Sunday, January 16, 2011

The Science of Building a Successful Startup

There are those who say that the majority of startups are doomed to fail. And there are those who believe that startup success is all about luck--being in the right place, at the right time, with the right idea.

Mike Cassidy, the founder of four technology startups, all with successful and very successful exits, has reduced building a successful startup to a science. His secret (which he shares openly): speed as the primary business strategy.

I heard Mike speak at The Entrepreneurs' Club (TEC) event on January 12. Recognizing that these strategies will not work for every entrepreneur, every business, or in every industry, I still found Mike's story and the premise very interesting and compelling. In the days following the event, even before I had had a chance to blog about it, I found myself sharing the presentation highlights with friends and clients, over and over again.

So why is speed so important?

  • It builds morale, for one. When employees have milestones they are helping meet every day and when objectives are being met all the time, it motivates them to do even more and to do it even better.
  • It also makes it difficult for competitors (especially bigger, slower-moving competitors) to catch up.
  • The press loves companies with momentum. A good write-up from a well-read publication saves a lot of advertising and marketing dollars, and a lot of time!
  • Finally, momentum drives higher valuations from a fund-raising perspective. The trajectory of a company moving very quickly is hard to map.

Timeline. A typical startup might take roughly two years to get from idea to first customers. Mike's timeline requires about 4 months, with 2 weeks allotted to exploring ideas, 1 day [gasp!] to raising capital, another 2 weeks to hiring a team and opening an office, and 3 months to building a product. Admittedly, this may not be possible for every company, but in the consumer Internet space it can be done.

So what does it take to speed everything up?

Fundraising. Most startups will not be able to get funded in one day, especially those founded by first-time entrepreneurs. But Mike's strategy for getting funded quickly may still help to speed up (or even make possible) a funding.

  • Raise money when the conditions are in your favor - in other words, when you are about to, but haven't yet, signed a major deal or there is another significant and predictable event about to happen in the life of the company that is going to raise its valuation. Mike is not worried about leaving money on the table by raising before, not after, the valuation changes. Getting funding and getting it quickly is worth more to him than getting the most money on the best terms. In addition, Mike's philosophy is to make sure every dealing results in people continuing to want to do business with him, and part of that is not being bent on winning a negotiation.
  • Get all decision-makers in the room - before taking a meeting with the VCs, Mike requests that all decision-makers be present, so that a decision can be reached the very same day. His track record demonstrates that this approach can work, for some executives and some companies. Some VCs, however, are turned off by an entrepreneur who rushes them and his own decisions, so if you're going to add this strategy to your repertoire, use at your own risk and peril.
  • Synchronize the timing of competing offers - startups that have the luxury of doing so, can turn up the pressure on the VCs to act and act fast by scheduling all their pitch meetings in one day. With the caveat that most startups would consider themselves lucky to be able to get in front of more than one VC in the first instance, it's certainly a strategy bound to put the pressure on the VCs to produce a term sheet.
  • Bring "if/then" contracts with customers to the meeting - an "if/then" contract is essentially a conditional indication of interest in becoming a customer. For example, "If you build an application with this functionality and specification, we will buy a license to use it." The bigger the account, the more impressive the potential client, the further it will get you. The "if" part of the contract is the action plan, and in the presentation you need to be able to show the VCs exactly how you are going to accomplish that "if" in the proposed time. According to Mike, "if/then" contracts go a long way towards convincing the VCs that you are the real deal.

Hiring. Just as Mike likes to get funded in one day, he likes to hire in one day as well. Not just anyone, of course--Mike is very picky with his hires. He looks for very experienced developers, not recent college grads, and he looks for people referred through and known in his network. But if he finds that great candidate, Mike checks his references while the candidate is proceeding with the interviews and, before the candidate leaves, presents him with an offer. He also asks for an answer by 9am the next morning. And until that offer is accepted, Mike pursues and woos and doesn't let up. He is relentless.

He also expects his hires to hit the ground running. No filling out IRS forms on day one. No reading through manuals, waiting for computer station to be set up, or twiddling your thumbs. That just kills all the momentum, all the great energy that an employee brings with her on the first day. The paperwork and manuals are given to the employee before the first day of work. The computer, email, accounts are all set up ahead of time, too. On their first day of work, Mike's employees receive a list of goals, projects and deliverables, and it's off to the races.

Of course, picking those perfect candidates is no easy task. Mike looks for hard-charging individuals, people who take ownership, but who are not stubborn. He also maintains a culture where no one looks back. Once a decision is made and all the voices have been heard, everyone gets behind it and works to make it happen. If it turns out to have been the wrong decision, there is no blame, no looking back. Everyone just moves forward. And if that's the culture, says Mike, people get used to it.

Product Development. Not surprisingly, given his speed motto, Mike believes in incremental development. He builds out his products module by module, one release quickly following the next. Another way to approach product development is to hit the market with a product that is rich and compelling, as you only get one first impression. But this approach calls for a longer development cycle and more capital upfront.

Business Development. "Probability of a deal ever closing declines by 10% each day it doesn't close," says Mike. So he pushes hard to close deals and not allow them to go stale, even if that means leaving something on the table. Some of his pressure tactics to elicit faster action involve using calendars and maps to show limited, even vanishing, supply, and encroaching competitors. Scarcity, after all, creates demand (and panic).

Marketing. Public relations is faster than marketing, is Mike's approach. All of his companies have been featured in major industry publications. If you can create a buzz with the press, the proverbial (or actual) phones ringing off the hook, who needs marketing?!

Changing Direction. As soon as you decide it's not working, you have to be fast to change direction, says Mike. Indecisiveness will only sap the resources of the company, sabotaging its chances of making it with either the old or the new idea.

But how do you come up with the "right" idea? It doesn't matter, says Mike, if you have a really strong team. You want to get into a space that is changing and happening, and learn rapidly. The "right" space will be something you enjoy and are excited about. You should have a network of people that you like to bounce ideas with, to help you find the right space. And, of course, look for pain points.

Can anyone replicate Mike's success using his business strategy? I think not. It takes a special kind of person, with amazing efficiency, organization, and even brilliance for building startups. But as with any success stories, there are valuable lessons to be learned.

Thank you for sharing, Mike! Your presentation was an inspiration!

Inna Efimchik

Emergence Law Group  Emergence Law Group, specializing in assisting emerging technology companies in Silicon Valley and beyond, provides incorporation, financing, and licensing services as well as general corporate counseling.