Art of the Start 2004: Creating an Ecosystem

This is part of a series of transcripts of the proceedings of the Garage Ventures’ “Art of the Start” conference held in Mountain View. See the complete series of transcripts here.

Guy Kawasaki, Garage Technology Ventures: This is a panel called Creating an Ecosystem. The purpose of this panel is for you to understand how you create an ecosystem and a community and a healthy stage/foundation for a company. So we’ve asked some experts from various professional functions to come up here and discuss with us this idea. The first thing I’d like to do is ask each of them to introduce themselves, the company they work for, and basically what they do. So I’ll start over here with Jeff.

Jeff Adams, Goldman Sachs: Great. First of all, thank you very much for inviting me. My name is Jeff Adams, I’m a Managing Director of Goldman Sachs in the Technology Investment Banking Group and, in that capacity, call on and service and work with a variety of companies, large companies, small companies, public, private, across a wide range of industries and probably the service or function that’s most applicable for this group is the IPO process that we take companies through when they become public.

Guy: Thank you Jeff. And Dave?

Dave Anderson: I’m Dave Anderson, I’m a partner with the accounting firm Mohler, Nixon, Williams. And we enjoy working with startup companies where we help them get started in terms of getting accounting systems put in, and then, as they grow their ecosystem and have more financial reporting requirements, to do their audits and help them get ready for whatever their exit strategy may be: an M&A transaction or IPO.

Guy: Alright. Alan?

Alan Jepson: Yes. I’m with Comerica Bank – we’re a full-service commercial bank. We assist early stage companies. I’m in the Technology and Life Sciences Group – we’re a national practice within the bank and so we have offices around the company. I handle the Northern California division. And again, we work with emerging companies and help them with their financial services needs.

Guy: Thank you. Betty?

Betty Taylor: Betty Taylor, the co-founder and partner of Krause Taylor Associates, which is a high-tech PR firm here in the valley. We’re located in the San Jose – been around for about eight years. My business partner, Barbara Krause, we both came out of Apple Computer where we ran the PR there – world-wide PR. She was actually my boss and ran all of corporate marketing. We’ve represented both small and large companies. Our forte is on startups, and helping get them started. We work with them on their positioning, their messaging, and their PR, strategy through implementation.

Guy: When Betty and Barbara were working at Apple, one of their main functions was to shut me up.

Betty: You always tell this story.

Guy: And so it is a reflection their sincere dedication to startups and entrepreneurship that they would even come to a conference and be on a panel that I’m hosting.

Betty: On continue to represent you at Garage!

Guy: And finally, last but not least, Mark.

Mark Weeks: I’m Mark Weeks, I am co-chair of the Venture Law Group at Heller Ehrman. We have always been passionate about and committed to the startups. We represent the companies before they’ve met a venture capitalist or funding source, before maybe they’ve gone through of the cycles that Guy’s referred to. We’ve been a startup ourselves, and that’s our passion: to help counsel entrepreneurs and build successful, changing enterprises.

Guy: Alright. I’ll start with you Mark and work my way back down. If each of you would address this issue: could you give the audience your analysis of the current situation of startups, the current atmosphere and, you know, are we “back” are we still down at the bottom of the barrel? Do you see another bubble coming? What’s your analysis?

Mark: Well, I appreciated your comment earlier, because we too pray every night for just one more bubble. And we don’t quite see that yet, we don’t have any expectation of that. I think our view is that this is a fabulous time for startups. The going is tough. The funding environment is challenging, but our impression, our view is that we’re seeing some very, very exciting people. We’re seeing some very differentiated technologies. And we think that probably the next generation of startups that have been put together in the last twelve months and then the next six to twelve months/two years, going forward may be some of the most differentiated and ever-changing companies that we’ve ever seen in a long, long time. I think, to your point earlier, people are forced to, and you’ll be encouraged to and forced to be a little bit more crisp about what you want to do and why you want to do it. I think Guy’s comments and his five points are spot-on in terms of some of the exercises you need to force y
ourself to do. I think it’s harder today, I think it’ll take more passion today, I think it’ll take more expertise today to do the things you want to do. But I think if you can get through the first phase of development, of going through the MAT, as you referred to it, and going through that process I think you’ll be rewarded. So, I don’t want to pretend to say it’s better or easier than it’s ever been – it’s probably, in some respect, harder. But there is a fair amount of, sources of, capital that are interested in putting money to work, there are fewer opportunities in a lot of those sources of capitals’ view of what are good opportunities. But if you make that bar, then I think you have a terrific opportunity.

Guy: Betty, what’s your analysis of the current situation?

Betty: Well, in terms of the flow of what we’re seeing in terms of new companies coming in, I think it resembles 1998 in some ways. The number of calls and that. We’ve taken on two new companies in the last couple of months and we’ve probably turned down, you know, five or six. Believe me, compared to two years ago, that’s a significant move forward.

Guy: Are you doing it for cash or stock though these days?

Betty: Well, for our base is not based on stock. So, once a company reaches the bar, we’ll consider stock, but not in trade. Not any longer. We learned from the bubble too.

Guy: Alright. So there is a change.

Betty: Oh yeah, there definitely is a change. I think the other thing that we’re seeing is the companies that we’re looking at have a lot more seasoned management and I think they’re much more realistic and have learned their lessons well in the last few years.

Guy: How would you define “seasoned management”? Because everyone says, “Oh yeah, now it’s a much more entrepreneur”, but if you look at some of the great companies, like Google, you wouldn’t say that Larry and Sergey were “seasoned managers”.

Betty: No, I wouldn’t. But I think what Larry and Sergey had the great sense to do is to bring in seasoned management. You know, we have firms like that right now – there’s this new company that we’re bringing out right now called Aliph. The two founders are kids out of Stanford University; however, they brought in a team that has, including a CEO, that’s been around the block several times and had successes under their belt in the area where these guys have technology. So that’s what I mean by “seasoned” – been around the block.

Guy: Alan?

Alan: Well, it’s definitely not 1999 again, so I don’t think we’re in trouble having another bubble here shortly. However, a think a frustrating thing for entrepreneurs is that the problems that they knew are out there waiting to solve are still there. And it’s been very difficult over the last few years to get the capital and to get the team together to help them solve those problems. And it’s gotten to the point where the venture capital community and I think the budgets at some of the larger companies are in shape so that entrepreneurs can now form a team. It’s kind of 1997, 1998 timeframe again, which is OK. And it’s been pretty frustrating from our standpoint, all us service providers up here, is that we’ve been waiting for the market to come back. It’s been three long years. So there’s a lot of people hungry to serve the entrepreneurial community. Now, there are a number of our fellow competitors that have gone away and those that are here are very anxious to help the startup flourish again. So I think that the capital is there, and I think it’s a good environment – it’s just not 1999.
Guy: Think it’ll ever return?

Alan: Not in my lifetime, I think.

Guy: How old are you?

Alan: Fifty! No, I don’t know – depends on how long I’m going to work.

Guy: Alright Dave?

Dave: Yeah, we continue to see some fundraising activity, but it tends to be later rounds, less often the early rounds. But the one thing we are seeing is companies are expected to do more with less. They’re looking at lot harder at their service providers, and the fee structures and all that, and they tend to be going, I think you said earlier, the brand name companies and looking for alternatives, especially in the world of the accounting firms.

Guy: Could you, for this audience, you know – so you said basically people are focusing more on function than form, if you will, alright. It’s not about the big names – it’s about what are you really getting?

Dave: Right. Value for the dollar.

