Silicon Valley Frontlines

Founders Stock Vesting - Why It's Important!

Boy, the longer I deal with early-stage tech companies the more I'm amazed by the prevalence of teams that operate without founder stock vesting. 

As you know, most startups get going with a team of two or three folks coalescing around an idea - and then spending perhaps years, with their own sweat and nothing else, developing a product or service and getting it going to the point they can raise money and scale it up. Assuming they've addressed ownership at all then they've probably agreed some split based on contribution of effort and skills, and it feels equitable (not the same as equal) to all involved. Hopefully they also set aside stock for others they've hired along the way, or contractors paid in equity and so on.

That's good, as far as it goes. Where it falls apart is if that stock hasn't been subject to a vesting schedule. In essence the ownership needs to be EARNED over the time each person has been contributing, not just given up front. In the extreme case, without a vesting schedule you have the potential for the ugly situation where one founder may just decide he's had enough and moves on, leaving his two co-founders to carry on and make the business work. Is it fair that he walks off with all his stock and is not adding any more value, while the others remain trying to make theirs - and therefore his also - worth something? Obviously not. And not only that, its a chunk of ownership not now available to recruit a replacement. 

The standard approach is to structure founders stock just like a regular stock option - vest over 4 years with a one-year cliff. And the logic is the same - you gotta stick around long enough to start with to have made a real and substantial contribution to the company and your team members. Then you keep earning more monthly as you go. Leave at any time after one year and you get to keep what you've earned - no more, no less. Have an accelerator in there in the event that the company is sold, sure. 

Obviously this approach does not, per se, apply to a solo founder for obvious reasons - but most startups are founded by teams and they must address this question. 

One objection some founders have had to putting these structures in place is their fear of the cost and complexity - and when you have no cash its hard to think about paying lawyers to do this stuff. Frankly, that's a non-issue. Reputable Valley firms will help you set this up for deferred or no fees at all, or you can simply go to my friends at Orrick who have set this up online for you for free (but consult them if these don't fit your situation). Go here to go through the Q&A process and create your Founder Term Sheet (in essence defining the founders, their ownership etc) and then here for the various legal agreements to document the deal. There are other similar sources out there if you look around. 

So now you have this in place. Lets say that helps encourage everyone to be in the boat pulling hard to make it worth something. Well, in my next post I'll discuss what happens to all this when you raise venture capital ... and it may not be what you think!

My Holiday Season Resolution ... Volunteer Business Advisor!

Last Christmas Eve I did a post titled "A Beacon of Hope This Holiday Season ..." about the San Francisco Homeless PreNatal Program. Still there in their 20th year, still doing great work! If you supported them last year as a result of my post, a big thank you. If you can contribute now, please do!

This holiday season I'm personally trying something a bit different. Given my background I'm going to offer my help as a volunteer business advisor through Pacific Community Ventures, a Bay Area initiative that helps small businesses create jobs and opportunities in lower income communities. They have supported many entrepreneurs starting and running bakeries, restaurants, landscaping, bag making and including some higher profile businesses such as Flora Grubb, my favourite San Francisco garden store, or Heath Ceramics, a long-time Bay Area operation.

It's not usually visible to most of us just how hard it is for people to make these businesses work. This recent story about Flora (yes, Flora Grubb is her real name - isn't that perfect for a gardener!) in the San Francisco Chronicle is what piqued my interest in PCV. Without them Flora Grubb (the store) might no longer exist and her 25 employees would be joining the ranks of job seekers. And I'd miss a great place to browse, shop and drink Ritual Coffee Roasters fabulous blends! Here are some pictures I took at a recent visit to Flora's store:

So, not exactly high tech - but important grassroots in our bigger ecosystem (so to speak). Maybe I can help a little bit, and in a longer-term manner than just writing a check.

As always, I hope you and yours have a happy holiday season and prosperous 2011, look out for and take care of the ones you love, and thanks once again for reading my blog!

Cheers!

Philip

The Ten Hottest Private Companies in Tech - Good News for the Valley in 2011?

