Building The Next Google
(Business 2.0) – It's a terrific time to be an entrepreneur. The availability of cheap computer hardware, free software, and high-speed Internet access has created a powerful new base from which to launch new businesses and expand or transform existing ones. The Googles and Microsofts of tomorrow are being built in ways never seen before. Here's how you can create your own world-changing company. -- MATTHEW MAIER
A - GETTING GOING
This is the most critical time for any startup. Your main goal is assembling the best team to get your venture off the ground--that is, generating a product or a prototype that serves as proof that your concept will work. Keep these pointers in mind during the early days.
1 Start Small Four founders is fine; two is better. With fewer people it's easier to build consensus and less likely that rival factions will form. Make sure you have technically minded founders (the more engineers, the better). No MBA required, but one founder should be able to moonlight as the company's top salesperson and communicator. Apple, Google, and Sun Microsystems each started with a close-knit group of founders who shared a common vision but brought different skill sets. Being small is also more efficient: Paul Scanlan, co-founder of MobiTV, a startup that offers TV services via cell phone, says having fewer people makes it easier to focus on a single problem. That helped MobiTV land a contract from networking giant Siemens despite having just six people on staff.
2 Look for Angels It's cheap enough these days to start a company without enduring the hassle of raising formal venture capital. If you don't have friends or family to put the arm on, and your credit cards are maxed out, consider an angel investor--typically a fat cat who'll write a big check in exchange for an equity stake in a promising early-stage startup. Ross Mayfield got $600,000 from angel investors who read about his idea for a social networking service, Socialtext, on his blog. You can find angel investors through organizations like the Angel Capital Association (www.angelcapitalassociation.org).
3 Embrace Open-Source The scores of free software programs available will help you keep infrastructure costs down. While Linux is the best-known open-source project, others, including the Apache Web server program and MySQL database software, are also widely used. Mayfield leveraged these free programs and spent just $5,000 to get Socialtext up and running. Make sure you know the origins of any open-source software you choose, though, since some programs are subject to intellectual property restrictions or open-source licenses that place limits on their use for commercial purposes.
4 Use Off-the-Shelf Equipment Commoditization has driven hardware costs through the floor. Standardizing around gear from Dell or Hewlett-Packard can save you thousands of dollars in hardware costs and potentially more down the road in productivity, since you'll be able to get replacement parts quickly and easily if anything breaks down. Neville Street, chief executive of Mobile 365, a startup with $75 million in annual revenues that manages messaging services for wireless carriers, keeps hardware costs down by ensuring that his entire workforce uses inexpensive Dell PCs.
5 Launch Early, Launch Often Expose your product to a community of users as soon as possible. Google has done this brilliantly with Gmail and Google Maps, letting the audience pound on the product and make suggestions about what's working and what's not. Be careful, though: If users are clamoring for specific features, you should either incorporate them immediately or give a clear explanation of why not. Firefox and Flickr were two of the most popular technologies of the past year, and their developers went to great lengths to incorporate suggestions from their audiences into the services. Imeem, a Palo Alto-based startup, tapped 10,000 testers to hone its social networking software, releasing product updates weekly.
B - FINANCING THE BUSINESS
It's not raining venture capital the way it was during the dotcom days. You'll need a strong vision, a working prototype, and a ton of users to be taken seriously now on Sand Hill Road or any other place where the big venture capitalists congregate. "The idea of funding concepts is out the window," says Ken Gullicksen, a general partner at Morgenthaler Ventures. Here's how to be a rainmaker in today's climate.
1 Bootstrap as Long as You Can ... Developing your product as fully as possible allows you to get the greatest valuation for your company. So don't race to the money trough: "A $1 million investment typically goes to a team that's still in the early stages," Gullicksen says. "At $10 million, the team has probably lived longer on sweat and has a more developed product." In other words, there's a lot more to sell.
