Likes & Launch

Reap the benefits

It’s a great time to be an entrepreneur.

Hungry and foolish? You’ve got advantages like never before.

Relationships used to be hard to establish, build over time and were location advantaged. The people you went to school with or the people you worked with were a huge part of your network. That was great for Harvard and a networked company like McKinsey, but you no longer need to join those ranks to gain access to the exact same people.

Now, it’s easier to connect to ANYBODY IN THE WORLD. I found out I was one degree away from one of the Powerball winners in TN, we’re all so close, even when we’re far. The internet connected the globe, and the social web has brought each individual online. It’s more noisy but for most developed nations, we’ve all joined the web and we aren’t leaving.

Fortunately, entrepreneurs noticed the increased noise from so many people now being present in social networks. They’ve created tools that have given us all greater capacity for relationships than ever before. According to Dunbar, the human brain maxes out at 250 human relationships. Tools like Facebook, LinkedIn and Gmail Contacts allow storage over 1000 and give us just enough information over time to feel connected to thousands of people we’ve met. How many people do you feel are part of your family, personal and professional network? Most likely more than Dunbar imagined.

Financial Capital used to operate under old rules. Only a few people had excessive capital and only a few beyond that could get access to it. Money was granted under strict rules from a small group of people, banks awarded loans and lines of credit but usually only with substantial assets or strict rules based on federal credit scores.

Now it is possible to raise money from a number of sources for very niche reasons. If you want people to fund you based on your future earnings, check out GoFundMe or Upstart. If you are looking for personal loans with smaller fees than what Mastercard or Visa offers you, you can seek loans through Lending Club or Prosper. If you’re interested in small business loans or capital to fund your business, you can check out Funding Circle, CircleUp, Angellist or Gust. If you have a working business and just need capital before you’ll get paid, there is C2FO for that too. If you have a product or idea, you can crowdfund from friends or strangers via Kickstarter. Interested in raising money for a real estate project instead, yes you can find funding for that too. Personal loans, small business loans, projects or property, you can raise money through many platforms today, no bank or credit score required.

Financial capital is still not free, but there are lots of financial tools to find the funding that helps get your future off the ground.

Education is in abundance. Anything you want to learn, anything at all, you can do so today with an internet connection. Rewire your home or learn Chinese, learn to make a film or how to build a website. Education used to be limited, restricted to those who could show up, and very expensive. Today, everything is available to learn online for free.

If you find something that is not currently being taught online for free, you my friend have found a business opportunity! For the most part, it’s all free. Most new education companies charge for content even though it could be found elsewhere at no cost, the difference is that they are selling the better learning experience. A more curated path to education is nice, but isn’t necessary so if you want to learn it, get to it.

Customers are everywhere. There are more people participating online than ever before, that means more than yesterday, the year before or a decade before. Google made a big business on a much smaller number of customers. The good news for google, more people online means more fragmentation. People are finding new places to spend their time. So there are more of them to find but the efforts to find them aren’t as easy.

Mobile to the web, there are participants online and they are ready to engage. As an entrepreneur, you don’t have to worry about the size of your audience, instead you have to look at the cost to acquire their attention. Attention grows with new people online, but don’t think every other online competitor doesn’t see it. The companies that figure out how to provide value to customers that are easy to find will have an advantage.

Experienced talent grown from the new incumbents. Apple, Google, and Facebook are the new tech incumbents. Players like Microsoft, Yahoo, IBM and Cisco still have a big place in the market but they are overshadowed by the new big three. The move to mobile has shaken out for now with Apple and Google in the lead with rights over most mobile phones in the developed world. Those platforms are stable and a great place to build a career if you’re an engineer.

Five years ago you couldn’t find an iOS developer with more than 5 years experience. Those platforms have evolved but aged nicely to allow great talent to become experts. The first iOS developers at Facebook have already vested and are in the market, and may be ready for their third new role now. Small and big companies can attract experienced talent. Stabilization in those platforms over time means that everyone wins in having a big pool to pull from.

No longer are engineers learning on your dime, they likely come from somewhere that could afford that type of risk. They now have experience and an interest in working for you, even if that means cut wages and longer hours. You’re in a good spot to continue to invest in great engineering talent, it may even get less expensive as the talent pool grows.

It’s a good time to be an entrepreneur. It’s a great time to the part of the tech ecosystem. Build the relationships that will earn you the new role that you want. You have access to all of the education that you need. Seek out experienced mentors and pursue the path that leads you to the customers you want to serve. A mature ecosystem will continue to evolve, but there is more room for you to be there to shape it.