The good folks at Mashable just published a list of the Ten Hottest Private Companies in Tech, based on a survey by SecondMarket. SecondMarket is a rapidly growing exchange offering (among other things) the opportunity for sellers and buyers to trade private company stock prior to an IPO or other typical public liquidity event. (We can discuss another time how these exchanges operate but they are indeed offering a valuable service to liquidity seekers and prospective buyers). SecondMarket surveyed their buyers and potential buyers about these companies and, In order of most- to least-interest, they are:

1. Facebook
2. LinkedIn
3. Twitter
4. Zynga
5. Craigslist
6. Groupon
7. Yelp
8. SecondMarket(!)
9. Pandora
10. Bloom Energy

As an avid Silicon Valley fan, I love the fact that all except Groupon and SecondMarket itself are Valley companies. And all, except possibly the wacky guys at Craigslist, represent possible IPO opportunities in 2011. And this doesn't even include Skype (new headquarters in Palo Alto; IPO about to spring loose), Art.com, MedeAnalytics (both East Bay) and others in the wings.

Five great outcomes of some or all of these IPO'ing in 2011:

1. Liquidity events are a key driver of VC investment sentiment. While much of that liquidity happens through M&A activity, the big splashes and payoffs from IPO's will enable portfolios to show substantial returns, raise new funds and have the confidence to invest in new startups or growing existing ones.
2. More cash into the Valley economy from employees selling stock, hopefully stabilizing and improving the housing market and the general ecosystem.
3. Greater momentum on the job front as newly public companies scale up with the proceeds (at this stage they are not cash hoarders like the Apples of the world!).
4. A boost to the California economy and budget. Not only does the ripple effect of spending spread across the state but the taxes paid by employees and others in exercising and selling stock would be substantial. In 2006 California personal income tax receipts grew by $4.3 billion from the prior year due in no small measure to employees and others selling their Google stock. During that time Google's market cap grew from $70 billion to $100 billion - and as it happens many people believe Facebook is already approaching the lower number in that range.
5. Talking of which, one benefit is that it would not be all about Google any more ....!

Agreed, all this takes time to ripple through the system. For example, shareholders in an IPO usually have to wait 6 months in a lock-up period before they can actually sell. But sustained benefit over a long period is better anyway ...

Related articles

• The 10 Hottest Private Companies in Tech [REPORT] (mashable.com)
• SecondMarket Releases Q3 Private Company Stock Trading Report (eon.businesswire.com)

Buying a Car Online with CarWoo! Does it Work?

Buying a new car falls directly into that category of "things you hate to do but love the result". Everyone loves to be driving a new car but nobody likes the process of negotiating with dealers to get one. Price is always the key factor, of course. And while a number of intermediaries promising best prices have existed for some time - car buying services, agents, even Costco - you never really know if they are truly working for you. Costco, for example, is one of many which charges car dealers to have access to their service, so you question whether you're really getting competitive bids from a broad-enough range of dealers. With other intermediaries you never know if you're dealing with someone who simply has a "cozy" relationship with a few dealers that benefits them more than you. Various other resources exist to help you with the process. Consumers' Checkbook, for example, has a very good guide online (Download CarBargains_Secrets) and also provides it's own car-buying service. 

Given my role working with startups in the Valley it seemed appropriate, however, to test out the service provided by CarWoo!. CarWoo! is a graduate of the Y Combinator startup program and has just raised $8m in its Series A led by Interwest Partners. Basic premise: for a small fee ($49) "3 to 5 dealers" will "aggressively compete" for my business and I can use CarWoo!'s "negotiation tools" to get the "lowest prices, guaranteed". 

I wanted a 2011 Toyota Camry 4-cylinder XLE as a second car for the family. Not a lot of fancy options - leather plus heated seats and floor mats. No sat nav etc. Had to be Barcelona Red with Bisque (Tan) interior, per The Boss. MSRP: $27,745. For a Camry? Yikes!

