In the last piece, I discussed some of the broader issues that a prospective entrepreneur should consider before starting a new technology company. In this piece, I’d like to get more specific, focusing for now on the software space, and building up your core team. The biggest inducement you can offer someone to come work for you is equity. If you don’t know what that means, I’m not really sure the rest of this article is for you. But just to review, it’s an ownership stake in the company. You obviously want to preserve as much as possible for the founders, but to succeed, you’re going to have to share.
Personnel – Technology
Can you write code? Can you sell? Can you manage a company’s finances in a professionally-competent way? All three of these are essential (the first two a bit more so) to getting off the ground. The first two keep you in the game, the third one helps keep you out of court. When even the prospect of significant money enters the picture, most people take things a bit more seriously.
Running a tech start-up means you must become an expert at triage. Since your product comes first – otherwise you don’t have a business – it makes sense to start there. Is a founder going to be the chief technical officer? If not, you’ll need to recruit one. That takes money and equity, since no one sane – and qualified – would choose to forgo an opportunity at an established company with health insurance and a 401(k) plan unless they’d get lots of equity. Nathan Myhrvold didn’t build a net worth of over $600 million reinventing the cookbook or scouring the Great Plains for dinosaur bones (they’re both hobbies, evidently). Dustin Moskovitz (Facebook’s first CTO) left with 2.34% of the equity in 2008. He’s worth over $6 billion today.
Personnel – Sales and Marketing
Next comes selling, since there’s a decent chance that your product will not sell itself. If it did, I’d be binge-watching Arrested Development on my Betamax VCR and typing this on a laptop running OS/2. Some start-ups don’t dedicate enough resources to this early on. This is a mistake, since factors that decide a product’s – and a company’s – early success are often appallingly non-technical and surprisingly pedestrian. According to Silicon Valley lore, Microsoft won the IBM contract to develop DOS for new PCs in 1980 because either a) Gary Kildall, their only other competitor, was out flying or, b) his wife (everyone seems to agree that he was otherwise occupied) didn’t like the terms of the non-disclosure agreement. The discerning reader will notice that – avionics aside – there’s nothing technical in either version.
And if you don’t know the difference between sales and marketing, then let’s just skip to the bottom line: you need help here, and you need it early. That takes a person – with a professional network – who knows how to make a pitch, ask for money and close a deal. If it’s not a founder, it might have to be the next hire. Remember the CTO’s calculus about coming aboard? This one will need some equity, too, especially since you may be strapped for cash early on.
Sales and marketing, though, share one vital aspect, which can be very helpful if you’re hiring someone to do it for you: success can be easily measured. Your product’s reach will depend on downloads, licenses, contracts, subscriptions or some other metric. This can be a smart way to motivate and manage sales and marketing people.
Personnel – Finance
Managing your finances is also essential, but it is somewhat less vital at first. Records need to be kept, bank accounts need to be reconciled and cash must be managed. So if a founder won’t be the CFO, then expect to spend money on one soon enough. That said, the cost can be mitigated depending on your funding arrangement. If you work with an incubator or accelerator, that’s a good example of professional advice they can help you find at a significant savings. If you are still self-funding and looking for investors, they tend towards companies that have someone on board who seems trustworthy with money.
One of the indicia of a good CFO is someone who can produce useful and timely reports for both management and the investors. That begins with basic income statements and balance sheets, as well as operating reports that measure key performance indicators like usage statistics, downloads and other forms of user engagement. Also important are projections (note that I didn’t say useful). Projections are important to investors because they usually look for an “exit” (when they sell their stake) that will return a good ten times (or so) what they invested. If you don’t show a path taking the company from inception to becoming a sovereign nuclear power in 3-5 years, Benchmark and Sequoia will probably pass.
That should suffice for the core team, at least for the time being. In the next piece, I’ll discuss advisors.
Yali Elkin spent 15 years perfecting his spreadsheetmanship in corporate finance before starting LiveDial (www.livedial.com), a company that develops and markets software for polling and surveying users via its eponymous smartphone applications on issues ranging from movie reviews and the culinary legitimacy of the cro-nut to gun violence and tax reform. He has a BA in History from University of Pennsylvania and an MBA from NYU. He lives in Teaneck with his family and regrets that jab at Myhrvold since he likes to cook, too.
by Yali Elkin