Entrepreneuring on the Central Coast: How to Survive and Thrive on a Start-up Team This presentation and the related book are published at eysu.org Mike Baird mikebaird.com firstonline.com eysu.org Contents of Engineering Your Start-up: A Guide for the High-tech Entrepreneur -- Copyright © 2003 by Professional Publications, Inc. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Copyright © 2003, 2004 James A. Swanson and Michael L. Baird Rev. 3/30/2014 5:39:41 AM KCBXnet (formerly SLONET) Computer Training Center, 4100 Vachell Lane, SLO March 22, 2004

n Past V.P. Eng. Ask Jeeves, Inc. ask.com one of most successful Internet IPOs in history n Past CTO Snap-on Inc. $2 billion co. n Partner, Los Altos Incubator firstonline.com n PhD Computer Science, MBA n Author: Engineering Your Start-Up: A Guide for the High-Tech Entrepreneur (Professional Pubs. Inc., 1992, 2 nd Ed. 2003); Starting a High-Tech Company (IEEE Press, 1995) eysu.org About the Speaker -Mike Baird

Every page of this book is now available for free online at eysu.org

How High-Tech Start-ups Launch, Recruit Team Members, and Grow Successful, Highly Lucrative Enterprises n You – the future CEO of such a business n You – a team member or supplier n Identify opportunities n Make rewarding career decisions n Understand the start-up entrepreneur

To Best Serve as a Technical Contributor, Consultant, or Employee in a Dynamic Startup … Know what makes startups tick … Know what kinds of people start them … Understand demands, expectations, stress, and pressures that can be put on all contributors … from information developers to CEOs Plan on how to not just survive, but thrive in such an environment

Issues to Consider (1 of 4) n What are your life goals? n What is your quality of life now, and how would it change? n What are you getting into, and is this really what you want to do? n Are you prepared for very hard work, or are you more of a quality-of- life person? n Have you talked frankly and in some detail with friends or colleagues who have significant start-up experience? n Will your business have a chance to succeed financially? Are you willing to bet on yourself and one or two key employees to come out on top? n Can you separate the excitement and glamour of a start-up from its reality?

Issues to Consider (2 of 4) n Are you prepared to be consumed by your business? Are you aware that it will never let up and that you will never escape it during its formative years? n What can a start-up do to you physically and mentally? Are you strong and healthy enough to pull off a start-up? n What are the time demands of a start-up? Do you like to recreate on weekends, or will you work? How much time do you want or need with your family? n Are you ready for extensive travel and give it all you have performances for customers and investors? n A start-up afford few luxuries!

Issues to Consider (3 of 4) n Realistically, what is your the chance of becoming independently wealthy through your start-up? n Can you survive without a paycheck for three to nine months, or longer, either while your start-up is getting funded or after your start- up falters? n Are there better alternatives to either launching a start-up or staying with your current employer? n Have you considered the possibility of a start-up damaging a stable marriage?

Issues to Consider (4 of 4) n Do you thrive on continuous change (not always improvement) or despise it? n How old are you? When is the best time to act? n Last, and perhaps most important: Will your spouse and family be enthusiastic about your venture? (If not, the additional stress makes your odds much worse.) Will you have their support? (Their support is critical, since they will share with you the inevitable financial and time sacrifices.)

Requirements for Successful Entrepreneurship n Basics for business success for the entrepreneurial engineer n Understanding how eBay became successful can help you build a successful smaller-scale business n Contrast smaller Lifestyle Consulting and Income Substitution businesses with venture capital-funded companies

Your Career... n Is a start-up for you? Are you a hunter or a farmer? n Internalizing the five fundamental success factors for launching and funding(or otherwise identifying) a successful technology-fueled start-up.

Reasons Cited for Starting One's Own Business 29% 19% 12% 8% 7% 5% 4% 2% 1% 9% Self-employment /Autonomy Income /Wealth The challenge To pursue an idea Utilize skills Build estate for family No better alternative Meet other's expectations Build an organization Respect/Recognition Contribute to society To live in the area Other (specified by respondent)

Big Career Picture Lifestyle consultancy Income substitution business High-growth team-driven business SalesEmployees (millions) > $20> 50 $1 – $205 – 50 $0 – $10 – 4

The Income-Substitution Wealth-Creation Spectrum Business size smalllarge slow fast Income Substitu- tion Wealth Building Growth rate

Business Size, Risk, and Reward P(survival) = p(failure) Low High Low Medium High Risk P(Survival) is inversely proportional to risk Retail stores Technology-based products (high-growth objective) Technology-based consulting (low growth objective) P(failure) High Low Reward Low High Low

Effort Allocated by Founders During First Six Months 0% 5% 10% 15% 20% 25% 30% 35% EngineeringSales/ marketing ManufacturingFinance/ administration 31% 28% 25% 16%

5 Basics for Success Beyond "The Big Idea, the Passion, the Vision" … making it real … involves … n Management n Markets and Customers n Proprietary Products, Technology, Services n Attractive Financing and ROI n Compelling Business Plan

benefits customers financial controls management market engine technology fuel rapid profitability products 2 1 3a 3b m a r k e t s 5 4 business plan money (ROI) Market- and Customer- Driven Technology-Fueled Business Machine

Products or Services Markets and Customers Management Teams Business Plan Financing Identifiable customers. Not a missionary sale. Market – Pull. Not Technology – push. Market niche with 15% – 30% market share possible. Know 5 prospects by name, ready to buy. Short procurement cycle. First of Five Elements of Start- Up Success

Markets versus Marketing n Gillette introduces The Sensor razor for men ¦ Retail price: $3.75 with three blades ¦ R&D costs: $200 million ¦ First-year advertising budget: $110 million ¦ Estimated annual retail sales: $390 million n Even if you could invent a superior razor blade, would you want to compete in this game?