We went to our local dealer, Toyota of Sunnyvale, test drove the car and asked for their best offer. They quoted $25,466 after "special Costco pricing" and based on financing the deal. Not bad - and a good yardstick for CarWoo! to beat. 

So did CarWoo! work? In a word, yes! Over 48 hours we got offers from 7 dealers (including a different sales person from Toyota of Sunnyvale but quoting the same price as above). One offer was for a completely different Camry than the one we spec'd - this same dealer told me none that I wanted were available in N. California (wrong!). So really 6 offers for what we wanted. They ranged from a high of $26,685 to a low of $24,457, after a couple of rounds of counteroffers, all via the site and without having to talk to anyone. This is all after adjusting any rebates etc to get valid comparables. Winner: Toyota of Palo Alto at $24,457, just over $1,000 lower than the visit to Toyota of Sunnyvale. 

Once we accepted the offer we went to the dealer and - no hassle, no renegotiation - we got the car for the price agreed. Plus zero percent financing for 5 years through Toyota. And two years free maintenance. (In fairness all the dealers offered the same financing and maintenance packages). 

Could I have negotiated in a dealer's office to get another $1,000 off? I suspect not. And certainly I didn't have to drive around a bunch of dealerships, knowing that when you're in their office they have you captive. Would another service have delivered the additional $1,000 off? Maybe, maybe not. Probably not with this transparency. And probably with a fee greater than $49. 

Was the final price a good one anyway? Well, I went to Vehix and put in the exact specifications of the car. For an identical vehicle they showed me that factory invoice is $25,603 and the net cost to the dealer after Toyota rebates or adjustments is $25,078. The average price other buyers have paid is $26,274 and I'm getting a "Great Price" with anything less than $25,743. Again, I paid $24,457. I think that's a "Super Great Price"!

Could CarWoo! be improved? Yes! 

• Customer service needs work. I called their 800 number to ask a question about the process with a dealer when it comes to financing. The person who answered said she was the answering service (wrong answer!) and would pass on my question. To her credit she made doubly sure she understood the question and read it back to me. Peter at CarWoo! then emailed me a few minutes later and said that CarWoo! does not do financing. I knew that and didn't ask that. CarWoo! needs to use some of the $8m to put in live 24x7 customer service with knowledgeable people. 
• Dealers will try and obfuscate the real price by being unclear on whether quotes are before or after rebates. Rather than have a text box that the dealer may or may not fill in in the quote I'd suggest the offers be in a structured CarWoo! format that requires full disclosure by line item. 
• CarWoo!'s "negotiation tools" seem to consist of a few FAQ's and a some reminders to counteroffer a dealer with a standard $500 less than whatever the dealer offered (even though this may still result in a revised offer higher than the lowest you have from someone else). A bit lame - needs work here!
• The site is of no help whatsoever with financing. Not with CarWoo! itself offering financing, but like Mint, providing financing offers from independent sources would be helpful. So would the key advice - which is to negotiate the best price, THEN talk financing. 
• Background education in a similar form to Consumers' Checkbook would be helpful. 

Will it work when I eventually buy that Aston Martin V12 Vantage? Er, probably not! Will it work with a Mini Cooper, with fewer dealers around to compete? Maybe. But with true internet democratization of the process combined with real transparency for your run-of-the-mill volume car, yes, CarWoo! works!

"What's So F***ing Special About You Then?"

When I first moved to the U.S. from England many years ago - more than I care to remember - I needed a visa to work here. The company that hired me brought me in under an H-1, which is the visa category reserved for people with highly specialized knowledge in certain fields or, as my immigration attorney put it, "aliens of distinguished merit". It was a rather flattering description of someone who, at the time, was a young professional really starting out in his field but who was I to argue if it worked?

