new code. They are asking for new features and platforms –now. Customers couldn’t care less whether it was delivered via spaghetti code, alien spacecraft or a completely new product. While the code rewrite is going on, competitors who aren’t enamored with architectural purity will be adding features, platforms, customers and market share. The difference between being able to add them now versus a year or more in the future might be the difference between growing revenue and going out of business.
Who Wants to Work on The Old Product Perhaps the most dangerous side-effect of embarking on a code rewrite is that the decision condemns the old code before a viable alternative exists. Who is going to want to work on the old code with all its problems when the VP Engineering and CEO have declared the new code to be the future of the company? The old code is as good as dead the moment management introduces the word “rewrite.” As a consequence, the CEO has no fallback. If the VP Engineering’s schedule ends up taking four years instead of one year, there is no way to make incremental progress on the new features during that time.
What we have is a failure of imagination
I suggested that this looked like a failure of imagination in the VP of Engineering - made worse by a CEO who’s never lived through a code rewrite – and compounded by a board that also doesn’t get it and hasn’t challenged either of them for a creative solution.
My suggestion to my friend? Given how dynamic and competitive the market is, this move is a company-killer. The heuristic should be don’t rewrite the codebasein businesses where time to market is critical and customer needs shift rapidly.” Rewrites may make sense in markets where the competitive cycle time is long.
I suggest that he lay down on the tracks in front of this train at the board meeting. Force the CEO to articulate what features and platforms he needs by when, and what measures he has in place to manage schedule risk. Figure out whether a completely different engineering approach was possible. (Refactor only the modules for the features that were needed now? Rewrite the new platforms on a different code-base? Start a separate skunk works team for the new platforms? etc.)
Not all code rewrites are the same. When the market is stable and changes are infrequent, you may have time to rewrite.
When markets/customers/competitors are shifting rapidly, you don’t get to declare a “time-out” because your code is ugly.
This is when you need to understand 1) what problem are you solving (hint it’s not the code) and 2) how to creatively fix what’s needed.
The young do not know enough to be prudent, and therefore they attempt the impossible – and achieve it, generation after generation.
Pearl S. Buck
Ask people what makes entrepreneurs successful and you’ll hear a familiar list of adjectives; agile, tenacious, resilient, opportunistic, etc.
What you don’t hear is that often they didn’t know any better.
It Can’t Be Done I was just rereading Jessica Livingston’s book Founders at Work, and a common thread through the stories reminded me that there is a type of technology innovation that occurs in startups when a founder/team simply doesn’t know what they’re attempting is impossible.
Steve Wozniak at Apple building the Apple II floppy disk controller without ever seeing one. The original Fairchild Semiconductor team of Moore and Hoerni racing to build the first silicon diffused PNP and NPN transistors and ending up with Planar transistors and integrated circuits. The list of “I just did it without knowing it was impossible” appears time and again as a common thread in stories about technology innovation.
I got to see this first hand, when I was lucky enough to be present as an incredibly small team designed and built the Zilog and MIPS microprocessors. And at Ardent I watched an equally minuscule company tackle building a supercomputer and at again at E.piphany building a data warehouse.
Almost all these innovations were built by people in their 20’s with a few of the old-timers in their 30’s. (One of the common themes was the physical effort to get these projects completed – entrepreneurs staying up for days to finish a project and/or sleeping at work until it shipped.) I flew more red-eyes than I can remember, and also had days where I just slept in the office with the engineers.
Age Means Wisdom It’s not that older entrepreneurs can’t start or build innovative companies – of course they can. Older entrepreneurs just work smarter and strategically. (Though my hypothesis is that funding from risk capital sources – angels and VC’s- don’t follow a normal distribution curve for older founders.)
And if they’re really strategic older founders hire engineers in their 20′s and 30′s who don’t know what they’ve been asked to do is impossible (exactly the strategy of my partner Ben at E.piphany.)
