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

Virsto Software & August Capital Talk About Their Courtship & Marriage

Silicon Valley is still the startup epicenter, or at least so we like to think here. And what does every entrepreneur hunched over in his proverbial garage working on the next big thing hope for and dream of? Well, that it really is the next big thing, that investors will recognize its potential, and that money will come in to allow the product (or service) to be brought to market.

Last night I attended a very interesting and informative event organized by The Entrepreneurs' Club--Founding & Funding - Entrepreneur & Investor Perspectives. It focused on a Silicon Valley startup, Virsto Software, that is on the right track to achieving the dream and on how they got to where they are today.

The speaker panel was well-balanced, featuring early stage investor Vivek Mehra of August Capital and co-founders Alex Miroshnichenko and Mark Davis of Virsto.

In their search for capital, Virsto had a hard-to-beat advantage. The co-founders are serial entrepreneurs, with connections to the venture capital community. That helps. But, according to Vivek Mehra, August Capital invests in first-time entrepreneurs just as often as they do in seasoned entrepreneurs, if not more often. So if you're a newbie, don't hang up your hat just yet. :)

The beginnings of Virsto are quite interesting. The co-founders weren't lifelong friends when they embarked on this venture. In fact, though for years they were within a degree of separation (as they later found out), they did not actually meet until an introduction was made by a mutual friend for the express purpose of starting a company. Vivek Mehra explained that investors are very cautious of companies with one founder. After all, if the founder wasn't able to convince even one other person to take the plunge with him (or her), it can seem a bit suspicious. In fact, while there is no magic formula for getting funding, Vivek Mehra says that a good founding team might consist of two technical people and one business expert. It so happened, that Virsto fit the bill exactly--Virsto's third co-founder, Serge Pashenkov, a friend of Alex's since graduate school, completes the deck as another technical expert.

Creating a successful business is about the people, whether you are a founder looking for other entrepreneurs to join your team, or an investor, making the call on which of the 100 ventures that come across your desk in a year to invest in. Vivek Mehra said of August Capital's philosophy, "We invest in people." Unlike some other funds that either look for a market for which they can create a team or find a team and create a market, August Capital tries not to predict markets. They want the ideas to be owned by the entrepreneurs. And they want the entrepreneurs to know more than they do. There seems to be good ideological alignment between August Capital and Virsto founders. "If you want an investor to tell you how to run your business," said Mark Davis, "you shouldn't be funded."

Just as there is no formula to tell you whether your dinner date is "the one," there are no hard and fast rules with getting funded. But there are also warning signs, in the personal and business spheres alike, that influence the outcome of the courtship. "A lot of unsaid things are very important," said Vivek Mehra. As an example, if a team of four founders comes to a meeting with the VCs, but only one does all the talking, it's a bad sign. If the founders talk for a half an hour during their pitch before they introduce the team and explain who is involved in the venture, investors are turned off. Investors also look at a company's setup. If the entrepreneurs are 3/4th vested going into a meeting, there is a misalignment of interests, and you can't build a marriage on that. Some VCs might renegotiate vesting when they agree to fund, but others might not bother and pass on the opportunity altogether.

The best group of collaborators, a large underserved market, and the cleverest solution, may still not get you funded. But if you stack your deck right, you are in a better position to make it happen. Of course, Emergence Law Group is here to help with corporate setup and make you look familiar and attractive to investors. The rest is up to you!

Inna Efimchik

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.