My job at the time involved international travel and on one occasion I came back into the country through Honolulu so I could take a few days vacation after a business trip to Japan. Anyway, I'm at the immigration officer's booth at the airport and present my passport, my visa and my letter of employment. The officer studies these for a moment and then leans over the counter, looks me in the eye and, very loudly, asks "so, what's so f***ing special about you then?" Which took me - and the people around us - back a bit because this is not typical of the almost universally-polite immigration officers I have met before or after (except in Miami, which is the worst port of entry to the U.S. by far). However, before I could respond, the guy burst out laughing and waved me through with a "welcome home!".

In retrospect this officer would make a pretty good VC. I've heard many different statistics but one is that the average VC may look at 3,000 business plans or in a year and invest in three. Which means saying "no" roughly 999 times out of 1,000. As an entrepreneur that doesn't mean your odds of getting funded are just one in 1,000 but it does mean you'll likely kiss a lot of frogs before you do get funded. But if you do want to get funded you in essence have to be able to quickly convince a potential investor what's so f***ing special about you as opposed to all the other opportunities he or she could invest in.

Which means your first exposure to an investor, often through an executive summary forwarded by someone they know (as opposed to your out-of-the-blue submission), needs to be strong enough and clear enough to grab them by the throat and convince them that this is worth looking at and taking a meeting. Then, as I've written before, when you get the meeting you need to be ready to go full-bore on your idea and what makes it - and your ability to execute on it - so special.

There's still hesitancy by some entrepreneurs - "I'm saving the demo for the second meeting" or "I don't want anyone to steal my idea". Well, VC's are not in the business of stealing ideas - they invest in them (or some will actually say they invest in the team more than the idea in many cases). In fact, if they did make a practice of stealing ideas then the word would get around pretty quickly and that would be highly negative for their business. They are investors so they need to hear the idea very clearly and, if possible, see it in action and some proof points if you want them to do what you want - which is write you a check!

In the last few weeks I've had the discussion about being very clear in an exec summary or pitch with a relatively new reader of my blog who lives outside Dublin, Ireland. She wants to raise money for her startup focused on interactive on-line educational programs in the arts and sciences for children. For her this is even more critical because her physical location makes it difficult to quickly get in front of many likely investors and because it's not the most obvious venture investment opportunity given that its more about approach, content and curriculum than a technology per se.

Her draft was a good start - except that it was not clear what specifically the "secret sauce" or differentiation actually was. As we've started to refine this together we've added that clarity, made it more of the focus (as the solution rather than the prior emphasis on the problem) and then addressed the key issue of how to get the content into the marketplace and adopted. Much of this has taken stuff that had already been thought through but, as she said to me, was in her head and needed to get into the pitch in a brief and compelling way. As we develop this further I think we'll have something that is far more attractive for early stage investment with the right partner or group of angels. In other words its starting to feel, er, special! Now we'll have to see if others do too ...

A Good Indicator of the Health of the Broader Silicon Valley Economy

One key indicator of the health of the broader Silicon Valley startup environment (my definition includes startups located pretty much anywhere in the greater Bay Area including San Francisco, Emeryville, San Mateo etc.) is the confidence in hiring plans evidenced by the signing of long-term leases for space. In some respects its starting to look like 1999 all over again - but with significant and encouraging differences.

Back then, in the dot.com heyday, what did we have? OK, some companies of true staying power starting to emerge - Google, Ebay and so on. But mostly wreckage in the making - Pets.com (major asset: one sock puppet), Webvan, Excite@Home ... gazillions of dollars raised from VC's and the public and a chunk of it spent in bidding wars South of Market for anything with a roof. And I mean anything - converted auto repair shops, derelict warehouses, rotting death traps with a quick coat of paint and a hundred employees stuffed in. I remember - I was there trying to find space for my first startup! Interesting aside: our original space South of Market was a wonderful old converted smokehouse, all brick and timber, that is now reincarnated as an upscale restaurant, Twenty Five Lusk, opening this coming Saturday - check it out:

Today the demand is back. Zynga just signed up for 270,000 square feet in San Francisco on a seven year lease. Twitter is leasing more space every quarter, it seems. Other startups are ramping up, getting funding, making commitments. San Francisco - specifically South of Market (the old Multimedia Gulch as it was called around South Park) is once again the center of gravity for many internet, media, social networking, gaming and other companies.

