Category: Entrepreneurship

Over the last year couple years I’ve helped several startups after they’ve raised a modest seed round and searched for product/market fit. In every case, the entrepreneurs were too optimistic, drove product development hard, and fell well short of their revenue goals. Fundamentally, the mistake is believing that once investors write the check, everything is going to go according to the spreadsheet model. That never happens.

Here are four reasons startups need to stay lean after the seed round:

1. Product Development is Never Finished – Entrepreneurs always cite product development as the main focus for the seed round. Only, with a small seed round, adding one or two engineers seriously increases the burn rate. Product development is never finished, so know that product/market fit comes with having the most fit, not the most features.
2. No Repeatable Sales Process – A handful of unaffiliated customers is far from a repeatable sales process. Building a repeatable sales process is harder, and slower, than expected, so plan accordingly.
3. Plan for 24 Months – Most entrepreneurs burn through whatever capital is raised in 12-16 months, as they’re optimistic and see opportunity. Instead, make the money last 24 months so that there’s more runway to course correct. It’s always easier to ramp up than it is to ramp down.
4. Scrappy at the Core – Creating a resourceful culture starts on day one. Each round of financing creates an internal tension around how much of that scrappiness needs to let up in search of faster growth. Stay scrappy through the seed round.

Startups needs to stay lean even after raising a seed round. Focus on customers and ensure enough runway to hit the key milestones.

What else? What are some more reasons startups need to stay lean after raising a seed round?

Following up with the post New Car, New House, or New Life Concept for Employee Equity Value, the reality is that almost all employee stock options in startups end up being worthless. Why? Well, 99% of tech startups never hit $1 million in revenue in a calendar year such that there’s no value in the business to begin with. Even then, there a number of reasons why startup stock options are usually worthless. Here are four:

1. Few Exits – Compared to the number of startups out there, and even the number that get funded, there are very few exits. Then, if you look at the exits in the Bay Area vs outside the Bay Area, the number drops even more.
2. More Capital Raised than Exit Price – Even when a company is acquired, if it isn’t acquired for a price substantially more than the amount of capital raised, the stock options are worthless. Investors structure their investment to get their money back first before anyone else in the event of a sale that’s less than the amount of money raised.
3. Leave Before Exit – Most stock option plans require the options be exercised (turned into actual equity) within 30 days of the leaving the company. Only, it costs money to exercise the options (the number of options times the strike price) such that most people don’t do it because they’ll be paying money for something that could very well have no value.
4. Down Round – When a startup raises money at a valuation lower than their last valuation it’s known as a down round. When this happens, common stockholders (e.g. employees, advisors, etc.) are often wiped out (diluted to where there’s really no chance of value).

Stock options, in most cases, should be viewed as icing on the cake. The salary compensation, experiences gained, and general journey should be the core value with stock options as a nice addition.

What else? What are some more reasons why stock options are usually worthless?

Last week the topic of employee stock options and grants came up in a conversation. We got to debating the best way to talk through the potential value. I offered up my favorite way to think about them in the context of expectation setting should things go well: new car, new house, new life.

Here’s how the new car, new house, or new life concept for employee equity value looks:

• New Car – $50,000 – Commensurate with the position and time of joining the startup, a quality exit might result in the stock options being able to pay for a nice car (e.g. owning .15% of a $50M exit and then paying the corresponding taxes).
• New House – $500,000 – A bigger exit, or larger ownership position, might result in being able to buy a nice house (e.g. owning 1.5% of a $50M exit and then paying the corresponding taxes).
• New Life – $5,000,000 – A massive exit, or large ownership position, could be completely life changing and provide financial freedom forever (e.g. owning 1.5% of a $500M exit and then paying the corresponding taxes).

The next time you’re setting expectations about the potential value of employee equity, consider the new car, new house, and new life concept.

What else? What are some more thoughts on the new car, new house, new life idea for thinking about potential employee equity value?

Josh Pigford has an excellent post up titled Getting Out of the Startup Rat Race where he talks about the pressure and grind of trying to build a hyper growth SaaS startup. After spending three years comparing himself, and his startup, to the high flyers we read about, he realized that it’s not all about being the next billion dollar thing. Rather, there are many other ways to define success.

The highlights from the post:

• Our revenue was definitely growing month over month, but my eternal optimism believed that it’d magically start really growing in “just a few months”.
• We were treating our company like we were in some race for time. But there is no race. There isn’t another runner we could lose to and we can’t “come in first”.
• Do not obsessively think about your startup “every single moment of the day”.
• Because doing things your own way, on your own terms, is where you’ll find fulfillment. And really, that’s what we’re all after.

There is a real rat race element to the startup world and entrepreneurs would do well to step back and objectively think through what’s important to them.

What else? What are some more thoughts on the startup rat race?

At some point during the startup process the shine of a new venture starts to wear off. Some call it the Trough of Disillusionment and some just call it a normal part of being an entrepreneur. When I hear entrepreneurs talk about what they’re working towards, and the tone of their voice is optimism wrapped in fatigue, I know that they’re feeling the grind.

Here are a few thoughts on settling in for the grind:

• Know that most “overnight successes” take 7-10 years
• Join a peer group like EO or YPO
• Find a few mentors and use a worksheet to guide the conversation
• Pace yourself with a work/life blend

The grind is real. Every entrepreneur goes through it. The key is to recognize it in the moment and stay focused on the mission.

What else? What are some more thoughts on settling in for the grind?