Guy: Right. So in your particular area, how does an entrepreneur know that they’re getting value for the dollar? Because you could make the case, you know, everybody says they can audit me, how do I tell the difference? And I’m going to ask each of you about your professions.

Dave: In our business, I mean, there are a lot of CPA firms out there -there are the big four and then there’s everybody else. We’re up there closer to five. And what you really have to look at are credentials. Our technology companies are very unique, because they have very complex products, they deliver a complex solution, which creates complex accounting issues and tax issues. And so what companies should look at is how credentialed is that firm? What are the backgrounds of people? Are they with, you know, technology companies every day. I think that’s the important thing.

Guy: Jeff, what’s you analysis?

Jeff: I actually think it’s a very good time, for a couple of different reasons. When I speak with my venture colleagues who are looking at investing in early stage companies, they certainly indicate that they’re seeing a lot more and a lot better ideas. When you think about the underlying economy, it certainly is getting better, and so the opportunity for people to spend and open their wallets is getting better. I know, within Goldman Sachs, and in our IT department for example, we certainly are starting to spend more now than we were over the last couple of years. And we’re starting to be open to looking at some earlier stage technologies and smaller companies. I think there have been quite a few good, very talented employees that have been displaced over the last several years, so there’s a good talent pool from which to draw from. And so I sort of think all of that creates the right stage to form companies and to get companies going. And then when you think about the liquidity strategy, and I know that may be a bad thing to talk about, when it comes time to hit the cash register, I mean you have to think about the two main ways that you’re going to ultimately get liquidity, either through an IPO or selling your business. The IPO market is much better than it was, it’s as healthy as it’s been, you know, basically since 2000. And in terms of selling your company, really companies over the last two or three years weren’t interested, the larger companies weren’t interested, in acquiring smaller private companies, both because they were dealing within their own organizations and, secondly, they didn’t want to take on more employees and additional burn. And I think we’re really starting to see it turn there in terms of the willingness to look at acquiring companies, new technologies, so there’s really a, I think, a much more constructed liquidity path for private companies as well.

Guy: What do you, what would you tell an audience of entrepreneurs about the sweet spot or minimum configuration for a company to consider going public?

Jeff: There are a number of different things. I’d say I think the most important things are a lot of the things that you’ve talked about, which is: having an idea, having something, a business, that is different, is something that people can really get interested in and excited about, that’s always going to be the thing that investors are going to get most excited about and that will be willing to pay for ultimately. I think that when you think about the financial aspects of the business, if you look over the last eighteen months just to pull some data points, over the last eighteen months, you know, there have been twenty to twenty-five technology IPOs. They’ve averaged about $100 million revenue run rate on an annual basis, forward-looking. So that’s gives you about the size of the business. The nineteen or twenty of the companies were profitable and had been profitable for an average of four quarters. So you’ve got to be of significant size to get public – call that $100 million dollars in revenue – profitable. And I think, you know, the management team is obviously critical because ultimately that’s who’s going to sit in front of investors, look across the table from investors, and they want to see that there’s some kind of track record. I think it’s great to have the young, hungry entrepreneurs who came up with the idea, but I think ultimately when you talk about being a public company you want to see some experienced management. SO having some element of the management team there is important. And then the last thing I would say, and I can’t emphasize this enough, the environment for accounting and financial controls has just changed radically. I know the amount of time that I and my colleagues are spending working with companies that are coming public right now – we spend an unbelievable amount of time really digging into that, because that’s the thing that investors are really focused on right now, to make sure that, you know, the house is in order from a financial controls perspective.

Mark: Just to echo one of the points you made. I would differentiate, for this group, when you talk about people and you talk about startups, differentiate between two groups: the management team, the board of directors, the experts when you’re a later stage entity going public or doing something as opposed to, what your first question was in a sence, when you’re a startup and what’s the exosystem and who should it be. Don’t necessarily assume that you need the experienced, vetted management at the start of days. What you need is exactly what Guy described before, which is someone that is or a team of people that are extremely creative, who have defined something that they want to change that they think has value or change the way people act, the way that people buys things, the way people do things. You know the Porsche example is a fabulous example – I didn’t se the one I wanted so I’m going to build it, do it – that can be someone coming straight out of college, that can be someone that’s been an engineer for three years, seven years, ten years in a fabulously company. And it doesn’t have to be someone that has done it two or three times to get it started. What those people have to do is to go through some of the steps that Guy outlined before, and build an ecosystem and build a set of people with the same passion in different areas of expertise to complement him or her in the startup. So I would really encourage you, as you think about your business, I think we see tons and tons of startups, pre-funded or just funded or by-hook-and-by-crook gone through that first phase, that if you really push, and we spend a lot of time going through MAT with them, because at the end of the day they’ve figured out or you’ve figured out, you know, how to put together, you know, a pretty good spreadsheet of the business plan, you can put together a pretty good spreadsheet of a billion dollar market because people tell you people want to see a billion dollar business. I guarantee every one of you out here has a billion dollar business because we can all figure out how to work the math and how to work the sign, but when you go through and really test and push yourself to test the milestones and the assumptions and the various tasks you’ve got to do, I would argue you’ve sort of taken that down to about the tenth degree and not all the way. And it may be that as you look at it you may not understand or know, you know, all the various assumptions and questions you want to answer, and how to ask the question, how to answer the question. That’s OK. Have that passion, but look around your community and find mentors and find colleagues and find people that share that passion, who bring, who are either smarter, you perceive to be smarter, than you or bring a different expertise than you that you don’t have and then force yourself to go very deep on the MAT. Because I think, probably the mistake a lot of people make is they realize they have a fabulous idea, and they may, but they don’t quite get to MAT.

Guy: Betty, I’d like to start with you on this question which Dave’s sort of alluded to already. It is about the selection process for an entrepreneur of someone in your profession. Specifically, how do they figure out which PR firm, which commercial bank, which accounting firm, which investment bank, and which law firm to pick? Because, you know, it’s not an easy decision!

Betty: So, I can answer that on the PR firm side. I think, yeah, your ecosystem is the great X factor. What you look for, the people you surround yourself with, in the service industry, your infrastructure, are the people who need to be able to give you access to all the things that you need to entre, in my case, into the media. So when you’re selecting a PR firm, the first thing you have to do is look at the track record of the firm, what they’ve been able to achieve, where they’ve had their success, the experience of those in the firm, and who you’re actually going actually to have working on your account. A lot of the larger firms you may see a partner of a senior vice president when you’re doing the vetting, but you may never see them again. In fact, that’s been one of our differentiators is to offer that kind of experience. And then, I think also, you know, many of our clients are repeat clients. So out of the eight or ten companies we’ve represented in any given time…

Guy: They’re what kind of companies?

Betty: Repeat.

Guy: Oh, I thought you said “weak”…

Betty: No, oh god no. No, not at all. They’re repeat clients, so that they, you know, we’ve worked with them in other capacities before, which says a lot because I think you want to know that any firm that you’re going with has the wherewithal and is “there”.

Guy: But won’t every PR firm that you go to say, “Yeah, we know Walt Mossberg, and we know Dan Gillmor, and we know, you know, Kara Swisher – I can get you to them!”

Betty: The proof is in the pudding.

Guy: But how does the, in the vetting process, how does the entrepreneur get the proof?

Betty: Well, you can call Walt Mossberg. Please, call Walt Mossberg!

Guy: Yeah, but would you want all these potential clients calling Walt Mossberg saying, “Betty says she’s well-connected with you – is that true Walt?”

