This new book by veteran Silicon Valley insiders offers a wealth of insights on startup teams, pitching, scaling, finances, and choosing investors.
The journey of a startup founder goes through multiple phases: technology, invention, product, company, and business. The new publication, Straight Talk for Startups: 100 Insider Rules for Beating the Odds offers founders a playbook with special focus on understanding the world of venture capital.
The authors -- veteran venture capitalist Randy Komisar and finance expert Jantoon Reigersman -- share decades of their insights from Silicon Valley. Randy is the author of The Monk and the Riddle, Getting to Plan B, and I F**king Love That Company; he was earlier at Apple and Lucas Entertainment and then joined Kleiner Perkins Caufield & Byers. Jantoon is CFO of Leaf Group, and was earlier at Goldman Sachs and Morgan Stanley.
“Become smart as quickly as you can,” the authors advise entrepreneurs. “The cheapest, quickest progress you can make is to learn from the successes and failures of others,” they add. See also my reviews of the related books Shortcut your Startup, A Dozen Lessons for Entrepreneurs, Startup Boards, Startup Leadership, Startup Land, and People with Purpose.
The 100 rules for founders are spread across 278 pages and grouped in five sections: fundamentals, choosing investors, raising funds, managing boards, and achieving liquidity. Here are my eight key sets of takeaways from this compelling book, which is a must-read for all entrepreneurs and investors.
The six phases and components of a startup journey are: an attractive idea, effective technology, desirable product, market demand, unit economics, and scale. Founders need to have an offering that delivers an order-of-magnitude improvement in the market; this will give an “unfair advantage” to disrupt the status quo. They must develop a deep understanding of the “startup food groups” – engineering, finance, operations, management, marketing and sales.
“The best ideas originate with founders who are users,” the authors explain, pointing to Apple, Uber, Google, Facebook, Patagonia, NetFlix, and Nest as examples. Not all founders, however, can manage to hold all three roles successfully: inventor, entrepreneur and CEO.
They need to have patience, focus, tenacity, timing, and “restrained urgency,” as shown by Reed Hastings who had to wait till the technology and customer behaviour trends were in place before he launched Netflix. Steve Jobs had a maniacal focus on quality and an “uncanny ability to never ship a product before its time.” He killed the Newton project, but launched the iPhone a decade later once the technology curve, price and performance fell in place.
Founders should begin with a fast-growing, dynamic niche market before expanding to larger markets, as shown by Tesla’s initial forays into the luxury car segment. It helps to focus on what larger companies cannot see or consider too risky.
Founders should develop two kinds of business plans: an execution plan (bottom-up, line-of-sight; achievable with 90 percent certainty) and an aspiration plan (top-down; with perhaps 50 percent certainty). Annual plans should be updated every quarter, thus creating a rolling forecast.
“Don’t view pivots as a defeat,” the authors advise; but at the same time, pivoting too frequently in the startup journey may lead to loss of confidence by stakeholders.
2. The team
Hiring should be based not just on employee skills but on their ambition, grit, comfort with uncertainty, low ego, and ability to learn. “It is said that A players are confident enough to identify and hire A players, while B players hire C players,” the authors joke.
Risk-taking, improvisation, trust and teamwork are part of the startup journey. “Manage your team like a jazz band,” the authors advise. Team players need to be open to the unknown, but should not let go of their collective vision. The leader’s role is not to play boss, but to get the most creativity and productivity out of their people.
“Purpose matters more than perks,” the authors explain. Some companies may offer free food (eg. Google, Facebook) but others do not (eg. Apple, Amazon).
Sometimes, experts will need to be hired on a part-time basis. Professionalism in the workforce is essential, but so are dreams and mission. Frugality should be valued and practised, right from the top management.
“Know your financial numbers and their independencies by heart,” the authors add. This includes income statement, cash flow statement, balance sheet, working capital schedule, debt and cash schedule.
Financial cultures vary with different sectors. The financial goals should be aligned with business goals, eg. too much discounting to get new subscribers may not be sustainable in the long run. “Be disciplined or the market will discipline you. Bleeding capital on every sale is no joke,” the authors caution.
