Entries Tagged 'careers' ↓

If you want to start a company and are working on new ideas, here’s how I’ve always done it and how I recommend you do it.  Be the opposite of secretive.  Create a Google spreadsheet where you list every idea you can think, even really half-baked ones.  Include ideas you hear about (make sure you keep track of who had which idea so you can credit them/include them later).

Then take the spreadsheet and show it to every smart person you can get a meeting with and walk through each idea.  Talk to VCs, entrepreneurs, potential customers, and people working at big companies in relevant industries. You’ll be surprised how much you’ll learn.  The odds that someone will hear an idea and go start a competitor are close to zero.  The odds you’ll learn which ideas are good and bad and how to improve them are very high.

Every conversation will contain some signal and some noise. Separating the two is tricky. Here are some broad rules of thumb I’ve developed for how to filter feedback based to the profession of the person giving it to you.

1) Employees at relevant big companies. These people are great at providing facts (“Google has 100 people working on that problem”) but their judgment about the quality of startup ideas is generally bad. They tend to have goggles on that makes them think every good idea in their industry is already being built within their company.  For example, every security industry person I talked to thought SiteAdvisor was a bad idea.  (If it wasn’t, they think, someone at McAfee or Symantec company would have already built it!)

2) VCs. VCs are good at telling you about similar companies in the past and present and critiquing your idea in an “MBA-like” way:  will it scale? what are the economics? what is the best marketing strategy?  I would listen to them on these topics but pretty much ignore whether they think your idea is good or bad.

3) Potential customers.  If your product is B2B, remember you’ll be selling to that person 2-3 years from now and by then the world and their priorities will likely have radically changed.  If your product is B2C, it’s interesting to hear how regular consumers think about your product but often they really need to use it fully built and in the proper context to really judge it.

4) Entrepreneurs. This is the one group I listen to without a filter.

Even though I have no intention of starting a new company for a long time (if ever), I still keep my idea spreadsheet and update it periodically.  Some of the ideas I wrote down a few years ago are now companies started by other people (some successful, some not).  A few I had the chance to invest in. It’s interesting to compare my notes and ratings of each idea with how those companies have actually performed. I also keep a list of “on the beach” ideas in case I have time in between startups. These are mostly non-profit ideas.  I don’t know if I’ll ever get to those but they are particularly fun to think about.

* Thanks to James Cham for inspiring & contributing ideas to this post!

VC returns over the last decade have been poor. The cause is widely agreed to be an excess of venture capital dollars to worthy startups. Observers seem to universally assume that the solution is for the VC industry to downsize.

For example, Fred Wilson says about VC:

You cannot invest $25bn per year and generate the kinds of returns investors seek from the asset class. If $100bn per year in exits is a steady state number, then we need to work back from that and determine how much the asset class can manage…. I think “back to the future” is the answer to most of the venture capital asset class problems. Less capital in the asset class, smaller fund sizes, smaller partnerships, smaller deals, and smaller exits

Similarly, Bill Gurley writes:

There are many reasons to believe that a reduction in the size of the VC industry will be healthy for the industry overall and should lead to above average returns in the future.

All of these analyses start with the assumption that aggregate venture-backed exits (acquisition and IPOs) will remain roughly constant. I don’t see why we need to accept that assumption. The aggregate value of venture-backed startups, like all valuations, is a function of profits generated (or predicted to be generated). In technology, profits are driven by innovation. I don’t see any reason we should assume venture-backed innovation can’t be dramatically increased.

For example, innovation has varied widely across times and places – the most innovative region in the world for the last 50 years being Silicon Valley. What if, say, Steve Jobs hadn’t grown up in Silicon Valley? What if he had gone to work for another company? Does anyone really think Apple – and all the innovation and wealth it created – would exist if Jobs hadn’t happened to grow up in a culture that was so startup friendly? Jobs is obviously a remarkable person, but there are probably 100 Steve Jobs born every year. The vast majority just never have a chance or give a thought to starting a revolutionary new company.

Some people blame our education system, or assume that there is some fixed number of entrepreneurs born every year. I think the problem is cultural. As much as we like to think of our culture as being entrepreneurial, the reality is 99% of our top talent doesn’t seriously contemplate starting companies. Colleges crank out tons of extremely smart and well-educated kids every year. The vast majority go into “administrative” careers that don’t really produce anything – law, banking and consulting. Most of the rest join big companies. As I’ve argued many times before, big companies (with a few notable exceptions) aren’t nearly as successful as startups at creating new products.  The bigger the company, the more likely it suffers from agency issues, strategy taxes, and myopia. But most of all: nothing is more motivating and inspiring than the sense of ownership and self-direction only a startup can provide.