Older Means You Know Too Much
However, as I’ve gotten older I’ve observed that it’s not just that stamina that changes for entrepreneurs. One of the traps of age is growing to accept the common wisdom of what’s possible and not. Accumulated experience can at times become an obstacle in thinking creatively. Knowing that “it can’t be done” because you can recount each of the failed attempts in the last 20 years to solve the problem can be a boat anchor on insight and imagination. This not only effects individuals, but happens to companies as they age.
If you take funding from a venture capital firm or angel investor and want to build a large, enduring company (rather than sell it to the highest bidder), this isn’t the decade to do it. The collapse of the IPO market and dysfunctional math in the venture capital community has stacked the odds against you.
The Golden Age for Entrepreneurs and VC’s The two decades from 1979 when pension funds fueled the expansion of venture capital to 2000 when the dot-com bubble burst were the Golden Age for entrepreneurs and venture capital firms. VC’s were making investments every other financially prudent institution wouldn’t touch – and they were printing money.
The system worked in predictable and profitable ways. VC’s invested their limited partners’ “risk capital” in a portfolio of startups in exchange for illiquid stock. Most of the startups they invested in either died by running out of money before they found a scalable business model or ended up in the “land of the living dead” by never growing (failing to Pivot.)
Startup lifecycle in an IPO Market
But a few startups succeeded and grew into profitable companies. Their venture investors made money by selling their share of these successful companies at a large multiple over what they originally paid for it. One of the ways most predictable ways for an investor to sell these shares was to take a company “public.” (Until 1995 startups going public typically had a track record of revenue and profits. Netscape’s 1995 IPO changed the rules. Suddenly there was a public market for companies with limited revenue and no profit. This was the beginning of the 5-year dot-com bubble.)
During the decade between 1991 and 2000, nearly 2000 venture backed companies went public. Take a look at the chart below. (It includes venture funded startups in all industries, from software to biotech. Source: NVCA.)
Number of Venture Backed Liquidity Events 1991-2000
The size of the red bars (IPO’s) versus blue (mergers and acquisitions) illustrates that while venture-backed startups did get acquired, the IPO market was booming.
Free At Last Going public did two things for your company. Your company had money in the bank to expand your business, scaling the company from the “build” stage into the “grow” stage. But even more important, your VC’s could sell off their ownership of your company. This changed their interest from managing your board for their liquidity to managing the board for all shareholders. Most VC’s would get off of boards of companies that went public.
Success Means That You’re Acquired The public markets for venture-backed technology stocks never really recovered after the collapse of the dot-com boom. Fast forward to today and take a look at the last ten years of IPO’s and M&A’s in the chart below, and you’ll see why life is different for entrepreneurs.
Number of Venture Backed Liquidity Events 2000-2010
Depending on your industry, in this decade it’s 5 to 10x less likely that your company will have an IPO as an exit. And what the chart doesn’t show is that the dollar amount of the deals are significantly smaller than the last decade.
Since there’s no public market for the shares your venture investor has bought in your startup, the most reasonable way for a venture firm to make money is to have you sell your company to another company. But unlike an IPO where you sold stock to the public and got to run your company, in an acquisition your company is gone, and the odds are in a year or so you will be too.
Startup Lifecycle Today
VC “Plan B” None of this has gone unnoticed by the venture community. Some of the old-line venture firms have changed their strategy, but some are still locked into last decade’s model while the partners are living off of their management fees and go through cargo cult like rituals. You can tell who they are by how often they remind you “this is the year the IPO market will come back.” (If the limited partners of these VC’s acted like real fiduciaries rather than waiting for the end of life of the fund, more than half of old-line venture firms would have shut themselves down today.)
New, agile and adroit venture firms with new business models have emerged to deal with the reality that 1) web 2.0 startups require significantly less capital to start, 2) exits for venture firms are predominately acquisitions, and 3) a venture firm with a smaller fund <$150M matches these exits. Floodgate, Greycroft, Union Square Ventures, True Ventures, etc. are example of this class of firm. (Raising a VC fund in this environment had it’s own perils.) And the explosion of private Angel firms continues to fuel this new ecosystem.