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Valuation Equation

A great developer I know started building an app and now has more traction than he expected. He’s trying to figure out how to sustain the development by expanding his team. Cash strapped to pay salaries, he’s considering raising money to continue expansion of the app.

We’ve been going back and forth on how to navigate terms for an early stage fundraise so I thought I’d share some of those ideas here.

Equation to calculate valuation:
1) How much of the business are you willing to give up? Typically 10-20% in a seed round, but can be less if you need less money.
2) How much money do you need to get you through the next 12-18 months? or to prove the next big milestone so you can fundraise for your next round. You may be able to get profitable off of one fundraise, but if not, think ahead for how much money you need to buy you the time you need to prove progress.
3) Valuation is this equation : Valuation = money you need /% you’re willing to give up.
If it’s $75k / 12% = $625,000 valuation, $700,000 post money

If it’s 100k / 10% = $1M valuation, 1.1M post money.

Determining if it’s a fair valuation:

1) Valuations are usually based on the future value of the company after you take this money. So the company may not be worth $700,000 today but with $75k of capital, you’ll be able to get it to that value.

2) How do you determine the value if you don’t have revenue to base the ‘worth’ off of? This is the tricky part. Danny Crichton provides a deep analysis in his “Complete Quantitative Guide To Judging Your Startup” (thanks to Stash for sharing) but even with lots of data, it’s still up to the investor. Serial investors or institutions should have a rough benchmark of traction, potential and growth that they can make an offer on valuation.

Don’t forget the big picture
From my VC & entrepreneurship experience, early stage valuations are more of an art than a science. A few things to remember when doing the fundraising dance:

- You can always raise less money. For example, if you only need $50k to get to your next milestone, take the $50k in January and use that money to build the business. By August you may have great traction, revenue or engagement metrics that place a higher valuation on the company. You may decide to raise $250 - $1M at that point.

If you raised more money earlier, you may have sold equity at a higher cost than you needed to. In this example, if the valuation on your company was $500k in January, if you raised $50k you’d be selling 10% of equity. If you tried to raise $250k in January, you’d be selling 50% of your equity, not a good idea.

- You might not need venture capital now. There are ways to bootstrap, find alternative sources of capital and further prove your idea today. Mark Suster does a great job covering this point here. Many alternatives cost zero equity.

- Think about your future rounds. Fundraising isn’t just about the capital you raise today, it’s potentially a piece of a longer path. The valuation, capital and time that you negotiate for now will impact your next fundraise. If your valuation is too high now, it’ll be more difficult to negotiate a higher valuation down the road. If your burn is too high for the amount you raise, you may not have enough time to grow the business. The early investors you work with may not be willing or able to invest in future rounds. This will impact your strategy for your next raise.

- Keep your cap table clean. If you have a messy foundation, it gets harder with each round to clean it up. Make sure equity is properly allocated, accounted for and setup with vesting schedules to keep team members and advisors properly engaged. Equity may seem cheap early on, but it feels much more expensive once you start selling it to investors. I’ve made this mistake in the past and it’s an expensive one to learn.

- Valuation is set by the person writing the check. You may want a certain price, but it’s only possible if the market is willing to pay it. This is a negotiation, so figure out what the market wants. There are tradeoffs between “easy money” and “smart money” so don’t forget to evaluate what you’re getting in return from the investors.

For answers to many frequently asked questions, Mark Suster has shared a Raising Venture Capital guide here.

Something to share?

I want to hear from you! If you or your team have something to add or challenge, please share in the comments below or on Twitter.

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Maturity Map- Dunbar Stage: 150+ employees

The most common questions I hear from startup founders and team members are, “What are the best practices? What lessons have others learned? What’s coming next?”

The purpose of the Maturity Framework Series is to help startup founders and teams to anticipate what is coming next. This post will specifically look at the Dunbar Stage, when a company grows beyond 150 employees.

Company Stages by Number of Employees

Links to full posts detailing the Early Stage, Momentum Stage, Expansion Stage, Growth Stage, and Scale Stage.

Dunbar Stage: 150+ employees

I’ve intentionally left no limit to the capacity of the next stage, no end state or upper bound. It starts at 150 employees and grows from there. I’ve done this for two reasons. First, the density of the USV portfolio companies hover between 30 – 150 employees, we have the most network knowledge in this company size. Second, there are changes that need to happen at this size of an organization that will continuously be required. I intentionally did not include pre-IPO company requirements here as it has less to do with employee headcount, and more with other factors. If you’re interested in what’s required of a pre-IPO company, you can read more here.