Betty: Well, first of all, I wouldn’t give him as a reference unless I was really serious about the company. So, to your point, I don’t disagree at all with what you said about the different stages of a startup. I think that when you’re ready for a PR firm, you’re much farther along that curve typically. So you do have a management team in place. Because one of the things, I think there’s a lot of naiveté out there about, you know, dealing with the press. A lot of people seem to think, “Well, you just put out a press release. I’m ready to start my company, just throw our press release out there!” You know, within the, dealing with the media and conducting public relations there is also ecosystem, there’s an infrastructure that has to be developed, and you firm, the PR agency that you choose, needs to work with you to develop that infrastructure long before ever put a press release out. So, I think you have to look at, and understand that, PR is a process and understand that what people can bring to the table will be accessed and, you know, if I’m serious about you, I will tell you to call Walt Mossberg.

Guy: OK Alan, so I walk into Comerica and I say, “Alright, I’ve got my million dollar funding, I’ve got a check for a million dollars. Who do I deposit it to?” How do they, what’s their process for figuring out the right commercial bank?

Alan: That’s a good question. The entrepreneurs obviously have, you have got your customers that you’re trying to go after and you’ve got your product that you’re trying to deliver. Banks are the same way. There’s going to be different products, and different customers that they’re trying to serve. So you’ve got to go in and deal with a financial institution that is interested in your kind of business: an emerging technology company. I was thinking of the example you talked about, the myth of the Pez dispenser. Banks, think of the relationship with Goldilocks – she sat in a chair that was too small and broke it. Small companies may think, “Oh, I need a small bank” – often, small companies that want to sell to the large companies, they have international needs right away, often you’re going to break the capabilities of a small bank. Large banks are often too uncomfortable for emerging companies. You need to find somebody that is just right, that knows what happens in between rounds of financing, that can make the introductions. As Betty just mentioned, what is the ecosystem that is going to help me? Comerica, for example, we bank venture firms, we bank early stage companies, and we’re part of the process of making sure that ecosystem works for our customer base. So you’ve got to deal with a bank that is focused on dealing with your type of company. So we understand what happens in between rounds, in between all the difficulties that happen along the way, and we’ve got the experience to do that.

Guy: OK. Dave, you want to add anything?

Dave: Yeah, I think the needs of a company along its lifeline for accounting services changes, obviously. In the very early stages, you know, like Mark was saying, companies will need to be focusing on different things. But there will come a time a point in time where they’re going to have to put in systems that are going to allow for growth and then start a CPA relationship that’s going to grow the company. Betty used the example where, you know, I was with a Big Four firm for a long time, you know, where I went out and did the initial sales call and then I didn’t talk to the company for, you know, nine months. You know, with our firm we really like working with startups because we do have the ability, based on our structure, where the partner group can deal one-on-one with the client. Then, going further as the ecosystem grows, and you get further close to the exit strategy, you know, as Jeff was saying, corporate governance takes on a much stronger importance. And that’s when you need to look at the Sarbanes-Oxley related kinds of things.

Guy: I’m glad you brought that subject up. For two guys or two gals or a gal and a guy sitting in a garage, does Sarbanes-Oxley mean anything for them? Or is that something for “stay out of jail” if you’re Enron?

Dave: At that point, probably not. They shouldn’t be worrying about Sarbanes-Oxley. But as the ecosystem grows, as you get funding, once you have an independent board of directors. Then the accounting relationship changes where your accounting firm now is engaged by your board, which means you have to have certain controls in place, because ultimately when you get acquired by a public company, the acquirer is going to be looking at the company in terms of how far along are you to have all the things you need to be compliant with Sarbanes-Oxley. Because if we acquire you, your financial records are going to become part of our financial records and so that becomes important. And then, I think it’s even more important if the IPO is the exit strategy.

Guy: Speaking of IPOs. OK Jeff, you know there’s Morgan-Stanley, there’s Goldman-Sachs, there’s Credit-Suisse. I’m hot, doing $100 million, four quarters of profitability. I’ve got someone telling me about this concept called a bake-off. I mean, what’s your advice to entrepreneurs? How do you tell? Every investment bank comes in and says, somebody says, “Well, you know, on the day that the cooling period stopped we had the highest return compared to the opening day” and another bank will say, “Well we had the best opening day increase for twenty-four hours”. So far, I’ve never met a bank that didn’t do the thing the best.

Jeff: There’s charts that shows they’re number one.

Guy: Right, so how do you pick an investment bank? Knock on wood, let’s all have that problem, right?

Jeff: Obviously it’s a great position to be in. And I would say, I mean, when I think about private company, and certainly early stage company, and how to think about that problem, really it’s almost something I would almost say don’t worry about it. You know, if you are executing on the plan and vision and all of the things that you put in place when you founded the company, you have the things in place, Wall Street will find you. You can’t hide. We will seek you out and find you, and we will do that through all of the partners and board contacts and so forth. The one thing that I would say that’s changed very much in this environment is really the relationship between the investment banking side of the house and the research side of the house. And it used to be that those two entities could work very closely together and talk very openly and freely about a whole bunch of different things in term of targeting companies, and how you were going to call on them and build the relationships, and now those relationship really have to be built independently. And so I would encourage, as you get to become a later stage company and really start to think about doing an IPO, while it may seem a little counterintuitive, you will need to be proactive in terms of reaching out and building relationships independently with the research and the banking teams. And hopefully at the time at the point in time when it comes to be a bake-off, you will already have built relationships with the people that are competing for your business. And if not, you should ask yourself, well, why is that? Was has firm X not been in to see me and not spend time to get to know me and understand what my value proposition is, and get to know me and my style and what I’m looking for as a company that’s seeking to use investment baking services? So, hopefully, when you get into that bake-off, you’ve met with all the various firms, you have a sense for what their capabilities, experience, track record is, and so when you’re sitting across the table and look at all this data, you’ll have the sense for who are the people behind that data and are they really going to be able to help me get through the IPO process and help me become a public company. Because, ultimately, it’s about the people you’re going to work with. Every firm will say they’re great in this, and there are quite a few very good, capable firms, but it’s ultimately about the people, the individuals that you are working with, that are going to call on you. Those are going to be your bankers that are going to help you, give you advice, and support you once you’re a public company.

Guy: Mark, besides picking a law firm that has Craig Johnson as the…are there any other algorithms you can use for finding a good law firm.

Mark: That’s really it.

Guy: That’s it? Alright, so I guess…

Mark: Yeah, I guess I would say the following: I’d say in all of these areas, I think at the end of the day you need to look for expertise. You don’t have time in what you’re doing to screw around with someone learning the business – you’re learning the business, you’re bringing in people you know what to do. And in all other areas and everything you’re hiring, you’re looking for expertise. On the legal side, you know, the first thing you need to do is subset – there are a number of terrific lawyers out there, lots of different firms – there’s a subset of those that focus on startups and technology. And then I think, reality is, wherever you go, whoever you talk to, find those people, find people who understand what you’re doing. Every lawyer, I don’t care what he or she tells you, can’t be everything to everybody, they can’t know every technology, they can’t know every, sort of nuance of patent law. They specialize, and they may be a little bit broader, or a little bit more narrow, but they’re not everything. So, even within a law firm, find those people. Even within an accounting firm, even within an investment bank, everybody subsets to one degree or another and they understand your technology. They understand the companies that would be, and the people that would be, your customers. They understand the venture capital and funding sources. They understand the deals that have been done. They’ve done it multiple times. And those are the people you want to find, because at the end of the day you’re looking for every single member of your team. And we consider ourselves part of your team – maybe that’s something to ask: are they purely a service provider or consultant or something, and are you part of their day, but not are they thinking about you? We think of ourselves as part of your team – we look and plan to spend an inordinate amount of time with you building your business, but you got to also find those of us that – you know, if you’re a software company, you’ve got an enterprise tool and you’re selling to a certain customer, there are lawyers, there are experts, there are PR people, there are accounting people, there are banks, that focus and can tell you the fifteen, twenty-five, thirty, very terrific, successful entrepreneurs and companies they’ve helped build. And those are the partners you want to be with. And, you know, the honest truth, for better, for worse out of all of this, you’ll probably spend more of your time with the lawyers in the early phases than anybody else, and so you’d better find the guy that you think that you can build with, you’re going to sweat with, you’re going to have some good days, you’re going to have some really terrible days, but find somebody who’s going to be a partner with you. Find someone who has the same passion about doing something crazy like you want to do, and I think you’ll have a great experience.

