Category Archives: Entrepreneurship

Book review: “Average is over”; about the future of successful people

I tend to read about 1-2 books a month. Largely on my kindle and sometimes audio books. I was referred to Tyler Cowen’s book “Average is over” by a friend who reads more extensively than I do. She wishes that I dont give her unnecessary attention.

It is about $10 on Amazon Kindle. If you want to be the 0.01% of innovators, creators and influencers, then you should read this book.

I have believed in the theory that “normal”, “average” and “balanced” are the worst words in the entrepreneur’s dictionary. Things like “best practices” suck. If something is a best practice you are getting no value from it at all, since someone who found out about it in the first place got the most value from it.

The basic premise of this book is that the next generation of technologies, innovations and breakthroughs in the next decade will not result in economic gains for the “average” folks.

Instead the folks who are extremely driven, intelligent and motivated are the only ones who will make it big.

The rest will see their quality of life improve marginally, but will have to find other means to feel “good” about the contributions they make.

I would recommend you read this book (or skim it) if you have an interest in economic activity and the history of innovation.

Individually proficient, Collectively efficient; why your first hire matters

The first employee outside your founding team is like a founder, but not quite. Many times you luck out and get a great person who steps up to be a founder emeritus, but you will most likely get a very good employee.

From my observation of the 72+ companies I have personally observed at Microsoft Ventures Accelerator over the last 3 years, if you hire your first employee outside your known “network”, it is very likely you will not succeed as a company.

There is a direct correlation between the first hire and the caliber of people your startup attracts.

Let me say that again differently. The first person that joins your startup as an employee, sets the tone for the entire set of next 5-10 people and then the next 11-50 and finally the rest of the people.

I developed a system to figure this out, which I use as a benchmark to evaluate companies who get accepted to our accelerator program – I usually ask to speak to the first hire in most cases, rather than the founders alone.

Many times, founders dont have a first hire. I ask them to name the first person they’d hire if they were to hire in a week and I ask to speak to them.

Why does the first hire matter the most?

Simply because they will be the manifestation of the “company culture”. It is a test, of whether the founders have given enough thought to what kind of company they want to build.

Based on my interview with the first founders over the years, I have developed a pithy – Individually proficient, collectively efficient.

In most large companies, the “team” looks really good because 1 or maybe 2 people carry most of the load and the rest are “bit players”, who come in for cameo roles, but are largely coasting. A large company has the ability to scale since there are so many people, so even in an organization of 1000 people, 10 people’s (1%) collective work is a lot of momentum.

To compete as a startup, you will need to build that momentum, but with fewer than 10 people. Which means, your 10 people are competing against the larger company’s 100’s. In most cases you really are competing with the larger company’s 10 people, but lets say for the sake of argument, you have to compete with a larger team at a large company.

The 10 people you have to go to battle with have to be wedded to your vision and view of the world. The only way that happens is via constant communication and reinforcement.

Which comes back to the first employee. The first employee is the reinforcement of your culture and you need to not only make sure that your first employee is competent and a superstar contributor but also makes your team collectively rise up the scale.

Why is it so difficult to raise money for tech startups outside the valley? And how to fix it

I was in Chicago on Friday for a startup event at 1871. The accelerator and co-working space is the most happening place in that city. Over 100,000 sq. ft. of awesome startup space. Imagine 350+ early stage tech companies, a few investors, small teams from larger F1000 companies, a developer coding academy and great event space all rolled into one.

That’s the future for all cities, which I see increasingly – Denver has Galvanize, Provo, UT has Boom startups and Austin has Capital Factory.

These hubs concentrate the tech startup activity and provide a critical mass of community, local engagement and evangelism for startups. I was super impressed with 1871 and left very excited after the session at Boom startup and Capital Factory as well.

The one consistent theme I have heard from most of the founders is how hard it is for them to raise money in all those locations. Outside of the valley, funding in New York, Utah, Austin, Chicago and Seattle takes twice as long and you dilute twice as much.

On average Silicon valley companies raise about $491K (Angel list data with cross-reference from Crunch base) for their seed round, which takes about 3 months to close. Since most of them raise a convertible note, it is fairly hard to understand seed stage dilution in the Silicon Valley.

