1 in managing a technology start-up: beware the easy money
By Frans M. Coetzee
Note: This is the first installment in Frans M. Coetzee's series "Here
Be Dragons: Managing a Tech Start-Up," which discusses the perils
and pitfalls of starting up your own tech company. The remainder
of the series will be posted on the IEEE Spectrum Careers site at http://www.spectrum.ieee.org/careers.
The day has dawned
on your revolutionary idea. You and your partners are eager to start
a company to bring your brainchild to market. If you are the chief
executive officer, you will ruthlessly exploit the elephantine maneuvers
of the competition with your hawklike perception, securely backed by
your technical SWAT team. If you are the technological force, you will
have the dream job of chief technology officer, directing development
strategy, solving choice technical problems, and obliterating bureaucratic
stupidities while your handpicked partners address the business side.
There are compensations
to being a start-up executive—but the perks mentioned above are
not among them. Instead, you'll find yourself rushing around at breakneck
speed dealing with crises, while your staff works on the cool strategies
and problems. As a CEO, you'll see every problem that cannot be solved,
no matter how trivial, ultimately landing on your desk. As a CTO, you
will be the organization's consummate middleman, attempting to trap
zephyrs of ideas from both the business and technical sides and then
returning structured instructions, only to see them promptly mishandled.
In this series,
I hope to highlight the basic problems in starting a tech company,
in particular those that set the business and technical sides at each
other's throats. From my own experience as CTO of two start-ups, I
know that the standard entrepreneurial how-to books, even those purportedly
addressing technical ventures, focus mainly on the business side and
fail to address the technical side in more than a cursory way. So in
this series, I'll focus on the technical point of view, looking at
how to work with venture capitalists, and how to understand the relationship
between the CEO and CTO, as well as how to staff your company, do product
planning, and avoid common cultural pitfalls.
TAKE A LOOK at the driving engine of any start-up: money.
More grief results from inadequate technical planning before the
initial financing is secured than from any other factor. The common
mistake is to accept money based solely on a financial business plan,
without a detailed technical development plan. Most business plans
concentrate on potential customers, pricing models, and marketing
projections, with technical development dealt with in a few paragraphs
and budget line items. A true development plan, by contrast, fully
describes the functionality of different product versions, as well
as resources, risks, and timelines.
won't push you to write a technical development plan—they have
neither the time nor staff to vet it in depth, and they prefer to spread
their risk by pushing for more stock up front and by penalizing nonperformance
later on. An accurate development plan, in other words, protects you,
not the VCs.
technical preparation almost always means applying the brakes to the
business partners. You may fear that the competition will get a jump
on you, but if you move precipitously at this point, you will almost
certainly sign away whatever wealth your company may eventually accumulate.
More important, you'll consign yourself to the executive hell of having
to deliver against a business plan without adequate resources or time,
and you'll eventually carry the blame for the company's demise.
are not into risk acceptance; they are into risk avoidance
VCs are not into
risk acceptance; they are into risk avoidance. The less planning you
do, the more risk the VCs can attribute to your venture, and the greater
the stake you'll have to give them to get their cash. From here, problems
only escalate, as the first funding deal you strike will determine
the amount and kind of funding you'll attract in future rounds. VCs
tag companies by capitalization class: once you have raised money in
US $1 million chunks, your chances of getting a $10 million chunk later
shrivel. Know what you need before you start, and make sure you get
it—you seldom raise too much money.
Taking money puts
a value on your company. Taking money carelessly may deliver you a
tax nightmare of overvalued stock and unaffordable options—if
not for you, then for the executives and key employees you later hire.
Always keep foremost in your mind that no money comes without strings
attached. The VCs may impose conditions to show specific technical
development results, thereby limiting your flexibility. They may also
earmark funds for a poor-fitting corporate structure. They may, for
instance, force you to hire sales staff at too early a stage, before
you have any product to sell.
In short, the wrong
first funding can destroy your company. The only way to avoid this
pitfall is to do careful planning with your own independent advisors
and lawyers; do not use the VCs' lawyers, even if this is offered as
REASON to push technical planning at the beginning is that
once operations start, you will have little time to deal with it.
Paradoxically, in start-ups the most capable technical person in
the company—ideally, the CTO—will not be able to focus
extensively on the technical work. Why? Because the company's technical
and strategic vision exists only in the founders' heads, and the
CTO's primary occupation will be to transform this vision into instructions
for the business and technical sides, rather than to execute it.
As CTO, you will find yourself in interminable meetings with sales
staff, explaining the latest product release, and you'll spend many
late nights translating new market research into concrete specs for
the development staff to execute.
The best way to
protect your venture is to plan in detail at least 80 percent of your
core technology before you seek funding or expand the business side.
If possible, construct a prototype. Identify and line up technical
and business partners. If you need resources you can't afford, such
as factory facilities, at least fully plan how they will be utilized.
Document everything. If you don't, unless you are extremely lucky,
you will lose control of the core technical and strategic direction
as the company accelerates.
Sure, this approach
is hard, especially when a VC offers you money supposedly so you can
devote yourself full time to strategic thinking and product development.
But remember that most prototypes and nearly all designs can be developed
with (lots of) sweat equity from a small group of individuals and a
post office box. The fewer people involved, the better; if you can't
find or motivate this core group, you should think twice about your
ability to attract the creative minds you'll need later to build your
ILLUSION that life improves after the first few months and
that once you hire staff, you will return to technical and strategic
work. For a start-up executive, diversions both small and large will
persist. Although the CEO may no longer have to clean bathrooms before
prospective job applicants arrive, he or she will still have to rush
off at a moment's notice to catch a red-eye flight to pacify an angry
customer. The CTO never seems to escape the curse of writing user
documentation the night before a product ships.
As the company grows,
the scope of your activities will only expand. My "eureka" moment came
a year and a half after I'd helped found a company and we were going
through a complicated merger and funding round. After two months of
running around in circles, no one had succeeded in accurately calculating
the terms of the deal—not our investment banker or the accountants,
not the VCs or the two New York City law firms representing us. In
the end, the calculation came from the only person capable of solving
a quadratic equation: me, the dumbfounded CTO. I vividly remember my
last question after presenting the calculation at a meeting: "Is anyone
going to check this?" The answer was, of course, no.