Startups for physicists

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Startups for physicists
20 years ago, industrial RD was concentrated at
corporate labs like IBM, Bell, Xerox PARC,
etc. Those days are over. Today, innovation is
more likely found at small, venture capital
backed startups founded by creative risk
takers.
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Innovation today
The odds have never been greater that you, as a
scientist or engineer, will someday work at (or
found!) a startup company. This talk is meant to
give an introduction to this dynamic and
important part of our economy. (Originally
presented at Caltech Entrepreneurs
Club.)
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Conventional story corporate RD spending is
down due to short term profit focus. But,
structural factors limit innovation at large
companies 1) Rigid organization and bureacracy
-- big companies strength is large scale
execution, not innovation. 2) Legacy
commitments may prevent adoption of new
technology or business models. e.g., VOIP and
Bells.3) Incentive structures politics and
subjectivity distort connection between
performance and reward.
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Startups are small, have no legacy commitments
and a pure ISO compensation structure.
Consequently, innovation comes disproportionately
from startup sector. Incentive Stock Options
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Currently, US VC funding is about 5 B per annum,
dominated geographically by the bay area
(Silicon Valley, but also companies like
biotechs, Pixar, etc.) with S. California and
Boston a distant second and third. What is
Venture Capital (VC)? A pool of risk capital
earmarked for investment in small companies,
usually technology companies. Venture capitalist
compensation 2/20, with many funds managing
well over 100 M per partner. (Most startups fail
-- returns are disproportionately from the few
successes.) Typical VC investors wealthy
individuals, university endowments, pension
funds.
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Do it yourself!

• Key stages in a startup
• In the beginning
• Raising money
• Running the company
• Exit

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Steves excellent adventure what I saw during
the tech bubble (2000-2003)

• Day job theoretical physicist.
• At Caltech, my engineer buddies all talked about
  starting companies while I was studying general
  relativity
• I was an academic migrant laborer (PhD Berkeley,
  research fellow Harvard, Asst. Prof. Yale, now at
  U Oregon).
• But something strange happened along the way --
  I started a Silicon Valley software company with
  some former students.

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Secure Extranet Appliancesecurity made simple
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SafeWeb, Inc.

• 32 employees, 25 technical.
• 10 PhDs from physics and computer science.
• Graduates of Caltech, Berkeley, Yale,
  Carnegie-Mellon, U Oregon, IIT (India)
• Venture capital funding 11.5 M
• Customers Google, EMC, Schlumberger, WHO, U.S.
  Navy, CIA, NSA

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SEA Tsunami
Creates encrypted connection between remote Web
browser and intranet using SSL encryption. SSL
VPN new product category, vs. IPSEC VPN Cost
effective no remote client on user machine
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SEA Network Diagram
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Do it yourself!
In todays world, entrepreneurs drive innovation

• Start Preparing NOW by developing critical
  skills (5 minute MBA -)
• Practice Fermi problems for business estimate
  cash flows, margins, costs, etc. (like in
  management consulting)
• Negotiation is an art. Practice.
• Communication skills
• SELLING (not just for used car salesmen)
• Be CLEAR and CONCISE (bandwidth is limited)
• How to motivate and lead others
  (self-discipline)

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Tech Startup complicated machine with many
moving parts
Hopefully, a money making machine! But, at least
should be an innovation machine

• People
• Technology
• Capital (fuel)
• Information (customer feedback, market
  intelligence)

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The kitchen table

• The team choose people you trust and can work
  side by side with through difficult times.
  Character is paramount. Its melodramatic, but
  imagine you are going off to war together.
• Due diligence and sanity checks
• The idea what is the innovation? technology or
  business model?
• Business plan the one you show to VCs, and the
  real one.
• Ready?

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Fundraising

• VCs really are dumb about technology. (But not
  about everything.)
• Network! Network! Network! (bounded rationality)
• Presentation is everything. Anticipate
  questions.
• Anticipate Due Diligence issues demos,
  references...
• Negotiate hard, but leave something on the table
  for everyone. (Find counsel that has done VC
  deals.)
• Valuation is not the only issue preferences,
  employment contracts, vesting, etc.

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Dealing with VCs

• VCs really are dumb about technology. (But not
  about everything.)
• They are going to be on your board and part of
  your life at every stage of the companys
  development
• You must manage their expectations
• You must meet as many as you can as you are
  always fundraising.

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Managing your equity stake

• Keep your eye on the ball how much will
  you end up with?
• Every dollar of money raised dilutes your stake
  in the company. Preferred hurdle unless you
  beat this, you will only get peanuts
• Example
• Founding 40 (2 founders, plus 20 employee
  pool)
• Round A 20 (VCs buy 50 stake 3M at 3M
  pre-money)
• Round B 14 (VCs buy 30 more 6M at 14M
  pre)
• Company acquired for 30M. Your take about 4M
  (after tax 3M).
• (If sold for less than 9M, zero for you! But,
  maybe youll get a carve-out ? )

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Managing and Leading Teams

• Managing is an art. Hiring decisions are among
  the most important, and firing someone is one of
  the most painful experiences you will go through.
• You are going to be managing under stress. DO
  NOT transmit the pressure you are under to your
  employees.
• Tech teams are totally different from business
  teams.
• The more your team understands and accepts your
  vision, the less managing you will have to do.
  Transparency is key.
• Always take the time to build relationships with
  and within your team. In war, people die for
  their buddies, not their country.

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Exit Strategies

• By the time you get here, you will have
  forgotten everything on this slide, so this is
  just for fun.
• Unfortunately, I have no personal experience
  with IPOs, so I can only tell you about
  acquisitions.
• Everything takes longer than you think it will
  building the product, proving out the market
  (sales), getting a deal done, etc.
• Keep your accounting and legal records clean and
  organized (including patents). Avoid litigation
  like the plague.
• Be very, very careful when negotiating personal
  employment agreements, non-competes, etc.
• Donate some of your money to physics! (Like Jim
  Simons did for RHIC -)

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Good Luck!