Upstart - Empowering The Next Generation of Entrepreneurs

Today the team at Upstart announced what we’ve been up to over the past three months. 

The Upstart mission is inspiring (see Founder/CEO Dave Girouard's blog post here), the team is world-class, and the culture of the company is…well…a ton of fun.  I’m especially thrilled to be joined as a “Backer” by two close friends and trusted colleagues in Boston, Frank Moss and Jim Dougherty.  Their leadership in supporting young people who want to turn their passions into careers as entrepreneurs is exemplary.  I’m also thrilled to be working yet again with the fantastic partners at Kleiner Perkins, NEA and Google Ventures. 

Briefly, Upstart is a new approach to funding and mentorship. Using a crowdfunding model, it allows college grads/would-be entrepreneurs in virtually any field to raise capital in exchange for a small share of their income over a 10-year period.   Upstart aims to provide a modest amount of risk capital, paired with guidance and support from experienced backers, to help grads pursue less-traditional and more-inspiring careers.  

I believe that Upstart has the potential to supercharge the US Innovation Economy - as Dave says "When politicians say we need more entrepreneurs, what they mean is that we need more people creating jobs, rather than taking them." I couldn't agree more - it's time to do the heavy lifting required to create more entrepreneurs so that they can do the heavy lifting required to drive job growth over the next two decades. Upstart believes that one of the key factors in creating more entrepreneurs is early intervention in their career development. Some of the key principles that are driving us include:

●       Innovative and ambitious young people should be empowered to pursue their passions when they are young.  If we don’t empower them when they are young, they risk being numbed by the bureaucracy of the larger organizations that they often join for lack of a viable alternative path as entrepreneurs. It’s not that big companies are bad. It’s just that young people who have a high risk/return profile can quickly lose their edge and passion as they succumb to the broader interests of a large organization vs. pursuing something that they care about deeply.  65% of our job growth over the past 2 decades has come from companies with less than 500 people - over the next 2 decades it's the Millennials/Generation Y that will create those companies and create the bulk of jobs that our country needs so desperately - we need to empower them as much as possible.  It's time to bet on Generation Y.

●        It’s fundamentally valuable for our economy to balance the recruiting machines of large organizations with a social networking-based system that facilitates young people who want to follow more independent, highly individual paths.  This generation just wants to connect with people who could be their mentors in pursuing their interests and passions. Mentors just want to connect with inspiring young people. Upstart makes those connections easy and automatic. 

●        Not every young person has a high risk/return profile, but many more young people will pursue entrepreneurial interests if they have a little bit of  financial flexibility at the right time.  Modest amounts of financial support as young people graduate from school, along with some strong support and encouragement from great mentors, can go a long way.  I know because I've had fantastic support from many great mentors during my career.  

●        Mentorship is just as rewarding for the mentor as for the mentee – if only we can make the right connections. What’s been missing is a system to connect potential mentors and mentees around shared interests and affinities.  I’m a software guy who is interested in the life sciences, so I’m naturally prone to want to mentor smart, young, enthusiastic people who share those interests.  But I’m also passionate about rugby, so anyone who is involved in rugby always gets more of my time than those who don’t ;)  When young people who share my interests ask for my help - I'm compelled to help them - because I get way more back than I give.

●        Most mentors who have the financial resources – when provided with the opportunity to earn a return similar to bonds – would be thrilled to invest their own money in promising young people with similar passions and interests. Upstart matches mentors with the young talent who will power the growth of our economy over the next 20+ years – and does this at scale.  I can't think of a better investment - definitely better than T-Bills.

●        To scale entrepreneurship in the US, we need to scale our ability to empower and coach young people who are capable of taking risks and executing on their passions. I’ve spent a lot of time starting companies from scratch. In my experience, the older and more successful people get, the more they are prone to take for granted the value of a small amount of coaching and financial resources early in the career of a budding entrepreneur.  Small amounts of time and money directed strategically and without friction at scale, can have a huge positive effect on our economy.

●        Most entrepreneurs need help, coaching and advice in order to achieve their missions. Most people are not the kind of superstar entrepreneurs that the media popularizes every day:  Steve Jobs, Bill Gates, and so on.  At the same time, these young people contribute the bulk of the job creation through the number of companies they start and the never ending flow of their ideas, energy, passion. A big part of what Upstart provides to young entrepreneurs is a network that can fill the gaps in their experience, knowledge and contacts so they can reach their full potential.

I’m honored to be partnering with my great friend and trusted colleague Dave Girouard as the Founding BOD Member at Upstart and thrilled to be the #1 Backer. 

