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25 things I learned about building companies Steve Kirsch CEO, Propel.

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1 25 things I learned about building companies Steve Kirsch CEO, Propel

2 Agenda To entrepreneurs: tips on building companies To VCs: tips on funding companies To both: What to do with all that money

3 Tips for entrepreneurs

4 Do you have what it takes to start a company? Q: Why are most startup companies started by mediocre people? A: The really smart ones know better!

5 The single biggest mistake you can make when starting or running a company and how to avoid it Hiring the wrong CEO (like yourself)

6 Nobody’s Perfect No perfect CEOs No perfect engineers No perfect VCs, … The whole trick is getting people to work effectively together to complement each other You might be a better CEO than your Board may believe When you lose the respect of your team, it’s time to throw in the towel

7 The single most important thing to get right Hiring great people Don’t settle for mediocrity just because you are in a hurry; you’ll regret it later Most via referral from people you know A great company should have all “A players” Don’t hire smart people who don’t fit the culture Steve’s “two strikes and you’re out” rule of hiring

8 Behavior changes are hard Hire for attitude, ability; train for skills Behaviors are impossible to change so you are destined to repeat the same mistakes Surround yourself with people who fix that and get outside your box Example: I got Ray Lane and Colin Powell to invest in Propel

9 Serial entrepreneurs win if still have the passion Are you committed? Are you prepared to do whatever it takes to win? Do you believe in your vision? Can you adapt quickly to new data?

10 Michael Robertson’s success secrets “If at first you don’t succeed, try, try again” “It doesn’t hurt to be: in the right place at the right time with the right product”

11 Trust your (wife’s) judgment My wife didn’t like any of the people who eventually didn’t work out Just because your whole board of directors is in favor of something, doesn’t mean it’s a good idea Example: Disney acquiring Infoseek Just because your whole board of directors is against something, it doesn’t mean they are right Example: firing the CEO

12 Smart people can disagree Myth: Given the same information, really good smart people will come to the same conclusion Reality: Bush vs. Gore

13 Keep your strategies simple Example: The 2 step TOP SECRET strategy AOL uses to makes the big money... Make it really EASY to sign up Make it really HARD to cancel

14 How pick a VC Do you like them? Do they like you? Do they understand your space? Do you trust them? Can they add value beyond money? Have they proven this with other investments in your space?

15 Boards Most board members have no clue what is really going on in a company until it is blatently obvious, I.e., typically the board members are the last to figure out that the company is in trouble Big companies tend to have the worst boards: large and ineffective and reluctant to make hard decisions Putting known “brand names” on your board is no guarantee of success Example: I went after Ben Horowitz for his leadership skills, track record, and insightful questions, not for his “name”

16 Be really careful picking your board You want Board members who aren’t afraid of finding out what is really going on … and supportive of efforts to effect change Most board members are reluctant to fire the CEO or re-constitute the board, even when the writing on the wall is clear to everyone VC board members tend to have influence beyond their own board seat so be VERY careful picking the partner for your board This is because the VC will often bring in other board members that will tend to give the VC the benefit of the doubt in a conflict because the VC is seen as independent

17 Many VC’s have unjustified big egos They think they are experts in building and guiding companies even though they have no track record of having “walked the talk” themselves If the partnership is successful, they typically all believe they can do no wrong If they are “a brand name,” they may be even worse (believing their own PR) I’ve personally heard of situation where senior VC partners at “brand name” VC companies back the wrong guy. It happens more often than you think. Example: David Dorman at PointCast was not the right fit

18 Dealing with a hostile board Try in this order Logic Persuasion Force

19 When it’s time to replace a board member Lie Withhold information Reward incompetence Pass on confidential information Act outside of the parameters agreed to by the Board VERY difficult to get an accurate reference check on a VC I had one VC partner who did all these and he’s still a General Partner at a leading VC firm.

20 Why VCs are like lemmings “We’d be interested in investing if you had another VC already committed” It’s very risky for a VC to be the first to commit to a deal: Nobody wants to risk being wrong. It’s much “safer” to validate someone else’s decision because you have someone to hide behind.