Guy: Do you think it’s a reasonable expectation for an entrepreneur to want his lawyer or her lawyer to help with fundraising, introductions, paving the way, etc. etc.? Is that a…

Mark: Yeah, I mean, I think it’s an absolute reasonable expectation. I think, the honest truth is, we’re interested in building successful enterprises. That’s what we’re about, working with fabulous people, building successful businesses. We define our success by your success. We define our success as…you know, we sit around as lawyers and we say, “Well, how do you define success?” – well you can defined success as making a lot of money. Well, that’s fine. We live in this Valley, and everybody wants to do certain things, but as Guy says, we have a core set of principles – making money’s not on our core values, okay? If we do things right and we build the expertise, and we build the successful business, just like you are, maybe some nice things will come. We define success as repeat entrepreneur. It’s the easiest way for us to test how we’ve done and whether or not our clients, our partners, you, consider us to have created success with you is you come back and do the next one. Funding is a piece of that. One of the things we do, is have a, you know – and a lot of law firms do this, love to say, “Hellerman/VLG, we are the only ones that have all the exclusive relationships with the sources of funding” – there’s a lot of people that have terrific relationships. But our goal, and that’s why I go back to “expertise” – if you’re working with someone who’s a lawyer, who’s been in the community and done this multiple times and worked with multiple companies, here she’s going to be able to direct you, to introduce you to the exact type of – and review with you the different types of – venture capitalist in your specific area, where you can make a call and very quickly that venture capitalist will know very, you know, very easily whether or not this is a business plan, a business, a group of startup entrepreneurs that they want to interview. And that’s something that we spend a lot of time doing, you know, the match, personality, expertise, the startup stage, what the venture fund does, how they invest, what their style is, what the terms are, is something that we have deep expertise in, and something – and a lot of lawyers do – but something we bring to the party. Now, I wish we could guarantee the funding. I wish we could say, “You what? We’re going to call these three entities and we know, pretty sure, that they’re going to fund you and you’re going to be off and on your way.” Can’t do that, would love to do that. When we figure out that riddle will be terrific. But what we do do is, we spend a tremendous amount of time helping the entrepreneur to build the team, and to identify the alternative sources.

Guy: You know, I think the message for the entrepreneur here is that as you are perhaps particularly seeking a corporate finance attorney, and also I think accounting to some extent is also true, that a very reasonable question in the interview process is: can you, will you, have you introduced us to sources of funding? So it’s not just about the legal work, it’s not just about the accounting work, it’s “Can you call someone at Sequoia and get us an appointment if we go with you as a lawyer?” Is it a reasonable question?

Mark: I think it’s an absolute part of your diligence -you should not only ask those questions, you should look and ask who else they’re represented in the past. You should ask, just as any of us, we all have references, we all have relationships. It’s across the board. What you’re trying to do is build, the word we keep using, this ecosystem. But as we go, can your lawyer call Goldman-Sachs, and can they get Goldman – who’s very busy and they have a high-profile and they work with fabulous companies – a little bit earlier in the process to pay attention to you or identify you? You’re right, when you get to the $100 million run rate, they’re going to find you, no question they’re going to find you – but before that, a year before that, two years before that, you may want to explore some alternatives, you may want to plan in advance what that process may look like and how you might want to do it. Boy, the hot topic today is the Dutch auctions – you may want to educate yourself a little bit earlier on what the heck that is and how it works and will that bring more value shareholder value or not, and how does that work. You may want to explore, “Gee, we’re going to go down one of two paths – we’re still going to build success either way, but we’d like to explore with Goldman-Sachs what the opportunities for acquisition are, and what we should think of? And here are our milestones for running the business, are those synergistic? Or how would Goldman look at that as our M&A bank, and what would they identify as different or additional milestones if we want to be acquired?” And maybe the value, exit scenario, dollars are different, but we’d like to explore that. Your lawyer, and your various board members and your relationships, the expertise you build around you, should be able to tap into that. And they should be able to tap into that in a way that you get the high, top tier, you know, people who’ve done this – again, expertise matters. Not the junior banker, not the junior lawyer, not the junior accountant, not the junior whatever it is, you get someone who is high-profile who can deliver value to you for many of these areas of expertise. So, I think it’s perfectly reasonable and, quite frankly, I think you should assume that what you’re trying to identify are those lawyers or accountants or any of the experts that can tap into the community.

Guy: Alan, I’d like to ask you this question about the ecosystem. What can you do to foster a very supportive and yet value-adding board of directors? Lots of people, you know, when we have these kind of panels, lots of people say, “Yeah, you ought to build out your ecosystem by having good board members” and everyone’s out there writing it down. Yeah, get a good board member, and then you go home tonight and say, “What the hell is a good board member?” – you know, duh, I was going find a bad board member, good thing I went to this conference! So, what is a good board member, how do you find these rare birds? And I’d like each of you to offer some opinion, advice on finding good board members.

Alan: Obviously early on the venture people that provide the money are going to want a board seat. They’re putting in capital, so they want that. That’s up to you to choose who you’re going to do there. Now obviously, what Mark is saying from all of us you could expect to find sources of capital, referrals to funding sources, and we’d be glad to do that. That’s the obvious thing. You’re obviously going to have people in your industry that know that. Now the advantage, I think, that Guy is alluding is the fact that since we’re banking a number of companies in the semiconductor industry, or in the telecom industry, we’re used to companies, that is we’ve banked a lot of companies, that maybe have been successful and we know retired people, for example, in the trust department or whatver and our personal banking area, and they’re looking for things to do, if you will, relative to the industry they’ve been involved in. And we can often make the introductions, but good board members are important because they can communicate certain things to the company and also to the banks and other people that need to understand where the company’s going, and that’s going to be critical in the process of moving from one step to the other. So, a good board member is one that communicates, has the domain experience, and has the connections that you’re going to need. I think the bank can provide access to certain of those people – we have to careful, from a fiduciary responsibility, we can’t, for example – when we give referrals, we have to be sure we don’t give one referral because it looks like we’re trying to put our person in there. We have to give several referrals. We’ve got to do homework, we’ve got to make sure that those are people that you’re going to find useful. And so that puts the onus on us to not only have one person we’re working with, but a whole variety of people. And it’s critical for us to make sure that we’re going to do something that makes sense for the company. We’re a very…you know, we’re a public company, we have to make sure that we want to see our name in the press for good reasons, we’re helping emerging companies not that we’re trying to plant somebody. So we’re very careful about that. And we’ve got a number of people that we’ve worked with in a lot of different industries that can help out in that regard. But I think the critical thing that we want to see, as a banker, is the communication that can happen between the board member and the company, and as a partner, the bank is a part of that triangle, if you will, between the funding source and the equity, the debt, and the board guiding the management to make that happen. We want to make sure that is all working very smoothly.