Let’s take the “post-industrial reins” off our brightest, ambitious young people and empower them to leverage the Information Economy to change the world for the better.  Our country was founded on a core principle of rugged individualism. Let’s coach our young people to take control of their own careers, professional lives and interests and pursue their passions.  We will benefit as an economy and a society in ways that we can't begin to imagine. 

Steve Blank on Demystifying the Start-Up Culture

In his remarks yesterday at the closing session of the National Governors Association Annual Meeting, author, successful entrepreneur and educator Steve Blank did a great job of articulating in layman’s terms how the start-up ecosystem in Silicon Valley works, why start-ups are different and require specific expertise, and why embracing start-up culture and expertise is so critical.  I believe Steve's work is going to be a primary driver of innovation at scale for our country. It’s BRILLIANT.  

If you care about start-up/founder culture or start-ups, you should watch his talk in its entirety.  

Steve mentions the importance of researchers who focus not only on world-class research going on inside of their respective academic institutions, but also on the application of their research at scale in the public and private sectors.  Some of my favorite role-model researchers in Cambridge include:  

George Church 
Eric Lander
Bob Langer
Marvin Minsky
Mike Stonebraker

These innovators have done not just one or two start-ups each, but many dozens of start-ups. It's this combination of world-class academic research and commercial innovation that creates exponential value in our economy and in society.  

Here is a quick summary of Steve's talk and some highlights that really hit home with me.

A Quick Summary  

Four lessons: 

• Different types of start-ups
• What a start-up ecosystem looks like
• How to make start-ups fail less
• Can we actually teach what we now know?

Types of start-ups: 

• Lifestyle start-up - small businesses that serve known customers with known products and feed the family
• Scalable start-ups – which are designed to grow big (“We’re going to build a company that will take over the universe!”)
• Buyable start-ups – which have low capital requirements and can be very valuable very quickly
• Large companies that focus on “sustaining innovation.” They innovate on core products but cycle time is compressing, creating pressure for large companies to innovate faster

Important Highlights

Referring to the Nokia Board of Directors’ reaction to the iPhone on day of launch – “It's a toy. Why should we worry about this?” – Steve said: “To a big company, a disruptive innovation always looks like a toy on day 1.”

“The secret history of Silicon Valley” [another great video]

“The first venture capital was an unintended consequence of Sputnik”

“We want the engineering department at Stanford to face outward as well as inward”  

“Recognize that 90% of start-ups fail”

“Failure = Experience. We understand that these are the risks”

“Start-up culture is not just about the great entrepreneurs. It's about the ecosystem. Building this ecosystem is critical in getting any cluster off the ground.”

"Start-ups are not just small versions of big companies" - Steve Blank

“Embrace failure as part of the process”

“95% of start-ups fail because they didn't find customers or markets”

“We now know that start-ups search for something and large companies execute...The difference between search and execution are not just words...it's actually the difference in how we build these things”

“On day one, start-ups just have guesses...A start-up is a faith-based enterprise.. You want to turn the faith into facts as quickly as possible”

“What we now know is that no business plan survives first contact with customers”

“A start-up is a temporary organization”

“A start-up is designed to search for something that is repeatable and scalable”

“In the Customer Development Process, everything you know or think you know is a guess"

“In a start-up, it used to be when you failed you fired the VP of Sales, then fired the VP of Marketing, then the CEO.  We know now that start-ups go from failure to failure…Pivot says that this is going to happen all the time.”

And, I love the fact that he was the only dude not in a suit. Now there’s a lesson in itself :)

Vertica - Remembering the Early Days

I had an awesome visit @ Vertica earlier this week for lunch. Cool new space in Cambridge and so many fantastic new people. Thanks to Colin Mahony for the invite and to all the talented engineers and business people at Vertica for building such an amazing product and a great organization!

Couple of memories that came to life for me during my visit:

Reading the draft of Mike Stonebraker's  "One Size Does Not Fit All" paper and thinking:  "This is the mission of an important new company: to prove that One Size Does Not Fit All in Database Systems."

During my first meetings with the "Vertica professors" - Mike, Dave Dewitt, Mitch Cherniack, Stan Zdonick, Sam Madden and Dan Abadi - thinking "We have an unfair intellectual advantage."  The technical hurdle was set early by this fantastic team.