21 Valuation Valuation is set based on what people will pay, not on some formula Expect to see a 2:1 range of valuations offered This isn’t a science! What people will pay is determined by: How well you tell your story and how convincing you are Your team The market opportunity Whether they like you Your track record Current market conditions

22 Fairness opinions They don’t have to live with the results; you do Their BIAS is to make the deal happen A fairness opinion is not a guarantee of fairness; it is just an opinion that can be justified in some way Just because you have a fairness opinion and board concurrence, doesn’t mean you should do the deal Best indicator: research the results of past mergers with the acquired company

23 Tips for VCs

24 Valuation “Ignore valuation” – John Doerr

25 My biggest mistake Telling Tim Koogle to take a hike because I thought $20M for Yahoo! was overvalued

26 Is Yahoo overvalued? “If you have to ask, you just don’t get it.”

27 My second biggest mistake Laughing when eBay said Infoseek could acquire eBay for only $1B

28 My third biggest mistake Telling Michael Robertson to pound sand when he wanted $20M for his company (later renamed mp3.com) (nowadays, I’m not looking like such an idiot)

29 Why I’m not a VC That should now be obvious…I have poor judgment So I stick with what I’m good at.

30 Why my investor list for Propel has only 1 VC I wanted independent validation from “professional investors” that Propel was a good idea Some VC’s wouldn’t pay the valuation I wanted But the partners at leading VCs who did the due diligence invested personally! My advice: If you like everything else don’t let valuation stand in your way. An 80%+ chance at a 100X return in 2 years isn’t so bad. Some VCs only would invest if they got a big enough chunk That makes sense since VC isn’t scalable. But experienced wealthy proven entrepreneurs won’t play that game because the VC “value added” is awfully expensive. Having a VC on your board is risky

31 What to do when a founder and a CEO don’t mesh The natural assumption is that the founder is the problem My experience has been that in most cases, this is a leading indicator that you goofed and hired the wrong CEO Another leading indicator: good people who have left cite the CEO as the reason they left You need to roll up your sleeves and find out what is really going on

32 The perfect investment… can you guess??? Recurring revenue stream High margins/High ASP/Low cost producer underpaid workforce, overpriced service, no COGs, low overhead Large user base No competition Established, well known brand name Never goes out of style No manufacturing or shipping costs No need to worry about customer satisfaction They pay nothing in taxes

33 What to do with all that dough

34

35 Some ideas House Vacation Private Jet Wife Computer gear Lifetime subscription to Worth OK so now what?

36 Giving it away is enlightened self interest Giving is not an obligation Giving is an opportunity to benefit US: yourself, your family, your friends, your community, the world … with tax advantaged dollars that otherwise would go to the government Pick cause(s) that interest you and make a difference Examples: I give to asteroid discovery because it may save my life (and the lives of 6B other people I don’t know) I give to nuclear disarmament because it may save my life I’ve gotten 2 pieces of legislation passed in California to clean up the air because if we can prove it can be done here, it can be done elsewhere and the threat of global warming is real. That affects us all.

37 The 1% solution We set aside 1% of Propel’s equity to donate to charity after we IPO Any company can do this easily It’s a win/win because our employees are at least 1% more productive and it helps at least 1% in recruiting VC’s should encourage every company they invest in to do this

38 You can donate when you are locked up One of the best times to donate is after IPO when your stock is locked up Even though you can’t “sell your shares,” you can make a donation and the charity can short the stock You lock in your tax deduction, the charity locks in your donation, and you become an instant philanthropist

39 “Larry #1” A true story Worth $2B at IPO in December, 1999 I suggested he put 10% into a charitable foundation now and decide what to do with it later He said “I don’t have time” All he had to decide was a “name” and the amount He is was worth $200M 4 months later

40 “Larry #2” A true story Still a billionaire Gave $100M to a noted scientist and asked him to fund cutting edge research on aging He’s the world’s second largest funder of aging research He funds some of the best research in this area The discoveries will benefit Larry (and everyone else too)

41 Giving strategy Make periodic small donations as your stock rises Many notable philanthropists regret not having taken advantage of this strategy. Don’t make the same mistake.


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