Guy: Dave, I’d like your advice about board members.

Dave: Yeah, I mean, a company that’s receiving an early round, you know, starts evolving and then the board is created typically with the venture partners that are funding the company. But as the company evolves, you know, with Sarbanes-Oxley, again, there is this requirement to have a financial expert on the board. And as a company gets closer to, you know, an exit strategy, they need to start looking at that once they have independent board members. So I think the value that we bring as an accounting firm, like Alan said, there’s this whole pool of people out there, I have a stack of people I know that are either retired partners with accounting firms or CFOs, you know, current CFOs that are looking to serve as financial experts, as directors. I think that’s an important thing that we could bring to a startup.

Guy: Board member advice?

Jeff: I would just add just that early in the company’s formation the type of board members that you will have and would want to have, I think, are going to be slightly different than what’s going to happen as you approach and ultimately become a public company. Early in the process, certainly, your venture investors are going to be extremely involved and they’re going to bring a lot of benefits to the table, in terms of advice on business model construction, company formation, helping to get the right management team in place and think about what market you’re going to go after, making introductions, and really providing sound counsel advice and guidance. That’s going to obviously continue, but as you become a public company you have to overlay on top of that a very strict corporate governance environment that all public companies are living in right now. All you have to do is pick up the Wall Street Journal and you just read about company after company that is getting just thrashed in the press about board members and lack of independence. So it’s really a big issue that you will deal with – and we’re dealing with it now with all of the companies that we’re bringing public, in terms of helping them think about how to construct their board, making sure that they have the right committees formed, nominating committee, governance committees, obviously the auditing committee, that there’s the appropriate amount of independence and diversity. And you want to make sure that you’re able to achieve all that, but at the same time not sacrifice the good counsel and wisdom and judgement. I’ve always had CEOs tell me that their best board members are a lot of times the ones that are toughest on them, that ask the hard questions, that really force them to answer the difficult issues and often do some difficult things they don’t want to do. So, you’ve got to think about that aspect of it as well.

Guy: Okay. Mark?

Mark: I would add to that last thought, I mean I think, particularly in the early days: expertise, expertise, expertise, and objectivity. You want to bring onto your board, look for people who have, again, maybe done it before or have a particular area of expertise, whether it’s the science and the R&D side, or the marketing side, or the financial side, whichever areas it is you might want some additional guidance and counsel on, make that list of people. Make a wishlist – it’s ok. Make a wishlist of some really terrific, high-profile people. You won’t get them all of them, you might not get any of them, you might get one to pay a little bit of attention to you as you grow, but make that list and figure out with your group of advisors who you know and who you might be able to call and ask to help you. I think it’s variety of things, if you’ve got people on your board that you respect and that are willing, you believe, to tell you and give you the tough feedback, it’s much more of a productive board relationship.

Guy: Let’s say that you have found this perfect board member: known in the industry, been around the block, credibility, just perfect. How much of the company would you offer that person to join the board, maximum?

Mark: The answer…that’s a great question.

Guy: That’s a great stall.

Mark: That’s a great stall. See – the lawyer in the group would say ‘it depends’.

Guy: I know it depends.

Mark: It depends. I guess I would say it this way Guy: I think that, you know, there are certain situations where, you know, you may get…if I went on the date and I said, “Geez, do those kind of board members bring, you know, one percent, three percent, ten percent of the company?” The answer might be yes, but it’s kind of an incomplete answer because, you know, of what? Of what? If you’re a pre-funded company and that person you’ve described has agreed to really spend a lot of time with you, I mean really a lot of time: they’re going to help you do MAT, they’re going to help you make connections, they’re going to help you get funded, okay? Whether that’s a venture capital or corporate or angel, or whatever, it’s going to be much higher in those percentage numbers than the one percent, two percent, half a percent kind of a number. If it’s a person who says, “You know what? I’ll spend two days a month with you, I’ll occasionally come to your advisory meeting, maybe I’ll be on your board, maybe I’ll be on your advisory board.” It’s probably going to be smaller range – half a percent to a percent – smaller, bigger depending on where you are. When we do these things and we go through this, I encourage the folks to sit down in a very honest way with the board or advisor and ask and talk about what the commitment of time will be. Because for a lot of commitment of time of a person you’ve described – this perfect, terrific expert – it’s worth a lot to you, if they’re really going to spend that time and give it to you. It’s worth a lot, but maybe less, if they’re going to lend their name and their credibility and be at your quarterly or monthly board meeting and do some things, but it may not be the same value scenario that it might have been if they were going to be, in a sense, part of the founding team. To me it really depends on what value they’re going to deliver, where you are as a company, if you’re already funded and then they can spend less time on that. It’s still a ‘maybe’ and I didn’t give you a straight answer.

Guy: You have sufficiently clouded the issue.

Mark: It’s clouded enough.

Guy: Somewhere between zero and…

Mark: I guess the one thing I would say, let me say the one thing I would say on this, which is that when you’re going in with venture or you’re going in with advisors: I wouldn’t get too caught up in the percentages. Okay? People often in a startup phase get very obsessed about dilution and ownership. You’re going to build something very, very successful, and if you force yourself to run the numbers, when you get to that $100 million run rate, and you’re going public with Goldman, and you’re building a terrifically successful business, you’re going to look back at whether you gave that person a half a percent or one and a half percent, okay – get the person. Don’t get caught up in that half a percent, get the value.

Guy: Alright.

Betty: I would just add to that, you know, from a press perspective the first thing that the media is going to ask when you go out there is, “Who’s behind your company?” So it certainly doesn’t hurt to have some high-profile, well-known people that have track records, but I agree that it can’t be in name only, they have to know that there’s a real vested interest in the company. Along those lines, there are other components to the ecosystem that we haven’t even touched on. There’s the very mixed question the media is going to ask you, “Who are your customers?” So, a big, you know, contributor in the ecosystem is your customer base, along with resellers (if you’re in that type of environment), VARs, etc.

Guy: Let’s take some questions from the audience. Anybody? There are mikes so that you can…

Audience member: Good morning, my name is Charles Palmer, I came in from Florida for the conference.

Guy: Not Tampa Bay though…

Audience member: No, but very close. And, one of the primary reasons I came here today is to find out: is it foolhardy to think that a tech startup can make an attempt from a place that is as remote from this region as southwest Florida? To any of the panel members, is it difficult or impossible to work with you if face-to-face is not possible?

Alan: Let me just say that, from Comerica’s perspective, we’ve got offices in about the largest ten places, geographically, in the United States where venture is putting in money. So, we cover everything nationally, we’ve got an office that covers the mid-Atlantic states, if you will, in that area. And so, we will, from a banking perspective, assist you wherever you are in the US, but we only have direct, inline offices where you’ve got probably the largest venture investment in that area. But, sure, you can do that.

Guy: All he wants is your ATM though. Any other thoughts on this? Can you work with someone in Florida?

Betty: Actually, we’ve worked with companies in Idaho and in Austin, and, you know, so the west coast is obviously easier for face-to-face, but we also have an employee in New York. So we’re set up to, you know, service companies that are geographically remote. Is it optimal? No.

Guy: But at an extreme, there are people that work with companies from Israel – I mean, that is a pain in the ass to get to. So it can work, but the bottom line is that if you’re good and interesting enough company it doesn’t matter. But if you’re a mediocre company, then Milpitas is too far to work with you. Next question?

Audience member: Could get a list of the most common mistakes entrepreneurs make when they come to your firm for services? Can we go over on the panel?