Outside of the valley, which was reinforced with entrepreneurs from Chicago and Austin, there’s a real push from angel investors to have “sustainable revenue” and “proven product”. The average company outside the valley (in the US alone, in the top 7 cities – Chicago, Austin, New York, Boston, Seattle, Los Angeles and DC – raised about $230K for the seed round and took about 5 months to close.

From the 11 entrepreneurs who I spoke with in Chicago alone, the average dilution at the seed stage alone was about 15%. In the valley it would be closer to 8-10% would be my guess.

That roughly equates to twice as long and 1/2 as much money and I would bet that it would be that they diluted twice as much as well.

Comparatively, Bangalore companies would take even longer from my experience – 7-8 months, and raise the same amount of money as the average in the US, and dilute in the range of 20% at the seed stage.

Outside the valley, everyone is in the same slow boat, to raise funds, as an entrepreneur.

The angel investors are slow moving, have little motivation to invest at the early stage and have a very high bar for “funding”. It is not unusual to expect to have serious, sustainable revenue from startups before angel investors fund the company.

It is no wonder that most entrepreneurs outside the valley think they are the ones with bad luck.

This is the same in other cities such as Philadelphia as well.

Funding, one of the critical parts of the ecosystem is underdeveloped and very difficult for early stage startups, outside the valley.

Just to be clear, it is hard to get funded, in the valley as well.

If you are from one of the “it” companies, like Google or Facebook and have built a network of colleagues who you have worked with, who again, because they are in those companies, have done well, financially, and are willing to fund your seed round, then things are relatively smooth.

Else it is a pain.

On the flip-side, I hear from my angel investors that the ideas are “poorly formed” and have a lot more risk than other “safer” investments they have in place. Also, in many cases the local seed investors prefer to fund “known” businesses and not take a risk with unproven models.

So what’s the solution in other cities?

I suspect there’s no easy answer until you get some “winners” – both startups and investors who make it big and decide to “give back” by investing. Or forward thinkers who decide to “pay it forward”.

Until then, here are a few things that you can do:

1. Build relationships with investors way before you need their help. I would advice future entrepreneurs to build deep relationships with potential investors 2-3 years before you start if you can. Meet them at events, volunteer for their projects and show / prove to them that you can deliver.

2. Start with a kickstarter campaign. This may not be a perfect option for many types of projects, but you will be surprised with the diversity of crowd-funding models and types of companies that get funded.

3. Help organize local “angel list syndicates”. Get a bunch of folks who invest in the stock market to help them diversify into startups – this is a role that angel groups tend to do but they do a largely poor job of it.

4. Organize entrepreneur-driven funding showcases and invite (beg, cajole and excite) investors from Silicon Valley, who have possibly connections to your city to come.

5. Get local large companies (the F1000 in your city) to kickstart a pooled fund model, with some initial funds annually. The budget for this could come from their innovation funds. Find a way to help solve that companies problems with local startups.

How #investors judge #entrepreneurs. Yes it happens all the time.

Over the last 2 weeks I had the chance to do what I like best. Meet and learn from entrepreneurs at the earliest of early stages. Hear about their ideas, learn about their problems and find interesting new ways they are tackling problems of funding, building products, hiring and managing teams and getting users and customers.

Similar to the Mazlov’s hierarchy of needs I have formed a mental model of entrepreneurs and their categories or types based on what they think they “need” from me. Most of them have an ask – connections, funding, advice or referrals. Which is expected, after all I am asking the question with an intent to help.

The hierarchy of needs are fairly similar to most entrepreneurs but the most self assured ones behave differently and ask different questions. They seeks perspectives on the problems they are facing and guidance on their choices.

The rest seek funding.

If your answer to the question “How can I help?” is ” all I need is money”, then you have lost the plot. I think most investors wIll judge you right there and drop you down 2 or 3 notches on their scale. That’s tough to hear but that’s the truth.

If your answer to that question is “I need to get connected to x customer, or y potential employee or a person for a partnership”, you will be viewed as a tactician. Nothing wrong with that, but hey just like entrepreneurs judge  investors, they do the same.

If your answer is “We are facing these challenges  and would love your take on how you’d solve the problem, you will be viewed as a smart, talented and open-minded entrepreneur.

If you answer the question with “I want to start a company but I don’t have a good idea yet”, then you will be judged as a wannabe. Someone that always fantasizes about entrepreneurship but never does anything about it.

