This is part of my ongoing series Startup Advice. This is a story of one of the risks of venture capital.
When you’re an early-stage startup that hasn’t raised any institutional money you end up doing almost every job function of the company yourself. But some companies have entrepreneurs that seem talented on paper, are in a space that seems interesting to investors and are able to raise venture capital early in the company’s existence. This can often happen when there is a good product built but no real customer adoption yet. This is what happened to me.
When I founded my first company along with Brian Moran (whose idea it was) I had no real experience running startups. I had worked for Accenture building computer systems for large corporations. I had an MBA, had done a few years of strategy consulting and knew all of the management theory. In my defense I had set up several businesses when I was younger and had been president of my fraternity (laugh if you want, I think this was the single best preparation for being an entrepreneur and a leader.)
My company had raised a seed round of capital in late 1999 even before either of us were full time in the company (ominous side note: on the way to pitch our seed investor, Delta Partners, a man walking right in front of me died of a massive heart attack making me late to the meeting. True story.) Our first big round of venture capital (our A round) was a whopping $16.5 million which closed the first week of March 2000 – a week before the market crashed. 2 weeks later and we may never have raised any more VC.
The expectations of our company having raised $16.5 million were enormous. We had to ramp up our team quickly and ramp we did. I hired a senior exec from the building materials industry (we were a document collaboration company for the engineering & construction industry) who was also ex McKinsey. He was to head up UK operations. We hired people to run the UK and Germany. We hired a head of technology, a head of customer service, a head of marketing, a head of strategy (which no startup should ever hire) a CFO and, ugh, 33 developers. We built 4 products simultaneously with no market feedback. But that’s a story for another day.
One the one hand I feel great because we went out and built software that solved an industry problem. Many companies in this era literally handed over $3-4 million to Ariba or CommerceOne and set up “exchanges.”
On the other hand, I had never had to do the detailed work to get an intuitive feel for what customers wanted or how to train and service them. I taught me an important lesson: it’s very hard to run a burger chain if you’ve never flipped burgers yourself. I always encourage young entrepreneurs now to flip burgers for as long as they can. This includes writing product specs, going on sales calls, handling customer complaints, building the financial model and a host of other activities that will ultimately owned by functional experts.
Quick aside: how can VC’s invest in online businesses, digital media, social networks or mobile applications if they don’t actually use the products actively themselves? Burger? Flip?
Back to BuildOnline, following the staggering decline in public market valuations throughout 2000 we were forced to cut our staff dramatically going from 92 employees to 38 in just one day (and down to 33 a month later). From then on I was forced to do detailed sales calls, get intimately involved with product management decisions and even make minute technical operation decisions. We recovered well but I think we wasted a good year wandering.
Fast forward 5 years to my second company. I had learned every lesson (which is why I usually prefer to back second-time entrepreneurs). We raised just $500k. We had 6 developers, 1 head of product management, 1 QA in India and me. I did all of the sales myself. I did our marketing and didn’t use any outsiders. I did our logo using Logoworks (who was then a nascent company) with the help of our UI lead Jon Levine. I did almost every VC meeting myself save for when one of my co-founders, Tim Barker, was in town. I led all of the legal work on company formation and the VC negotiations on the seed round.
I led the sales effort to Salesforce.com when they wanted to buy our product and wrote the training materials and ran many of the training meetings. I admit that without the huge talent of our product manager and engineering team this company would have never been successful. I’m not trying to take credit beyond where credit is due. But my point is that I flipped burgers from day 1. I did the grunt work. And this is how it should be in startups.
So if you present to me and the CEO can’t drive the demo or the financial model themselves it is a BIG RED FLAG. I don’t expect that CEO to be a developer but when the language back about the technology stack is completely superficial it tells me they’ve checked out of important details. For me, it’s a tell.
When you don’t have money you have to flip burgers. When you raise VC make sure you keep on hand on the grill.
(second photo credit to Osei (Ozzy) via Flickr)
