Posts Tagged ‘founders’
We constantly hear about “product market fit.” But my post yesterday about The Power of Passion When Starting Your Company was about “founder market fit.” And I’ve come to believe that – especially among first time entrepreneurs – founder market fit is much more important than product market fit at the inception of the company.
I stumbled on the phrase a few times over the past year and it’s been rolling around in my head a lot since. The first time was on Chris Dixon’s blog Founder / market fit which led me to a guest post by David Lee of SV Angel on More Thoughts on What Makes Great Entrepreneurs Great.
I’ve seen this over and over in TechStars. Founders come in with something they are super excited about. As they get exposed to mentors and feedback, they quickly start moving around within the market (or domain) as they search for a clearer focus, which could be defined as product market fit prior to getting a product out there and doing any real testing. This search is usually qualitative – it involves real feedback from potential customers and users, but it’s not a measured, tested approach.
In parallel, there’s often a Lean Startup methodology going on that does more quantitative tests of the specific product. But in a lot of cases, the qualitative feedback at the very formative stages is just as, if not more, important to make sure you end up in the right zone to test.
Underlying all of this is the regular shift away from something the founders are passionate about. The Orbotix example in my post is a great one – it would have been easy for Adam and Ian to decide to work on something that had a better product market fit, like iPhone enabled door locks, instead of something that not only hadn’t been invented yet, but also wasn’t obvious what market would really want it (a ball controlled by your smartphone – ok – that’s cool, but who will buy it?)
They, and their co-founder and CEO Paul Berberian had a vision for who would want a ball controlled by a smartphone. And Adam and Ian were obsessed with the idea. The three of them had extraordinary founder market fit, well before they figured out the product market fit.
We’ve got lots of other examples of this in our portfolio. I can’t tell you the number of times I get asked “what would someone ever use a personal 3D printer for?” But Bre Pettis at MakerBot is completely and totally obsessed with bringing 3D printers to the masses. While product market fit is getting clearer with each new product release, the founder market fit in this cases was awesome. Or Isaac Saldana of SendGrid, who initially named the company SMTPAPI. He has a great chapter in Do More Faster where he wrote about how he “Looked for the Pain” as a developer, found it in sending transaction email, and created SMTPAPI (now SendGrid) to address it. Or Eric Schweikardt who is unbelievably focused on creating the next generation robot construction kit at Modular Robotics. Sure – the “market comp” in this case is Lego Mindstorms, but Eric’s vision for the market goes well beyond this, and the product follows.
I’m not suggesting that product market fit isn’t an important concept. It is. But at the very beginning, especially with first time entrepreneurs, founder market fit is even more important.
Today’s “founder hint of the day” is to create an email address called firstname.lastname@example.org and have it automatically forward to all the founders of your company.
I interact with a ton of companies every day. For the ones we have a direct investment in via Foundry Group, I know each of the founder’s names (although with 40 companies, at age 45 – almost 46, there are moments where I have to sit quietly and think hard to remember them.) For the TechStars companies, especially early in each cycle, I have trouble remembering everyone’s names until I’ve met them. And for many other companies I have an indirect investment in (via a VC fund I’m an investor in) or that I’m simply interacting with, I often can’t remember all of the founders names.
Ok – that was my own little justification. But your justification is that as a young company, you want anyone interested in you to be able to reach you. While email@example.com is theoretically useful, in my experience very few people actually use it because they have no idea where it actually goes. On the other hand, firstname.lastname@example.org goes to the founders. Bingo.
We’ve been using this at TechStars for a number of years and it’s awesome. I’ve set up my own email groups for many other companies, but this morning while I was doing it for another one I realized that they should just do it. Sure – there’s a point at which the company is big enough where you probably don’t want to have this list go to all the founders, or there are founders that leave, or something else comes up, but when you are just getting started, be obsessed with all the communication coming your way and make it easy to get it.
Finance Friday’s gets off the ground with today’s post by introducing you to an imaginary startup, the entrepreneurs that we’ll being following throughout the series, and their first challenges: splitting up the founders’ equity and addressing the case where one of the founders provides the initial seed capital for the business.
We felt like we needed to put some groundwork in place using a case-study like approach, rather than just jumping into looking at balance sheets, income statements, and cash flow statements. Hopefully, by the time we are done, we’ll all have some new friends and a lot of knowledge. Let’s get started.
Jane and Dick worked together at Denver Health, the nation’s “most wired” hospital according to Hospitals & Health Networks Magazine. They have seen first-hand the impact technology can have in the medical field through exposure to a number of Denver Health IT initiatives. Through a series of conversations, Jane and Dick have come up with the idea to develop a social network tailored to the medical community. Through an online platform, doctors, nurses, and administrators would be able to assist each other with complicated diagnoses, collaborate on research studies, and find and fill job openings. After sharing the concept with a number of colleagues and receiving enthusiastic support for the idea, Jane and Dick built up the confidence to quit their day jobs and launch a business together.
Jane and Dick each brings a similar level of skill and capability to the business, making it easy for them to agree to a 50/50 equity split. While they could both go without salaries for a year, Dick had no extra money to invest in the business. However, Jane was in a position to invest some of her savings into the startup. How could they treat Jane’s cash investment in the business in a way that was fair to both of them?
Jane could have covered expenses from her personal account for now, keeping track of the receipts, with the plan of letting an accountant sort it out later. After all, they needed to focus on building their product, right?
Fortunately, Dick and Jane had both read Dharmesh Shah’s piece on avoiding co-founder conflict in Do More Faster and knew it was important to address co-founder issues – including how to handle co-founder investments – from the start. They also knew that it was important to set up proper accounting systems from the beginning and that paying for bills out of your personal bank account and having an accountant sort it out later for you seemed like a recipe for future pain.