Looking up at the new duct work from our original server room (at our original office), which Carty Castaldi vented into the conference room because the conf room was so cold and the servers were running so hot ;)

Inspired Duct Work by Carty Castaldi

The thrill I felt the first time that I watched SELECT work on the Vertica DB :)<

Our first Purchase Order. Thanks to Emmanuelle Skala and Tom O'Connell for that one and the many more that followed and made it possible to build such a great product :)

At our first company summer picnic at Mike's place on Lake Winnipesaukee: taking Shilpa's husband Nitin Sonawane for a ride on the JetSki and him being thrown 10 feet in the air going over a wave. I thought he'd never talk to me again. So glad that he didn't get hurt and that he talks to me regularly ;) 

Our first big customer deal with Verizon and then the first repeat purchases by V. Thanks to Derek Schoettle and Rob O'Brien for building such a great telco vertical and for doing deals with integrity from Day One.

Sitting in the basement at Zip's house in Chicago with Stan, Zip and Mike as they jammed Bluegrass music and we all ate Chicago-style pizza until the wee hours.   Thanks to Zip and to everyone at Getco for being such a great early customer and partner.

Relief I felt when Sybase admitted that Vertica did not infringe on their IP :)  Thanks to Mike Hughes and everyone else involved for the truly awesome result.

Getting early offers from a bunch of big companies to buy Vertica and thinking "These guys don't realize how important Big Data is going to be and how great our product is and how incredibly talented our engineering team is."  Thank you to our BOD for resisting the early temptation in spite of tough economic conditions at the time and thanks to Chris Lynch for negotiating such a great deal with HP.  

During lunch on Wednesday, realizing that Vertica's product is truly world-class and has proven that one size does not fit all. Special thanks to every engineer at Vertica, especially Chuck B. : you all ROCK!

I have a much more detailed post in the works, about the early days of Vertica and what I as a founder learned from the experience.  Stay tuned for this post in the next few months.

Founders: Are You Stuck Before You Start?

Where Start-ups Get Stuck – and How to Avoid Going There

Between us, my long-time friend (and fellow blogger) Jim McHugh and I have started a lot of companies. We also advise many other companies and look at even more pitches from start-ups.  A shared observation is that while a few start-ups shine (or at least glimmer) and go on to some success, other start-ups seem stuck before they start.  Why?

Here are our observations on where start-up founders get stuck and our advice on how to prevent Stuck situations, presented Q&A style.  

Q.        Jim, where are the most common places you see founders getting stuck – and why?

In my experience, the two most common causes of becoming stuck are 1) an incomplete or muddled business model (see Stuck in the Fog) and 2) directly related to that, not clearly understanding the specific needs of their customers (see Stuck in a Rut).

Jim McHugh
McHugh & Company

What do I mean by an incomplete business model?  A well-defined business model (i.e., the “guts of the business”) states how the company is organized; what products and services it sells to whom; and how the company “goes to market.” In addition, the whole company clearly understands the associated operational policies, processes and needs (both for the supplier and the customer).

Start-up and early-stage teams become obsessed (as they should) with the product/prototype, the team, and the market potential. However, they sometimes fall short in three important areas.  First, they are naive about all aspects of the business model. Second, they don’t understand – or they have chosen to ignore – the specific linkages of their product to their customer’s product. Third, they have not solved or put in place key components of the business model and assume it will be easy to “finish those later.”

The business model can be pretty straightforward if it is a simple B2C or B2B connection – that is, “we make it, you consume it.” The linkages become more difficult to sort out if the start-up’s product becomes embedded in their customer’s product offerings – for example, as a component. 

One striking example I have seen of an incomplete business model was a food ingredient technology company that had considerable success raising seed money from a group of angels. This company had traction:

●       The technically elegant prototype demonstrated product effectiveness and potential significant benefits to consumers

●       The company had received approval from a key regulatory agency

●       The product was going to revolutionize one segment of the food industry

●       There were positive (but limited) real-world test applications

●       The expected market was huge

Then the company’s traction stalled; they became stuck. How could that happen?  

This revolutionary product was not sold directly to end-user consumers. It was an ingredient that became part of other companies’ product formulations. The industrial and consumer target customers who evaluated the start-up’s product realized they would have to change their end-use product specs, add equipment and processes to their production line, and change their quality control testing procedures. They would also have to change their existing descriptive product information and packaging.

For some customers that would mean altering (for the better?) very successful, stable products that were established with consumers. 

Were the customers prepared to take the market and product risk (with a start-up) and incur the costs and aggravation associated with adopting this new technology? Having a great product was a prerequisite for the big food ingredient companies, but it quickly became apparent to the start-up that many other factors influenced the prospective customers’ decision-making process.