Unit economics reveal whether your business is viable. In technology businesses, decreasing costs can change the growth profile in the long run, eg. solar panels. Business model assumptions needed to be tested carefully, eg. giving away razor sticks will make sense only if it is verified that customers will buy blades.
“Use your financials to tell your story,” the authors advise. The cash flow statement should show the way you proportion and prioritise your resources. Balance sheets over time should reflect assets, liabilities and variances. “Net income is an opinion, but cash flow is a fact,” the authors add; there are many ways of interpreting the growth of a startup, but cash is king.
4. Choice of investors
Not all businesses need venture capital; bank loans and crowdfunding are other external options. “Remember: venture capital comes at a price, in the form of a meaningful percentage of your company. You aren’t just raising money; you are selling ownership,” the authors caution.
Investors will also demand board positions. “You aren’t just adding a partner, you are hiring your boss,” the authors add. In the long term, investors are looking for liquidity; if this is not your goal, then venture capital is not for you.
“Don’t just take the first eager investor who knocks at your door,” they caution. Meet potential investors well in advance; do research on their portfolios and alumni, covering successes as well as failures. “Great fundraisers are proactive, not reactive, and they don’t take money from strangers,” the authors explain.
The best venture capitalists help with recruitment, business connections, industry visibility, financial credibility, engagement with domain experts, access to other fellow founders, and further rounds of fundraising. Good investors are not just financial engineers; they bring valuable operational and entrepreneurial experience. Reliable investors help you ride through rough times rather than abandon you. Great investors are gamechangers, not just cheerleaders.
The authors classify investors into the following types: domain investors (with sector expertise), strategic investors (eg. large corporations), thematic investors (with their own theses), quant investors (data-centric focus), growth investors (for scale stage startups), and people investors (focused on the founding team). Each has their own strengths and biases in terms of domain expertise, operational experience, preconceived notions, and long-term compatibility.
Commercialisation time frames and reward profiles differ across industries, eg. bio-tech and hardware versus mobile apps. Founders should choose investors with the right risk appetite and expectations for their sector.
Fundraising needs and deals vary with the stages of startup growth, eg. pre-product, pre-sales, pre-revenue. Funds should be raised based on milestones achieved, burn rates, available runway, and implications of dilution. The authors’ “financial forensics” reveal that many founders still grapple with the “magical investment math of capitalisation tables.”
The objective is optimal valuation, not necessarily minimum dilution; these can be tricky decisions in the context of market cycles. Founders should be thinking not just of the current deal, but of future deals as well, just as in a billiards game, the authors explain.
“Investors are looking for the best risk-adjusted price for a likely big winner,” the authors write. Investors are also driven by fear of missing out (FOMO), and founders should cultivate a sense of urgency and scarcity.
Founders should pay special attention to liquidity preference clauses. But founders should negotiate wisely, and not fight over crumbs. “Raising too much money too early can undermine your discipline and lead you off track,” the authors add. “More ventures fail from indigestion than from starvation,” they caution.
6. Investor communication
Care should be taken to craft an effective pitch in 15-20 slides, covering vision, problem statement, value proposition, market opportunity, competition, product, unit economics, team, financials, and investment opportunity (see also my write-up on How to Make a Great Pitch, and the YourStory Changemaker Story Canvas).
Founders should showcase their passion, storytelling, choice of customer, human interest, business acumen, and beachhead, addressable and aspirational markets. Product IP, economic value chain, sensitivity analysis, and timing of the investment opportunity should also be highlighted.
During the pitch, white papers can be shared, but care should be taken not to drown the investor with too much information. Financial documents can be provided in print or online.
“Fundraising also takes more time than you think,” the authors caution. “Do not take rejection personally,” they advise. Even if the investor does not sign on, founders should cultivate relationships with them for further referrals or subsequent fundraising interest if circumstances change. Communication should be consistent across investors; after all, they share notes with each other as well.
7. Effective boards
Raising investment goes hand in hand with building and managing an effective board of directors. Scale-stage startups sometimes fail to have effective operating discipline due to lack of alignment between founders, management, investors and the board. “A great board is an invaluable asset. A bad board can sink a good ship,” the authors caution.
