Keep Working, Worker Bee!

10.26.2005

As I've mentioned before a few times, I attended Paul Graham's Startup School a couple weeks weeks ago. I took lots of notes with the hope of sharing them with you, and then, um, left them in Boston. Mike mailed them to me, though, so I've got them now and I can share them with you. I don't have time to write all of them up at the moment, so this is just part one.

By the way, MP3's of most of the presentations, and those presentations' slides, are available at the Startup School wiki. They're useful.

A general thought: there was a lot of advice given at this event, and a lot of it, I'm realizing now, seems just as relevant to computer science research as it does to starting your own company. Of course the stuff about the venture capital system and finding a way to sell your company for millions might need a little tweaking to apply to research, but I'm surprised by how much of it applies straight across to what I do on a day-to-day basis.





Mike and I biked the mile or so from his apartment to Harvard's Science Center. It was raining like crazy and generally really unpleasant to be outside, but gosh darn it, if you can't handle biking in bad weather you can't handle a startup!

Also the bike I was riding had its seat rusted in place a little too high for me, so biking was that much more of an adventure.

Anyway.

Langley Stein — Co-Founder, TripAdvisor

Stein gave us his six lessons from starting a startup. In his case the particular startup was TripAdvisor.com, a travel-oriented search site, but these lessons apply generally:
  1. Follow your passion
  2. Do it for the right reasons (not money)
  3. Choose your partners carefully
  4. Less is more — raise as little money as you can
  5. Don't be afraid of change
  6. Keep an eye on the exit sign

I didn't realize it at the time, but this was a pretty decent outline for the rest of the day. All of these lessons got repeated throughout the day, so Stein was really giving us the big picture of how all the things we'd learn came together. This talk was where I first got the inklings of two themes: what venture capital is really all about, and how startup companies really make money.

Marc Hedlund — "Entrepreneur in Residence," O'Reilly Media

An "entrepreneur-in-residence" turns out to be someone who sits around thinking about startup companies while drawing a regular paycheck. Anyway: Marc's talk, "Startup Stories," was basically a litany of little parables drawn from the many experiences he's had with startup companies. There are too many of them for me to list them all, but here were a few:
  • Bloglines.com — turns out this whole site was the work of one guy, who recently was paid a huge amount of money for it (some number of millions, I forget exactly how many). Turns out that a single talented programmer who has a good idea can still make big bucks.
  • flickr — you've probably heard of flickr as a photo-sharing service, but they actually started life trying to make computer games for girls. They quickly abandoned that idea and went on to make a chat room. The chat room didn't do so well either, but it had a photo-sharing feature that people liked, so the company just made that into their whole product. Even then, they changed around their profit model a few times before they settled on what they've got now. The moral: be flexible! Your first idea may need some refinement (or outright replacement) before it's good enough.
  • koders — Koders is a search engine for source code. Hedlund pointed out that they had a problem with their business model originally: they'd try to sell ads on their regular site, and then sell customized installations of their search engine to corporate clients. In principle either of these models is fine, but if you're a company you really need to focus on one or the other, since you've only got so many salespeople and so many programmers to make the ideal product for whatever userbase you target. Giving your people two unrelated sales tasks is a recipe for not getting either task done well.

Hedlund concluded with what I think is excellent advice: DON'T START A WEB 2.0 COMPANY! Or more generally, don't chase after the current hot buzzwords. Make your own new hot buzzwords instead, that's a better way to make sure you're on the cutting edge.

Qi Lu — VP of Engineering, Yahoo!

This was the first of two talks by people who might buy you if you're successful enough. It was really mostly about the various Yahoo! subsidiaries that the company bought when they were startups. The technology demos were cool, but since I'm not really interested in making a company that's primarily a web page company and then selling it to Yahoo!, this wasn't super-interesting to me. It is amazing what you can do with some well-placed Javascript and CSS, though.

Hutch Fishman — CFO of cMarket and Veveo

Hutch's talk was all about startup financing and I thought it was fantastic. I knew nothing about venture capital or anything like that, but this talk spelled it out for me pretty well. First of all, one thing you've got to accept is that it turns out that there are lots of companies out there that you could reasonably convince to give you a few million bucks in exchange for partial ownership of your company. Once you've accepted that, the next thing to know is that there's actually quite a bit of structure to these companies, and they give out money in "rounds" that correspond to the various stages your company might be in. Here they are:
  • "seed" funding — this is a very small amount of money, and your goal with this money is to get you set up with a strategy, an intial business plan, and maybe a demo.
  • First round — this round is for developing your intial product, and to buy you time and experience with which to develop your business plan, and to put together a team that's larger than just your initial group of founders.
  • Second round — this is for taking your product to market and filling out your team.
  • Third round — this money is for expanding: building a sales and marketing team, and taking out any significant risk that's left in your business.
  • Fourth/"mezzanine" round — this is for preparing for a "liquidity event" (i.e., getting bought) wherein you, your partners, and mostly all the people who gave you money in these five rounds, make a whole bunch of money.

Venture capital firms think in terms of these rounds, and if you can't accomplish the goal of the round with the money you're given, it'll become much harder to get funding for the next round, and so on. Also, funding at the early rounds tends to be much easier to get, but costs a whole lot more in terms of control and amount you've got to pay back. Your goal, as startup founders, should be to own somewhere between 5 and 10 percent of the company by the time it becomes liquid. That seemed shockingly low to me at first, but remember that five percent of $100 million is a whole lot more than 100% of nothing, so taking a bunch of VC money may well be very much in your interest even though when all's said and done they own more of your work than you do.

He pointed out that these days you really are going for getting bought rather than making an IPO, due mostly to the fact that corporate accounting laws are starting to make running your own company prohibitively risky and expensive. It's cyclical, he said, so at some point the pendulum will swing back and nobody in their right mind will want to sell their company anymore, but at the moment your sole job is to make a company that Google or Microsoft or somebody will want to buy from you.

He also stressed the importance of having enough money in the bank to operate for 12 to 18 months, if not for yourself then to present a solid financial picture to your potential investors and buyers. He also stressed that you should get professional accountants, and you should shell out the big bucks for the very best national firms — since you're trying to get bought, you really want your books to be in order. Deals can and do collapse all the time because the books weren't straight.

Paul Graham

Paul read us this speech about how people get ideas for startups. Paul is a great speaker, though I've got to say some of his fans can get annoying in their zealotry. My favorite part of this talk, and probably the part I'll be repeating over and over again as the situation arises, was his story of the new oven at his mother's house:
The average programmer seems to produce UI designs that are almost willfully bad. I was trying to use the stove at my mother's house a couple weeks ago. It was a new one, and instead of physical knobs it had buttons and an LED display. I tried pressing some buttons I thought would cause it to get hot, and you know what it said? "Err." Not even "Error." "Err." You can't just say "Err" to the user of a stove. You should design the UI so that errors are impossible. And the boneheads who designed this stove even had an example of such a UI to work from: the old one!

I think I've already recounted this story once or twice.

David Cavenaugh — Partner, Wilmer Cutler Pickering Hale and Dorr

This was about intellectual property. I actually happen to gave gotten a really well-done hour-long lecture once in undergrad all about intellectual property, so I knew all of this stuff, but if it's new to you you might want to check it out.




Okay, after that was lunch. The White Sox have just won the World Series as I type this, so I should probably take off and join the revelry for a bit. I'll give you the exciting conclusion of what happened after lunch later on.

1 Comments:

  • another excellent source code search engine, Codase, at http://www.codase.com

    By Anonymous Anonymous, at 01:55  

Post a Comment

<< Home