Other VC’s who invest in Information Technology have taken a different approach. They’ve created virtual IPO’s for founders and employees via late-stage private financing. It has put a per user dollar value on these sites and these few startups will be the next likely IPO candidates. In their short time as a fund, Andreessen Horowitz seems to be on top of this game with their investments in Facebook, Skype and Zynga.
What About Us? But not all industries are as capital efficient as the Web or Information Technology. Biotech, medical devices, semiconductors, communications and CleanTech require significantly more capital to build and scale before they can generate profits. It’s in these industries that the lack of a public market has taken the heaviest toll on entrepreneurs and their startups. Great companies with innovative ideas have simply died not having the cash to scale. VC’s who would have normally kept writing checks were faced with no public exits and cut them off.
Some of these industries have turned to the U.S government for funding. Elon Musk has not only tapped the feds for his electric car startup Tesla, but also received hundreds of millions for his space launch company – SpaceX. Other Clean Tech companies have tried this approach as well. Yet while the U.S. government doles out funds to connected entrepreneurs, it lacks an integrated strategy to deal with the lack of public market financing for critical growth industries.
It may be that these entrepreneurial industries suffer the same fate as manufacturing in the U.S.- they die out of benign neglect and a lack of a coherent understanding of the role of risk capital in our national interest.
What Does it Mean to an Entrepreneur? If you’re starting a software company, your exit is most likely a sale to a larger company. This decade has been a Darwinian filter – only the very best companies will survive as standalone companies.
If you’re starting a company in other, capital intensive industries, it’s no longer just about having great technology. You need a plan for partnership and long term funding from day one.
In either case Customer Development provides entrepreneurs with a methodology for being capital efficient.
We live in interesting times.
Advice that’s more than 5 years old is obsolete.
Software startups are most likely to exit as an acquisition.
Being acquired has lots of math challenges about your valuation, amount of money raised, percent of founder ownership, type of investor, etc.
Non-software companies need to be thinking much deeper and further than ever before about search, build, grow funding strategies. It’s no longer just about building great technology.
Customer Development provides entrepreneurs with a methodology for being capital efficient to scale when the funding environment demands it.
I started working when I was 14 (I lied about my age) and counting four years in the Air Force I’ve worked in 12 jobs. I left each one of them when I was bored, ready to move on, got fired, or learned as much as I can.
There was only one job that I quit when I feared for my life.
Life Is Good The Vietnam War had just ended and I was out of the Air Force back in college living in Ann Arbor Michigan. Colors other than olive green or camouflage slowly seeped back in my life as “Yes sir, and no sir” faded away. Unlike my previous attempt at college as a pre-med, four years working with electronics convinced me that perhaps I ought to study engineering.
Civilian life was good, the government was paying my tuition and I got a college work/study job in the University of Michigan physics department. After a few weeks, the Physics lab staff realized I knew something about repairing electronics (you try fixing a sodium-iodide scintillation detector without a manual.) I got asked, “Would you like to work at the nuclear reactor?” I thought they were joking. “The university has its own nuclear reactor?”
Oh man, something really new to learn. “Heck yes, sign me up.”
Nuclear Reactors on Campus Starting in 1953 the U.S. built over a 150 research reactors. Much smaller than the ~500-1,500 megawatt nuclear reactors that generate electricity, by the late 1960s these 1 to 10 megawatt reactors were in 58 U.S. universities. In addition, 40 foreign countries got research reactors in exchange for a commitment to not develop nuclear weapons. (But these reactors used weapons grade Uranium-235 for their cores, and by the late 1970’s we realized it wasn’t a good idea to be shipping highly enriched uranium overseas.)
My first day in the reactor electronics lab I got a lecture from the health physics department. I was given a film-badge (a dosimeter to measure whole body radiation) and taught how to use the hand and foot monitors (to prevent radioactive contamination from spreading outside the containment dome.)