Q.        So, what’s your advice for avoiding getting Stuck before you Start?

To be sure, the business model for early-stage companies evolves over time. It gets fine-tuned, even changed.  But fine-tuning is a lot different from having a naive view of the customers’ needs out of the gate.

It’s a cliché, but how many times does “knowing the customer’s needs” have to be said to founders? 

Q.        Any general tips about how to avoid getting stuck?

Yes, it really helps to have the right people on the team who understand and have experience in the industry they are selling into.

Q,        Andy, where are the most common places you see founders getting stuck, and why?

Andy Palmer
Start-Up Specialist 

I see a lot of founders get stuck at the very earliest stages – by being distracted by fundraising.  I’ve said before – over and over again – founders should focus on developing their business first and not worry about fundraising nearly as much as they would probably like.  It’s natural to be nervous when you don’t have any money in the bank.  But it’s a healthy discipline to figure out how you are going to create value for customers who will pay you instead of spending time thinking about how to extract money from venture capitalists or seed investors.  As an angel investor, I’m always looking for people who are mission-driven and focused on their customers, as Jim says, instead of worrying about what potential investors might think.

 Q.        So how can entrepreneurs avoid getting distracted by fundraising? 

Just focus on your business and your customers.  Wake up every morning thinking about how you are going to create value for your customers. Go to sleep at night considering which of your customers you helped that day and how.  Be maniacally focused on your customers’ needs.  It sounds simple – and it is – but executing this when you are starting from scratch – with no product, no credibility, and no people –  is really hard. It requires all your energy and your concentration. 

Q.        Any final tips on how to avoid getting stuck?

Be maniacally focused on your mission, particularly understanding and meeting your customers’ needs. In my experience, the money will follow.

Spend More Time on Your Mission - The Money Will Follow

Time – and how you use it – is the most important consideration for a Founder.  This is one of the most important lessons I’ve learned in my 20 years as an early employee, founder, and CEO of start-ups.

When you’re starting a new company from scratch, time is your most precious resource because it’s so scarce.  Initially all you have is yourself and one or two partners who are preferably (at least in my case) a lot smarter than you.

If you believe, as I do, that your success is determined by how you spend your time, then start by spending it on your mission and the experience of your customers – not on money.  Randy Komisar at Kleiner Perkins likes to talk about “mission-driven” founders and start-ups. I like that phrase a lot.  And I believe that you need to embrace the concept from Day One – by being mission-driven in how you allocate your time.

Spend your time talking to customers, recruits, and partners; not with consultants or financiers – it’s almost a complete waste of your time. 

As money for early-stage companies increasingly becomes a commodity, entrepreneurs’ success will be determined more by their ability to create a great business – and less by their networks and credibility with a small number of professional early-stage investors (who control the purse strings granted to them by a small number of relatively disconnected Limited Partners). 

I’m not saying that early-stage/venture investors don’t add value. Specific people absolutely do add value and are important to the success of many companies. However, early-stage/venture investors shouldn’t be the primary focus of your time – and the good ones don’t want you to focus on them anyway. They want to help you build a great business – to put the priority of your time ahead of their own.  The ability of a venture investor to prioritize the time of the entrepreneur ahead of their own time is a primary test of a great investor.

The best venture investor partners are those who embrace modesty as a primary quality: in other words, they exist to help make the company (and by definition the founders) successful.  In interviews, Peter Barris of New Enterprise Associates has specifically and frequently cited modesty as a primary cultural dynamic at NEA. I've experienced this first hand working with many partners at NEA – especially Harry Weller and Tom Grossi –and I believe it is a key component of NEA's ability to scale successfully. John Lilly at Greylock is another great example of someone who demonstrates this type of modesty – putting the entrepreneur first.

Often, the problem for Founders and venture partners is conflicting objectives relative to their time.  

As a company Founder, your goal is to get the best possible return on the time you spend achieving the mission of your company. For many venture investors, the goal is to meet with as many prospects as possible because their limited partners are essentially paying them to talk to people and gather information that the partners can use to make optimal investment decisions. This behavior is particularly true of younger, less-experienced early-stage investors, who have lots of time to spend.  Some young venture investors may meet with you even when they have no money to invest. Talk about a waste of time – it happens more than anyone would ever admit.  

You may ask:  “But don’t I get value from every meeting with investors?  Even if the meeting doesn’t result in an investment, won’t I get useful free advice?”  