Whenever I see a brilliant kid decide to join Goldman Sachs, McKinsey, or Google, I think to myself: a startup just died, and as a result our world is a little less wealthy, innovative, and interesting.

I’ve seen a number of situations recently where entrepreneurs decided to shut their startups down while they still had cash in the bank. (Contrary to popular mythology, I’ve never seen a case where investors forced an early-stage startup to shut down before they ran out of cash — it has always been voluntary).  Shutting down is an incredibly hard thing to do.  It takes great maturity and intellectual honesty to realize things aren’t going the way you hoped and that it might be better to just close shop and do something else.

How entrepreneurs handle shutting down is very important.  First, try to return as much capital to your investors as you can (after paying off employees and other important debts – but don’t waste money on an expensive legal process). Second, if you’ve developed IP, spend a few months trying to sell it to recover as much capital as you can (often investors will offer a “carve out” to incentivize entrepreneurs since the likely return to investors will be under total number of preferences).  Don’t go off starting a new venture before you’ve properly closed down your current one (I’ve seen this twice recently – very bad form).  Finally, for your own learning as well as your reputation, write a detailed post-mortem about what went right and wrong and send it to your investors, and then try to follow up with in-person discussions.

Here’s the good news.  One of the great things about angel and venture investors is that failure is accepted, as long as you do it in the right way. Venture investors will often fund entrepreneurs who’ve lost their money in the past. They understand that if you build an interesting product and, say, market forces turn dramatically against you, that’s a risk they took — and the type of risk they will take a again. Also, entrepreneurs tend to be judged by their wins (max() function), not their average.  You’d be surprised how many entrepreneurs have failures in their past that no one remembers once they have some success.

I’ve been trying to set up a “Popular Posts” widget on the sidebar of this blog but somehow repeatedly failed.  So instead I’ll just post them here:

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Generally speaking, there are two approaches to relating to other people in the business world. The first approach is transactional and legalistic:  work is primarily an exchange of labor for money, and agreements are made via contracts.   Enforcement is provided by organizations, especially the legal system.  The second approach relies on trust, verbal agreements, reputation and norms, and looks to the community to provide enforcement when necessary.

In the startup world, the latter approach dominates.  It is almost unheard of, for example, to see entrepreneurs or VCs sue each other.  The ones who do tend to leave the startup world, either by choice or by having ruined their reputation.  It is very rare to see someone in the startup world break a verbal agreement.  And, in most cases, employees and employers show loyalty far beyond what is seen in larger companies or what is economically “rational.”   (Most startups do spend considerable legal fees on financing, employee, and IP documents, but that is mostly because they know that those are necessary if they decide to sell themselves to a large company where the legalistic approach dominates.)

For this reason, if you are an employee working at a startup where the managers are honest, inclusive and fair, you should disregard everything you’ve learned about proper behavior from people outside of the startup world.

For example, let’s suppose you are a two years out of college and have a job at a startup.  You like your job but decide you want to go to graduate school.   The big company legalistic types will tell you to secretly send in your applications, and, if you get accepted and decide to attend, give your boss two weeks notice.

What you should instead do is talk to your boss as soon as you are seriously considering graduate school.  Give them twelve months notice.  Any good startup manager won’t fire you, and in fact will go out of her way to help you get into school and get a good job afterwards.  They will appreciate your honesty and the fact that you gave them plenty of time to find a replacement.

(Now don’t get me wrong:  if you work for bosses who have a legalistic, transactional mindset, by all means give two weeks notice.  I gave 4 months notice once to a boss with that mindset and was duly punished for it.  But hopefully if you are at a startup you work with people who have the startup, relationship-centric mindset.)

This way of relating to other people is one of the main things people are talking about when they talk about “startup culture.”  It is why so many people coming from other industries have difficulty fitting into startups (especially people coming from Wall Street where the transactional mindset is at its most extreme).  I personally find the community approach a much nicer way to operate, and try to only professionally associate myself with people who prefer that approach as well.

For most people I know who join or start companies, the primary goal is not to get rich – it is to work on something they love, with people they respect, and to not be beholden to the vagaries of the market- in other words, to be independent.  The reality is being independent often means having made money and/or being able to raise money from others.

A while back, I posted about how I recommend thinking about non-founder option grants.  In the comments, Aaron Cohen made the point that given today’s “good” exit sizes and standard equity grants, most non-founders will not gain independence even in the (non-extreme) good cases:

Most startup employees need to realize they are on a journey and that in addition to making a few hundred thousand dollars on a good outcome they are learning how to become more senior at the next company. Real wealth creation will take founding, seniority, or staggeringly large exits.

