Team i$ Money
It has been badgered into my head a million times that Time is Money. Indoctrinating me into believing that spending time on anything that doesn’t result in monetary gains is like throwing Money away! That may be true when the path to your goal is clear and the actions required to get there is also crystal clear. But, that is never the case at the very beginnings of a startup. During the early days Time would be abundant. Ideas would morph and mushroom by the minute but everything else would be in short supply, particularly Money. So, the Founder has to temper the urge to move at lightning speed with another equally popular idiom : “Haste makes Waste”.
However, for the Founder to be able to raise the much needed funds, the investors will have to first value the startup. What can a startup with just a Founder and a great idea be valued at? A more apt question could be, what should the Founder initially focus on to make the startup valuable?
Ideas are a dime a dozen
Ideas are a dime a dozen, is the mantra in the Silicon valley. Ask any institutional investor, what is crucial for the valuation and they would say : team’s capabilities. Barring a few exceptions, valuations of most early stage companies will always tilt in favor of team’s quality and passion. The more complete a team that is backing a great idea, the better the valuation. However, building a complete team without the funds is like a chicken and egg problem. Breaking that loop is the challenge!
A team that’s able to execute like a well oiled machine will attract good valuation. Investors seeking to invest in the next disruptive idea believe that the success of a startup is largely based on Edison’s quote that
Genius is 1% inspiration and 99% perspiration
Just having a great sounding idea may tease a good valuation but sustaining it over the life of the company would be really hard without a great Team. Additionally, most investors would be hesitant to invest in a company with only a single Founder even if the idea was great. So, the very first step a Founder has to take, is to build his team of co-founders.
Attracting co-founders
Encouraging others to join you as co-founders is no small feat. It’s even more challenging in the current environment, in Silicon Valley. Companies like Facebook, Google, Uber are offering rich compensations that are unprecedented.
During my time as an entrepreneur, in the 80’s and 90’s, Founders came together to build exciting products by foregoing their lucrative careers and investing in themselves. Today, it is hard for a millennial founder with a great idea to attract co-founders without offering them a package, rich enough to compete in the marketplace.
However, a couple of options do exist for the millennial founders. They could use accelerators like Y Combinator, Plug&Play, and 500 S to take their idea to the next level, making it possible to then attract both co-founders and institutional investors. Yet another option for the millennial Founder, would be to seek out an Angel investor as a co-founder. This option could get you more attractive terms than those offered by the accelerators.
Time also matters
Throwing a lot of money at the get-go behind a great team with an idea , may result in astronomical valuation instantly but would be unsustainable. To create real value, any team would need time and energy to transform the idea into something tangible. It takes a finite amount of time to find the product-market fit. Much like a great cake; besides the ingredients, the quality of the cake will depend on the temperature and time taken to bake it. In other words, value creation couldn’t be sped up to be instantaneous!
There are so many examples of companies that raised huge capital on just great ideas during the dot-com bubble. Many of them were caught in the bust that ensued and didn’t make it all the way through, despite having copious amounts of money.
The one that comes to my mind is Brience Inc, that raised $200 Million right off the bat, after commencing its operations in March 2000. They offered broadband experience on wireless devices for businesses . By September of that year, just 6 months after it had started, the company filed S-1 to raise as much as $100 Million dollars in IPO. However, by March 2001, the company withdrew its application citing unsuitable market conditions . Eventually, Brience went through a couple of acquisitions until it ended up in TSI.
Astronomical valuations will not insulate a startup from adverse market conditions and the necessity to incessantly compete against the continuous evolution of technology.
Hindsight — 20/20?
Nimbus Technology, which I co-founded in 1991 with five friends couldn’t fetch a good initial value because we didn’t have much of a track record. Our combined network of family and friends didn’t have the capacity to financially support our idea. We were all skilled in just one thing, designing very complex systems. That helped us design and manufacture 6 chips and a motherboard in record time; less than a year! However, we just couldn’t operate efficiently as a company because most of our decisions were deadlocked and our votes were almost always split in the middle. Nevertheless, what kept us going was the trust we had developed for each other over the years.
We were committed to each other and never tried to undermine the value of the team. When our Series A financing failed in 1992, we didn’t give up our hopes. Instead, we stuck together by signing up for unemployment while trying to figure out our next steps. In less than six months, Alliance Semiconductor, as part of their broader IPO strategy, acquired Nimbus Technology for its capabilities in designing complex Graphics chips. Six months after the acquisition of Nimbus Technology, Alliance went IPO and subsequently made follow on offerings, two more times
The experience at Nimbus convinced me that in order to achieve operational efficiency in a startup, the number of co-founders had to be relatively small and the co-founders had to possess complimentary skills.
So when we founded Lara Technology in 1997, we were just 3 co-founders and we all had worked at Alliance Semiconductor for over 3 years. Our long association had helped build deep trust and mutual respect for each other. Our skills were complimentary and just as I had predicted, we were able to make quicker and better decisions. Additionally, our combined network of family and friends had the capacity to back our idea. In fact, right after we signed Cisco as our initial customer, we were able to raise over a million dollars in less than a couple of months.
We always feared that at some point one of the founders could get isolated by the other two. Fortunately, that wasn’t the case until Lara Technology was split into two companies by an overzealous board member.
In 2004, a year after founding YuMe Networks and after intense market research, I was ready to bring co-founders on board. Based on my earlier experiences, I decided to add no more than two co-founders . However, after some thought, I decided to bring just one co-founder to oversee the technology development and engineering. He had been a friend of the family for over three decades. But for a fleeting moment’s lapse in clear thinking, I brought his friend also as a co-founder purely based on his recommendation; violating all the lessons I had learned.
Right off the bat, it was clear that their skills were not complimentary and in fact overlapped. Additionally, the combined value of our network of family and friends didn’t quite add up. Almost 80% of the funds raised came from just my network! Violating the rules I had setup for myself led to the point where I was forced out of the company by the other two co-founders.
Rule of Three
Condensing my experiences down to a minimum set of absolute rules:
- Keep the number of co-founders to no more than 3. {Since the value of a startup at its early stage will be largely a reflection of the quality of the team, getting a large group of founders together doesn’t guarantee the best value. Instead, you may end up with a group that will be in a constant state of paralysis. In my opinion, the value drops off significantly after the number of Founders reach 3!}
- Co-founders should possess complimentary skill sets.
- Co-founder’s network (family and friends) should have minimal overlap.
Most important of all, wrap these three rules with a fabric of trust. Remember trust is earned with time and can never be compromised.
Engineering the lessons learned
- Team = function(Rule of Three)
- Team + idea + (some)Time = Money
- Team + idea + (more)Time + (more)Money = Jobs + Wealth
Don’t rush to find your co-founders. It’s great to have a group of co-founders with diverse skills but it’s not essential. If the co-founders are lacking some skills, you can always hire. Instead, look for people with high integrity to be your co-founders who are driven by passion and not by greed .
No doubt that Time is Money but during the early days of a startup,
Team i$ Money.