But other parts of the Valley also have their share of demand. Want space in downtown Palo Alto? Well, good luck with that. Facebook had to move to California Avenue, well away from downtown, to find enough space. If you can find it you'll pay upwards of $5 a square foot per month ($600,000 a year for a 10,000 square foot space in downtown P.A. In the second quarter of this year Cornish & Carey, a major broker, reported that Class A office space in Mountain View had just a 4.5% vacancy rate (basically fully occupied) - perhaps in part becase you'll pay soemthing like 60% of the downtown Palo Alto rate but with similar ambiance (and fewer panhandlers). Broader Palo Alto had a 14% vacancy rate - though I bet this was more like Mountain View's in the downtown area - along with similar rates in Santa Clara and Menlo Park.

Is the Valley as a whole doing well? Not yet. Class A vacancy rates in Sunnyvale? 42.6% in Q2. San Jose? 37.7% vacancy rate. Drive through San Jose's office parks, as I did recently, and it seems like For Lease signs are on every other building.

So what's really going on and is it sustainable? Well, like the parson's egg, you can see it's "good in parts". And getting better. Clearly a lot is dictated by the type and location of the space and the type of company seeking it. Many of these startups want character, proximity to transport or restaurants and general ambiance. They wouldn't be found dead in a San Jose business park. And the traditional occupiers of those business parks? Still downsizing or "rightsizing" or whatever Mark Hurd was axing to get HP profits up (good riddance to him, and good luck Oracle!). And the manufacturing is still gone.

Is it sustainable? Well, only time will tell. But I'm betting that the Zynga's and Facebooks and many others are far more sustainable long-term businesses than the Webvans and the Sock Puppets. We seem to have learned some lessons, for sure. And once again the broader Valley - certainly compared to the dreadful state of the rest of the economy - shows that there is hope!

 

 

IPO's and M&A Exits Continued to Improve in Q3 ... Good News for the Trickle-Down Effect

As noted many times before, the availability of funding for startups is heavily influenced by the state of the market for exits - IPO's or acquisitions. If investors don't think they will be able to exit an investment down the road then they won't tend to make it in the first place (duh!). Somewhat illogically, this has very immediate impact on new investments even though the exit will be years down the road and subject to whatever market conditions then exist, going to show that emotion and sentiment is still a significant factor in current decisions.

They good news in Q3 2010 is that while IPO's continued to improve from last year, the sales of venture-backed companies in M&A activities (including two of my prior startups or clients, yea!) increased substantially. This has the effect of (eventually) encouraging more money to go into startups as individuals cashing out then start new companies or become angel investors, and from traditional VC's seeing positive outcomes. In addition more money comes into the local economy from employees and individuals cashing out and buying houses and cars and the usual trappings of success/hard work. (Of course, IPO's aren't strictly exit events but for most earlier-stage VC's they are the start of that process).

According to Thomson Reuters and NVCA there were 14 venture-backed IPO's in Q3, for a total of 40 for this year-to-date, compared to just 18 in 2008 and 2009 combined. The average IPO took 6.7 years and $51m in funding to get there. An additional 49 venture-backed companies are on file with plans to IPO in the near future, representing a healthy pipeline for the rest of the year and into 2011. And of course not including - yet - Facebook, Zynga, LinkedIn or some other hot Valley companies!

Total M&A deals involving venture-backed companies in Q3 were 104, and 322 year-to-date compared to 173 in all of 2009. Two-thirds of the 104 were for computer software or internet companies. The average time it took a venture-backed company to achieve an M&A exit in Q3 was 4.8 years (20% less time than last year's exits) and an average of $23m in venture capital to get there (versus an average $27m in exit proceeds). The latter suggests that on average VC's don't make much money on their investments so it's interesting to look at an analysis of the values of the transactions versus the amounts invested in these companies (so much for averages!):