As Aaron said, you shouldn’t think of joining a startup as just joining a company. You should think of it as joining the startup career path. This career path could mean starting a company as your first job.  It could also mean working at a few startups and then starting a company.   (In my view, if your goal is to start a company, it is mostly a waste of time to work anywhere but a startup – with the possible exception of a short stint in venture capital).

Maybe you will make some money working at a startup, but more importantly you will hopefully work for founders and managers who are smart and willing to mentor you and eventually fund or help you fund your startup.

The startup world is extremely small.  If you’re smart, work really hard, and act with integrity, people will notice.  Contrary to popular wisdom, you will actually have more job stability than working at a big company.  And hopefully you’ll go on to start your own company, gain independence, and then help others do the same.

Andy Weissman’s blog has the tagline “Maximizing the serendipity around you.”  It’s a good philosophy.  I think one of the simplest ways to do this is to ask people lots of questions when you meet them.  I’m surprised how often people fail to do this.  Besides being good manners, it’s also an efficient way to learn about the world and sometimes make important discoveries and connections.

About 6 years ago, when I was working at Bessemer as junior investor, I was at a dinner with a group of friends and acquaintances.  The guy sitting next to me was a business school student who spent most of the dinner talking about how he was trying to get a job in venture capital.  He never bothered to ask me what I did for a living and I never mentioned it.

Now, I wasn’t a particularly important venture capitalist, but getting a job in the industry is all about meeting as many people who work in it as you can.  The fact that he happened to be sitting next to one was potentially serendipitous – had he only bothered to ask questions.

I know a brilliant young kid who graduated from college a year ago and now works at a large investment bank.  He has decided he hates Wall Street and wants to work at a tech startup (good!).  He recently gave notice to his bosses, who responded by putting on a dog and pony show to convince him to stay.  If he stays at the bank, the bosses tell him, he’ll get a raise and greater responsibility.  Joining the technology industry, he’d be starting from scratch. He is now thinking that he’ll stay, despite his convincing declaration that he has no long term ambitions in finance.

Over the years, I’ve run into many prospective employees in similar situations. When I ask them a very obvious question: “What do you want to be doing in 10 years?”   The answer is invariably “working at or founding a tech startup” – yet most of them decide to remain on their present path and not join a startup. Then, a few years later, they finally quit their job, but only after having spent years in an industry they didn’t enjoy, and that didn’t really advance them toward their long term ambitions.

How can smart, ambitious people stay working in an area where they have no long term ambitions?  I think a good analogy for the mistake they are making can be found in computer science.

A classic problem in computer science is hill climbing.  Imagine you are dropped at a random spot on a hilly terrain, where you can only see a few feet in each direction (assume it’s foggy or something).  The goal is to get to the highest hill.

Consider the simplest algorithm.  At any given moment, take a step in the direction that takes you higher.  The risk with this method is if you happen to start near the lower hill, you’ll end up at the top of that lower hill, not the top of the tallest hill.

A more sophisticated version of this algorithm adds some randomness into your walk.  You start out with lots of randomness and reduce the amount of randomness over time.  This gives you a better chance of meandering near the bigger hill before you start your focused, non-random climb.

Another and generally better algorithm has you repeatedly drop yourself in random parts of the terrain, do simple hill climbing, and then after many such attempts step back and decide which of the hills were highest.

Going back to the job candidate, he has the benefit of having a less foggy view of his terrain.   He knows (or at least believes) he wants to end up at the top of a different hill than he is presently climbing.  He can see that higher hill from where he stands.

But the lure of the current hill is strong.  There is a natural human tendency to make the next step an upward one.  He ends up falling for a common trap highlighted by behavioral economists:  people tend to systematically overvalue near term over long term rewards.  This effect seems to be even stronger in more ambitious people.  Their ambition seems to make it hard for them to forgo the nearby upward step.

People early in their career should learn from computer science:  meander some in your walk (especially early on), randomly drop yourself into new parts of the terrain, and when you find the highest hill, don’t waste any more time on the current hill no matter how much better the next step up might appear.

Getting a job in venture capital is extremely hard.  There are a lot of really smart, well qualified, eager people who want to work in VC, and very few jobs.  And it’s likely to only get harder as the industry contracts.

If you look at the backgrounds of partners in VC firms, they generally either came in as a partner after being a successful entrepreneur or worked their way up in VC.  There are books written on how to become a successful entrepreneur, so here I’ll just focus on the other common path – career VCs.

