Straight Talk for Startups

100 Insider Rules for Beating the Odds--From Mastering the Fundamentals to Selecting Investors, Fundraising, Managing Boards, and Achieving Liquidity

Randy Komisar, Jantoon Reigersman

• Publisher: Harper Business
• Year: 2018
• ISBN:
  9780062869074
• Topic: Business
• Subtopic: IT Industry
• Index: Business

" Straight Talk for Startups memorializes age-old best practices and empowers both experienced and new investment professionals to beat the odds."—David Krane, CEO, Google Ventures

" Straight Talk for Startups is filled with real, raw, and fact-based 'rules of the road' that you need to know when diving into our ultra-competitive startup world. A must read and a re-read!"—Tony Fadell, Coinventor of the iPod/iPhone & Founder of Nest Labs

Veteran venture capitalist Randy Komisar and finance executive Jantoon Reigersman share no-nonsense, counterintuitive guidelines to help anyone build a successful startup.

Over the course of their careers, Randy Komisar and Jantoon Reigersman continue to see startups crash and burn because they forget the timeless lessons of entrepreneurship.

But, as Komisar and Reigersman show, you can beat the odds if you quickly learn what insiders know about what it takes to build a healthy foundation for a thriving venture. In Straight Talk for Startups they walk budding entrepreneurs through 100 essential rules—from pitching your idea to selecting investors to managing your board to deciding how and when to achieve liquidity. Culled from their own decades of experience, as well as the experiences of their many successful colleagues and friends, the rules are organized under broad topics, from "Mastering the Fundamentals" and "Selecting the Right Investors, " to "The Ideal Fundraise, " "Building and Managing Effective Boards, " and "Achieving Liquidity."

Vital rules you'll find in Straight Talk for Startups include:

• The best ideas originate from founders who are users
• Create two business plans: an execution plan and an aspirational plan
• Net income is an option, but cash flow is a fact
• Don't accept money from strangers
• Personal wealth doesn't equal good investing
• Small boards are better than big ones
• Add independent board members for expertise and objectivity
• Too many unanimous board decisions are a sign of trouble
• Choose an acquirer, don't wait to be chosen
• Learn the rules by heart so you know when to break them

Filled with helpful real-life examples and specific, actionable advice, Straight Talk for Startups is the ideal handbook for anyone running, working for, or thinking about creating a startup, or just curious about what makes high-potential ventures tick.

Part 1
Mastering the Fundamentals

The rules in part 1 address the fundamentals of preparing a startup business plan, obtaining the best funding, and engaging the most effective board members to help support the mission.

There are shelves of textbooks and manuals that purport to teach entrepreneurship. We instead focus our attention on just the essentials. The crucial things, like creating two financial plans, not one; hiring part-time experts rather than full-time trainees; knowing what to measure and the pitfalls of doing it too early; and the criticality of unit economics and working capital. There is a lot to know about startups, but we want to make sure you know a few key rules by heart.

And we cast a wide net: telling your story with your financials, practicing minimally invasive management, recruiting with the thoroughness of a preflight checklist, and taking advantage of disappointment, to name just a few of the topics. You may consider yourself a connoisseur of all things entrepreneurial and be an avid follower of the Twitter musings of smart investors and founders. Perhaps you are up to the second on who got funded and what new idea just launched. You may already have a deep understanding of one or more of the startup food groups—engineering, finance, operations, management, marketing, and sales. But unless you have been in the game a long while and are on a first-name basis with those tweet-lebrities, chances are you haven’t had a chance to assemble a complete understanding of exactly what matters and what doesn’t. In this section we pull from all the skill sets to provide you with a firm foundation for beating the odds.

Rule 1
Starting a venture has never been easier; succeeding has never been harder.

Whenever we hear this platitude recited for entrepreneurs, we see the faces of the wannabe founders light up. Unfortunately, while they are rejoicing at the ease of getting started, they seem to miss the second part entirely: it is really hard to succeed. It’s a bit like learning a new language: you master “hello” and “goodbye” and then you have to face the arcane rules of grammar that stand between you and fluency. Easy to start, hard to succeed. This book is all about making the hard easier.

So why is it so easy to start something? First, venture capital is plentiful in the dominant hubs of innovation, especially Silicon Valley. This may reflect a wrinkle in time. Since the Great Recession of 2008, interest rates have been depressed worldwide. This means that hungry investors have had to stray into areas of risk usually reserved for experienced startup investors with plenty of intestinal fortitude. Sovereign funds, growth funds, private equity funds, and strategic corporate investors are chasing higher returns and ignoring the risk that accompanies them. And then there are the newly minted angel investors, individuals who find themselves with an excess of discretionary means, often because of their own entrepreneurial success, who become relatively casual funders of new ideas. These dynamics may present professional investors with reason to worry, but it’s a positive development for entrepreneurs raising money. With a greater supply of capital from an array of sources, raising money is easier than ever, and deal terms favor the entrepreneur.