Analysis of Transaction Values versus Amount Invested
Relationship between transaction  value and investment		Q1 10 M&A **		Q2 10 M&A **		Q310 M&A **
Deals where transaction value is less than total venture investment		9		3		7
Deals where transaction value is 1-4x total venture investment		7		4		11
Deals where transaction value is 4x-10x total venture investment		9		9		4
Deals where transaction value is greater than 10x venture investment		4		4		5
Total Disclosed Deals		29		20		27
Source: Thomson Reuters & National Venture Capital Association

I'd expect the overall M&A trend to continue and even accelerate as large tech firms, flush with cash, put some of that money to work (as they should do in the interests of improving stockholder returns over time rather than just punting with stock buybacks or starting to pay dividends). 

The reality is that, despite the improvement, an IPO continues to be a hard way to find an exit with more and more companies tending to sell themselves (as we see above) or delaying or avoiding such events until they literally have to. You may remember Google's IPO timing was heavily affected by the company getting to the point of having more than 500 individual stockolders, a key statutory threshold for being considered "publicly held" and almost by default. Facebook has avoided this by allowing big investors to come in and provide liquidity in the near-term to certain employees and others in private transactions and I'll discuss more of this in a future post.

Sources: Thomson Reuters, National Venture Capital Association and Dow Jones VentureWire

Top Ten Start-Up Mistakes. Not What You May Think! Part Two ...

Ok, here's my belated follow up and conclusion from Part 1 of Top Ten Start-Up Mistakes from the Orrick event last month!

Mistake #5: Not Recognizing When to Supplement or Shrink the Team

Founders who fear bringing in the right people at the right time are a problem. "When I find someone as smart as me then I'll bring them in" - wrong! Engineer founders generally don't know how to build sales and marketing. The culture you want determines the kind of people you hire. You should always be hiring or shrinking - but make sure the people are the right fit (don't hire guys with machetes if you are already on the highway). Personal characteristics and motivation are always the most important, not the specific skills - you can learn the latter but not the former.

Mistakes #6 and #7: Not Having a Real Plan - and Not Knowing Where You Are On Your Roadmap

A key emphasis here was to insure you figure out what type of business you are building - a big or small company, a home run or a single. This is really important because it determines much of what you do - and who you hire and whose money you take. The reality is the vast majority of startups that succeed turn out to be single. Very few ever IPO (fewer than ever). Most will get acquired if successful. And for you as a founder you may be a lot better off taking smaller money from angels or smaller vc's, controlling your destiny more and getting a larger share of a smaller business (and more total dollars) than someone who swings for the fences and even if successful gets a very small piece of that bigger business. Regardless, you need to build your business to be independent, not just to be bought. 

Always have a clear plan - but be nimble enough to change it if you need to. If revenues are less than you planned then you need to find new growth or cut expenses. This is partly why investors bet on people - things rarely go according to plan and how the people handle it is key. Knowing where you are on your roadmap then becomes key - is your hypothesis (for that's what it is) working or not? By the way - as I've written about before - tying funding to milestones is wrong, not just because its a cheat on valuation by the investor but because you may need to change the plan and the milestone becomes a millstone.

However metrics are important. Here's what we said we'd do. Here's what we did. Here's what we're going to do next. It's your feedback mechanism. Why is something drifting? Be ready to reset if needed, or take other action. Be super transparent, regular, communicative and avoid surprises.

Mistake #8: Being Penny-WIse and Pound Foolish

As a financial advisor and CFO to startups of course I have to echo the starting point on this one - the panel's statement that you need to have a good CFO or Controller. It's still a surprise to me that so many startups don't have either one - and in fact frequently don't even have a good bookkeeper or basic financial information available. The panel view was that you need someone on board who doesn't want to spend money BUT the real key is someone (CEO's are often not the right ones) who can help make the right trade-offs. After all, saving $5k a month in online marketing is a false economy your total burn is $150k/month and not spending the $5k means you take X months longer to make your target. Not having a top sales person is a bigger mistake than having a colour copier. I'll repeat a personal view here: the right financial person on board (emphasis on RIGHT) will pay for themselves many times over in better business decisions and return on investment. 