Scram Lots of things could go wrong in a nuclear reactor – loss of cooling, power failure, jammed control rods, reactor power excursions, etc. While a reactor failure can’t create a nuclear explosion, if its core is uncovered long enough it can generate enough heat to melt itself, with all kind of nasty consequences (see Three Mile Island and Chernobyl.) To “scram” a reactor means an emergency shutdown by inserting neutron-absorbing control rods into the core. This stops the nuclear chain reaction. My job in the reactor electronics lab was to rebuild the reactor “scram system.”
Ford Nuclear Reactor at the Phoenix Lab
The scram system had three parts: the mechanical part (the control rod drives and electromagnetic latches), the electronic part (comparators circuits and trip logic), and the sensors (to measure neutron flux, core temperature, pool water level, etc.)
The 20-year old electronics in our existing scram system were based on vacuum tubes and had the annoying habit of scramming the reactor every time a thunderstorm was nearby. And summertime in the Midwest has lots of thunderstorms. The Nuclear Regulatory Commission had approved a transistorized version of the electronics. My job was to build the approved design, retrofit it into the existing power supplies and integrate it with the existing mechanical systems and sensors.
But first I was going to see the reactor.
Cerenkov radiation Over time I would get used to visiting the reactor, but the first visit was awe-inspiring. Entering the containment building through the air lock, my eyes took a few seconds to adjust to the dim light. The first thing I saw was a gigantic mural of the earth rising over the moon painted on the side of the dome. After another few seconds I realized that the mural was illuminated by an unearthly blue glow coming from what looked like a swimming pool below it. My eyes followed the source of the light down to to the pool and there I first saw the 2 MW nuclear reactor in the bottom of the swimming pool – and it was generating its own light. When I could tear my eyes from the pool I noticed that in the far end of the building was a glass wall separating a room bathed in red light, where the reactor operators sat at their console. The lab manager let me stand there for a while as I caught my breath. Hollywood couldn’t have set the scene better.
As we walked towards the pool I learned that the bright blue light was Cerenkov radiation from the reactor core (electrons moving faster than the speed of light in water polarizing the water molecules, which when they turned back to their ground state, emitted photons.) We briefly walked across a bridge that spanned the pool and stood directly over the core of the reactor. Wow. They were going to pay me for this?
Dose Roulette Over the next few weeks, as I began work on the scram system, I got to know the control room operators and others on the staff. Most of them were ex-Navy reactor technicians or officers. They had been around nukes for years and were bemused to find an ex Air Force guy among them.
One of their weekly rituals was to read the bulletin board for the results of the dosimeter readings. Since most of my time was spent outside the containment dome my radiation exposure numbers were always zero. But there was a bizarre culture of “you’re not a real man until you glow in the dark” among the ex-Navy crew. They would celebrate whoever got the highest dose of the week by making them buy the beer for the rest.
After spending the last four years around microwaves I had become attuned to things that you couldn’t see but could hurt you. In the Air Force I had watched my shop mates not quite understand that principle. On the flightline they would test whether a jamming pod was working by putting their hand on the antenna. If their hand felt warm they declared it was. When I tried to explain that the antenna wasn’t warm, but it was the microwaves cooking their hand, they didn’t believe me. There were no standards for microwave protection. (I always wondered if the Air Force would ever do a study of the incidence of cataracts among radar technicians.)
You Buy The Beer In a few months I had the new scram system ready for debugging. This required connecting the new electronics to the neutron detectors in the pool that monitored the core. We timed this for the regular downtime when used fuel elements were swapped out and they had lowered the pool water level for easier installation. I remember standing on the bridge right over the reactor core watching as the reactor techs remotely connected up the cables to my electronics. I leaned over the bridge to get a better look. By now the reactor was so familiar that I didn’t think twice of where I was standing.
A week later as I was about to enter the dome, I heard someone congratulate me and ask when I was going to buy the beer. They were pointing to the Health/Safety printout on the wall. In one week I had managed to get close to my annual allowable radiation dose (~5 rems?).
In my mandatory talk with the the safety officer to figure out where I got exposed, I remembered hanging out over the core on the bridge. The heavy water in the pool was both a moderator and a radiation shield. With the pool level lowered I shouldn’t have been on the bridge. I had been in the wrong place at the wrong time.
