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One of the most popular questions at the Atlanta Tech Village is if our community is comprised of early twenty-somethings that are fresh out of college. While we do have several of those, our average age is around 30 with plenty of entrepreneurs in their 40s, 50s, and 60s. While there are outlier success stories of entrepreneurs going straight from college to startup CEO, I’m a fan of entrepreneurs-to-be working at a startup for a few years before starting their own company. Personally, I went straight from college to startup CEO and made a ton of mistakes I could have learned on someone else’s dime.

Here are a few lessons learned going into the startup CEO role with no real world experience:

• Culture is King – The tendency coming out of college is to focus on people that can get the job done — not people that meet the core values and get the job done (this is my most important lesson learned).
• Sales is Hard – Even the best products require extensive sales and marketing, which is difficult to appreciate without experiencing it first-hand. Acquiring customers is much harder than expected.
• Everything takes Longer – As an entrepreneur I like to rush things and move quickly. Only, most of the world doesn’t operate that way and everything takes longer than expected — much longer than expected.
• Multiple Iterations Required – Every successful venture I’ve been involved with started out doing something different from what they ultimately ended up doing. Don’t expect the first idea to work.

Going straight from college student to startup CEO is hard. Seeking mentors, peer entrepreneurs, and studying lessons learned will help increase the chance of success.

What else? What are some more thoughts on going from college student to startup CEO?

Recently I was talking to an entrepreneur who was launching a new product and wanted to talk through a few ideas. As we drilled into his product it was clear that there were a number of well-funded competitors already in the market. When I mentioned this, he didn’t seem phased and said that they are “rolling into a crowded market.”

Here are a few thoughts on rolling into a crowded market:

• If it’s a market that’s saturated with legacy technology, the new technology needs to be 10x better (not just twice as good) to get people excited about changing
• If it’s a green field market (customers are buying this technology for the first time), the solution needs to be compelling enough to get them to try it out (the number one enemy is no decision or no action — the status quo)
• The go to market strategy needs to be strong enough to beat the competition, assuming a solid product (better marketing, stronger sales team, differentiated partner program, etc)
• Sufficient resources need to be in place (or low burn) to spend enough time figuring out the market dynamics and a strategy to win
• Pick out a niche that’s winnable yet relevant enough whereby the product can be expanded to a larger market

Startups roll into crowded markets all the time. With a solid product and strategy, crowded markets are still readily won.

What else? What are some more thoughts on rolling into a crowded market?

Every day I get the opportunity to interact with a number of entrepreneurs. Entrepreneurs are great in that they’re always dreaming and seeking the next great idea to improve their business. After hundreds of these conversations, I’ve found one question that continues to be my favorite: what have you learned recently?

• Entrepreneur: We’re working hard to improve our product.
• Me: Great. What have you learned lately?
• Entrepreneur: We’re scaling out our sales team.
• Me: Cool. What are some things you’ve learned lately?
• Entrepreneur: We’re having a hard time finding a great software engineer.
• Me: Finding the right person is hard. What have you learned recently?

Of course, I don’t ask the same question over and over. I do look for ways to both gather ideas personally and share things that have and haven’t worked for me. I enjoy learning from entrepreneurs by asking what they’ve learned lately.

What else? What’s your favorite question to ask entrepreneurs?

Last week I was talking to an entrepreneur that’s in the process of raising money. Naturally, I asked what he planned on doing with the money and got the expected response: hire 10 new team members including software engineers, sales reps, one support rep, and one customer success manager. Awesome, now for the hard question: how many of the positions do you already have candidates lined up and ready to go? Answer: 0.

Here are a few thoughts on building a recruiting pipeline prior to financing:

• Recruiting without a hard and fast start date is harder than normal recruiting, but still the same process (word of mouth, referrals, LinkedIn, social media, recruiters, etc)
• One challenge is expectation setting around timing of when the financing will close and a potential start date, especially if the candidate has multiple offers
• Recruiters can be a good resource and understand the role of fundraising in startups along with nurturing candidates
• When money is raised there’s an expectation to put it work quickly, and hiring is often the largest area of investment

Entrepreneurs would do well to build a recruiting pipeline prior to financing so that they have great candidates lined up that can come on board as quickly as possible.

What else? What are some more thoughts on the idea of recruiting candidates in advance of having the resources to hire them?

After yesterday’s post Sell 20% of the Equity Per Round of Investment, I received a number of good comments about other factors that affect the equity splits between non-investors and investors. Overall, the main idea is that entrepreneurs often sell too much of their company too soon and should plan for multiple rounds of financing. Now, there are a number of things that affect equity percentages in a startup:

• Pro-Rata Participation – Do the existing investors continue to participate pro-rata in subsequent rounds? Almost all investors require the option to continue putting money into a company to keep their ownership percentage in subsequent funding rounds.
• Preferred Stock Preferences – Preferred stock, which is commonly sold to investors, often requires that it get paid back first before anyone else makes money. Sometimes, the preferred stock has a preference on it such that the investor gets a multiple of the money invested and then their percentage ownership of the company (e.g. they get a higher percentage of the financial proceeds, compared to equity ownership, until a certain amount is met).
• Lines of Credit – Many venture banks, like Silicon Valley Bank and Square 1 Bank, ask for warrants in the range of .5% to 1% of the company as part of the loan.
• Stock Option Plans – Typically, a new stock option plan and pool of equity is created after each funding round thereby diluting all shareholders.
• Boards and Advisors – Independent board members and advisors to the startup are often compensated with equity in the range of .1-1% (board members earn more than advisors).

Of course, this doesn’t include the entrepreneurs, team members, and investors that own equity as well. Equity dilution is a normal and standard part of the startup world and it’s important to understand common items that influence it.

What else? What are some other items that can dilute equity in a startup?

Back when we tried to raise venture money for Pardot in late 2009, we reached the term sheet stage with a number of investors. One of the investors that we talked to really wanted to invest $5 million in the company at a $7 million pre-money for a post-money valuation of $12 million. Divide 5 into 12 and you get 42% — the investor wanted to buy 42% of the business as our Series A round. After building a spreadsheet of different scenarios, especially taking into account the growth rate at the time, it was clear that we were better off not raising money and growing organically. Selling 42% of the business with our first round of financing didn’t make sense.

After talking to other entrepreneurs and reading about best practices online, my advice to entrepreneurs is to not sell more than 20% of the business per round, with 25% OK on occasion, if needed. The biggest reason why is that it’s likely there will be more rounds of financing in the future, and each round compounds the dilution to the entrepreneurs. Here’s how four rounds of financing works out selling 20% each time:

• Round 1 – 80% non-investors and 20% investors
• Round 2 – 60% non-investors and 40% investors
• Round 3 – 40% non-investors and 60% investors
• Round 4 – 20% non-investors and 80% investors
• Note: Investor ownership will be slightly reduced by new stock option plans as well as pro-rata non participation

If the amount the investors buy each time increases to 30% or 35%, you can see how little the non-investors have at the end. Now, if the company sells for a billion dollars, everyone is happy. In reality, most exits are for less than $50 million, making it ideal for entrepreneurs to minimize the amount of dilution for each round of funding knowing that most venture-backed startups raise multiple rounds.

What else? What are some more thoughts on the idea that entrepreneurs should sell roughly 20% of the equity per round of investment?