When you have raised money (see below) then have self-control and don't defocus. If your plan said you would spend $Y on marketing and you raise the money you needed then don't go spend that $Y on swanky new space instead.

Mistakes #9 and #10: Never Be In The Position Where You Have No Money; Don't Raise Too Much or Too Little

Sounds obvious. Amazing how many don't figure it out. Cash is the rocket fuel so you need to raise it. Be sure you know you much you need to get to the next key funding milestone - then raise more because it will take longer than you think to achieve that milestone. But also, raise money when you can, not when you need it. Timing is a key factor - not just in your business but when the market is more ready to supply funds is critical. 

Be forced to make tradeoffs and prioritize. Be very lean during product development and market discovery, then accelerate to ramp up the customer acquisition and returns.

Raising lots of money at a high valuation means you need to have a big exit. This will NOT happen for most companies. Solid singles (an exit in the $50 - $100m range) are a great result for most people. When raising money don't obsess on valuation. Take a reasonable valuation and focus on increasing it solidly between rounds. Down-rounds are viewed very negatively (in fact they can be the kiss of death).

Finally, raise money strategically. This means raising based not just on cash needs. You need to have in mind what business you're building over the longer haul, who the investors are and what they bring to the table that can truly help move the business froward. Yes, terms are important but get a win-win-win out of it.

Top Ten Start-Up Mistakes. Not What You May Think! Part One ...

I spent some time at Orrick's "Top 10 Start-Up Mistakes" event this morning, part of their Total Access series. Despite their size Orrick is a great law firm for early-stage companies (they have a dedicated practice for that group under Don Keller, who was partner on my first startup in the late 1990's) - unlike some other tech law firms who have become too big and arrogant for the little guys.

Panelists today were Ann Miura-Ko of FLOODGATE (formerly Maples Investments) and Howard Hartenbaum of August Capital, along with George Garrick, CEO, Offerpal Media and Gary Swart, CEO, oDesk.

As we know there is no limit to the ingenious ways people find to royally screw things up - as a start-up or anywhere else. As one panelist put it, experience is what you get when you fail to get everything else you wanted so, in lieu of learning the hard way, learn from others! In order of importance, most important to least (of the Top 10), here's what the panel said. I'll cover some of them today and some in my next post.

Mistake #1 (The Worst): Burning Your Bridges

Paraphrased, this came out more as "live by your word and act with integrity". Interesting #1, this, because its not limited to startups, obviously. In the world of startups, however, there are many inexperienced people, sometimes significant personal money at stake, lots of uncertainties and a huge amount of trust needed between investors, boards, founders and employees to pull it off.

This can cause people to behave, lets say, in a manner which is less than desirable or ethical. And outsiders sometimes take advantage of this (example quoted: Facebook's and Microsoft's habits of structuring acquisitions to offer more value to key people they want to keep going forward, vs. the deal already agreed between the investors and the founders/employees).

The point comes down to this. As you go into this with your team - all of the stakeholders - keep your word, make sure everyone feels good and properly treated and take care of your reputation. If you shake hands and then do something different it will come back to haunt you.

Mistake #2: Not Focusing Nimbly

Focus is critical in startups. Its very easy to get distracted, or overreact to outside factors. That said, the reality is that things change as you go along. So you need to be highly focused, yet nimble enough to change tack if something happens to significantly impact your plan. Fact is, many successful startups never set out to do what they ended up doing.

Ann Miura-Ko from her investments: Chegg was Craigslist for Colleges - until Facebook started doing it, so now it's textbook rentals for students; Circle of Moms was started as Circle of Friends by two young, single (no kids) guys as a way to create groups on Facebook, so when Facebook started doing the same thing they focused on Moms as one of the key active large groups that formed under their prior plan. (Hmm, notice a theme in Ann's investing??).

Focusing nimbly was also defined by one panelist as being able to say what you do clearly, in one sentence. Focus certainly, not sure about the nimble ...