“Don’t do it again” was his advice.
That week I finished up the installation and resigned from the lab. While the radiation dose I received was unlikely to effect my health, the cumulative effect of four years of microwaves and the potential for more unexpected “winning the dosimetery lottery” convinced me to consider alternate jobs in electronics.
In some sense my career in startups was steered by deciding to avoid future jobs with gamma rays or high-power microwaves.
But I sure learned a lot about nuclear reactors.
Postscript: a year and a half after I left, the power reactor at Three Mile Island had a core meltdown. For years I would worry and wonder if I had wired my scram system correctly.
Things you can’t see can hurt you (microwaves, gamma rays, toxic bosses.)
No job is worth your health.
If it seems dangerous or stupid it probably is.
Rules and regulations won’t stop all possible mistakes.
Make no little plans. They have no magic to stir men’s blood… Daniel Burnham
A lot of entrepreneurs think that their startup is the next big thing when in reality they’re just building a small business. How can you tell if your startup has the potential to be the next Google, Intel or Facebook? A first order filter is whether the founders are aiming for a scalable startup.
Go For Broke A few years ago I sat on the board of IMVU when the young company faced a choice my mother used to describe as “you should be so lucky to have this problem.” For its first year IMVU had funded itself with money from friends and family. Now with customers and early revenue, it was out raising its first round of venture money. (Not only did their sales curve look like a textbook case of a VC-friendly hockey stick, but their Lessons Learnedfunding presentation was an eye-opener.)
Staring at us in the board meeting were three term-sheets from brand name VC’s and an unexpected buy-out offer from Google. In fact, Google’s offer for $15 Million was equal to the highest valuation from the venture firms. The question was: what did the founders want to do?
Will Harvey, Eric Ries and the other founders were unequivocal – “Screw the buy-out, we’re here to build a company. Lets take venture capital and grow this thing into a real business.”
The Scalable Startup Will and Eric implicitly had already made six decisions that defined a scalable startup.
Their vision for IMVU was broad and deep and very big – 3D avatars and virtual goods would eventually be everywhere in the on-line world. They wanted to build an industry not just a product or a company.
Their personal goal wasn’t to have a company that stayed small and paid them well. Nor did they think flipping the company to make a few million dollars would be a win. They believed their vision and work was going to be worth a lot more – or zero.
They envisioned that their tiny startup was to going to be a $100 million/year company by creating an entirely new market – selling virtual goods.
They used Customer and Agile development to search for a scalable and repeatable business model to become a large company. It reduced risk while allowing them to aim high.
They fervently believed that only they were the ones who could and would make this happen.
These decisions guaranteed that the outcome of the board meeting was preordained. Selling out to Google would mean that someone else would define their vision. They were too driven and focused to let that happen. A few million dollars wasn’t their goal. Taking venture money was just a means to an end. Their goal was to get profitable and big. And risk capital allowed them to do that sooner than later. Venture money also meant that the VC’s goals of obscene returns were aligned with the founders. For the entire team, turning down the Google deal was equivalent to burning the boats on the shore. (One founder quit and joined Google.) After that, there was no doubt to existing employees and new hires what the company was aiming for.
Take No Prisoners A “scalable startup” takes an innovative idea and searches for a scalable and repeatable business model that will turn it into a high growth, profitable company. Not just big but huge. It does that by entering a large market and taking share away from incumbents or by creating a new market and growing it rapidly.
A scalable startup typically requires external “risk” capital to create market demand and scale. And the founders must have a reality distortion field to convince investors their vision is not a hallucination and to hire employees and acquire early customers. A scalable startup requires incredibly talented people taking unreasonable risks with an unreasonable effort from the founders and employees.
Not All Startups are Scalable The word entrepreneur covers a lot of ground. Itmeans someone who organizes, manages, and assumes the risks of a business. Entrepreneurship often describes a small business whose owner starts up a company i.e. a plumbing supply store, a restaurant, a consulting firm. In the U.S. 5.7 million companies with fewer than 100 employees make up 99.5% of all businesses. These small businessesare the backbone of American capitalism. But small businesses startups have very different objectives than scalable startups.