Guy: How about the single biggest mistake or most common mistake, you know, for lawyer, PR, bank, accounting firm, investment bank? Is it hard to narrow down?

Alan: One of the things, from a banking standpoint: sometimes entrepreneurs confuse the role of debt and the role of equity. But again, we’d be glad to chat with you about how those work out, and what the capital structure should be. But, you know, I’ve found that entrepreneurs before they get venture money understand that better than after they get venture money. But we can help.

Guy: Alright. Accounting?

Dave: One of the biggest mistakes is waiting too long before to bring in some sort of accounting in house, accounting person, whether it’s a controller or accounting manager.

Guy: Okay.

Jeff: The only thing that I would say is that the biggest mistake is just getting people involved either too early, I mean from an investment banking perspective, is getting people involved too early or before you really know what you want and how the firm can be helpful to you. Because what ends up happening is if you set the wrong expectation right out of the gate, where the management team doesn’t have a defined plan or defined strategy, then that can put you in that particular banker’s mind in the wrong bucket in terms of being a priority to invest and develop the relationship longer term.

Guy: Betty?

Betty: It’s definitely not leaving enough time in the process. You know, we get brought in and the company will say, “I want to do a press release in two weeks, I want to introduce the company in two weeks.” You just can’t do the work that needs to be done in that timeframe. It’s unrealistic.

Guy: Okay. Mark?

Mark: I would go back again, Guy, to a couple of your points because I think it’s what we see most often. One is a failure to really spend time and to articulate core values. I couldn’t agree with Guy more that a mission statement is a very creative experience for team-building – it doesn’t make a company. And he had a different word for it, I call it ‘core values’, but if you in a half a page can articulate your core values it really helps you define whether or not you want to do what it is you set out to do. The other thing, the other biggest mistake again I would say is most people haven’t spent enough time on MAT, on what you defined as MAT. And if you could take more time to do anything before you go see any startup service provider, lawyer or potential investment source, is to really go through the milestones and the assumptions.

Guy: Thank you. Over here?

Audience member: My name is Doug Milke, I’m with a very fresh startup called Wyhona, content enabler. There’s been a lot of discussion about how venture capital will define the shape and the picture of your actual board. And, in fact, I’ve had discussions with my partners where the question is raised, “Who’s the CEO?” and my answer to that is, “I don’t know, I haven’t met him yet.” And what I mean by that is: you’re building teams, teams are very, very important – pick the right people to manage your company. Why would I go ahead and build a board when it’s going to be redefined when I finally find my venture money?

Guy: Well, I mean, one answer is: it’s sort of a Catch-22, right? If you have a good board, you’ll attract venture money. Yeah – any more thoughts on that?

Alan: Part of it is, you know, a good board member is somebody that’s from the industry, gives credibility, and answers the Catch-22 question. And maybe being there only for a temporary period and they know that. You know there are early stage board members that know they’re going to drop off, but they help you get started.

Guy: Yes?

Audience member: This is a question based on your remarks in the opening there – where are the women investors and what are they investing in right now?

Guy: We not going to…maybe that’s why there’s so few women investors – they know that there’s not that much to invest in. We’re not ending on that question – over here?

Audience member: Hi, I’m Jim Franklin with, and I just have a question for Mark. You know, a lot of the early stage companies that have got their business plan done, they’ve got their management team together, and they’re out, they’re looking for venture funds. One thing we noticed: a lot of the venture funds are depleted from the assets, the cash assets, to invest in companies. I wonder if you could address, you know, the Dutch auction has been mentioned, it’s been very much part of the news, some of the regulations of the state offerings of regulation A, interstate offerings, what other avenues do some of these companies have in approaching raising this capital?

Mark: Well, I’m going to distinguish, and maybe I’ve missed the question here but, distinguish two separate situations. There’s raising capital in the public markets and then there’s raising private money from institutional investors or from an angel network. When we talk about Dutch auctions and IPO processes, there’s a number of different alternatives, or there’s now two or three different ways to raise money in the public markets and it’s evolving, Google being another example and we’ll see what happens there. Red Envelope was another example of a Dutch auction – we’ll see more and more of those I think as we move on. It’s got its own set of issues and challenges, but that is different from what I would say to you is, for most of you, the traditional method of, from a select, limited number of investors, whether it’s institutional venture capital, corporate investment groups, or individual networks, you’re still raising private money under private offering exemptions in a variety of state and federal laws. It’s not worth getting into that sort of a level of detail here. I’d say it hasn’t changed much in terms of how you’re doing it. I would caution everybody in terms of trying to keep, when you’re going and trying to raise money, the number of people you solicit to a minimum and to get some guidance on that.

Guy: This is the “Mark Benioff” theory?

Mark: Definitely.

Guy: Please join me in thanking the panelists.

Art of the Start 2004: The Art of Starting

This is part of a series of transcripts of the proceedings of the Garage Ventures’ “Art of the Start” conference held in Mountain View. See the complete series of transcripts here.

Good morning, my name is Guy Kawasaki and I would also like to welcome you to our conference, called The Art of the Start. In particular, I found out that there are some people here who have come from foreign countries, so I’d like to thank you for coming so far for this conference. There’s a pretty large contingent of Canadians – I have to tell you that when the Calgary Flames lost to the Tampa Bay Lightning, I wanted to cry. Frankly, I believe the Stanley Cup does not belong in a city where you get snow in a cup. It just doesn’t fit. I’m a Calgary Flames fan – so, welcome to my friends from Canada.

I am going to give you an overview, a “big picture” view of starting a company. This entire conference is roughly based on the book that I just wrote, called The Art of the Start – it looks like this [slide reference].

Book Cover: The Art of the StartThis cover is actually an interesting story – it is using a photo from a company from Calgary called iStockPhoto. Any of you could have bought that photo for about a buck and a half and created this cover. iStockPhoto (Patrick Lor is the CEO) represents a new kind of market for stock photography: usually stock photography is about $300 a shot – this is a buck and a half a shot. And that’s Canadian.

So that’s the cover of the book that will be coming out in September, but this is not a promotion for my book. This session is about the big topics of starting a company.

For those of you who have seen me speak before, you know that I like to use a Top Ten format. There’s a historical reason for that – the historical reason is that I’ve seen so many hi-tech CEOs speak in my work that suck as speakers. I figured out early in my Apple career that if you’re going to suck and you use a Top Ten format, at least the audience knows how much longer you’re going to suck. I hope you don’t think that I, or Bill, or Bill suck, but in case you do at any given point, usually in our presentations you just have to subtract from ten.

I struggled (this is the introduction chapter of the book) to come up with a Top Ten the things you really need to do to start your company off correctly. And there are not ten things – the most that I could come up with (that are crucially important) is five. So this is a top five for you – I’d like to go through these top five things and discuss them in rather great detail from The Art of the Start.

Lesson 1: Make Meaning

The first thing I learned that, you know as Bill alluded to, is that we have seen literally thousands of companies over the past six or seven years, and we have met tens of thousands of entrepreneurs and entrepreneur teams. And with hindsight, although we were honestly swept up in it as much as they were, I think the thing that we learned the top level thing you must have. If you’re going to create company and that company’s going to be successful, it is because the founders of the company want to make meaning. Not money. Not prestige. Not power. Not status. It is about making meaning.

I would encourage you entrepreneurs as you’re contemplating your companies or forming your companies to think about what is the meaning going to be? Not the money. Money is the outcome of successful meaning-making, if you will.

Let’s analyze the types of meaning – I think there are principally four types:

  • One is to make the world a better place by a product or a service.
  • The second is to increase the quality of life of people.
  • The third is to right something that is wrong, to fix something.
  • The fourth is to prevent the end of something good.