First, you should understand how VC firms are structured.  Every firm is different, some have no junior people, some have just a few, and some have a lot.

The key distinction between junior and senior people is whether they can write checks – meaning they can independently lead a deal.  If you can’t write checks, you have to get a check writer to sponsor an investment you like.  Check writers get almost all the credit and blame for an investment.

The hierarchy within VC firms is basically as follows:  (There has been a wave of title inflation in VC lately, so I’ll put the inflated titles in parentheses).

Partners – Owners of the firm.  Get the most of the management and carry fees.  Can write checks.

Principals – Usually get small piece of carry.  Can write checks.  (Inflated title:  Partner;  in which case it’s hard to tell the “real” partners from the principals).

Associates – Usually post-MBA or 4-6 years work experience.   Usually get little to no carry and can’t write checks.  (Inflated title:  Sr. Associates or Vice President).

Analyst – Usually right out of college.   They do research or cold call companies.   No carry and obviously can’t write checks.   (Inflated title:  they just don’t list a title or say something vague like “investment professional”).

As you can see with the title inflation this is all pretty confusing.  It’s meant to be.  VCs want entrepreneurs to take their junior people seriously.  (Which, by the way, entrepreneurs always should:  even though they can’t directly write checks, they can be extremely influential)

You can break down working your way up in VC into 3 challenges:

1) Getting a job in the first place.  The two most common places to break into VC as a junior person are after undergrad or business school.  VCs are heavily biased toward certain top schools.  On the MBA side, the industry is dominated by Harvard and Stanford.  Undergrad, the VCs I know only recruit from Wharton, Harvard, Stanford and maybe a few other elite schools.  (Please don’t accuse me of elitism-I’m just reporting on elitism, not promoting it). Even if you go to one of these fancy schools it’s still not easy to get a job.  You need to network like crazy.  I did a whole bunch of volunteer research projects for VCs when I was in business school.  I came up with lists of investment ideas so when I got a few minutes with a VC, I could show them I was obsessed with this stuff.  Other things that help you:  computer science or other relevant technology background.  Single best thing is to have started a company (even if it didn’t succeed).

2) Going from non-check writer to check writer.  This might even be harder than breaking into VC.   There is kind of a Catch-22 here:  you can only gain credibility by having led deals, yet you can’t lead deals until you’ve gotten credibility.  Some partners are nice and let high level junior people “virtually” lead deals, join boards etc so they can get credit.  My advice here is to try to get your hands on a checkbook, even if it means leaving a top tier VC and going to a second tier one. Too many junior people hang around top tier firms waiting to get promoted.

3) Once you get your hands on a checkbook, then you just need to find the next Google/Facebook and invest before anyone else figures it out.

If you really want to break into VC and aren’t just now graduating from a top school, my top suggestion would be to go start a company.  If you don’t have the stomach for that, the next best thing is to work in a VC-backed portfolio company, hopefully in a role where you get some VC exposure.

And, finally, if you just want to work in finance, try to get a job at a hedge fund or a big bank.   Breaking into VC so hard that it’s only worth it if you really love startups.

If you want to work in venture capital focusing on internet/software companies, or start one of those companies, or work as an employee in any role at one of those companies, there is only one undergraduate major you should consider:  computer science.*

I’m not saying you need a computer science degree, but I am saying it’s incredibly helpful to know computer science.  Lots of great computer scientists are self taught. But almost all of them started coding in their teens.  If you are a coder already and want to spend your college years majoring in something else for the heck of it, great.  I spent my whole childhood coding, and worked during college as a programmer, so decided to major in Philosophy because I thought it was interesting.

Why is it so much better to learn computer science in college (or before)?  Because after college it’s very hard to find the time and discipline to teach yourself coding.  On the other hand, it’s pretty easy to pick up business skills, economics and all sorts of other skills on the job or in grad school.

Why is a computer science degree so important to VC and startups?  I would estimate in about half the conversations I have at my own startup, with tech founders, and with venture capitalists, there is a moment in the conversation when we start getting technical.  Sometimes someone will even ask “Are you technical?” before starting down a topic.  The non-technical people in the room just sit there like we are speaking Greek.

It’s a shame that student enrollment in computer science is in decline.  The thinking apparently is that computer programming is increasingly moving overseas.  What these students fail to realize is you don’t need to be a professional coder all your life to find computer science an incredibly valuable major.

* There is a whole separate world of VC and startups in energy and healthcare.  In those areas I’d recommend analogous technical undergraduate majors.