In an effective board, directors challenge the founder and one another; they encourage constructive disagreement. Consensus, administration and oversight are not the focus; operations, strategy and value are the focus.
The directors should bring experience and expertise to the board, and also act as advisors (knowledge), coaches (skills) and mentors (overall development). CEOs who have benefited from mentorship include Steve Jobs, Larry Page, Scott Cook and Jeff Bezos. Board members should also spend time with the best performers of the team.
Founders should speak candidly at board meetings, sharing highlights and “lowlights.” Sub-committees can be formed for finance, compensation and compliance. Challenges can arise in dealing with conflicts of interest, ensuring diversity, and time management of busy directors. Conflicts can arise in choice of CEO.
8. Achieving liquidity
The last part of the book deals with tips on achieving liquidity via IPOs, mergers, acquisitions, secondary markets and private equity investors. Challenges can arise with respect to timing of the IPO and expectations of the investors, board, founders and employees.
“Liquidity is not necessarily the final outcome but it can be a healthy step along the path toward building a successful business,” the authors explain. Founders should map target acquirers, analyse their acquisition history, calculate acquisition metrics, and initiate interactions with key influencers and decision makers.
For example, US Robotics acquired Donna Dubinsky and Jeff Hawkins’ PalmPilot business and helped launch the product. The founders later spun off the company to form HandSpring.
Analytics firm GraphIQ was founded by Kevin O’Connor, who had sold his earlier startup DoubleClick to Google for $3.1 billion. He explored publishing companies and tech giants as potential acquirers, and then zoomed in on Apple, Microsoft, Amazon, and Samsung as candidates. After a series of connects and pitches as a potential partner, investment, or acquisition, Kevin eventually negotiated a sale to Amazon.
The road ahead
Even with a wealth of insights from investors and other entrepreneurs, founders still need to factor in luck and the ability to learn from failure and setbacks. “Success is not linear,” the authors explain, pointing to how Apple had to beg for a loan from Microsoft in 1997, and how Twitter was created in the aftermath of Odeo’s failure.
When luck comes their way, founders should grab the opportunity. Steve Jobs had lucky breaks during his days with Pixar and NeXT. Bill Gates also had lucky breaks when IBM eventually chose his operating system. Google ended up taking its own path in search when its earlier customers like the Netscape portal could not monetise their search impressions.
Learning and experience can improve a founder’s intuition. “Intuition is not just fast thinking from the gut; it is good judgement informed by knowledge,” the authors explain. In addition to their 100 rules, the authors urge founders to go ahead and reinterpret these rules, add their own rules, and share them for the benefit of the next wave of entrepreneurs.
Ultimately, founders should ask themselves three questions: Why this, Why you, and Why now. These questions can inspire a sense of purpose while also keeping you grounded.
“Starting a venture has never been easier; succeeding has never been harder,” the authors caution. The startup landscape has not just become very crowded, but also non-economic in some sectors where massive funding leads to irrational and non-viable business models. Some employees may also act as “free agents rather than comrades,” moving onto other competitors. Quality time from investors and mentors is also becoming scarce.
“Massive amounts of capital are wasted because one or more parties have raised a war chest that allows them to bleed red ink, at least for a while,” the authors lament. Many investors also gamble on trends over substance.
“Entrepreneurship risks becoming just another fad, a lifestyle rather than a passion,” the authors caution. It’s much more than “free food, unsupervised work, open offices, fun-loving camaraderie and a chance at the gold ring” – it is about the “hard work of bringing to life meaningful innovations and creating valuable businesses from them.”
Therefore, founder should ask themselves what is so unique about them, the problem they have picked, and the customers they want to help. Are they out to make a difference, or just a dollar? “If you fail, will you feel you wasted your time, or that you fought the good fight,” the authors ask.
“Entrepreneurs live the creative life. In the end, successful entrepreneurship is the triumph of human potential. Entrepreneurship is important because it has the power to make the world better,” the authors sign off.