Mistake #3: (Not) Letting Your Investors Become Your Trusted Advisors

This one actually focused more on developing the right dynamic between you and your Board/investors. A consistent theme was along the lines of "well, you (the CEO/Founder) are in charge and you need to run the company", with of course the caveat that if we don't like what or how you do it then we'll take you out. Reality is that you need to pay a lot of attention to who you take as your investors and how the dynamic will play out. Many investors have two completely different sides - when things are going well, and when things are not. So check out both sides with people who have worked with both sides - before you take the money.

If you need more help from your Board or investors its OK - to a point. Introductions to potential partners? Great. Taking over running the business - not good. It all depends on the timing, the relationship and the needs. Generally investors want you to listen to what they have to say, but not be told what to do (otherwise they should get someone else). So you have to figure it out but with their advice and input.

This also helps with one key point: never surprise your Board! Always keep them in the loop, knowing what's going on.

Mistake #4: Not Having Trusted (Valuable) Advisors

Naturally I like this one (becoming a trusted advisor - and earning that role - is one of the ways I help startups myself). And I agree with it because even experienced entrepreneurs don't know it all. They tend to know a few things well, and the rest has to come from around them - the team, the investors/Board and the trusted advisors.

In this case "trust" means "valuable". They need to add true value. If they are just names on paper to look good then they're just endorsements -and largely worthless. They need to be real help to you. You should hire an advisor the same way you hire an employee - carefully, with reference and other checks. Paid or unpaid, cash or stock, depends on the value and the role. 

However advisors will get frustrated and move on if you don't know how to use them, receive the advice and know how to parse and act on it. This does not mean blindly following the advice. But if you ask for advice then please accept it and decide how you will use it. And don't try and do it all yourself.

More in the next post!

Rugs to Riches - Saeed Amidi and the Plug and Play Silicon Valley Story!

If you want to get a first-hand, very intimate view of growing a successful business in Silicon Valley in the age of the internet then listen to this 30-minute segment from BBC Radio 4's In Business programme (listen online or download as a podcast). 

Actually it's the story of Saeed Amidi and his family's transition from leaving Iran prior to the revolution and, because they could not then go back, how they made their way in Silicon Valley. Saeed is now a good friend of mine as we've worked together for a couple of years at his Plug an Play incubator in Sunnyvale and the story is a great example of why Silicon Valley is the one and only Silicon Valley!

It starts with storing their family rugs in a building on University Avenue in Palo Alto - behind papered up windows - and then accidentally getting into selling the rugs after they tear down the paper. This leads to meeting successful VC's and executives of recent IPOs who want ... rugs for their mansions. Saeed buys the building (listen to how he deals with being told by Mr. Pappan, his landlord, that the building is for sale for $1 million but Pappan tells him he'll have to pay $1.2 million because he's always late with his rent) and then starts renting space to startups. Not just any startups but in part through his rug connections its to the fledgling Google, Paypal, Danger and Logitech. A few times it's mentioned that this is a "lucky building". I should think so. Foursquare is in there now! Here's a photo of the first group of Google employees in front of that building, 165 University Avenue.

Of course Saeed was not just a landlord. He was smart enough to ask for equity in each company as part of the deal to rent the space. When you look at the list you know just how smart this was!

Then the story broadens out into the bigger Plug and Play operation that Saeed has built since then, including the 160,000 square foot incubator in Sunnyvale, a former Phillips Semiconductor plant that was empty for 6 years before Saeed bought it in 2006. Plug and Play is now a vast ecosystem of startups (over 200), events, venture capital meetings, cloud computing services, Executives-in-Residence (I'm one, part time) and so on. Now Saeed is looking to broaden further, bringing startups here from all over the world - Canada, Asia, Italy, Spain, you name it - and starting to brand the Plug and Play operation into places like Singapore.

It's an American-immigrant-makes-good story. And its a Silicon Valley as the center-of-the-tech-startup-universe story. And its a we-can-help-the-world story. I love it!