Almost every developer has an idea
and might want to start a company. Where do you start? Entrepreneurs Paul Buchheit, Joe Kraus, and Seth Priebatsch explained
how to go from hacking on the nights and weekends to building an investor funded startup. We
also discussed how to find co-founders, attract investors, and focus on the key decisions. You
can watch the complete Google
I/O session on YouTube. Here are some highlights.
Should I have a
co-founder? Having strong co-founders join you in transforming your idea into a real
company is critical to success. There is a positive correlation between the number of
co-founders and successful outcomes up to about four co-founders. Beyond four co-founders
there isn’t much data. But having more co-founders on your team definitely improves your
chances of success.
What are important characteristics of a
co-founder? It helps if you have worked together before, know each other well, have
complimentary expertise, and can communicate openly and honestly. Joe Kraus said you should be
able to settle arguments with great answers, not the compromise middle position. What else
should you look for in a co-founder?
Experience starting a
company
Domain experience and an understanding of the
market
Balance and different experience than your
own
Passion about the company vision
How do you get
started? Paul Buchheit knew he wanted to start a company but didn’t know how. So, he decided
to join a startup to get some experience. That startup was Google. Paul learned how startups
grow, and worked with some great people who would later become his co-founders at FriendFeed. Having experience at a
startup earns you credibility with potential co-founders, employees, and investors.
What matters most; team, traction, idea, or market
segment? They all matter, but the people on the team are the number one
consideration. The founding team shapes the product vision and sets the direction for the
company. Potential employees and investors are attracted...or not, by the members of the
founding team. The idea matters, but will probably change significantly over time, so most
investors don’t fixate on the idea. The market segment is important, but only as a gauge of
the range of successful outcomes. Traction from early users or customers makes it much easier
to raise money.
How do you find investors? People
invest in businesses they understand, or people they know. Look for investors that have
started companies in your area, or have invested in similar companies in the past. Talk to
everyone you know about your idea. Joe Kraus, co-founder of Excite, tells the story of how he read
a book about starting companies, called the author, got introduced to other people, who
introduced him to other people, and finally ended up with a $3M investment from Kleiner
Perkins, one of the top VCs in the world.
Should you raise
money from VCs or Angels? The first consideration is who can help you most. You want
more than just money from investors. You want help, advice, introductions to other people who
can help, and maybe access to press. Aside from help, it depends on how much money you need to
raise. Friends and Family is the best place to start to raise small amounts of money. Angel
investors can fund anywhere from $100K to $1M or more. Venture Capitalists (VCs) usually
invest $1M to $3M in a first round Series A investment.
Incubators, Angels, and VCs - Seth Priebatsch, founder of SCVNGR.com did all three in starting his company.
Seth entered a business plan competition at Princeton...and won. He used that to get the
initial product built, and then applied to DreamIT, a startup incubator. That experience at
the incubator allowed him to build and refine the product. Next he raised a small amount of
money from Angels and brought on advisers to help him grow the company. That led to a small
round from VCs. Seth believes the more investors you have, the more help, advice, and
experience you get.
How do you arrive at a valuation for the
company? Joe Kraus says it is an art, not a science. It depends on the stage of the
company, the competition, and how fast the market segment is growing. Most early stage
startups don’t have revenue and don’t have many users so the valuation is typically between
$1M and $3M, and depends on the experience of the founding team, how much progress you have
made on the product, and the relative success of competitors. The best way to determine a fair
valuation is by having several competing investors give you proposals.
Do I need a business plan? No, but you do need a good slide deck that
explains what you want to do, what problem it solves, why it will be successful, and how your
team can execute on the vision. Here is a link to a post that explains how
to pitch your company to investors. A good pitch deck and a product demo are what
most investors are looking for. Business plans might be useful for helping you refine your
ideas and vision, but most investors will never read it.
Are
patents, IP, and trademarks important? Paul Buchheit says in most cases they don’t
matter for early stage startups. Joe Kraus added, patents might be of some value to a
potential acquirer, but probably just as a defense against patent infringement cases. Patents
are very expensive to obtain (legal bills) and they take two to four years, sometimes longer,
to actually get issued. By that time most startups are out of business, acquired, or moving on
to something else. Even if you have a patent, most startups can’t afford to defend them in
court against potential infringers. The legal expense of defending a patent, and time lost
away from your business, make it nearly impossible for a small startup.
Don
Dodge is a Developer Advocate at Google helping developers build new applications on
Google platforms and technologies. Prior to joining Google Don was a startup evangelist at
Microsoft. He is also a veteran of five start-ups including Forte Software, AltaVista,
Napster, Bowstreet, and Groove Networks.