Those are the four types of meaning that any company, any organization can make. My plea to you is to focus your efforts on making meaning, not making money.

Now, there may be an element of hypocrisy here because I will tell you that there were times in my life that I wasn’t focused on making meaning. I will pull a mea culpa, if you will. I look back, and I say, well in 1983 I was starting in the Macintosh division at Apple and I wasn’t exactly focused on making meaning. Basically in 1983, I, and the rest of the Macintosh division, wanted to send IBM back to the typewriter business holding its electric balls. So that’s not as lofty as making meaning. In 1987 at Apple, we were obsessed with beating Windows, beating Microsoft – we wanted to send Bill Gates back to making/serving Frappachinos at Starbucks. It was about Apple versus Microsoft.

But in 2003/2004, I’ve really come to this conclusion that a great company is about making meaning. That’s lesson number one – making meaning.

Lesson 2: Make a Mantra

Lesson number two is a passionate request from me for you to focus on making an organization mantra. Now a mantra is very different from a mission statement. A mantra is typically shorter – arguable the shortest mantra ever is “om” (the Hindu mantra) – it is a sacred verbal formula. It is thing where if you could ask any employee “what do you do?”, they would understand it immediately and be able to consistently communicate the purpose and meaning of the company.

Now I have to contrast mantras (because it is not a typical recommendation for an entrepreneur) with mission statements. Many of us make mission statements – how many of you have mission statements? Now let me guess how that mission statement was done. You took a group of people, maybe you even went offsite, you had each functional group represented, and for a day you hammered out this mission statement. And at the end of the day, every group had a little say in it: HR got to say “well, we have to do good for the employees”; the Finance person said “we have to return money to the shareholders”; the marketing person said “we have to change perceptions”; the engineering people said “we have to design something new and radical”. So at the end of the day, you had a mission statement that was about 25 words long that no one can remember. It’s just total Chop Suey. No one could care less about the mission statement. I have seen very few mission statement done well.

Book Cover: The Mission Statement BookI looked up in a book, called The Mission Statement Book by a man named Jeffrey Abrahams – and he analyzed 301 mission statements. This is a very interesting statistic: of the 301 mission statements that he looked at, ninety-four use the word “best”, 211 used the word “customers”, 77 used the word “excellence”, and 169 used the word “quality”. The message here is that everybody uses the same kind of words in a mission statement. For this reason, I recommend to you that you forget about creating a mission statement. Make a mission statement when you’re a middle stage company, when you can hire consultants and go to Monterey for an expensive offsite. If you want to waste a day, go make a mission statement. But while you’re a young company, focus on a mantra.

A mantra is short and sweet. Let me give you some examples.

Nike‘s mantra is “authentic athletic experience”. If you were to ask a Nike employee “what do you do?”, it is about “authentic athletic experience’. Disney is about “fun family entertainment”. The Green Bay Packers football – “winning is everything”. Those are mantras, they are not mission statements.

By contrast, let me give you a mission statement. Starbuck‘s mantra is “rewarding everyday moments”. Starbuck’s mission statement is: “established Starbucks as the premier provider in the world of the finest coffee in the world while maintaining our uncompromising principles while we grow”. Which one do you think is easier to remember?

Let me give you more examples:

  • Southwest Airlines: The mission of Southwest Airlines is “dedication to the highest quality of customer service delivered with a sense of warmth, friendliness, individual pride and Company Spirit”. The mantra that I would make for Southwest Airlines is “better than driving”. Also “cheaper than driving”.
  • Coca-Cola: “The Coca-Cola exists to benefit everyone that is touches”. My mantra? “Refresh the world”.
  • Wendy’s: “The mission of Wendy’s is to deliver superior quality products and services for our customers and communities through leadership, innovation, and partnership”. That’s for a hamburger. I think the mantra for Wendy’s should be “healthy fast food”.
  • United States Air Force: “To defend the United States and protect its interests through aerospace power”. I think the Air Force’s mantra is “kick ass in air and space”.
  • The March Of Dimes: “The March of Dimes researchers, volunteers, educators, outreach workers and advocates” – someone from HR got all the groups in there – “work together to give all babies a fighting chance against the threats to the their health: prematurity, birth defects, and low birth weight”. I think the mantra for the March of Dimes should be simple “save babies”.

The point here is to focus on mantras. Short, to the point, memorable. That’s point number two: make a mantra.

Lesson 3: Get Going

Point number three is to get going. One of the thing that Bill and I and the other people at Garage have noticed is that many people, when they decide to create a company, they think that the first thing is “buy Microsoft Office”. Because if I don’t buy Microsoft Office – because you need Powerpoint, you need to start creating presentations, then you need Word to write a business plan, and then you need Excel to create that spreadsheet and have a financial model. I am not nearly as anti-Microsoft as I used to be, but I am telling you the key to getting going is not spreadsheets, it’s not Powerpoint, it’s not wordprocessing. The key to getting going is to get your hammers, and your tools, and your compilers and your Autocad, and whatever it is that you’re use to create your product or service and create. Get going. Start making that product or service.

Getting Going

Let me give you some principles of getting going.

First of all, I encourage you to think big. Think big. Don’t just do things 10% or 15% or 20% better. Think 10 times better. Think more dramatic improvement. Think different curve, not same curve. Think getting to the next curve. Think creating the next curve. You know when Jeff Bezos created, he didn’t go to a Barnes & Noble Superstore and say “Wow, Barnes and Noble has 250,000 titles in this brick and mortar store, I’m going to create leapfrog them. I’m going to carry 275,000 titles in bigger brick and mortar store”. He went from 250 to 3 million in a digital book store. Think big to get going.

The second thing is you need to find soul mates. You know, in America, and particularly Silicon Valley, there is the myth of the sole entrepreneur. This it the Steve Jobs, the Henry Ford, the Anita Roddick, the Richard Branson, the Thomas Edison working alone, genius doing it by all by himself. And in fact, I think if you analyze even these companies history is wrong. All of those people had groups and were members of a team. History is wrong. It is not about one person, the sole entrepreneur, it about the group of entrepreneurs. Hence my second recommendation is you need to find some soul mates, the people who are drinking the same Kool-Aid that you are. Find some soul mates.

The third thing is when you design your product or service you should be not even not afraid, you should want to polarize people. You should want people to look at your product or service and say “I love it” or “I hate it”. The worst thing is indifference. So when you look at some cars – because cars is an easy example for people – look at the cars that you see that you “wow, I love that design” or “I hate that design”. When you look at a Mini Cooper, you love that design or you hate that design. When you look at an Infiniti FX45, you love that design or you hate that design. When you look at a Toyota Scion XB – that thing that looks like a little bread truck, you either love that design or you hate that design. But that’s what your product or service should do.

When we introduced the Macintosh it was definitely a bifurcation of the world. People either loved it or hated it. But the people who loved it are what mattered. The people who hate it don’t matter. The worst case is people don’t care. Don’t be afraid to polarize people.

Design Differently

The next recommendation about getting going is you need to design differently. You need to get out of the usual patterns of design. Let me suggest a few. One method is called “I want one” – which is you’re the customer, in this rare case there is no disconnection between what marketing says the customer wants and what engineering says we can do. It’s in the same body. You are the engineer, you are the designer, I want this, and I’ll make it. This is what happened with Steve Wozniak and the Apple. Another example, also from the car world is Porsche: Ferdinand Porsche once said, “In the beginning, I looked around and, not finding the automobile of my dreams, decided to build it myself.” I love this theory, the “I want this” theory.