Now, what is the Dunbar number and how will it influence our company structure once we have over 150 employees?

“Dunbar’s number is a suggested cognitive limit to the number of people with whom one can maintain stable social relationships. These are relationships in which an individual knows who each person is and how each person relates to every other person. This number was first proposed in the 1990s by British anthropologist Robin Dunbar, who found a correlation between primate brain size and average social group size.^[7] By using the average human brain size and extrapolating from the results of primates, he proposed that humans can only comfortably maintain 150 stable relationships.^[8] Proponents assert that numbers larger than this generally require more restrictive rules, laws, and enforced norms to maintain a stable, cohesive group.” (Read more on Wikipedia)

The TL:DR version is, our brains can only sustain 150 meaningful relationships at one time. Now, there are many questions as to whether the actual limit is 150, look at Facebook or LinkedIn connections, with some users maintaining 250+ contacts, but when we focus on individuals within an organization, all working together, this number is a typical break point. Fast growing startups may feel this break point between somewhere between 125 and 225, but we’ll use 150.

Before we get into the specifics of the Dunbar stage, let’s take one minute to step back to think about the scale of 150 people. Think about sitting in your living room with 15 people, and let’s say they invite 15 more people. You’re now standing because you don’t have seating for 30. Now the party next door comes over with their 30 people, people are clumping in smaller groups to have a conversation and you’re worried about the line for the bathroom but with 60 people, you can still look around the room and recognize faces. Now imagine the restaurant down the street invites all 75 of their guests to your party. People are elbow to elbow, it’s impossible to hear the person next to you because the noise of the crowd is so loud. You now have 135 people at your house and your 15 best friends just showed up. You let the chaos bubble around and hope that no disagreement occurs. At one point you try to make a toast, but your attempts at quieting the crowd leads nowhere. Time to make room for the new guests soon on their way.

150 people is a large group, that requires a certain physical amount of space to be comfortable, and that doesn’t touch on the social constructs required. As an employee, even if you know everyone’s name still, you can no longer know exactly what everyone is working on, and when. The politics of each team are now local, not team-wide. You have blind-spots. Just like at a party, you can’t see how everyone is interacting at once. That’s okay. That’s the point, to scale with trust and distributed decision-making.

A successful organization requires new structures, policies and organizing principles to build the trust required to function at this size. As a CEO, you need to trust your management to drive their part of the business, take care of their teams, escalate any issues, and provide feedback as a whole. Your organization will be a collection of smaller organizations working together, not just a collection of individuals. It’s a society now, be mindful as to whether you’re building it like a democracy or a dictatorship.

Depending on the business model, early success, and senior leadership, the scales may be working in your business unit’s favor. For example, in an engineering-focused company, the early team might be 50-75% engineers. Resources, headcount, and positioning efforts always favored engineering. As the company grows, the demand for additional engineers may slow, but the demand for sales may grow. At 150, the team may be 50% sales people, 30% engineering. Resources will flow accordingly.

Shifts in team focus are not a good or bad thing, just a shift that should be addressed, acknowledged and not ignored. Folks on those respective teams will see that shift in power and it may ruffle feathers. Ex:

“Why does marketing get more resources now?”

“I want to work on the sales team instead of BD, they have more engineering resources since they’re bringing in revenue.”

The new team structure is not bad, but the change from how ‘things were’ won’t go unnoticed. Address them, communicate and react accordingly. The danger occurs when this information is passed only in back-channels and it creates uncertainty. You will have uncertainty, be open about it in order to align on what is actually uncertain. Like a rumor, if you let it out of your hands, you lose control of the message.

Leadership needs to err on the side of more communication and teams need to build more process. I can hear it now, “Process? Yuck! That’s only for big companies, that’s why I joined a startup, to get away from process.” You will face this, the default for most startup companies is to reject process in favor of innovation. The often overlooked point is that good process enables faster innovation.

Early companies have process, they just don’t label it that way. An engineer may build a prototype on their own, bring it to lunch to get some feedback, and make improvements afterwards. That is a process. There aren’t many parts to it, but it is a process, something that doesn’t sustain over time, or just gets sloppy. Imagine 10 engineers all clamoring for feedback on their prototypes each day at lunch. It’ll get noisy, you’ll need to double the length of lunch. It’s sloppy process.