First, their goal is not scale on an industry level. They may want to grower larger, but they aren’t focused on replacing an incumbent in an existing market or creating a new market. Typically the size of their opportunity and company doesn’t lend itself to attracting venture capital. They grow their business via profits or traditional bank financing. Their primary goal is a predictable revenue stream for the owner, with reasonable risk and reasonable effort and without the need to bring in world-class engineers and managers.
The Web and Startups The Internet has created a series of new and innovative business models. Herein lies the confusion; not every business on the web can scale big. While the Internet has enabled scalable Internet startups like Google and Facebook, it has also created a much, much larger class of web-based small businesses that can’t or won’t scale to a large company. Some are in small markets, some are run by founders who don’t want to scale or can’t raise the capital, or acquire the team. (The good news is that there is an emerging class of investors who are more than happy to fund and flip Web small businesses.)
Scalable Startup or Small Business – Which One is Right? There’s nothing wrong with starting a small business. In fact, it is scalable startups that are the abnormal condition. You have to be crazy to make the bet the IMVU founders did. Unfortunately the popular culture and press have made scalable startups like Google and Facebook the models that every entrepreneur should aspire to and disparages technology small businesses with pejoratives like “lifestyle business.”
That’s just plain wrong. It’s simply a choice.
Just make it a conscious choice.
Not all startups are scalable startups
6 initial conditions differentiate a scalable startup from a small business;
Breadth of an entrepreneurs’ vision
Founders’ personal goals
Size of the target market
Customer and Agile development to find the business model
World-class founding team and initial employees
Passionate belief and a reality distortion field
Understand your personal risk profile/ don’t try to be someone you’re not
Early on in my career I took a “we’re moving too fast to deal with lawyers” attitude to patents and Intellectual Property (IP.) That changed when I joined the board of a startup, and we sued Microsoft and Sony on the same day for patent infringement – and won $120 million.
A few caveats, this post is not legal advice, it’s not even advice, and it deals with law in the United States. Outside the U.S. your results will vary depending on your distance to a consistent and predictable legal system.
At one of my entrepreneurship classes at Stanford, Dan Dorosin, of Fenwick & West LLP guest lectures about startups and Intellectual Property. Most of this post is from Dan’s lecture. (But there are no guarantees that I got it right.) It may seem full of legal definitions and terms but my two takeaways are: 1) Entrepreneurs need to know about these legal options, 2) Consulting an intellectual property attorney is a good move even before you get funded.
Intellectual Property Intellectual property gives you rights to stop others from using your creativity.
The assets you can protect may include your “core technology” like source code, hardware designs, architectures, processes, formulas. Or it can be your brand, logo or domain name. You can protect business processes, know how, customer information, product road map. Protection is also available for content such as music, books, or film.
For some of these assets, you get protection automatically. For other classes, to get full protection, you should/must go through a registration, application or examination process.
software, songs, movies, web site content
Secrets with economic value
(i.e. the Coke recipe)
customer lists, formula
As defined in the contract
technology, business information
Trademark A trademark protects branding and marks, it gives you the right to prevent others from using “confusingly similar” marks and logos. Trademark protection lasts as long as you are using the mark. The more you use the mark, the stronger your protection. Trademark registration is optional, but has significant advantages if approved.
Copyright A copyright protects creative works of authorship; typically songs, books, movies, photos, etc. Copyright gives you the right to prevent others from copying, distributing or making derivatives of your work. It protects “expressions” of ideas but does not protect the underlying ideas. (If your product is software, copyright is also used to prevent someone from stealing your software and reselling it as machine and/or source code.) Copyright protection lasts practically forever. Registration is optional, but is required to sue for infringement.
Contract A contract is a binding legal agreement that is enforceable in a court of law. There’s no official registration process. You have whatever protection is defined in the contract (e.g., a Non Disclosure Agreement gives you certain rights to protection of your confidential information.) The protection lasts for the time period defined in the contract.