How to get on an venture investors “radar, then their “shortlist” and finally on the “spotlight”

If you are looking to raise your post seed round or series A, I would highly recommend you find a way for venture investors to seek you than you seek them. The process is much quicker and you get better terms. How do you do that?

First you have to understand how the venture process works – like most other processes, they go through stages. For the purposes of our discussion, I am going to define the process into 3 steps.

Venture investors have associates or principals, who are smart young folks whose job it is to do due diligence, source new deals and keep their eyes and ears on the ground to new opportunities. Many folks malign them, but they are good folks mostly and have their heart in the right place for most parts.

Many of them are from a Ivy league B school and most likely have been at a management consulting firm after that like Bain or McKinsey. They tend to think very much top down, but I have know a few folks to hustle and pound the pavement as well.

I spoke with 5 associates and principals over the last week to understand their role and the new changes so I thought I’d share some of their thinking to help you.

Venture principals have “categories” of companies on their radar or “spaces”. Given their background in management consulting, that’s to be expected. They think top down – what are the meg-trends, which are the big industries ripe for disruption and which sectors are ready for startups to innovate in. This is important to know. They may have a few companies, but many a sector is likely in their radar.

The associates then spend about 2-6 weeks doing a “deep-dive” on that sector – meeting entrepreneurs, talking to companies, reading research reports (not necessarily in that order) and forming an opinion. Most of them will pick a theme or category based on their experience and some level of “comfort”.

Then, they would present their findings to the “partnership” meetings on Monday. If all looks good, (and I am grossly simplifying), they get a “yellow” light to go ahead and source / look at companies. Not a “green light”, mind you, that’s only given if they have already a list of 3-5 companies identified on their “shortlist”.

After the partnership meeting, they will be assigned a “executive sponsor” partner – someone who can make decisions to write a check on behalf of the firm. The associate has to provide a weekly status update to the partner, who in turn will brief the rest of the folks if they find something “hot” to invest in.

With the yellow light, the associates then tap into their “network” to get proprietary deal flow – usually folks they went to college with, or folks they met at some conference or others they read about on blogs like Geekwire, TechCrunch, etc. In the last 2 years, many folks are also sourcing from angelList or other platforms.

That’s the opportunity for you. Meet with the associates and principals, because not many folks take them seriously. They cant write checks, so most folks ignore them. They are the most crucial part of the equation to get on the “shortlist of companies” within the radar. Typically 7-10 of the 30-50 companies the associates meet will make the “shortlist”.

The best way to make the shortlist is to get you other startup friends and CEO’s to recommend what you are doing to the investors.

The next step is the “spotlight” – the executive champion and your associate will usually meet the 7-10 companies for 2-3 meetings and finally pick 1-2 to bring to the entire partnership.

The process I explained above works “most of the time”. It may happen that the entire process is completed in days as well. I had a chance to speak to 3 partners at venture firms as well, and they attributed about 40% of the deals to this part of the process. The rest were the partner’s networks and recommendations from invested company CEO’s legal partners, etc.

The rise and rise of coding schools – a tale of #entrepreneur opportunity

Over the last 5 years, nearly 100 coding schools – both offline and online have sprung up in various locations around the world. Most of the students that attend coding schools are from one of 3 backgrounds:

1. They have been involved with technology – as a marketing manager or a designer or a customer service rep, and see the opportunities in their company and others to get a higher paying job by doing development

2. They are from a completely different career – pizza delivery, real estate, stay-at-home-mom, and want to get into coding and technology.

3. School students with majors outside computer science who realize that the jobs in their field of study are no longer paying well and are moving to studying coding.

A typical coding school in the US charges about $8000 (average) and promises 16-20 weeks of intense bootcamp style practice and work to get you placed at a job in a company that needs “junior developers”. Starting salaries are usually $50K to about $75K.

Who are the ideal companies that hire these hacker school graduates?

It used to be startups were the prime target, but increasingly folks like Facebook and larger companies as well who are looking for junior developers are making up a good part of the hiring – 30% vs. smaller startups – 50% and rest go to non technology companies requiring developers.

Right now we are in one of the biggest booms of technology startups so coding schools are able to guarantee 80% placements or above. When the tide turns (which I cannot predict) then I suspect that the winner-take-all approach returns, which means coding schools will take in fewer candidates since the demand for developers will become lesser.

