Creating Your Startup – Part 1
In our last post we talked about the technicalities of incorporating a startup. Let’s now talk about what happens once you have incorporated your dream company.
Now that you’ve decided that a startup is indeed for you and that you have the attitude, temperament and ability to deal with the ambiguities and tensions, you need to figure out how to go about the whole process of creating your startup. Gurukul will walk you through the process over the next few weeks.
Startups are usually created in either or both of these ways: you get THE BIG IDEA and then decide to talk to some friends and colleagues to get them to join or you together with some friends decide that its high time you “did something” and then figure out what to do.
Sometimes, both of these happen in parallel. But whichever way the startup happens, the thing to remember what, according to Arthur Rock, are the 3 most important factors in a startup: “people, people, and people”! Well, he should know considering he was the VC who backed Intel and Apple. The legendary John Doerr of Kleiner Perkins says that above all he looks for a quality team and that most of his time goes towards recruiting quality people.
So, in this psot, let’s talk about people.
Remember, startup valuations will be dependent on the management team’s completeness and experience. VCs will fund companies with nothing more than an approximate business plan purely on the strength of the management team and the opportunity.
For example, Mindtree Consulting which raised $9m or so essentially on the strength of the team and the opportunity in E-Commerce & Telecom services. However, most startups don’t start with all-star teams. The founders usually have ambition, good ideas, persistence, an ability to work with and motivate people and may have financial savvy.
Founders who want to retain all control, give poor direction, make business decisions for non-business reasons, bring in ineffective relatives and don’t take corrective actions in time are unlikely to be funded by VCs. So how can a quality team be put together?
This team will need to be together through thick and thin and must share a common vision. Look for people who thrive on risk, are optimists, have integrity, have dogged persistence, have energy and enthusiasm, and make sure they pass the “chemistry test” with you – can you crack jokes together, go out for a drink together…? A single poor member can ruin a company – the road to startup heaven is littered with startups destroyed by tensions within the management team.
The core team will consist usually of 3 members: CEO, VP Sales and/or Marketing, and VP Engineering/CTO. A CFO/VP Finance can be added later as the company grows. The entrepreneur will have to decide early on whether he/she’s the right person to be the CEO.
If yes, then focus on being the CEO and nothing else! If no, then let one of the team members be the CEO. Else, VCs will do it! Usually, good friends get together and do a startup. The chemistry is great, there is shared vision and commitment and there is no real decision making process or hierarchy.
This works well initially but there needs to be someone or someones (sic!) who are more equal than the others. After all, somebody has to call the shots and take the hard decisions in running the company, in marketing, in engineering etc.
This is not as easy as it sounds as equity holdings in the company are a direct function of responsibility. In 1995, Architext Inc was started by a group of Stanford grads and everyone was equal. Then Vinod Khosla of Kleiner Perkins got involved during Architext’s garage phase and asked them choose a CEO, a CTO since someone had to run the company and take decisions. Architext subsequently grew up and became Excite.
So, another set of questions to ask yourself and of the (potential) team members: Are you willing to be replaced by more professional management if need be as the business grows? Will you move aside if proven to be less than able? Are you open to hiring your own replacements? After all, your commitment must be to creating a successful business and you should be willing to do the right thing for the business: VCs love such entrepreneurs!
Along with the key team members, the startup will need to create a Board of Directors (BOD). Since the BOD decides on senior management hires and fires (including having the power of replacing you the CEO), compensation, stock options, dividends, setting the company direction, and other tasks mentioned in the company’s charter, the entrepreneur will want to control who gets on the board.
The number of board seats is usually odd (i.e.3, 5, 7) and the key investors take board positions. Board seats in startups are usually split down the middle between the investors and the management team with a mutually acceptable person occupying the “odd” seat. Board members are typically top corporate executives.
Such board members are usually compensated with stock in the startup. The CEO may in all probability be the Chairman as well; but Chairmen carry little additional power especially if you are the CEO. Most startup boards prefer the CEO to run the business and step in to provide guidance and assistance on a need to basis.
In addition, it is advisable to create an Advisory board. Advisory boards are set by the CEO to help manage the startup and typically consist of people who bring a diverse set of competencies to the table.
You should focus on getting people who complement the competencies available within the company and who provide credibility and legitimacy to the fledgling company. Well known top corporate executives, successful entrepreneurs, experts in finance and technology or marketing, academics, professionals from the legal, accounting, PR, head-hunting worlds are some of the people you may want on your Advisory board. Advisory boards are also usually compensated in stock or a combination of cash and stock. These Advisors can help you tremendously; so spend quality time in creating the Advisory board.
Finally, remember that the CEO is the most important person in the startup and potentially its weakest link. So ask yourself as the founder entrepreneur: Am I the right person for the CEO job?
That’s it for today, in the next part we will talk about markets and customers the two most important aspects after people.
This article was originally published in VentureKatalyst, India’s first e-zine aimed at entrepreneurs, started by Sanjay Anandaram.