The Entrepreneurial Company: Lessons from Silicon Valley

1
The Entrepreneurial Company Lessons from Silicon
Valley

• Garth Saloner
• Graduate School of Business
• Stanford University

2
Myth New Venture Ideas Come Out of the Blue

• It is a myth that getting an idea for a new
  venture is like getting struck by lightning
• More often than not grow out of experience.
  Experience is a source of ideas and lens for
  evaluation
• Entrepreneurial ideas can be searched for
• FiberTower
• EIRs

3
Myth There is a Particular Entrepreneurial
Type

• Decades of research has failed to identify
  personal traits
• Some research suggests generalists are more
  likely to become entrepreneurs than specialists
• Risk aversion is not a good predictor and not a
  good metric since risk can often be controlled
• Some observers suggest integrity, intelligence,
  judgment, creativity, and passion.
• There is more commonality to the process of
  entrepreneurship than to the entrepreneurs
  themselves

4
Myth Vision is Only For Leaders of Large
Companies

• Vision is critically important in start-ups
• A coherent vision is required to sell to sources
  of capital, prospective and current employees,
  customers and strategic partners
• But also need a compelling business model and an
  associated financial model that derive from the
  vision and that make sense
• A good business plan is the manifestation of the
  test of the underlying assumptions

5
Myth Start-Ups Move too Rapidly to have Strategy

• Strategy defined as objectives, scope,
  competitive advantage, and logic
• Because start-ups learn at a much faster rate
  than established firms, strategy changes more
  often
• Strategy process is typically more flexible
  strategy often exists as a Powerpoint
  presentation
• There is a tension between focus and
  experimentation
• Strategy process is much simpler and certainly
  more top-down than in most established companies

6
Myth Most Silicon Valley Start-Ups are Venture
Capital Funded

• Friends and family
• Angels
• High net-worth individuals
• Venture capitalists
• Strategic investors

7
Recent History and Current State of Venture
Capital in US

• The bubble years
• Large funds and overhang has become an
  investment category
• Hierarchy
• Gun-shy about new investments 2001-2003
• 2004-2005 Return to normalcy
• 2006/7 Return to multiple term sheets,
  valuations rising.

8
The Venture Firm Model

• GPs and LPs
• Management fee and carry
• Lone ranger vs. team models
• Time and money
• Fund success driven by big wins

9
VC Return Profile
10
Profile of a successful venture-funded firm
11
Some Pros and Cons of VC Funding

• Pros
• Money now and deep pockets
• Credibility
• Help in building out the business
• Help in finding customers/strategic partners
• Cons
• Dilution
• Control/influence
• Exit pressure

12
Timing and Rounds

• Financing is usually done in rounds to balance
• amount of money at disposal
• valuation
• and cost of raising money
• The typical path has a seed round from friends
  and family, perhaps a round of angel financing,
  and then several rounds of venture financing
• Many start-ups believe in overfunding when they
  can (eat while dinner is being served)

13
Myth Organization Design is a Big Company Issue

• Do entrepreneurs worry about setting culture
  early on or later?
• Difficult to change
• Clarity of vision and culture may induce
  self-selection
• The Silicon Valley culture mobility, failure
  forgiveness, networks, sweat equity.
• Most successful start-ups are forced to confront
  the issue of whether the founding management team
  can scale
• The skill sets that are valuable in the start-up
  stage are often not valuable in the growth phase

14
Some Lessons From Successful New Ventures

• They are scrappy
• They hire ahead of the curve
• They use their Board, Advisory Board, strategic
  partners to look larger than they are
• They define culture early and use it as a
  self-selection tool
• They are agile and change strategy as needed
• They get lots of market feedback and adjust
• They are honest about their prospects (good and
  bad)