Scaling a company requires elegant process, the kind that is barely noticeable. If you are a fan of watching Apple Keynotes or engineering talks, you’ll notice the phrases like, “We looked at the landscape of what was out there and decided…”, and “Our team spent a year developing this new product” These individuals are describing their process in it’s elegance. They aren’t saying:

“We had 2 PMs that prioritized this item in Jira for 4 months, we had to get feedback from engineering and senior management to push it forward in Q4. We had input from marketing, customer support, and HR to ensure we weren’t having any conflicts with external events that may delay or change our timeline. Then, we brought the idea back to the team, created sprint cycles for the next 6 weeks, making sure our backlog wasn’t creating roadblocks. Oh, and we also had to kill a lot of other things along the way to make it happen, there were disagreements and back-and forth emails among sales, product and engineering. Our CEO believed in it but actually wanted it 6 months earlier. But hey, here we are now.”

Process can be daunting to setup, as it’s never done. New components will come up that change what you need to do. App store review timelines have changed a number of times, each time it happens, everyone who has a mobile app has to consider the impact to their process. It used to take 24 hours for an app review and now it takes 7 days? Time to make sure you let communications know, so they know the press release will go out a week later. Don’t let the need for flexibility, stop you from putting process into place.

The advantage startups have over other companies is that change is part of the DNA. Building iterative products to serve customers is core to how the team works. Leverage that mindset for process, that it’s iterative, great products make people happy and things easier. Positioning critical process as ‘internal tools’ or ‘business products’ can change the perspective. These are products that serve customers, those customers just happen to be employees of this company. As you did with the company, make sure you’re staffing correctly to enable internal tools teams to successfully deliver.

So how does a company at 150 or 300 evaluate their success? Take a look at three things:

How do decisions get made?
How does positive information flow?
How does negative information flow?

These will help identify some of the largest organizational challenges as you scale. You will iterate on the ‘ideal’ outcome for each of these questions constantly. Build the communication and processes to make it easier to identify challenges and improve over time.

Current state of the organization:

You know what you stand for
Stable, but constantly changing

Things you’re doing for the first time:

Hiring Executive coaches for your leadership team
More management tiers
Expansion in new markets or languages
Reaching or settling into profitability
Building teams that take care of your teams, like a learning and development team
Introducing support roles in Sales or HR that are more focused on execution
Build roles that are deeper, less wide.
Increasing the strength of your finance and security teams.
Thinking about IPO or late stage financing.
Paying market rates for talent, once you’ve evaluated title-fit

What you’ve already solved:

Better knowledge of your company’s ‘core focus’
You know what you’re doing, your title may actually reflect what’s expected
You continue to double down on profit generating parts of your business: engineering, product or sales.
Expectations that team structure will change
Right-sizing titles to fit the teams

If you have something to add to this list, please share in the comments or send me a line on Twitter.

To subscribe to weekly email updates, sign up here.

Footnotes:

*Please note, this outline is based off of trends I’ve seen in venture-backed startups. It very easily could apply to bootstrapped or non-venture funded companies, but not necessarily. In this outline I assume the company has taken funding.

**We’ve invested in a number of companies mentioned in this note. For a full list, visit our Portfolio Page or find opportunities with them through the USV jobs page.

Maturity Map- Scale Stage: 75-150 employees

The most common questions I hear from startup founders and team members are, “What are the best practices? What lessons have others learned? What’s coming next?”

The purpose of the Maturity Framework Series is to help startup founders and teams to anticipate what is coming next. This post will specifically look at the Scale Stage, when a company grows from 75 employees to 150.

Company Stages by Number of Employees

Links to full posts detailing the Early Stage, Momentum Stage, Expansion Stage, and Growth Stage.

Scale Stage: 75 – 150 employees

Getting to 75 employees happened before your brain could process it. This is often the case, you plan to grow slowly and then within a short period of time you add 30 new employees in less than 6 months. Welcome to the scale stage.

Your company is at the point where you know what your mission is, you understand your market and the most important piece is serving more customers faster. Your teams will grow quickly with more experts in the areas you need it. This is no longer a mystery, but it’s growing existing teams to have more manpower.

The skills required of your team are changing, make sure to let the team mature. The shifted demand for experts may mean a number of early employees are leaving. That’s not a reflection that you’re doing something wrong, that’s a natural shift. Some people prefer smaller teams, others want to change the work that they’re doing. Prepare your process to help employees who are exiting, including exit interviews and a standard for equity execution plans. An informal poll of our portfolio companies that less than 5 of your first 20 hires will stay with the company beyond 100 employees.

