Founding a company (Thu Nov 23, lecture 23)

Homework due for today

Legend: :Participation :Early :PDF

  1. Talking to real life entrepreneurs. I would like you to interview a real entrepreneur that founded a company. Not just anyone who says that they are an entrepreneur but someone who actually is in the founding team. I prefer it to be face to face, but telephone or email is also acceptable. Many of you might know family members or aquantances who are founders or know people who know. You can also ask me and/or use LinkedIn.

Try to get answers to questions such as these (use your own words):

  • What was your first job after your education, and at what point did you know that you wanted to be an entrepreneur? Also, how did you go from wanting to be an entrepreneur to actually starting the company?
  • How did the company develop? How was it successful, how was it not successful? What did you personally do in each scenario?
  • Have you started other companies, and how did they go in comparison?
  • What are some of the personal traits, talents, skills or knowledge, that have served you well as a founder? What is the mistake you feel is made often in founding a company?

Deliverable: Write a 1-2 page report on your interview. Try to distill out some lessons. Include a section with your own personal reflection on: what it means to be an entrepreneur, and how you yourself see your entrepreneurship, and what you personally learned and got out of the interview. Submit as a pdf.

  1. Teams: Meet for at least 2 hours per week! Continue working on Stage 3 of Term Project Outline. Continue refining your product, getting more feedback and supporting information and preparing your Term Project Final Deliverables

A Made Up Story

Jan 2015: Chris is a senior in college, and has a great idea for a product, and spends senior year (spring term) working many hours refining the idea into a mockup. Senioritis, you know? Many discussions with other students improves and refines the idea.

October 2015: Chris’ friend Dana is interested in helping on the product. It turns out that Dana has experience from courses and also hacking on the side, and knows just how to build a working prototype.

It becomes a practically full time obsession for the two of them, and together Chris and Dana continue to refine the project and get feedback. During the summer and fall, Dana writes a lot of software, which is a central part of the project.

August 2016: Dana and Chris realize that they have a knowledge gap. Chris is the product visionary with strong technical chops. Dana is the hands-on coder and has developed a majority of the code.

However to be able to pay the bills they decide that they need to raise money and to have more business expertise. They have no clue how to do this, but a friend of a friend introduces them to Alex. They really hit it off with Alex, who is very experienced, has been involved in a startup before and knows several angels very well.

Questions to discuss with students near you. There are no correct answers. Imagine yourself in the actual situation and ask yourself what your position would be and how you would defend it:

  1. When do you think is the right time to start thinking about incorporating, realistically, and why?
  2. When do you think the three individuals should assign a ‘title’ to themselves, 1. what titles would you suggest, and why?
  3. Who do you think may legitimately call themselves a “founder”, a “co-founder”, or just an “early member of the team” and why?
  4. What is a fair way to allot ‘ownership’ to the three individuals and why?

The eRoom Story

  • Story of eRoom’s entry into the market
    • Pito and Jeffrey in 1995: Home delivery of groceries
    • The importance of domain expertise
  • The case we made to the VC about our competitive advantage: Internet + Desktop software + groupware
  • How to position it? Groupware, Collaboration, Teamware: all were dirty words
    • Customers (early adopters) really liked our value proposition
    • “We are constantly reinventing the wheel”
    • “there’s too much email”
    • “we should be sharing better”
    • “we are inefficient”
  • How to sell: Download vs. Corporate sales team
    • Direct sales: selling an alpha and beta test
    • At first it went well but then it didn’t
  • We needed to get more specific
    • Go beyond “nice to have” to “must have”
    • Vitamin vs. Aspirin
  • What happened next
    • Horizontal/Vertical/Horizontical
    • The importance of real domain expertise
    • Why vertical (IMHO) is easier place to start
  • Exercise Look to your “extended” team: what do you know better than eanyone else?
Company Founding
  • Incorporation
    • When is it a good idea
    • What are the key reasons forcing the decision?
    • Types of corporations
  • Founding team
    • What is a founder and why does it matter?
    • “Can I be a founder too?”
  • Equity
    • How to divide up the pie
    • Stock options and the option pool
    • Why it exists and how it works
  • Vesting
    • Percentages
Building a company
  • Hiring
    • Who should be on the founding team?
  • interviewing
    • How fast do you hire?
    • What do you look for?
    • How do you decide?
  • Company Culture
    • Titles
    • Salaries - how much?
    • Giving feedback
    • Fairness
  • Benefits
    • Offices, office space, remote work, dogs
    • Secrecy/Confidentiality
  • When things go wrong
    • Firing
    • Layoffs
    • Legal issues
    • Lawsuits

How Startups get Money

  1. Friends and Family
  2. Consulting/Work on the side
  3. Angels - Individuals or in groups (e.g. Walnut or Common Angels)
  4. Venture Capital - Organized as funds - two sided (e.g. North Bridge or NEA)
  5. Incubators/Seed funding companies (e.g. Y-Combinator or TechStars)
  6. Crowdfunding (e.g. KickStarter)
  7. (Banks)

Venture Capital

What is a VC firm?
  • A “firm” that stands between two constituencies
  • “Limited Partners”
    • Organizations like Universities or Pention Plans
    • Who need to “manage” a large sum of money
    • They allocate portions of their funds to different investment types
    • One of the investment types is “venture capital”
    • Considered high risk and very long term
  • Startups and other businesses who need money
    • New teams looking to raise capital
    • Previously funded teams who need more capital
    • Existing companies who are established and need more capital.
  • “Value add” of VC firm
    • Locating the best investments into a portfolio of investments
    • Managing the portfolio companies for best outcome
    • Over 7 years goal is
      • 10% companies are 100+x successes
      • 40% companies do “ok”
      • 40% fail outright
    • VC pools “Limited Partner” funds into numbered Funds
    • Each VC will choose an appropriate size fund.
What is the process?
  • Rounds of investment
  • How valuation changes
  • Term sheets
  • Liquidation preferences will turn your hair grey.
  • Ideal First Round Funding Terms
Sequence of events
  • Founders have an idea - investors have money
  • It’s a contract between founders and investors
  • Result is a new corporation owned partially by founder and partially by investors
  • Look at eRoom term sheet.
Rounds of financing
  • What is a round
  • How does it end? Liquidity Event
  • Seed/Angel, A-Round, B-Round, … IPO or Acquisition* Let’s work an example on the whiteboard
What you negotiate over
  • Valuation and Investment amount are the key parameters
  • How term sheets turn into “deals”
  • What’s a seed deal?
  • Should you or shouldn’t you?
  • What are VC firms really?
  • General and Limited Partners
  • Why do people love/hate vcs?