Starting a company can be both exhilarating and terrifying — and the decisions that founders make are often under a microscope. While most start their business with the best intentions, it’s easy to lose track of important details like company culture.
Brad Feld, a co-founder of both TechStars and the Foundry Group, has seen his share of startups rise and fall and rise. Before Foundry, he also co-founded Mobius Venture Capital and, before that, founded Intensity Ventures. He is also co-author of the book Startup Opportunities: Know When to Quit Your Day Job, which had its second edition released last month. Street Fight caught up with Feld over Skype a couple of months ago to talk about some of the trickier maneuvers in starting a company, and what makes a team more likely to succeed.
(The is is part two of a two-part interview. Click here to access the first section.)
When you’re in the first stages of a startup, you often don’t know if it’s going anywhere or if you’re going to get any investment — it’s all a wing and a prayer. In that situation, when you’re just trying to get a few customers in the door and get some momentum, how do you even start to think about culture?
Well, if you spend all your time on you know defining your cultural norms and none of your time on your business, you will fail. If you spend none of your time on [cultural norms], then you’re setting yourself up for some pain down the road.
So I think it’s about putting the right kind of energy into it. An example would be every start-up founding team — even if it’s just the founders — I believe should do at least on a monthly basis an off-site for a half a day where they talk about the business rather than about tactically what’s going on.
Every CEO should spend a meaningful chunk of time working on the business rather than in the business. When it’s just two of you and you have no customers and you have no financing and you’re just working on the first product, of course, you’re going to work in the business most of the time. But you need to spend a little time working on the business. And by the way, the time that you spend working on the business will make the time that you spend working in the business much more satisfying and productive because you have somewhat of a longer-term view of what you’re doing. By the way, there’s no magic balance and there’s no easy way to segment. You just have to recognize that part of creating a company is more than just that sort of heads-down, I’ve got to get these things done.
You talk about working on the business — as opposed to in the business. I assume you mean on sort of long-term strategy versus short-term execution, right?
In terms of long-term strategy value, thinking about you know who you want to add to the team, putting effort into thinking about what the business will look like down the road; thinking about product for more than the next release; spending time thinking about as you get to different stages in the business, what your long-term partnering and financing strategy should be; things like internally facing cultural norms — when you hit a year, now you have 15 employees but you have no HR processes.
My guess is you probably have three to five people that are not being very effective in your company when you have 15 employees. What are you going to do? You’re going to ignore it and have three to five people who are not very effective? Or you can fire them and have 10 people that are now very uncomfortable that one day you might just randomly fire them because they don’t have any idea what they have to do.
That’s working on the company — thinking about “now that we’re 15 people, what do we need to do?” By the way, for founders it’s also looking inward, working on yourself.
As an investor, from the other side, how do you identify like what’s real and what’s not in an opportunity?
I think that an investor’s goal should be to invest in companies that she thinks could be huge successes one day — and what you have to realize as an investor is that many of the things you invest in are not going to turn into huge successes. So a number of the companies you invest in are going to fail and your goal though should be on the day you make the investment that you believe that the company could be a huge company someday.
That’s different than picking the winners. You can’t —especially if you’re an early stage investor. Anybody who says they can pick the winners, they’re lying to you.
Is it knowing kind of the size of the market that the company could hit, or is it a more mysterious sort of metric?
Some of the best companies you couldn’t define their market size on day one. Nobody has any idea what their market sizes are. Others a lot of times you think the market size is X and it’s either an order of magnitude bigger or smaller. So ultimately there’s lots of different strategies that you can have as an investor when you’re investing in what you’re looking for. And separating at the earliest stages from later when the business is actually a business and there’s revenue and there’s product and you can sort of see what that business you know the economics of that business look like and aspirational goals and the execution abilities of the team looks like but at the very early stages there’s some practical things as an investor you can do.
And you’re going to make assumptions about both the people and the product, but for me, I have a set of filters that allow me to say no to almost everything in 60 seconds — including themes that we invest in. So if it’s outside our theme; if you’ve raised more than 5 million dollars, if you’re not in the U.S., we just say no. You could be the most amazing entrepreneur ever in the history of entrepreneurs and we’re not a good fit.
Once the company gets through that filter, then I focus on three things. Do I have an affinity for the product? And the reason for that is because I’ve invested in so much stuff that I don’t care about that I don’t want to do it anymore. I only want to be involved in companies where I care about the product. Are the founders obsessed about the product they’re building? Is this the reason they were put on planet Earth? And number three, do they want us to be investors as much as we want to be investors?
How do you figure out how much money (or other support) a company needs? Is it the story that they tell and you know how many people they think they need — or is it just a rough estimate based on the opportunity?
There’s a lot of heuristics from experience over time. The more an investor does this, the more sense you have of how much a company needs, recognizing that the company raises multiple rounds of financing typically. So my view for a founder, for a founding team is they should raise the least amount of money that gets them to the next level and they get to define what the next level is and what the amount of money they need to get to that level is.
And the reason they should be raising the least amount of money is because (a) it’s easier but also it’s less dilution. If they raise less money, they’ll sell less of the company and if they make it to the next level, then when they raise more money, they’ll raise at a much higher price, they’ll give up less of the company. Now, they could be wrong about that, so having an investor who’s going to support them over multiple rounds of financing — let’s say that you thought you needed X to get to the next level and with X you got halfway there, and your investor says, “Sorry, you didn’t get to the next level, I’m done.” That’s not so good.
If the investor says, “You know what, your premise is still good, I still believe in the product, I really like working with you all, you’re obsessed about what you’re doing, here’s some more money. We just mis-estimated, we mis-sized it.” — that’s a better dynamic from the entrepreneur’s perspective.
David Hirschman is co-founder and CEO of Street Fight. This interview has been edited for length and clarity.