Lessons from an exit
tl;dr: A startup I helped create & worked at for ~5 years from 2010 to 2014 was acquired by a public company. I share some first hand lessons, mainly around 4 things that matter for startups — keeping score, market, team, & product. If you are considering joining a startup or creating one, I hope this is useful.
My role(s)
I joined Sefaira in 2010 as one of the first engineers. I wrote code for 1.5 years. Following that I was a “renaissance rep” & sold our first ~100 customers over 1.5 years. Then, I led our product team for 2 years. When I left, we were ~ 50 employees & had ~400 customers in 30 countries.
While there are many things I learnt & experienced (like being escorted out of the office of one of the the largest architecture firms for being persistent, only to be invited by them back to the same office 2 years later), I want to share the most fundamental lessons I learnt about startups — how to keep score, importance of the market, building the right team, & lastly — the product. I & many of us will be at a startup at some point in future, so here are some things to keep in mind.
The Startup Scorecard
This might seem like an awkward place to start (many people are conditioned to think about the product) but everything you do at a startup is measured by a scorecard that is objective & independent of the actual thing you do as a business or what your product is.
The value of a startup is a proxy for its impact on the world. All estimates of value, whether you are selling prospective candidates, raising money or thinking about an exit will be rationalized based on 3 factors.
Growth
Measured typically by month over month revenue growth (or user growth, absent of substantial revenues — though this is rarer these days) for the trailing 3 to 6 months. No one really cares how fast you grew 2 years ago or 1 year ago.
Revenue
Not “Annualized run rates” but actual trailing 12 month revenue. Many startups try to pitch projected revenue using annualized run rates, but they often end up deluding themselves.
Profitability
If you can continue to operate without need for capital, you are more valuable than if you are not — and you have more options. Controlling your destiny as a business can’t be overstated.
2 out of these 3 should look solid for a startup. If 2 out of these 3 look bad, there is trouble if the financial markets turn. This is why I think a handful of “Unicorns” will diminish in value because their growth will sputter & they are not profitable despite having solid revenue (unlike 2001).
Even public tech companies risk valuation when growth sputters. LinkedIn took a massive haircut because they shut down their effort to build an advertisement business, signaling to the market that their growth prospect looks weak.
Having established how score is kept, startups have 3 things to play with as Marc Andreessen said — market, team, & product (in that order). Many teams over index on the importance of team or product, under indexing on the market. My goal is to change that perception based on my experience. It took me a while to get around to this, even after I had intellectually understood this.
Market
Markets for startups or new products come in 2 shapes — an established market that is underserved by current providers where new technology can shake things up, & a new market that taps a latent need that is tiny but growing rapidly.
When Amazon started, retail & marketplaces had been around for thousands of years — a well established market that Jeff Bezos felt could be served better via the internet. Similarly, when Salesforce started, CRM was an established product category, with many large businesses but cloud gave Marc Benioff a break, just like internet did for Jeff Bezos.
When Facebook started, “social networking” was a tiny market (only a few years old), was seeing ridiculous growth (myspace, friendster, etc were going gangbusters). While the need to “network” was real (sharing / connecting is a human universal encoded in our genes, something that makes our civilization possible), no one had built a real business around connecting people since Bell Telephony.
Sefaira started out with the latter in mind. We believed that performance of buildings (in terms of energy use, daylight, carbon emissions, operating cost) should be an important criteria for design & construction. There were existing software in the space, none of them successful independent businesses, & almost all of them had their first line of code written before I was born.
After we found initial product market fit (it took us a while), we grew quickly. Growing a startup is always challenging, and the levers aren’t obvious. As a startup, your hair is always on fire — the product is broken in many ways, and the team is fighting multiple battles.
At some point, we recognized that sustained growth would come from serving our larger customers better & building products for adjacent markets (e.g. MEP engineers). I think our judgement was right but we should’ve moved much faster than we did. We underestimated the speed at which we could build a 2nd product, especially the cost of abstracting the existing platform (bear in mind, we had abstracted it once already & knew how costly that was but somehow, we underestimated it).
Your potential as a startup is ultimately capped by the market. Choose a market wisely, & keep your eyes on the horizon for signs of trouble — even though its super hard to do at a startup. Once you decide to move, move extremely fast.
Team
This is the 2nd most important part of building a business. Of all skills that are required for a startup, recruiting & ensuring people are productive & focused is the most underrated.
When you are building a team at startup, you need to be able to recruit well. This requires the following
- Identify potential team members
- Communicate & sell the vision
- Foster a culture of focus & impact
- Define goals & organize the team
- Roll up your sleeves & get things done
It took us a few mistakes before we were able to get this right-ish. Mistakes are not uncommon — just look at Twitter where time lost due to internal squabbling has forever limited the upside of Twitter. A company that handled this well was Google — with a clear acknowledgement that Larry Page will lead the business, while Sergey runs X.
However, these mistakes are costly. Losing time as a startup is painful, & we lost time. Large profitable companies can (barely) afford this but a startup simply can’t.
Product
Once you’ve decided on the problem, validated that the pains are real, and have a team to build the product is when the real fun starts (this is never linear, nor is it constant). I don’t think anyone should even come to this point without a working prototype that has been validated by a few customers.
The problem we picked at Sefaira was hard — physics based simulation of buildings within seconds. This was a double edged sword. You can build a solid company if you solve a hard problem (Stripe, SpaceX, Tesla), & it helps you recruit engineers who want to solve hard problems, but on the flip side — hard problems are usually much harder than you can imagine.
On the contrary, the problem that Facebook started out by solving wasn’t hard. In fact, Mark had it up and running very quickly. Many founders are mistaken that true value can be built only by solving hard problems. Frankly, that’s not correct.
Many founders also wrongly believe that solving hard problems protects them against competition. While difficulty of a problem builds a moat for your business, its not the only moat. The strongest moat for a business is distribution of a product, not the difficulty of building a product.
My take on this — find the easiest problems you can solve & optimize for distribution — i.e. as many customers as possible, using the product & getting value. This will allow you to validate the market size as efficiently as possible, & it will ensure that the holy trinity points in the right direction. Once there is head room, & the score look good, focus on more difficult problems in the space.
The Upshot
To summarize, if you’re going to build a company — my advice to you is focus on the smallest meaningful problem you can solve for the largest number of people as quickly as possible. Look for points of evidence along the journey, & let growth / revenue / profitability be the concrete guideposts.