This is a serious dysfunction, especially for first-time Founders. Sure, some of these folks can provide valuable advice, but to be mission-driven, it's much more important to focus on your customers, the people working for you and your business.   

The nature of the venture capital business is that it’s populated by a lot of people with relatively large egos. In my experience, such people are prone to radically over-estimate the value of the time they “invest” in your business. They do get a lot of data from a broad variety of sources – they get paid to meet with lots of companies ;) So if you're looking for a lot of data – great, go out and ask them a ton of questions. But be specific about what you are trying to get out of the interaction instead of just “catching up.” 

The best investors will want to get to decisions quickly and not waste time – yours or theirs.  They recognize that their success as investors will depend on how wisely you spend your time to build a great business in a short period of time.  In my experience, the best investors almost always start their side of the meeting with "How can I help?" not "You should think about...." They arrive prepared, they listen, they help and they give you decisions very quickly.

So, given all the "red flags" I talked about above, how do you find the best prospective investors and avoid wasting your time?

Time-Saving Tips for Dealing with Investors

Before you meet with any investor, try to qualify the person and the firm.   Sometimes this is difficult because of lack of transparency in the venture business.

Fortunately, transparency is steadily improving. Be sure to read the Kauffman Report, which does a great job moving us toward transparency for early-stage investing.  Kudos to the Kauffman team. 

It's somewhat ironic that so many venture investors  (who profess so much faith in capitalism and free markets) have worked so incredibly hard to limit transparency, both at the micro and macro level.   

• Who are the actual top venture firms by return?  
• Who are the partners who have created value for common shareholders vs. those that jump at the chance to dilute common shareholders at every opportunity?

This kind of information has traditionally been hard to find, even by doing primary research within entrepreneurship inner circles.

Here are some other to-do's:

Look up the investors on The Funded.  Get every source of information you possibly can about not only the firm – and the culture of the firm – but also the PERSON who you are taking money from. Relentlessly pursue personal and professional references. 

Before you agree to meet, ask them the following questions:

• How much of your existing fund(s) is still available to invest?
• When are you planning to raise another fund and what is the target size?
• How many investments have you (firm and partner) made in the past month, quarter, year?

Also, ask yourself:  “Who do I trust that has had experiences with the firm/partner?” Try to have candid conversations with those people.  True character in early-stage companies is measured by what people do during the worst of times and the best of times. This is where you see their true values reflected in their actions – you want to know that they will do when it looks most grim or when there is a ton of money on the table. Those who will support the mission of the company in either of those cases are the people you want to work with.  Empirical evidence is always telling.  

If you do meet with investors and they say anything other than “absolutely yes – we want to do this deal ASAP – here is a term sheet or I will have a term sheet to you within X days,” you should interpret their response as essentially a “NO.” 

Great companies are built by people (including investors) who are fiercely mission-driven.  If external financing is required (which is far less often than most entrepreneurs realize) – make sure that your investors believe that great companies are defined by their ability to create value for ALL shareholders through the achievement of the companies' missions – not a quick flip to pump up the value of a particular venture fund.  This is a long-term view that is all too rare among venture capitalists, but a key attribute of the most consistently successful early-stage investors. 

Transparency: It’s About Time

Fortunately, there is a massive culture change brewing in early-stage investing (thanks again to the Kauffman team and many others). The potential of democratized early-stage investing is becoming obvious: combine AngelList with the potential impact of the Jobs Act.  Entrepreneurs are realizing that it’s their time that’s precious (to themselves and their future investors), NOT the time of the investors.  This has always been true among the best companies and the best people at the high end of the start-up market, but it’s now coming downstream.  Hallelujah.

So, spend your time pursuing your mission, developing your idea and creating your technology.  Spend it with potential customers, turning them into real paying satisfied customers.  If you do this well enough, and are smart, disciplined and mission-driven, there will always be capital available for your company.

Finally, if you’re wasting time thinking “But I have a pit in my stomach because I can’t pay my mortgage,” stop. This is how it feels to take risks. It’s painful but it WILL make you stronger as a person (insert Nietzsche cliche). It will make you stronger as a role model for potential employees and customers, who will respect your commitment and sacrifice in the interest of achieving your mission.   And it will make you more attractive to the right kinds of investors, if and when you need them.

Many Small Stock Grants Over Time Should Be the Rule in Start-Ups

An Alternate Approach

In my last post, I wrote about how important it is for founders to take a proactive and decisive approach to crafting their ownership models – to the extent of being a control freak about it.  Getting the correct ownership model in place up front is one of the more important decisions you will make as a founder, and it will guide you through key hiring decisions.  