The other theory is the “my employer couldn’t or wouldn’t do it” – this is where you’re working for a company and you see a market, you see a technology, you see a service that you want to do, but your employer doesn’t see it, your employer doesn’t want to do it. So you leave that company – hopefully you get your IP done correctly – and you go start a company.

Another theory, this theory is my favourite, which is “what the hell, it’s possible, let’s build it”. This is the spirit of Silicon Valley. What the hell, let’s build it! That’s how Motorola built the first cellular phones – what the hell, let’s build it, let’s go prove the market for cellular phones. You know, it was a completely foreign concept to think of carrying a phone with you – phones were at places, when you wanted to use a phone, you went to the phone. Retraining humans to think that you could carry a phone was majorly powerful in many ways. For Motorola, that phone was mainly engineering driven. What the hell, we can build a portable phone, let’s do it.

The last theory of designing different is called “There Must Be a Better Way”. This is when you’re sitting around one day and you’re saying “There is something just wrong with the system”. This was the genesis of eBay. Pierre Omidyar, when he started eBay, wanted a very market system. A better market system so that people could sell their stuff, their junk, online. The story of his girlfriend wanting to sell Pez dispensers online is more mythical than true. He really wanted to create a perfect market. A perfect market because he knew their must be a better way.

So those are the keys to getting going – that’s step number three.

Lesson 4: Define a Business Model

Step number four is to define a business model. This, for many people, may appear to be a “duhism”, as is “Duh! Of course you have to create a business model”. But we have found that many people do not pay any attention at all to the process of creating a business model. This is, I would say, a vestige of the dot-com era. Now, don’t get me wrong: no one wishes more for one more bubble than me. I just need one more bubble. Because this time, I know what to do. Having said that, that is my appeal, every night I pray to God for one more bubble.

But let’s suppose that actual bubble doesn’t appear – then it’s all about defining a business model. Now, I often lack subtlety (that may not be often), but I think the definition of a business model is: who has your money in their pocket, and how are you going to get it? That’s a business model. So let me give you some notes on a good business model.

Be Specific

First of all, be specific. Who is the customer, why are they paying you, when are they paying you, how much are they paying you? Be very specific. None of this, “Well, we’ll attract million of eyeballs and somehow we’ll figure out how to monetize it by building a community, we’ll sell advertising, or we’ll be the paid-for search engine for something, but don’t worry we’ll gather the eyeballs and figure it out later”. Not specific enough.

Keep It Simple

Also, keep it simple. You know if you need a partnership to another partnership and another partnership who will bring in this partnership to form a community to get revenue, it never works. You have to keep it very simple. Think of eBay’s business model – people post stuff, they sell it, eBay takes a piece of the action. See, that’s a business model – you don’t need a PhD from Stanford to figure it out. Keep the business model simple.

Another recommendation on business models is to copy somebody else’s business model. By the year 2004, pretty much all business models have been figured out. Why create a new model – copy someone else’s business model.

Ask a Woman

And I have one more recommendation about business models. It is one of the more controversial things in the book. This theory is that when you are developing your business model, what you should do is ask women what they think of the business model. Specifically women. Don’t ask men. The reason is that I believe men, deep in their DNA, have this code, this desire, to kill things. Men want to kill plants, they want to kill animals, they want to kill other people, they want to kill a lot of things. By and large, society has repressed this genetic need to kill things. By contrast, women do not have this DNA, do not have this need to kill things. So one of the problems with asking men about a business model is that men will always say, “That’s a great business model” because men are trained or genetically inclined to want to kill things – no matter how stupid your business model is, they will always say, “This is a good way to kill the competition, that’s a good business model”. Women, by contrast, don’t have this flaw. So ask women about your business model.

Book Cover: The Darwin AwardsThis is a very terrible indictment of men and their judgement – to reinforce this theory I suggest you pick a book called The Darwin Awards. The Darwin Awards is a collection of extremely stupid things that people have done that have gotten them killed. I read the Darwin Awards and I noticed a very interesting thing – there are approximately 12 chapters about people killing themselves in The Darwin Awards, 11 of them are about men. That should give you a rough indication. My favourite example is when, in 1998, two construction workers fell to their deaths – two male construction workers fell to their deaths – while they were cutting a circular hole on the floor. They literally cut a hole around themselves, then fell to their deaths. Would you want to ask that gender about a business model? I rest my case, I rest my case.

Lesson 5: Weave a MAT

The fifth and final step of The Art of the Start is for you to weave what I call the MAT. MAT is a very interesting thing – in the dictionary, a mat is defined as a heavy woven net of rope or wire cable placed over a blasting site to keep debris from scattering. And starting a company is very much like a blasting site that has debris scattering. So a mat is a very important thing. So what are the three things that MAT, M-A-T, stands for?

The first is M, milestones. When many people start companies, we’ve noticed – and I was guilty of this myself – when you start a company, it looks like there’s a whole bunch of things to do. You know you need to incorporate, you need to register with the government, you need to buy chairs, you need to find a building, you need to do all those kind of things. But fundamentally, there are only about seven milestones that matter to a company, and I would recommend that you focus on these seven milestones. These are milestones, these are life-changing, company-changing, company-setting events. These are the seven:

  • First is proof of concept – that the science really says you can make electrons do what you say you’re going to do.
  • The second is that you complete the design specifications.
  • The third thing is that you finish a prototype.
  • The fourth thing is that you raise capital.
  • The fifth thing is you ship a testable version to customers.
  • The sixth thing is you ship a final version to customers.
  • The seventh thing is you achieve break-even.

Those are the milestones of a company. Every one of you should address those milestones.

These milestones, I believe, are a product of every kind of business. Whether it’s a new school that has to prove their concept of teaching, or a semiconductor company that has to prove that their chip will work. All of these things are products.

The second letter in MAT is A, A stands for assumptions, One of the things that I think is difficult for many companies is that they build financial models and business models with certain assumption and they never test those assumptions. Or if they do test them, it’s done looking backwards when it’s too late and you’re running out of money. I think it’s very important that you list and test these assumptions in real time. These are the kinds of assumptions: the performance metrics of the product – are you going to test the performance that you say you’re going to achieve. Another is to really test the market size assumption. Another is to test your gross margin assumption.

Other assumptions: how many sales calls can a salesperson make? What is the length of the sales cycle? What is the return on investment for the customer? How many technical support calls will you get per unit shipped? What’s the payment cycle for receivables? What’s the payment cycle for payables? What’s the compensation requirements for the kind of people you require? What are the prices of parts and supplies? These are the kind of assumptions that should be tested. Indeed, many of them should be tested as you achieve milestones.

So now we’ve done the M and the A. The T stands for tasks. Tasks – here I ask you to create a comprehensive list of the major tasks that are necessary to achieve your milestones. This is a subset of the totality of the tasks, these tasks are only done to achieve milestones. They are things like renting office space – it is necessary to rent office space to finish your prototype, for example. Another task is finding key vendors. A third task is to set up accounting and payroll systems. A fourth task is to file and fill out the legal documents. And the last kind of task is to purchase insurance policies.

The whole thing is woven together: What are the major milestones? What are the assumptions in those milestones? What are the tasks we have to do to get to those milestones.

These five things, these five absolutely crucial things, I believe, are The Art of the Start. It is the art of getting the company going. These five things are the most important things that you need to do to get your company off and going well.

With that, I would now like to go to the panel, where we’ve going to bring up some people from our community service providers and other experts who are going to discuss the art of starting. I’ll ask you for a sixty seconds while we set up the stage. Thank you very much.

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