25 things I learned about building companies

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25 things I learned about building companies

• Steve Kirsch
• CEO, Propel

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Agenda

• To entrepreneurs tips on building companies
• To VCs tips on funding companies
• To both What to do with all that money

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Tips for entrepreneurs
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Do you have what it takes to start a company?

• Q Why are most startup companies started by
  mediocre people?
• A The really smart ones know better!

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The single biggest mistake you can make when
starting or running a company and how to avoid it

• Hiring the wrong CEO
• (like yourself)

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Nobodys Perfect

• No perfect CEOs
• No perfect engineers
• No perfect VCs,
• The whole trick is getting people to work
  effectively together to complement each other
• You might be a better CEO than your Board may
  believe
• When you lose the respect of your team, its time
  to throw in the towel

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The single most important thing to get right

• Hiring great people
• Dont settle for mediocrity just because you are
  in a hurry youll regret it later
• Most via referral from people you know
• A great company should have all A players
• Dont hire smart people who dont fit the culture
• Steves two strikes and youre out rule of
  hiring

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Behavior changes are hard

• Hire for attitude, ability train for skills
• Behaviors are impossible to change so you are
  destined to repeat the same mistakes
• Surround yourself with people who fix that and
  get outside your box
• Example I got Ray Lane and Colin Powell to
  invest in Propel

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Serial entrepreneurs win if still have the
passion

• Are you committed?
• Are you prepared to do whatever it takes to win?
• Do you believe in your vision?
• Can you adapt quickly to new data?

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Michael Robertsons success secrets

• If at first you dont succeed, try, try again
• It doesnt hurt to be
• in the right place
• at the right time
• with the right product

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Trust your (wifes) judgment

• My wife didnt like any of the people who
  eventually didnt work out
• Just because your whole board of directors is in
  favor of something, doesnt mean its a good idea
• Example Disney acquiring Infoseek
• Just because your whole board of directors is
  against something, it doesnt mean they are right
• Example firing the CEO

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Smart people can disagree

• Myth Given the same information, really good
  smart people will come to the same conclusion
• Reality Bush vs. Gore

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Keep your strategies simple

• Example
• The 2 step TOP SECRET strategy AOL uses to makes
  the big money...
• Make it really EASY to sign up
• Make it really HARD to cancel

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How pick a VC

• Do you like them?
• Do they like you?
• Do they understand your space?
• Do you trust them?
• Can they add value beyond money?
• Have they proven this with other investments in
  your space?

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Boards

• Most board members have no clue what is really
  going on in a company until it is blatently
  obvious, I.e., typically the board members are
  the last to figure out that the company is in
  trouble
• Big companies tend to have the worst boards
  large and ineffective and reluctant to make hard
  decisions
• Putting known brand names on your board is no
  guarantee of success
• Example I went after Ben Horowitz for his
  leadership skills, track record, and insightful
  questions, not for his name

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Be really careful picking your board

• You want Board members who arent afraid of
  finding out what is really going on
• and supportive of efforts to effect change
• Most board members are reluctant to fire the CEO
  or re-constitute the board,
• even when the writing on the wall is clear to
  everyone
• VC board members tend to have influence beyond
  their own board seat so be VERY careful picking
  the partner for your board
• This is because the VC will often bring in other
  board members that will tend to give the VC the
  benefit of the doubt in a conflict because the VC
  is seen as independent

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Many VCs have unjustified big egos

• They think they are experts in building and
  guiding companies even though they have no track
  record of having walked the talk themselves
• If the partnership is successful, they typically
  all believe they can do no wrong
• If they are a brand name, they may be even
  worse (believing their own PR)
• Ive personally heard of situation where senior
  VC partners at brand name VC companies back the
  wrong guy. It happens more often than you think.
• Example David Dorman at PointCast was not the
  right fit

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Dealing with a hostile board

• Try in this order
• Logic
• Persuasion
• Force

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When its time to replace a board member

• Lie
• Withhold information
• Reward incompetence
• Pass on confidential information
• Act outside of the parameters agreed to by the
  Board
• VERY difficult to get an accurate reference check
  on a VC
• I had one VC partner who did all these and hes
  still a General Partner at a leading VC firm.

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Why VCs are like lemmings

• Wed be interested in investing if you had
  another VC already committed
• Its very risky for a VC to be the first to
  commit to a deal
• Nobody wants to risk being wrong.
• Its much safer to validate someone elses
  decision because you have someone to hide behind.