Patents A patent is a government granted monopoly to prevent others from making, using or selling your invention – even if the other parties infringement was innocent or accidental.
Just about anything can be patented: circuits, hardware, software, applied algorithms, formulas, designs, user interfaces, applications, systems. Scientific principles or pure mathematical algorithms cannot be patented.
Your invention must be “non-obvious.” The test for non-obvious is: given the prior art at the time of the invention, would a typical engineer 1) identify the problem, and 2) solve it with the invention? You must be “first” to patent. In the U.S. that means “first to invent” while outside U.S. it means “first to file.” You must file in U.S. within one year of sale, offer for sale, public disclosure or public use.
Your patent application has to include a written description with details of the claims of the invention. The details have to allow others to duplicate your invention from your description and has to the “best mode” in describing critical techniques/technologies. And it has to identify all prior art.
Patent protection lasts typically for 15-20 years. There is a formal application and examination process that’s required. Each patent filing will cost your company $10-30k and take 1-4 years. Filing of patents is frequently of major interest to people funding your company.
(There’s something called a “provisional patent.” It’s an alternative to a full patent. It allows you to claim “first to file” and use the term “patent pending.” Provisional patents get into the patent office quickly and cheaply. However they automatically expire after one year and no patent rights are granted. Provisional patents are a good placeholder because they are cheap to file and doesn’t get in the way of your other patent efforts.)
Key Idea #1 – Intellectual Property Creates Value Intellectual Propertyis an asset for you company. You need to acquire, protect and exploit it. An intellectual property strategy will map out:
Who are the key players and technologies in its market(s)?
What are the important patent applications that come next?
Key Idea #2 – Your Intellectual Property Needs Are Unique What type of intellectual property matters to your company, and what you should do to protect it is highly company/industry dependent, requiring unique analysis and/or protection. For example if you are a:
Medical device company – patents are key
Web 2.0/social network start up – trademark and copyright are more likely
Enterprise software company – copyright and trade secrets are probable
Biotech/phama – don’t even leave your bedroom until you have a patent counsel
Make sure you understand Intellectual Property for your specific industry.
Four Common Intellectual Property Mistakes by Start-Ups 1. Founders Didn’t Make Clean Break with Prior Employer Under California law, employers may own inventions that are “related to employer’s reasonably anticipated R&D.” It’s a very subjective standard, and since startups don’t often have resources or time to spend in lawsuits large companies use threats of litigation to ensure you don’t take anything. Therefore the best advice is “take only memories.” If you’re at a university, they may have patent policies that apply, too.
2. Your Company Cannot Clearly Show That it Owns its Intellectual Property Take the time to create a well documented, clear chain of title to your intellectual property. If you are using independent contractors make sure you have written agreements assigning work created. Make sure you have Employee Invention Assignment Agreements. (If you hire subcontractors or friends to do some work, get assignment agreements as well.)
3. Your Company Lost Patent Rights due to Filing Delays/Invention Disclosures In the U.S. patent rights are forfeited if you wait greater than 1 year after:
- Disclosure in a printed publication: Red flags: White paper, journal/conference article, Web site
- Offer for sale in the U.S.:Red flags: Start of sales effort, Price list, price quotation, Trade show demonstration, Any demonstration not under NDA
- Public use in the U.S.
In most foreign countries there is no one-year grace period.
4. Your Company Grants “Challenging” Licenses to Intellectual Property Startups acquiring their first customers may give special licensing terms in key markets, territories, etc. For example, a grant of “most favored nations” license terms or other licensee-favorable economic terms can make your intellectual property less valuable to future buyers of your company. Or you may cut a deal that you can’t assign or transfer (or can’t get out of) if you get acquired.
Protecting your startups intellectual property should be a strategy not an after the fact tactic.
You need a plan for trademarks, copyright, trade secrets, contracts/NDA’s and patents before you get funded.
Your intellectual property may be an additional revenue stream or may add substantial value to your company.