So why is it harder to succeed? More money brings more startups, which crowd markets with more competition hell-bent on rising above the crowd. That fuels irrational behaviors, such as “non-economic growth.” Non-economic growth is when you price your product or service lower than the amount that the product or service contributes to the operating income of the business—for instance, when you sell ready-made meals delivered to the home for $10 while spending $5 on ingredients, $3 on preparation, $3 on packaging, and $5 on delivery. Most kids with a lemonade stand would see the folly of this business model. But the hope is that you can win more loyal customers faster than your competition while slowly lowering costs and raising prices. The problem is that once one company starts down this road, investing its venture capital in acquiring customers who are only coming for the free food, all the other competitors need to follow suit. Massive amounts of capital are wasted because one or more parties have raised a war chest that allows them to bleed red ink, at least for a while. Combine that with the fact that almost any new idea brings clones raising their own war chests and it’s no surprise that the competitive landscape becomes crowded and non-economic.

Hiring, too, becomes more difficult and more expensive. Your employees act like free agents rather than comrades in arms, updating their LinkedIn profiles the day they start and ready to move to the competition at your slightest misstep. Real estate is scarce and dear. And the experienced mentors and directors who can help navigate all this, if you can get their attention, are stretched to the limit.

So while it’s easy to get started, money and talent are spread thin by the proliferation of competition as investors gamble on trends over substance. But if you know the rules and understand everyone’s motivations and peculiar self-interest, you may be able to win nevertheless.

Rule 2
Try to act normal.

There is nothing normal about being an entrepreneur. The norm is not to turn down or leave a well-paying job with benefits. Or to put your family and friends on hold for years while you devote every ounce of energy to an idea that others likely view with plenty of skepticism. It’s not the norm to sleep on a futon under your desk, sipping energy drinks by the case and eating some god-awful synthetic food bars because there just is not enough time in the day to do everything that needs to be done. Or to look over your shoulder obsessively to make sure the competition isn’t coming for you. And it certainly is not the norm to risk your career and livelihood on a dream and a prayer. Entrepreneurs need to believe, irrationally, that they are immune to the forces that defeat the normals every day and that they can succeed where a host of others have failed.

Venture capitalists have one of the greatest jobs in the world. They get to sit across the table from passionate strangers who hallucinate the future for them. These entrepreneurs tell investors about a future they haven’t even imagined and how, with some money, talent, and a little luck, they can make it a reality. (Actually, they usually leave the luck part out, but we know better.) The investor then has the privilege of choosing which precious lunatics to join on their journey. Great entrepreneurs have a gleam in their eye and a chip on their shoulder. They can’t contain themselves. If only you could dream the dream with them and dismiss the obvious obstacles to success. It’s the lunatics who change the world, not the normals.

You might think, with all the fawning press and deafening hype insisting that everyone quit their day job and become an entrepreneur, that entrepreneurship is for everyone. If the classic movie The Graduate were made today, Dustin Hoffman’s character would be advised to pursue startups, not plastics.

When meeting potential investors and comrades in arms, however, you must try to act normal. Don’t let them know you are one of those precious lunatics hell-bent on changing the world until you’ve gotten to know them better. You don’t want to scare them off right at the start.

Entrepreneurs are the exception, not the norm.