2 ... But Know When to Tap the Venture Community "When thousands of users spontaneously tell their friends about your product," says David Cowan, a general partner at Bessemer Venture Partners, "that's when you should start thinking about looking for money." Why is that a key milestone? It means the product is working; now you want to have the resources to do whatever it takes--from hiring quality-assurance testers to signing partnerships with other companies--to sustain that growth. For most businesses, that means it's time to turn to a VC.
3 Don't Wait Too Long to Ask for More Money Building a successful business almost always costs more and takes longer than you expect--so make sure to start raising your next round while you've still got plenty of cash in the bank. If an investor knows that your company is desperate for cash, you may end up striking a Faustian bargain and be forced to give up too much equity. Fresh from raising $20 million, Greg Ballard, chief executive of Glu Mobile, based in San Mateo, Calif., decided to accept an offer for another $7.5 million from Time Warner (parent company of Business 2.0), even though Glu didn't need it immediately. "The valuation was good and so was the investor, so it became a smart strategic decision to take the money," Ballard says. "It's always good to have a well-stocked war chest."
4 Think Beyond the Terms Not all venture capitalists are created equal. Top-tier firms such as Kleiner Perkins Caufield & Byers and Sequoia Capital can offer connections to CEO talent and customers and can serve as useful strategic guides on your board of directors. Others focus on specific markets or sectors and have a better understanding of how to grow, say, an enterprise software firm or a consumer digital-media play. Make sure you match your business with the right VC.
C - MANAGING GROWTH
The final stage of a startup's life is the trickiest. It's a critical juncture when you'll need to show steady growth of not only your revenues but also your staff. The types of hires you make and when you make them call for the finesse of an orchestra conductor. These five tips will help ensure that your company doesn't grow too fast--or too slowly.
1 Hire Smart Paul Graham, an entrepreneur who sold his second company, Viaweb, to Yahoo for $50 million, says the first people you hire should be technical folks who can focus intensely on perfecting the product. Expensive marketing campaigns and advertising blitzes are no-nos for startups today; don't fill out your sales and marketing team until after you've built a business that has proven it can generate cash.
2 Sell It Yourself An old VC adage: Hire slowly and fire quickly. Nowhere does this apply more than to the sales staff. While it's a critical component of any organization, the sales force is one of the most expensive. Luckily, selling the product happens to be a task that can be handled--at least at first--by most members of your team. Mark Leslie, founding CEO of software firm Veritas and a professor at Stanford's business school, even developed a model, called the Sales Learning Curve, to help companies determine when to start hiring salespeople. Read more about it at www.eldorado.com/pg_newsletter_read-7.html.
3 Spread the Wealth If your startup hopes to compete for top talent, you'll need to offer something established companies can't: the chance to strike it check-out-my-new-Maserati rich. "If you are going to ask someone to take a risk on your startup, you have to give some equity," says Srivats Sampath, chief executive of Mercora, a popular Internet radio network. Still, make sure stock options vest over a four-year period, lest your top people be more concerned with cashing in than with building a lasting company.
4 Bring In the Big Guns Once you've built a product you can sell, you'll need the professionals--experienced players who have done it before for larger companies and come equipped with deep Rolodexes. When it needed to land some big customers earlier this year, Palamida, a San Francisco-based risk-management software startup, hired former Sun Microsystems executive vice president Mark Tolliver as its chief executive. Within months Tolliver had tapped his network of contacts to help the 20-person firm land several new clients, including big-fish customer Cisco Systems.
5 Know When to Step Aside Leave your ego at the door and don't overstay your welcome. As has been painfully demonstrated many times, the founders often are not the best people to take the business to the next level. You might be a brilliant technologist but a lousy CEO. When Jim Clark wanted to bring Netscape to the masses, he was smart enough to step aside and let über-CEO Jim Barksdale come aboard. Barksdale helped the company navigate a successful IPO and negotiated a $4.2 billion deal to sell Netscape to AOL in 1998.