Second of Five Elements of Start- Up Success Markets and Customers Management Teams Business Plan Financing Board of Directors CEO CFO VP-Engineering (CTO) VP-Marketing & Sales Products or Services

Management Completeness- Experience Grid Inexperienced (0) Very experienced (2) Complete team (2) Partial team (1) No team (0) Experienced (1) 2 2 2

Team Size and Product Status in Business Plan Reception Management status Most desirable Level 4. All members on board and experienced = = = = 8 Level 3. All members identified; some on board only after funding = = = = 7 Level 2. Two founders; others not identified = = = = 6 Level 1. Single entrepreneur = = = = 5 Product status=> Level 1. Idea only; market assumed. Level 2. Prototype operable but not developed for production; market assumed. Level 3. Product fully developed; few or no users; market assumed. Level 4. Product fully developed; satisfied users; market established.

Third of Five Elements of Start-Up Success Product Family. Easily understandable. Easily Sold. Short Development Time. Markets and Customers Management Teams Products or Services Business Plan Financing Proprietary Technology.

Cost versus Perceived Differentiation Model Perceived cost versus competition LowHigh Low Perceived differentiation versus competition Market success likely Market failure likely Success highly uncertain

Fourth of Five Elements of Start- Up Success Markets and Customers Management Teams Products or Services Business Plan Financing Form. Content. How many pages? How much time to write? When to write it? What's in it? Written for whom? Types of plans: Funding; Operational

Fifth of Five Elements of Start- Up Success Markets and Customers Management Teams Products or Services Business Plan Financing Never run out of money. Fair Valuation. Attractive ROI

Genus, Inc. Case Study ($9.5M, 1981) Section name Number of pagesComments Executive Summary 2It is compelling and powerful. Marketing Analysis 15 The section is comprehensive. Product Analysis 4 Says what the product will do,nothing about how it will be developed or invented. Technology is not being sold here. Operations Plan 1 The strong management team, with proven track records, can administer operations. Management and key personnel 8 Three two-page r é sum é s for the president/general manager, the V.P. finance, and the V.P. engineering, plus an organization chart says it all.No mention is made of any key engineerswho might design the product. Financial Data12 Tells investors how much money the business is going to make, when, and what will be spent to make it happen.

Fatal Flaws and Deal Killers n Lofty Mission Statement (e.g., reduce world hunger, plow 10% of profits into charity … ) n Missing any of the 5 basics of success w/o acknowledging the fact n Imputed ROI not attractive n Fixation on "control," overt greed n "Distributed leadership," or professed"socialist" management philosophies

Case Study: One Business Plan that Will Never be Funded n Entrepreneur looking for $500,000 for 15% of the company (Implied pre-money valuation = $2.83 million; post-money valuation = $3.3 million) n Projected Sales of $1 million in 3 years n Management team is one person n Market is "everyone"

Getting Funded n Sources of start-up capital n "Shopping a plan n Venture capital – is it for you? n Funding the Lifestyle Consultancy or Income Substitution business

Sources for Seed Capital for High-Tech Companies 0% 10% 20% 30% 40% 50% 60% 70% 80% Personal savings Private investors (angels) Non-financial corporations Family and friends Venture capital funds Public stock offerings 74% 7% 6% 5% 3% Percent by number of deals Note: "Family and friends" plays a smaller role in high-tech start-ups than for most other small businesses Personal savings dominates!

VCs versus Angels Angels support ~30,000 deals per year Venture funds back ~2,000+ deals per year

"Shopping a VC plan n Unsolicited "Over the transom" plans: % funded ~= 0 n Use VC directories only as a road map (WAVC is good) n Strong partners are well-connected (work on developing, or joining, a team)

VCs A joke about a company founder finding a bottle on the beach and a genie granting three wishes. Genie: I will grant you three wishes. Founder: Great! Genie: There is a condition. Founder: What's the condition? Genie: I will also give every venture capitalist in America double everything you wish for. Founder: OK. My first wish is for a million dollars. Genie: A million dollars has been deposited in your checking account. Two-million dollars has been deposited in the accounts of every venture capitalist in America. Founder: For my second wish, I want a beautiful woman to go on vacation with me to Tahiti. The founder was immediately whisked away to Tahiti, where he was joined by a beautiful woman. Also there was every venture capitalist in America, each with two beautiful women. After a month in Tahiti, the founder returned to the genie. Genie: Have you decided your third wish? Founder: Yes. Chain me to a wall and beat me until I'm HALF-dead.

Summary n Commit (make the right decision for yourself) n Educate yourself (read, network, explore, experiment, invest time and money, build relationships, build prototypes, cultivate potential customers) n Plan (what will result in success for you?) n Execute (persist, but know when to call a loss)