Advice to a Startup CEO
I recently passed along some advice to a first-time CEO who is contemplating his first raise of outside capital in the not too distant future. He's built an incredible business on his own over the past 5 years, and is dealing with primarily Tier 1 venture firms. With specifics to his situation and company removed, herein is the context of what I sent. Just my $0.02 - as I told him - take it for what it is worth. If you find them helpful, let me know.
Here are the points, some strategic and some tactical, and not necessarily in order of importance:
1) Create several financial models and options. While your potential investors are talking about investments of anywhere from $10-$25M, it's important that you give yourself options and have a very clear view on how you'll use the proceeds. Additionally, give yourself the option of not raising any outside capital at all. While the revenue growth curves attached to the different capital raise models may differ greatly, having a "no outside capital" plan gives you confidence and leverage as you go through the process - leverage you'll want when it comes time to talk terms. And being clear on your use of proceeds (in a measured manner) is a nice check and balance to the push you'll get to "go go go" for growth.
2) Nail the financials and legal. Nothing can derail a successful venture investment faster than a screwy set of books or legal structure. In my last company, we gave an above-market option grant to a CFO we trusted implicitly (I'd known him for 10 years, and his track record as a banker and VC was impeccable) - and I never had to worry about our financials (or our cap structure either, for that matter) again. Having absolute trust in your CFO frees you up as CEO to focus on growing the business, and you know when you walk into that board meeting that your numbers are accurate and well-thought out. A good CFO will also work well (and proactively) with your investors, saving you time and letting you focus on strategic dialogue with this group and your Board. On the legal front, once you take in outside capital, you become a shareholder like everyone else - and your law firm's obligation is to the company, not to you. See point #7 below.
3) Build the team. Focus on key management team hires and assume you're going to make a few mistakes. A great hire can have a big impact on a company, but a wrong one can have an even bigger impact. Carefully craft the metrics your management team members are responsible for, and address performance issues asap. As the Chairman of my first company told me - "The common elements I see in first time CEO's: a) they don't hire fast enough, b) they don't fire fast enough, and c) they don't manage their board and investors well." Board members can also help provide an objective view on a senior management player if need be.
4) Craft a marketing plan. Given the market you are playing in (customers are enterprises), PR can be an important catalyst to help you appear "bigger than you are." I am NOT a fan of big marketing plans or budgets, but a well-crafted PR strategy and a good web site can go a long way. I utilized an outside contractor in my last company - paid her $5-6K a month for 5-7 days a month - and got phenomenal output and focus (happy to send you her name - she's fantastic). A good professional in this area will help you craft a PR strategy that identifies your audiences (customers, employees, investors, analysts, etc.) and creates 3 messages for each, then works to get these noticed by the appropriate media and analyst outlets. I've used both big firms and independent contractors, and it would take a miracle for me to go back to using a large firm in a startup environment again.
5) Nail down your sales process. This includes the tactical - what the stages are for qualifying and closing deals - as well as the strategic - who do you sell to, why do they buy, what are the decision criteria, what are your strengths against the competition, etc. If you are selling something relatively new to your buyers (may not be the case in your situation), you may have to "teach them how to buy" your products/services. In any case, definition around these concepts will greatly improve not only common understanding among the management team, but also do wonders for consistency and reporting as you start to keep investors posted on your progress.
6) Build a Board. Your new investors will likely take 1-2 board seats. I'd stronly suggest you bring 1-2 non-investor board members onto the team prior to financing. If you are already in discussions with a potential investor, you should co-opt them in this process. If not, go ahead and build your Board. I'd focus on people who a) you can trust, b) have a track record and understand the space(s) you are playing in, c) can bring ideas on talent, financing and growth (sales, product, etc.), and d) understand the venture and growth financing landscape. In my last company, I had 2 board members who had "been there done that" several times and were incredibly valuable to me - we probably talked at least every other week - and were a great catalyst and compliment to our venture investors. As a young CEO, these "more experienced" Board members can be incredibly valuable in new hire, financing and partner discussions, where appropriate. Brad Feld's blog site also has some interesting posts on Boards and Board management.
7) Get your personal house in order. Although this is last on the list, it is perhaps most important for you personally. Make sure your option and equity agreements are rock solid, and your employment agreement is fair and competitive with what an investor would expect. If you have corporate counsel, I'd still recommend using a third party personal attorney to draft your employment agreement. I can provide you with benchmarks on what is considered competitive in today's market, as can any attorney doing this kind of work in Silicon Valley. I can shock you with stories of scenarios gone bad in this area, both mine and others, but suffice it to say this is one area you want to absolutely make sure you get right well in advance of a financing.
Most of all, ENJOY THE RIDE. Building a company is an incredible experience. Done right, it can be incredibly rewarding - both financially and emotionally. Enjoy it.
Jeff