You will need more leaders, managers and reporting structure. This doesn’t require you to set up a bureaucratic process. It does require providing enough structure that each member of your team can focus on doing their best work, not worrying about who owns what project or where they should take feedback. Imagine it as building a map to a new town. When it’s two houses, it’s easy to find your way, when you have 20 houses, you’ll need an easier way to identify where people are and what they are working on. Since you’re adding employees quickly, that organizational structure will help new hires even faster.

Focus should continue to dictate what gets prioritized. Make sure the senior leadership team you’ve built understands that and doesn’t get lost in defending ‘their turf’. Another risk is making sure leaders are empowered to provide the CEO with honest feedback. No single person in the company will know everything going on, trust, communication and transparency are key.

Current state of the organization:

You’re building out a matrixed organization under your new executives
Meetings: weekly one-on-ones, weekly senior leadership discussions, townhalls
Founders are focused on growth
You’re raising your Series B, C or D
You have analytics in place and a real amount of historical data for comparison
You’re finally making decisions based on data
More management brings up questions around career progression
Your office is likely bursting so a move will happen in this stage
You know the board and are better at utilizing them as a resource
You bring executives into board meetings, less is presented by the CEO
Revisit your mission, vision and values – make sure you stay focused
You’re likely known in your market or a larger business market, you have a reputation now- make sure you know what it is

Things you’re doing for the first time:

Creating more robust reporting structures under new executives
Retitling, especially if early titles were inflated
Increasing communication to give ‘new folks’ the same access as ‘veterans’
Raising your Series B, C or beyond, being mindful not to get too far ahead of your valuation as it may limit future round sizes
Restructuring your team (again) around new management
Increasing your data infrastructure to help departments make decisions
Having policies and protections in place to prevent employee security breaches
Your infrastructure team now has some time to tackle some of the backlog
Negotiating a new option pool to continue to provide equity to those who are close to vesting
If you offer meals, figuring out how to feed 100+ people at scale
Building your sales team to feed the revenue machine
You’ve recently hired a Head of Product or you will in this stage
Tools are up for debate as sales, marketing, product and engineering all want something different
You have recently hired or are hiring a second office manager to keep up
You’re figuring out how to handle equity grants for employees who leave
You may have reached sustainable profitability with enough growth capital to continue, figuring out where to invest becomes crucial

What you’ve already solved:

What the company is solving: stake in the ground
Key OKRs
Testing revenue models
Milestones you’re going to accomplish in the next 6-12 months
Understanding the largest opportunities and the biggest threats in your market

Software you use:

Payroll - ADP or TriNet
Benefits – Private broker
Accounting – Intaact, Netsuite or a third-party accounting firm
Google Apps for email and documents
Dropbox or Box
Google & Flurry Analytics plus MixPanel or Localytics for data
Using Hadoop, Redshift and Tableau for data
You’re starting to build your own data tools
AWS or your own servers
Zendesk or Desk for customer support
Sprout Social or Hootsuite for Social Media
Jira for Product Management
Github for permissions & software sharing
Salesforce CRM for your sales pipelines
Careers 2.0, Indeed and external recruiters to hire outside of your network
Stripe and Dwolla for payments
Skype, BlueJeans, Zoom.us (http://zoom.us/) or Google Hangouts for remote meetings
Hiring Platform: Lever.co, Greenhouse.io or BambooHR.com

Who you need to know:

Catering: ZeroCater, Food2Eat (links) or an in-house Kitchensurfing chef
Recruiting firm for executive hires
Management training coach
Lawyers to review equity documents & update the cap table
Journalists you’ve built relationships with to write-up new features
Skilled friends who may refer top talent to your company
Mobile platform gatekeepers to promote you in their stores
Full time accountant to manage books
409a consulting firm to evaluate equity
Specialists in SEO, SEM, PR, Marketing and Branding

Additional decisions that may start in this stage:

Having multiple offices or remote employees
Offering your product in more than 5 languages
Securing visas for international candidates
Hiring outside or in-house council, for more regulated industries
Negotiating a lease on a new office
Hiring a white hat security firm to run an audit
Opening an office in a different country
Accepting foreign currency or cryptocurrency
Hiring an external CEO candidate

If you have something to add to this list, please share in the comments or send me a line on Twitter.

Next up, the Dunbar Stage, growing a team beyond 150 employees. To subscribe to weekly email updates, sign up here.

Footnotes:

*Please note, this outline is based off of trends I’ve seen in venture-backed startups. It very easily could apply to bootstrapped or non-venture funded companies, but not necessarily. In this outline I assume the company has taken funding.

**We’ve invested in a number of companies mentioned in this note. For a full list, visit our Portfolio Page or find opportunities with them through the USV jobs page.

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