And it doesn't matter how many or how few employees are involved* – it's still important. Do you grant stock up front to new employees? Or do you delay the grants (either through vesting or follow-on grants) over some period of time?  There are costs and benefits to various approaches, and many different mechanisms for executing any given approach.  Having a great start-up lawyer is key: the best folks I've ever worked with are Mitch Zuklie at Orrick and Marc Dupre at Gunderson.  

"Front-loading" stock options – granting large options up front to key employees – has been a popular approach in the past for many start-ups. But I've come to believe that a better approach is to give smaller stock grants up front (with relatively standard vesting of four years total with one-year cliff, then monthly for the last three years); followed by many small grants over time, at least annually but preferably every six months or so.  

When you grant options in this way, you essentially create a "ladder" of stock vesting that helps ensure that the rate of vesting for any given highly valued employee is going up consistently during that employee's first five to ten years at your company. 

Of course, you can always make exceptions, giving them a large up-front grant. However, I believe that such grants should be the significant exception rather than the rule.  

Here's my rationale.

How It Works and Why

With a laddered approach, you're focusing on the RATE of vesting, not the size of the initial grants, to increase the likelihood of retaining superstars over time.  Key employees who you want to reward and retain for the long haul enjoy an ever-increasing RATE of vesting: the number of options that vest each month or quarter after they pass their cliffs.  This also has the benefit of minimizing the impact of bad hires, who – assuming you are doing your job – will leave the organization before they vest too much and/or will not receive follow-on grants.  

The laddered approach has a powerful psychological impact on the employees. They're getting regular feedback on their performance. They FEEL appreciated on a regular basis and their efforts are recognized by the company through ownership, the most valuable form of compensation in mission-driven startups.  The sacrifices they are making are often “unnatural acts” of saying no to family, friends and personal comfort in the interest of doing “whatever it takes” to make a company successful.  Being recognized with more ownership over time, in my experience, means more to the average start-up employee than most investors can ever appreciate.

Another benefit of this approach is that it can protect you from a common pitfall: inadvertently selecting people who are great negotiators but perhaps not as good at actually doing the work and earning the stock.  For example, sales-oriented people tend to view the negotiation as an end in itself,  while engineers tend to view the work as what determines value and earns rewards.  By appealing to mission-driven people who know that there is more ownership available to those who perform, you'll attract people who are confident and willing to prove themselves and for whom the mission of the company is enough to get them on-board initially.  

Some Downsides

This approach does have some downsides. It can require a lot of administrative support and careful expectation-management so that employees don't expect both frequent grants AND large grants regardless of company and individual performance.  

Another potential downside is that the strike price of options or the purchase price of restricted stock increases over time.  So, the weighted average price for the individual is higher – sometimes dramatically higher during the first five years of a new company’s life cycle.  This can be especially hard if you are allowing your employees to exercise their stock early.  However, I suspect that most companies would be more than willing to compensate for this by granting a larger quantity of stock for the ultra-high performers.  It’s a net-positive-value decision to give top performers a disproportionate amount of stock.  The basis for their retention compensation is that they create more value than other people. Therefore, locking them in with more stock is equivalent to fundamentally increasing the value of the stock.

Ultimately, I believe that this approach actually costs the company less in the end. 

I believe that the practice of large initial stock grants is nothing more than an artifact – and one that doesn’t optimize growth for the company or the investors.   Let’s bury this practice once and for all and use it only as an exception not a rule.

* Except of course for the extreme case where no one gets any ownership other than the founder. If you are looking for examples of those, there are plenty - for example, Kenan Systems and Ab Initio in Boston or Trilogy in Austin.

Beware the "Accidental" Ownership Model

As a Founder, You are the Master of Your Domain

Over the past 20 years, I’ve participated in many start-ups, both bootstrapped and venture-backed.  During that time, I’ve seen many approaches to start-up employee ownership across a broad spectrum of philosophies – from radically low/no employee ownership (beyond the founder/founders) to ultra-high employee ownership (where many or all employees are treated as owners).  At Infinity, we referred to this broad form of ownership as "Citizen Ownership."

I’ve also experienced the best and worst of how ownership can change over time in early- stage companies: from too few people owning too much of a company, all the way to people who contributed little or nothing to the company's success owning a large stake.  In between, of course, is a broad spectrum of ownership, which is where most companies end up.  