The coding schools themselves are a great case study in entrepreneurs solving entrepreneurs problems. Which is the microcosm of an industry with its own “microclimate”.

The first few coding schools started to solve the “hiring” problem of many startups who were unable to hire good talent and were instead competing with the larger companies to hire the best. Then folks like General Assembly, Coding Dojo and others started. At about the same time, folks like Udemy, Code Academy also did to help new entrants to learn how to code.

Unlike offline schools, the online academy’s were seeing a significant drop-off in students – most folks were just not completing their courses (90% drop offs were typical).

Now, however having been to 10 coworking spaces which all have a coding school attached to them, I can see the natural fit for these spaces to want a school in their facility.

Over the last 5 years, the number of graduates from coding schools has gone from 500 per year to over 20,000 annually. As far as I can see the demand for developers will not slow down for the next 5 years. Even if there is a slow down in the startups hiring coders, the larger companies will pick up the experienced coders from failed startups, and that means new (maybe fewer) startups will end up having to hire from a hacker school.

So what type of a person actually is a good “coding school candidate”?

I think the only thing coding schools are looking for are motivated individuals who have some sort of inclination towards programming. That’s it.

Everything else is secondary.

In attending a coding school last week and speaking to the students, I found that most were excited about learning the trade, but were solely focused on getting a job, not necessarily learning programming for passion.

So, that means when the economy for “other areas” picks up I suspect many will go back to a higher paying job which they are passionate about, leaving more room for newer candidates who want to join the programming revolution.

Which is why for the next 5 years as well, I can see a constant growth curve for most coding schools and I suspect they would be a good investment as a franchise or a business if you are so inclined.

What ingredients do you need to run a successful school – a good pool of potential companies “looking to hire local junior developers”, a set of part time developers “who are passionate about teaching the craft of programming” and a large pool of talented candidates from other fields willing to learn programming and raise their salaries from their current jobs.

Kickstarter is the new “beta” customer, “social proof” and “friends and family” round all rolled into 1 for #entrepreneurs

I had a chance to meet an amazing entrepreneur on Tuesday at Utah, Tammy Bowers, who the founder of LionHeart Innovations. They provide a mobile platform to help caregivers of kids with chronic conditions. Think of it like a coordinated platform that everyone who cares for the kids needs to ensure they are all in sync – the mom, the dad, nurse, doctor, nanny, etc.

Their son has a health condition so their startup was born from that experience. Now, after many months of working with health organizations and other care givers, they are ready to launch their mobile app.

A decade ago, options for Tammy would have been to talk to a lot of potential customers, then raise a small “friends and family” round and then look to get some marquee investors / advisors agree to be associated with the company – to provide social proof.

Now there’s indegogo and kickstarter. Tammy put together an early funding campaign on the tool to see there were many other parents who were also interested in the tool to keep their folks in the know. Word of mouth, thanks to the indegogo campaign also got her a lot of press among bloggers, media and news outlets.

For entrepreneurs in smaller cities, getting the attention of Silicon Valley angels or investors is very difficult if not impossible. Many local investors are willing to help, but they lack the ability to validate the problem, the need and hence tend to invest in “things they know very well” or “those things that generate revenues quickly.

Enter crowd funding. If you thought it was for hardware programs alone or for creative ideas, then you need to look at indegogo and other platforms again. 7 of the 10 companies in the accelerator program at Seattle raised money on these platforms. Some of them raised $50K and others more than $350K.

There are 3 things a successful crowdfunding campaign gives you:

1. Customer validation: People (real customers, though largely early adopters) put their money where the mouth is. Not just “likes on facebook”, they commit dollars to your program.

2. Funding: If you can put a little money into your campaign, typically the crowdfunding dollars can help you generate more money to ship your product.

3. Social proof: I would highly recommend you talk to a few “influencers” who can back your campaign on these platforms, but if they dont and still notice it, then the campaign can help you generate some press, which is good social proof if you can get folks to share the press.

I am a huge fan of these programs not just for creative movies, music and hardware “maker” type products, but also for software products that are niche initially.

There are 3 important elements of a successful crowdfunding campaign, which other folks can tell you more about:

1. Create great content assets – video is usually essential.

2. Engage with potential influencers before your campaign so they can back you when the campaign launches.

3. Provide quick and constant updates to your backer so they can help champion and be evangelists for your startup.