4/06/2005

Adam's Advice for High Tech Startup Entrepeneurs

"1. Before getting too excited about your latest idea, ask yourself if it's a project, a product or a company…

2. Outsource HR. HR scales up but does not "scale down," and therefore it's a great candidate for outsourcing...

3. Recruit for skills, not titles. For the first couple of years…you want to recruit people with many skills and who are comfortable wearing many hats…A tech person who can only "do software" is a classic disaster-- she also needs to know how to raise money…Power politics is destructive…you want to be careful not to "hire your friends"...

4. When you first get going, the order in which you hire people is a critical success factor…my preferred order of hiring is:

1) prototype product engineer. You need someone who can bang out a prototype, suitable for raising money…

2) early stage product manager. Next, you need someone (or a team) who knows how to design a prototype. Almost invariably, this is one of the founders.

3) general business manager with startup experience....

4) legal. You need this early on, and it should be outsourced. If you have a good idea, there are terrific lawyers...who specialize in representing startups…

5) business development. As soon as the prototype is fleshed-out enough to sell, you need a busdev person to get some customers, if only to get feedback about the product. Revenue also helps to close financing…

5... Turnover should be absolutely minimized. First, it makes for a crappy culture-- a revolving door reminds people of the impermanence of a startup and it makes people feel personally at risk. Second, recruiting takes a lot of time; turnover doubles that. Third, it means that your intellectual property and/or business ideas/lessons are walking out the door, possibly to competitors.
That said, the turnover paradox is that double-digit percent turnover (per year) is healthy... turnover is critical for attracting, retaining and motivating top talent and reducing politics. When underperformers are coddled, the overachievers start whispering in the halls and whining in private. This is no fun for anyone...

6. early VC fundraising. Fundraising is a form of sales...It pays to learn the dynamics inside VC firms. For example, VC firms typically require two senior partners to drive a deal through. Junior partners don't count, for example. Thus, once you woo a senior partner, expect to have to get a second one excited before the partner meeting.

7. angel fundraising…Avoid putting in your own money. A certain amount is healthy, but...you want as many people rooting for your success as possible. Outside investors also provide a more objective view on your company, and act as a measure of success. Having many "smart money" outside investors looks great; having a CEO self-fund the company buys you nothing. Finally, outside investors help with leads-- sales, fundraising and recruiting.

8...Recruiting is the single biggest determinant for success, with the people you hire literally being the DNA of the company... Here's some basic tips: (1) strategize: list reasons why people would join your venture instead of others, including reasons they wouldn't. Then, use this to source candidates…(2) treat hiring like a project, including realistic schedules, budgets, risk analysis, contingency plans, etc…(3) use pipeline management-- an ordered set of steps, with tracking of how candidates are getting through the process… (4) respect legal and ethical guidelines…The world is a small place, so be careful of your reputation in the hiring process…

9. corporate structure and cap table…Beyond under-capitalization, you have to keep a clean cap table-- you can't issue tons of shares to everybody. More subtly, preferred shares have to have reasonable preferences-- anti-dilution clauses, participation rights, etc. all need to be managed carefully. If you expect to raise money at ever-increasing valuations, don't expect the preferences to get gentler with later rounds of financing. Down-rounds and dilutive stock splits are morale-killers, if only because employees never have as large a stake as they want ("deserve").

10. It's true that lots of other things can be fixed-- so my last piece of advice is to get good corporate attorneys. One veteran's advice: your lead attorney should be at least 40 years old, because it's mathematically impossible to have enough experience otherwise. You also want attorneys who believe in you and your business, and will give you attention and priority. Treat your attorneys like board members, making sure to reinforce the future potential of the business-- but also take steps to make them look good (to friends, colleagues and family members) for representing you…Don't be afraid to ask questions, and check the answers with information on the internet."

For more great advice for technology startups, see this post by Adam Sah from which the foregoing was taken.