I believe that it's very important for founders to (1) consciously and proactively decide up front their aspirational ownership model and (2) plan how to achieve that model using specific corporate and legal mechanisms to execute it.  Don't let your ownership model happen accidentally. This happens - and more often than you would think.

Part of your responsibility as a founder is to protect the interest of early-stage common shareholders from the nature of capitalistic individuals who are not capable of starting companies themselves and/or are just trying to make a $ and don't care about your mission.  If you as a founder aren't looking out for the interest of the common shareholders, it's possible that the people who put in the hard work, sacrifice and commitment to start the company from scratch may be pushed aside by investors or late-comers who desire to capitalize on others' hard work.  

Just to be clear: I’m not advocating that founders be greedy and not share ownership with employees (or investors) who come in at later stages when new skill sets are required.  Quite the opposite: I believe sharing ownership with those who come in later in your company's life-cycle is essential for most entrepreneurs to be successful - I've done this consistently in companies that I've helped start and it has often worked well.  It's critical to embrace the reality that few people are wired like Bill Gates or Steve Jobs and have the skills to lead a company from founding all the way through world domination. 

However, I am advocating that founders be VERY disciplined in ensuring that they protect their own interests and the interests of other early-stage employees, particularly engineers.  If you are successful in your start-up's mission, many people will come along who want to capitalize on your hard work. Sharing your ownership with the right people can create a lot more value as you grow.

So, what's the best ownership model?

Over the past 20 years, I’ve concluded that there is no single ownership model that works broadly across all different types of companies. Founders must match their companies’ ownership models to their management philosophies, as well as their business goals and their expectations for their companies.   

There are as many ways to successfully configure a cap table as there are entrepreneurs. But the end-game configuration that hurts the most is the one where you feel like you've given too much ownership to people who don't deserve or appreciate their ownership in an entity that you started from scratch and that you believed in when no one else did. 

Unfortunately, all too often I see first-time founders accept outmoded or antiquated ownership practices and beliefs that may or may not have worked in another situation/project/company: "In our companies, Founders get X%, Investors get Y%, post-founding employees get Z%."  Often these ownership practices are driven by investors' “models” for how they would like to run their funds: essentially as a series of relatively homogeneous ownership structures that minimize cost and complexity for the fund and help them reduce risk.

I’m not blaming the investors for trying to reduce cost, simplify their businesses and minimize risk.  However, I've observed that often, the most successful companies – those that venture investors strive to fund (call them “The Fundable” ;) ) –  have strong founders who are deliberate in terms of the ownership models that work for them and their new companies. 

The impending Facebook IPO is a strong reminder that founders can and should pursue ownership models that work for them and their companies, regardless of how different it might be from current venture capital ownership dogma.  No matter what investors say, they make all kinds of exceptions to most of their “rules,” all the time.  As a founder, you may or may not have the leverage required to trigger their exceptions. If potential investors say “We never do X,” what they usually mean is “You don’t have enough leverage to make us do X.”

One interesting example of ownership innovation is the “Founder Preferred” model, which has become accepted in Silicon Valley.  Unfortunately, this model has yet to become broadly used in smaller, more provincial markets such as Boston/Cambridge, Seattle and Austin.  It’s hard to believe that such basic practices have not yet been widely adopted, but I hope we will begin to see this happen. 

The recent improvement in the economy has reinvigorated founder confidence, and increasingly founders have the benefit of improved transparency from sources such as “The Funded” and publicly available templates that enable founders to compare deal structures and terms proposed by their potential investors to those of other founders. Let's hope that a successful Facebook IPO will help validate the benefits and integrity of some of these innovative mechanisms that benefit entrepreneurs and thus further encourage even more entrepreneurship/start-ups.  

In my next post, I'll talk about one very important facet of ownership when starting your company: how to optimally structure options grants for early employees.

The Power of Mentoring

Paying Back by Paying It Forward

There are all kinds of reasons to mentor people in business.

It feels good to invest in the next generation. 
You get back more than you give. 
You'd want someone to help your own kids. 

But it’s also good business and it pays forward more than you can ever possibly imagine – especially if you are (or aspire to be) an entrepreneur.

That’s why I’m psyched to be participating in a Fireside Chat on Mentorship at the Greener Ventures Conference at the Tuck School of Business this Saturday, April 14. Joining me will be my long-time friend and colleague Dave Girouard (Dartmouth ’88, Thayer School of Engineering ’89), founder and CEO of Upstart.   Along with a number of other great folks, we will be judging the Greener Ventures Entrepreneurship Contest. We are psyched to be sponsoring the first-ever business plan competition at Dartmouth/Thayer/Tuck and are looking forward to a weekend in Hanover. 