Jane and Dick had several options, including structuring this as a debt transaction where Jane simply loaned the money to the company, or as convertible debt transaction where Jane’s investment would convert into equity in the next round. But they worried that future investors would frown on that or wouldn’t give Jane credit for the investment at a later date, since they might consider it as part of Jane’s contribution to her original ownership position of 50%.
That narrowed the possibilities down to an equity transaction, which would in turn require a conversation about valuation. Jane and Dick briefly considered a valuation based on the next external financing round, perhaps applying a discount. For example, if the first round of external investment values the company at $2 million post and, prior to that, Jane had invested $50,000, then with no discount, Jane’s investment would earn her 2.5% of the company ($50k/$2M = 2.5%). If they agreed on a 20% discount, then Jane would be entitled to 3.125% of the company ($2M * (1-20% discount) = $1.6M; $50k/$1.6M = 3.125%).
At this stage it wasn’t clear when (or even if) the first round of external financing might occur or what it might look like, which made agreeing on a discount just as difficult as agreeing on a valuation, while adding complexity. After a tense conversation about this, Jane and Dick decided to go out for a beer and try to resolve the equity allocation issue once and for all.
Jane indicated that the most she could invest in the company before they would have to seek other sources of capital was $50k. Dick hated to think that he would be diluted by more than 20% of his stake over $50k and proposed that Jane receive 10% incremental equity for her $50k. Jane felt comfortable with receiving 10% for $50k, but no less, so they agreed on a $450k pre money valuation of their startup.
There are a number of ways Jane and Dick could have executed the equity transaction. The simplest would be if they agreed in the founders documents that they would both commit full-time to the business, Jane would contribute an initial $50k, and they would split the equity 55/45 in favor of Jane.
Dick and Jane have now successfully navigated their first finance challenge: dividing up the founders’ equity, including an investment from one of the founders. A few key lessons from today’s post are:
- Invest the time upfront to get the founders’ documents right. This will save a lot of pain down the road. This includes agreeing on how you will handle personal investments in the business, but it also includes many other topics such as founders’ vesting schedules and voting rights.
- Every time you put money in the business it represents some form of debt or equity transaction. You can introduce complicated mechanisms for handling these transactions (e.g. warrants or discounts). However, there is a lot to be said for keeping things simple during the early stage of a startup. It helps control transaction costs in terms of both time and money.
- You could inject more cash into the business on an as-needed basis. However, this is distracting, even if you are raising the money from yourselves. Each cash injection effectively represents a new round of financing, which can get messy. Try to minimize the frequency of transactions by investing enough money each time to get you to the next key milestone for your business.
Next week, we will address how Jane and Dick put proper accounting systems in place. Oh, and you’ll notice that they don’t yet have a name for their company. They’ve told us they are open to suggestions.
I was going to write a different post this morning, but I came across this post by Matt Haughey titled Ev’s assholishness is greatly exaggerated and, after reading it, sat for a few minutes and thought about it. Go read it now and come back.
Welcome back. I’m not an investor in Twitter directly (I am indirectly in a tiny amount through several of the VC funds I’m an investor in) but I’m an enormous Twitter fan and user. I also wasn’t an investor in Odeo so, as the cliche goes, I don’t have a dog in the hunt. But I have a few friends who were so I have second hand knowledge about the dynamics around the Odeo to Twitter evolution.
When I read (well – skimmed) the latest round of noise about “how founders behave”, possibly stoked by Paul Allen’s new book on the origins of Microsoft along with his 60 Minutes appearance, I was annoyed, but I couldn’t figure out exactly why. I had a long conversation with a friend about this when I was Seattle on Tuesday and still couldn’t figure out why I was annoyed.
Matt, who I don’t know, nailed it. As he says in the last sentence of his post, [it's] just melodramatic bullshit.
Creating companies is extremely hard. I’ve been involved in hundreds of them (I don’t know the number any more – 300, 400?) at this point and there is founder drama in many of them. And non-founder drama. And customer drama. And partner drama. And drama about the type of soda the company gives or doesn’t give away. The early days of any company – successful or not – are complex, messy, often bizarre, complicated, and unpredictable. Some things work out. Many don’t.
We’re in another strong up cycle of technology entrepreneurship. It’s awesome to see (and participate) in the next wave of the creation of some amazing companies. When I look back over the last 25 years and look at the companies that are less than 25 years old that impact my life every day, it’s a long list. I expect in 15 more years when I look back there will be plenty of new names on that list that are getting their start right now.
So, when the press grabs onto to the meme of “founders are assholes” or ex-founders who didn’t stay with the companies over time whine about their co-founders or when people who didn’t really have any involvement with the creation of a company sue for material ownership in the company because of absurd legal claims, it annoys me. It cheapens the incredibly hard and lonely work of a founder, creates tons of noise and distraction, but more importantly becomes a distraction for first time entrepreneurs who end up getting tangled up in the noise rather than focusing on their hard problems of starting and building their own company.
When I talk to TechStars founders about this stuff, I try to focus them on what matters (their business), especially when they are having issues with their co-founders (e.g. focus on addressing the issues head on; don’t worry about what the press is going to write about you.) When I hear the questions about “did that really happen” or “what do you think about that’ or “isn’t it amazing that X did that” or “do you think Y really deserves something” it reminds me how much all the noise creeps in.
I like to read People Magazine also, but I read it in the bathroom, where it belongs, as does much of this. It’s just melodramatic bullshit. Don’t get distracted by it.