Tuesday, October 23, 2012

Choosing Your Cofounders: How We Fight

Jessica Alter, cofounder and CEO of Founder Dating, recently authored a guest post on Steve Blank's blog titled "How We Fight -- Cofounders in Love and War." Her thesis is that one of the most important criteria for selecting a cofounder is knowing how you fight with them -- how do you resolve differences? When there are disagreements, do you resolve them quickly and move on, or do you remain resentful? What do you fight about, and why? It's important to know the answers to these questions, since startups move quickly and also go through tough times, making it likely that there will be disagreements and fights between the cofounders. If you don't know how you will be able to resolve these disagreements, you're setting yourself up for risk of failure.

One thing that Jessica advised is for you to actual work together with your cofounder for some time before signing up to build a company with them. Work on a side project with them, or maybe even spend a few months working full-time with them. This is similar to what I wrote about a few weeks ago: that it is really important for you to work on a project with your cofounder before starting a company with them. Before we started Dasient, my cofounders and I spent several months building Facebook apps together during nights and weekends. Working on a project together enables you to understand how complementary you are to each other, if each person takes on a fair share of responsibility, what each person's values/commitment level is, and finally how you resolve disagreements and differences. It also allows you to "kick the tires" and take your cofounder for a "test drive" before forming a company together. 

I think Jessica's advice is spot on. Make sure you develop some experience actually working with your cofounders on a project so that you know how you fight (and move on) -- because there will be plenty of opportunities to disagree as you navigate the ups and downs of a startup.

Wednesday, October 17, 2012

Raise at a Local Maximum

Mike Maples from Floodgate, one of our investors in Dasient, once gave us the advice that "you should always raise at a local maximum." What he was referring to was that as a startup grows, it always has its ups and downs. To get the most interest from investors (and therefore the best valuation and terms), you should time your fundraising so that it happens right around one of the "ups"-- or at a "local maximum." 

When we asked him what qualified as a local maximum, Mike mentioned several possible inflection points for a startup: coming out of stealth, entering a new market, winning a big customer/partner deal, releasing a new major product. Basically anything that is news worthy, which creates a lot of momentum for the company, and that also paints a picture that there is huge upside for the business. A recent example was when Instagram raised its $50m round right after it released its Android app (and right before it was acquired by Facebook). Or when Lookout Security raised a $40m round last summer, soon after announcing a big partnership with Verizon Wireless. 

As an entrepreneur, you always want to raise funding at a local maximum. This requires you to be strategic about your fundraising process, since you need to cultivate investors for some time before you formally begin to raise money. One of the biggest complaints from VCs is that they don't want to be approached for a new round at the tail end of a your fundraising process, where they would have to get up to speed on your business and market quickly, and hustle through their due diligence process. Worse yet, they fear being used merely as a bargaining chip against another VC who is ahead of them in the process. So many VCs will just pass on what might possibly be a good opportunity if they don't have enough time to do the work they need to do. 

To approach your fundraising strategically, you need to anticipate what some of your upcoming local maxima will be over the next 6-12 months. And you need to keep building relationships with potential investors at a slow drip, even during periods when you are not actively seeking to raise money. Get to know potential investors, help them to get to know your market and your company, so that they are familiar with you when it's time to raise. If you keep fundraising going at this slow drip even between rounds, when a local maxima is about to arrive, you can "activate" what were previously informal conversations into a formal fundraising process. And hopefully then you will raise a round on your terms, with the wind at your back, rather than when you are up against a wall. 

Thursday, October 4, 2012

Hiring Experts v. Staying Lean

I recently came across a white paper written by Vinod Khosla titled "Gene Pool Engineering for Entrepreneurs." In the paper, Khosla describes a process for creating the right "Gene Pool" for a company by (1) aligning your critical first few hires with the key risks and opportunities for the business, and (2) by consciously hiring for diversity across skills, background, experience, and mindset. By following rule #1, you ensure that you find the best experts that you can that will help you solve the biggest problems for your business. By following rule #2, you include the diverse perspectives necessary to foster creative problem-solving and also prevent groupthink. 

I generally agree with Khosla's recommended approach-- you should always keep in mind what the key risks are to your business, and which experts (from which "centers of excellence") would you like to recruit to address those risks. And when evaluating any new candidate, don't just think about how they will address the key risk or opportunity that you will point them at, but also think about the impact he or she will have on the "gene pool" of your business.

After reading the paper, though, I remembered the book Getting Real by 37 Signals, which had a chapter of their book called, "Less Mass." In this chapter, the authors advise startups to avoid taking on too much mass, in the form of product features, customers, and employees. The core argument is that one of the greatest advantages that a startup has is its agility, its ability to stay nimble and adapt to new customer needs and changing market conditions. As you take on more mass, it becomes difficult for a startup to change. 

I have firsthand experience with this advice -- at Dasient, we made technology, product, and hiring decisions based on our initial vision of providing web security (in a similar market to vulnerability scanning). However, as we began to see opportunities in the mobile security space, we had taken on too much mass to adapt quickly to take advantage of the new opportunities. For better or for worse, we were committed to the original vision for the business, and it would be difficult to change.

So how do you reconcile the advice from 37 Signals -- avoid taking on mass, avoid over-hiring, stay lean and nimble so that you can adapt -- with the advice from Khosla, which is to identify the key risks to your business and hire people specifically to address those risks? Suppose you start with an original vision for the business, and you hire experts to help you address risks for that vision. But then the company needs to pivot and the experts you had hired for the previous vision are now obsolete? 

Here is a proposal: figure out which risks to your business may cause you to pivot to a "plan B" if the answer comes back a certain way. Think explicitly about what that "plan B" is. If you plan to hire a person to address the risk that has a good chance of becoming obsolete if you pivot to plan B, don't hire that person yet. The founders should continue to address that risk until in your judgment you have more certainty around whether you need to pivot. Only when you are relatively "committed" to a certain path, then make the hire.

Another option is to screen your hire for their "option value": can they help you address the risk if you stay the course with plan A, and could they also be valuable to the business if you pivoted to plan B. Can they multi-task and add value in multiple areas (and delay your hiring someone else)? And, importantly, do they have the experimentation mindset; the scrappy, can-do, entrepreneurial spirit; and the attitude to adapt well to changing conditions, lack of clarity, and lack of resources? 

I believe that rather than treating the risks to your business as static, think of the risks as dynamic depending on whether you stay with plan A or pivot to plan B. Prioritize addressing those risks that may cause you to pivot, and tackle those yourself if possible. If you decide to make a hire, screen them for their option value-- could they be valuable in plan A and plan B? This will help you avoid some of the downside of "taking on more mass." As you become more mature and more certain that you will continue to stay with plan A, you can veer more towards hiring experts for specific risks and opportunities for your business.