How to Start a Startup — W05

Raising Money. Company Culture

Here are a few takeaways from Stanford/Y Combinator CS183b — How to Start a Startup — Week 5 lectures.

Lecture 9 — How to Raise Money Ron Conway, Founder, SV Angel. Marc Andreessen, Founder, Andreessen Horowitz and Founder, Netscape.
Parker Conrad, Founder, Zenefits

Lecture 10 — Company Culture and Building a Team, Part I Alfred Lin, Former COO, Zappos and Partner, Sequoia Capital. Brian Chesky, Founder, Airbnb

How to Raise Money

Venture Capital Business

The venture capital business is 100% a game of extreme outliers.

Out of 4000 venture fundable companies a year that want to raise venture capital.

• About 200 will get funded by what is considered a top tier VC.
• About 15 will someday get to a 100 million dollars in revenue.
• And those 15 for that year will generate close to 97% of the returns for the entire category of venture capital in that year.
• You are either in one of the 15 or one of the 200 or you are not.

Raising Money

The single biggest point entrepreneurs are missing both on fundraising and how they run their companies is the relationship between risk and cash and then the relationship between risk and spending cash.

Onion Theory of Risk

Make a list of risks

A startup on day 1 has every conceivable kind of risk. When starting up think of all the risks your company may be facing and make a list.

• Founding team risk — are the founders going to be able to work together?
• Product risk — can you build the product?
• Technical risk — maybe you need a machine learning breakthrough
• Launch risk — will the launch go well?
• Market acceptance risk — will the market accept the product?
• Revenue risk — will the product generate enough revenue?
• Cost of sales risk — can the product sell for enough that it actually pays for the cost of sales?
• Viral growth risk — if you are a consumer product.

Peel away those risks

Now as you get your startup off the ground start attacking those risks. Raise money and use that money to peel away those layers of risk.

• Seed Money — Raise seed money to peel away the first two or three risks, the founding team risk, the product risk etc.
• Series A — Raise the A round to peel away the next level of product risk; or some of the recruiting risk by getting your engineering team and maybe eliminate some customer risk by getting your first 5 customers.

You peel away risks as you go by achieving specific milestones and while hitting those milestones, you make progress both in your business and you justify raising more capital.

Adjust your pitch

The best way to pitch to your investors when raising money is to show proof of your past achievements. If you come in and pitch to someone like us and say you are raising a B round the best way to do that is to say —

• Raised a seed round. Achieved these milestones. Eliminated these risks.
• Raised the A round. Achieved these milestones. Eliminated these risks.
• Now here for raising a B round. Here are my milestones, here are my risks, and by the time I get to raise a C round this is where I want to be.

You calibrate the amount of money you raise and spend it on the risks that you want to mitigate. It is a systematic way to think about how the money gets raised and deployed.

Company Culture and Building a Team

What is Company Culture?

Everyday behaviors and actions of each member of the team in pursuit of your company mission.

“Your beliefs become your thoughts. Your thoughts become your words. Your words become your actions. Your actions become the habits. Your habits become your values. And your values become your destiny.”- Gandhi

Why does culture matter?

Because you can move FASTER

First Principles — It matters because it becomes the first principles you go back to when you make decisions.

Alignment — It becomes a way to align people on values that matter to the company.

Stability — It provides a certain level of stability to fall back on.

Trust — It provides a level of trust.

Exclusion — It also helps you figure out what not to do.

Retention — It allows you to retain the right employees..

Create values that define culture

• As the leader of the company ask yourself what values are most important to you? Of those, what are most important in business?
• Who are the types of people you like working with? And what are their values? From the answers distill together a set of values.
• Think of the people you have hated working with. What values do they have? Maybe the opposite of those should be the values of your company.
• Finally values should support your mission, if they don’t support your mission, you are missing something.
• Values need to be credible and uniquely tied to match your mission.

Zappos’s core values were to deliver wow customer service and being humble. The value identification process at Zappos was a year long exercise; they asked all their employees at the time what core values they identify with and came up with 37 it was finally whittled down to 10.

Airbnb and Culture

Why is there a resistance to culture?

• First no one talks about culture there are tons of articles on building a great product or growth but very few on having a strong culture.
• The second issue is culture is hard to measure and things that are hard to measure are often discounted.
• The third problem is that culture does not pay off in the short term. Culture makes you hire really slowly, makes you deliberate about your decisions that in the near term can slow progress.

Airbnb hires for culture

“I think bringing in your first engineer is like bringing in a DNA chip to the company. If this person, were successful, there were going to be a thousand people just like him or her in that company” — Brian Chesky

• In the beginning Airbnb founders spent time as one big family this shared way of doing things with accountability became the DNA of their company. To build a company that would endure the founders realized that culture needs to be designed with intention.
• Airbnb took 6 months to hire their first engineer after looking at thousands and interviewing hundreds of people because they wanted a value fit. Brian Chesky, the founder interviewed the first 300 employees at Airbnb.
• At Airbnb every single person is encouraged to hire a person better than the previous hire and this constantly raises the bar.
• Airbnb has core values interviewers, these people are separate from position related interviewers and independently interview candidates just for values and cultural fit.

“You want diversity of background, age. You don’t want diversity of values, you want very very homogenous beliefs.” — Brian Chesky

*Photo by: winterofdiscontent