I’ve been blessed over the past 20 years to have a fantastic series of mentors who have all given more to me than I can ever possibly describe or repay. 

In particular, Peter Barris (who I met in 1993 while a second-year student at Tuck) has been both consistent and thoughtful in his advice and support over the past 18+ years. One of the unique aspects of Peter’s advice over the years was that – consistently – he gave me advice that was as objective as possible. Peter was always able to abstract his own interests out from the situation. He gave me feedback and advice on my own professional development, and ideas that were the best for me in the long term – regardless of the short-term benefit or cost to himself.   This ability to focus on my long-term development regardless of short-term interests was more valuable for me than I can describe. 

Also, my friend Frank Moss has been an incredibly powerful influence on my professional development. Through a very critical time in my career, Frank taught me that – no matter what the reward – compromising your personal values in business is never worthwhile and that true leadership in business is not about making money, but rather it is about being mission-driven, building valuable things and helping people. 

I've been working with Dave Girouard on his new company, Upstart, which is focused on empowering young, smart and innovative people who are just beginning their careers and are interested in taking paths other than the traditional or conservative. 

Building a Founders Culture in Cambridge, Mass.

Why It Will Take More than Money

My adopted hometown of Cambridge, Massachusetts, has perhaps the highest density of IQ anywhere in the world and a strong entrepreneurial spirit that helped create many great companies. It’s one of the best places in the US to nourish new Internet, info-tech and biotech companies.

What’s missing is a radically stronger founders culture that will attract and motivates the kind of entrepreneur who will found companies and work to keep them here. Multiple times. Silicon Valley has done a great job at this. Cambridge/Boston has not. I am not the first person to have said this - far from it.

In a recent Innovation Economy column, Scott Kirsner compared the paths of two companies – Brightcove and Facebook – that both got their starts in 2004 in Cambridge but followed clearly different paths to IPO. In analyzing why Boston let Facebook’s founders simply walk away, Spark Capital’s Todd Dagres cited a discomfort with unproven entrepreneurs, among other things.

But if we’re only willing to trust proven entrepreneurs and help them succeed, how will we attract the next wave of company founders?

My friend and trusted colleague Dave Girouard puts it the following way: “In Boston, they want somebody who has done it before. In the Valley, they want someone who could do it next.” Eight years ago, Dave made the decision to go to Google instead of moving back to his home town of Boston. He recently announced that he’s leaving Google to do a new start-up backed by Kleiner Perkins, NEA and Google Ventures – and his new company, Upstart – will be based in San Francisco. :(

It's Time to Lean Into Risk

We need to ensure that we’re starting the kind of companies and attracting the best talent to Boston on a regular basis. Let’s make it easy for potential recruits by leaning into risk and doing whatever it takes to attract the best and brightest entrepreneurial business talent to Cambridge.

There are a few shining examples of how it should work. Probably one of the most notable is the fantastic job that Tim Healy has done in founding and building EnerNOC here in New England.

Tim and his co-founders started EnerNOC from scratch in New England and located in Boston. They did all the unnatural acts required to start a company, took it public, and resisted temptations to sell out. EnerNOC is now an anchor of the energy cluster in Boston.

Money isn’t the problem. Venture capitalists invested $30 Billion in the US in 2011, so there’s plenty of money out there. About $3 Billion of this went to companies in Massachusetts.

If you're an entrepreneur, the question is whether you need to raise money, and on what terms is it worthwhile. Savvy entrepreneurs recognize that venture funding is just another form of capital – and it’s by far the most expensive form of capital. The partners and firms that you choose to work with have to make it worthwhile for you – the entrepreneur – the person with a portfolio of ONE.

Perhaps most importantly, you have to trust that those investors that you select as your partners will support you during the worst and the best of times – because doing start-ups is a guaranteed roller coaster. But as my friend Adelene Perkins at Infinity Pharmaceuticals says: “Things are never as good or as bad as you think they are in early-stage companies.”

Great start-ups and entrepreneurs can always raise money: by definition, they figure out how to get the capital they need to achieve their missions. What’s missing are the right kind of talent and support required to take ideas from their raw state to something that is Fundable regardless of whether they’re raising outside institutional funding or self-funding/bootstrapping.

The right kinds of talent and support will allow entrepreneurs to build companies that will generate huge value for shareholders by achieving an aspirational mission that has a significant positive impact on the world.

Let’s work together to make this happen. What are your ideas?