Table of contents

• Dedication
• Contents
• Introduction
• Part 1: Mastering the Fundamentals
• Rule 1: Starting a venture has never been easier; succeeding has never been harder.
• Rule 2: Try to act normal.
• Rule 3: Aim for an order-of-magnitude improvement.
• Rule 4: Start small, but be ambitious.
• Rule 5: Most failures result from poor execution, not unsuccessful innovation.
• Rule 6: The best ideas originate with founders who are users.
• Rule 7: Don’t scale your technology until it works.
• Rule 8: Manage with maniacal focus.
• Rule 9: Target fast-growing, dynamic markets.
• Rule 10: Never hire the second best.
• Rule 11: Conduct your hiring interviews as if you were an airline pilot.
• Rule 12: A part-time game changer is preferable to a full-time seat filler.
• Rule 13: Manage your team like a jazz band.
• Rule 14: Instead of a free lunch, provide meaningful work.
• Rule 15: Teams of professionals with a common mission make the most attractive investments.
• Rule 16: Use your financials to tell your story.
• Rule 17: Create two business plans: an execution plan and an aspirational plan.
• Rule 18: Know your financial numbers and their interdependencies by heart.
• Rule 19: Net income is an opinion, but cash flow is a fact.
• Rule 20: Unit economics tell you whether you have a business.
• Rule 21: Manage working capital as if it were your only source of funds.
• Rule 22: Exercise the strictest financial discipline.
• Rule 23: Always be frugal.
• Rule 24: To get where you are going, you need to know where you are going.
• Rule 25: Measurement comes with pitfalls.
• Rule 26: Operational setbacks require swift and deep cutbacks.
• Rule 27: Save surprises for birthdays, not for your stakeholders.
• Rule 28: Strategic pivots offer silver linings.
• Part 2: Selecting the Right Investors
• Rule 29: Don’t accept money from strangers.
• Rule 30: Incubators are good for finding investors, not for developing businesses.
• Rule 31: Avoid venture capital unless you absolutely need it.
• Rule 32: If you choose venture capital, pick the right type of investor.
• Rule 33: Conduct detailed due diligence on your investors.
• Rule 34: Personal wealth ≠ good investing.
• Rule 35: Choose investors who think like operators.
• Rule 36: Deal directly with the decision makers.
• Rule 37: Find stable investors.
• Rule 38: Select investors who can help future financings.
• Rule 39: Investor syndicates need to be managed.
• Rule 40: Capital-intensive ventures require deep financial pockets.
• Rule 41: Strategic investors pose unique challenges.
• Part 3: The Ideal Fundraise
• Rule 42: Raise capital in stages as you remove risk.
• Rule 43: Minimizing dilution is not your fundraising objective.
• Rule 44: Don’t let a temporary fix become a permanent mistake.
• Rule 45: Pursue the lowest-cost capital in light of your circumstances.
• Rule 46: Escape the traps of venture debt.
• Rule 47: Choose one of four approaches to determine how much money to raise.
• Rule 48: Always have your aspirational plan ready.
• Rule 49: More ventures fail from indigestion than from starvation.
• Rule 50: Never stop fundraising.
• Rule 51: Venture capital moves in cycles.
• Rule 52: Fundraising takes more time than you think.
• Rule 53: The pitch must answer the fundamental questions about your venture.
• Rule 54: Make it personal.
• Rule 55: When pitching, carefully read the room.
• Rule 56: Use white papers for deep-dive follow-ups.
• Rule 57: Prepare your financing documents ahead of time.
• Rule 58: Obsessively drive to the close.
• Rule 59: Consistent communication is important in convincing investors.
• Rule 60: Milestones can solve irreconcilable valuation differences.
• Rule 61: Liquidation preferences will change your outcome.
• Rule 62: Do not take rejection personally.
• Part 4: Building and Managing Effective Boards
• Rule 63: Boards are deliberative bodies, not collections of individuals.
• Rule 64: Conflicts of interest and conflicting interests are elephants in the room.
• Rule 65: Your board should be operational rather than administrative.
• Rule 66: Small boards are better than big ones.
• Rule 67: Lead investors ask for board seats; qualify them first.
• Rule 68: You need a lead director.
• Rule 69: Add independent board members for expertise and objectivity.
• Rule 70: True board diversity is a competitive advantage.
• Rule 71: Each director must commit to spending meaningful time.
• Rule 72: Review director performance regularly.
• Rule 73: Your chief financial officer has a special relationship with your board.
• Rule 74: The founder should choose the best CEO available.
• Rule 75: Find a coach.
• Rule 76: It is the CEO’s job to run efficient, productive meetings.
• Rule 77: Don’t “oversell” your board.
• Rule 78: Board agendas should look like this.
• Rule 79: Prepare thoroughly for board meetings.
• Rule 80: Use your daily management materials for board meetings.
• Rule 81: Too many unanimous board decisions is a sign of trouble.
• Rule 82: Use working sessions and committees to reinforce your priorities.
• Rule 83: Your board should spend time with your team.
• Part 5: Achieving Liquidity
• Rule 84: Build companies to last, providing liquidity along the way.
• Rule 85: Liquidity is not limited to initial public offerings and acquisitions.
• Rule 86: If you go public, don’t slip and fall.
• Rule 87: Investors’ and management’s interests in liquidity often conflict.
• Rule 88: Individuals need liquidity, too.
• Rule 89: Your valuation will have a local maximum.
• Rule 90: Ventures aren’t just bought; they can also be sold.
• Rule 91: Choose an acquirer; don’t wait to be chosen.
• Rule 92: If you want to sell your business, you need to know the decision makers.
• Rule 93: Determine whether you are a good fit for an acquirer before contacting them.
• Rule 94: Know your acquirer’s acquisition history in detail.
• Rule 95: Make yourself visible.
• Rule 96: Build a relationship with potential acquirers; don’t cold-call.
• Rule 97: Be ready when they are.
• Rule 98: Success is not linear.
• Rule 99: Prepare for your lucky break.
• Rule 100: Learn the rules by heart so you know when to break them.
• Epilogue: The Cardinal Rule
• Acknowledgments
• About the Authors
• Copyright
• About the Publisher