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Valuation

• Valuation is set based on what people will pay,
  not on some formula
• Expect to see a 21 range of valuations offered
• This isnt a science!
• What people will pay is determined by
• How well you tell your story and how convincing
  you are
• Your team
• The market opportunity
• Whether they like you
• Your track record
• Current market conditions

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Fairness opinions

• They dont have to live with the results you do
• Their BIAS is to make the deal happen
• A fairness opinion is not a guarantee of
  fairness it is just an opinion that can be
  justified in some way
• Just because you have a fairness opinion and
  board concurrence, doesnt mean you should do the
  deal
• Best indicator research the results of past
  mergers with the acquired company

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Tips for VCs
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Valuation

• Ignore valuation
• John Doerr

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My biggest mistake

• Telling Tim Koogle to take a hike because I
  thought 20M for Yahoo! was overvalued

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Is Yahoo overvalued?

• If you have to ask, you just dont get it.

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My second biggest mistake

• Laughing when eBay said Infoseek could acquire
  eBay for only 1B

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My third biggest mistake

• Telling Michael Robertson to pound sand when he
  wanted 20M for his company (later renamed
  mp3.com)
• (nowadays, Im not looking like such an idiot)

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Why Im not a VC

• That should now be obviousI have poor judgment
• So I stick with what Im good at.

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Why my investor list for Propel has only 1 VC

• I wanted independent validation from
  professional investors that Propel was a good
  idea
• Some VCs wouldnt pay the valuation I wanted
• But the partners at leading VCs who did the due
  diligence invested personally! My advice If you
  like everything else dont let valuation stand in
  your way. An 80 chance at a 100X return in 2
  years isnt so bad.
• Some VCs only would invest if they got a big
  enough chunk
• That makes sense since VC isnt scalable. But
  experienced wealthy proven entrepreneurs wont
  play that game because the VC value added is
  awfully expensive.
• Having a VC on your board is risky

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What to do when a founder and a CEO dont mesh

• The natural assumption is that the founder is the
  problem
• My experience has been that in most cases, this
  is a leading indicator that you goofed and hired
  the wrong CEO
• Another leading indicator good people who have
  left cite the CEO as the reason they left
• You need to roll up your sleeves and find out
  what is really going on

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The perfect investmentcan you guess???

• Recurring revenue stream
• High margins/High ASP/Low cost producer
• underpaid workforce, overpriced service, no COGs,
  low overhead
• Large user base
• No competition
• Established, well known brand name
• Never goes out of style
• No manufacturing or shipping costs
• No need to worry about customer satisfaction
• They pay nothing in taxes

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What to do with all that dough
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Some ideas

• House
• Vacation
• Private Jet
• Wife
• Computer gear
• Lifetime subscription to Worth
• OK so now what?

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Giving it away is enlightened self interest

• Giving is not an obligation
• Giving is an opportunity to benefit US yourself,
  your family, your friends, your community, the
  world
• with tax advantaged dollars that otherwise
  would go to the government
• Pick cause(s) that interest you and make a
  difference
• Examples
• I give to asteroid discovery because it may save
  my life (and the lives of 6B other people I dont
  know)
• I give to nuclear disarmament because it may save
  my life
• Ive gotten 2 pieces of legislation passed in
  California to clean up the air because if we can
  prove it can be done here, it can be done
  elsewhere and the threat of global warming is
  real. That affects us all.

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The 1 solution

• We set aside 1 of Propels equity to donate to
  charity after we IPO
• Any company can do this easily
• Its a win/win because our employees are at least
  1 more productive and it helps at least 1 in
  recruiting
• VCs should encourage every company they invest
  in to do this

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You can donate when you are locked up

• One of the best times to donate is after IPO when
  your stock is locked up
• Even though you cant sell your shares, you can
  make a donation and the charity can short the
  stock
• You lock in your tax deduction, the charity locks
  in your donation, and you become an instant
  philanthropist

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Larry 1 A true story

• Worth 2B at IPO in December, 1999
• I suggested he put 10 into a charitable
  foundation now and decide what to do with it
  later
• He said I dont have time
• All he had to decide was a name and the amount
• He is was worth 200M 4 months later

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Larry 2A true story

• Still a billionaire
• Gave 100M to a noted scientist and asked him to
  fund cutting edge research on aging
• Hes the worlds second largest funder of aging
  research
• He funds some of the best research in this area
• The discoveries will benefit Larry (and everyone
  else too)

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Giving strategy

• Make periodic small donations as your stock rises
  
• Many notable philanthropists regret not having
  taken advantage of this strategy. Dont make the
  same mistake.