## Startup Teams

#### Attracting Talent & Assembling Startup Teams

Roles and Titles in a company
• CFO
• CXO
• EVP, SVP, VPs
• Director of ...
• General managers
• managers
• engineers, technicians, accountants, admins ...
Usually, 6 - 12 for each manager to oversee, ideal number is 6 or 7, for smaller company.
Typical product company Hire people & set up Co. -> Design -> Build Inventory -> Sale closed -> Collect Cash
You need cash to make sure the biz run, for example, when you build an inventory for 1 million, but the sales maybe sell in 30 days, and collect money 60 days later, you need 90 days money. A lot of the companies run out of biz because they success. For example, the finger print companies.
Timing of Capital Idea discovery & mkt Research -> Pre-Seed -> Prototype -> Seed -> Prod Dev -> Startup funding -> Prod Delivery & customers -> Expansion funding -> Scaling & Channel
Money resources
• Friends & family - $10k to$100k
• Angel investors - $200k to$2m
• Early stage VC - $2m to$10m
• Late stage VC - $10m to$50m
• PE or IPO - $50m to$1b
IPO is nothing, but another financial event as finding a VC, but from general publics
Factoring market, is that when you get an order, and you can take to them, they will take the risk of not paying or paying, but they will charge 10%
Dilution, as you issue shares, the denominator is increasing.
company value = stock price * number of shares
The usual Equity Distribution is shown as the following figure for a startup.
Example
If we have 3 people start a company
• Before investment
• 10M shares issued
• Each founder has 25% (a total of 75%), reserve 25% for employees & advisors
• Price $0.01 (this will resulting in company valuation of$100k)
• Now the Equity Ownership is shown in the following figure:
• 1st round investment (series A, product development)
• Pre-money valuation ~$2M (this will be done by agreement with Investors) • Per share price =$2M/10M shares = $0.20 • Investors put in$3M (buy shares at $0.20) -> 15 M new shares will be issued • Post money is$5M ($2M pre +$3M new money), investors own 60% of the company now.
• Total number of shares = 10M + 15M new = 25M
• Now the Equity Ownership Post Round A is shown in the following figure:
• 2nd round investment (Series B Product deployment)\
• Pre-money valuation ~$10M • New per share price =$10M/25M = $0.40 • Investor put in$8M (buy shares at $0.40) • New 20M shares issued ($8M/$0.40) • Total 45M shares (existing 25M + new 20M) • Post money is$18M - everyone gets diluted, they all get smaller share of a bigger pie
• If the board decide to add 5M shares to Employee pool (ESOP)
• Now the Total shares = 50M
• Now the Equity Ownership Post Round B is shown in the following figure:
• 3rd round investment (Series C, channel expansion)
• Pre-money valuation ~$50M • New per share price =$50M/50M = $1.00 • Investors put in$15M
• Post money is $65M - everyone continues get diluted • 15M new shares issued (total 65M) • Now the Equity Ownership Post Round C is shown in the following figure: • Initial Public Offering (IPO) • Valuation by investment bankers ~$100M
• Reverse split shares 5:1 to get decent price at IPO
• Market usually needs to see stock price in the $6 to$18 range
• Now 65M outstanding shares become 13M but they are 5x more valuable
• 13M shares pre IPO
• Sell 2M new shares at IPO at $100M/13M =$7.70/share
• Raise $15.4M for operations (less fees) • Employee lockup • Founder lockup • Now the Equity Ownership after going public is shown in the following figure: We can also see at different stages, the founders' ownership is diluted, but the total value is increasing. sharesPriceOwnershipValue Founding7,500,000$0.0175%$75,000 Series A7,500,000$0.2030%$1,500,000 Series B7,500,000$0.4015%$3,000,000 Series C7,500,000$1.0011%$7,500,000 at IPO1,500,000$7.709%$11,550,000 Vesting Vesting is an interesting concept to protect early companies. For example, if you have a co-founder who have 50% shares of the company. But he left the company within a year of the start of the company. After a few years, you sell the company for$200M, do you need to give your co-founder 100M? The answer is no, because of vesting. Vesting means that at the very beginning each founder gets his or her full package of stocks at once to avoid getting taxed for capital gains; but the company has the right to purchase a percentage of the founder's equity in case he or she walks away. This means that if your partner walks away after a couple of months, he or she will not be able to claim those 100 million dollars because the company purchased his or her equity when he or she left the company. In essence, vesting protects founders from each other and aligns incentives so everybody focuses towards a common goal: building a successful company. -- from Here For example, the following figure shows you how vesting works. Standard vesting clauses typically last four years and have a one-year ‘cliff’. This means that if you had 50% equity and leave after two years you will only retain 25%. The longer you stay, the larger percentage of your equity will be vested until you become fully vested in the 48th month (four years). If your co-founder leave within a year, he or she will have nothing, ### Building a team What do you look for in a team? • Passion • Hunger • Alignment of vision • Technical competence • Leadership ability (earn other's respect) • Prior experience matters less Board of Advisors • Domain experts • Market experts • Channel experts • Technology experts • Personal coach & mentor • Celebrity Board of Directors • Fiduciary responsibility • Come with money • unless their name will generate extreme credibility • Limit size & be very choosy • No family or relations ## Case study - Vermeer Technologies This week we discussed the Vermeer Technologies case For this study case, it shows how important to select the best team members for a startup. At last, the VCs don't want the founder to be the CEO because he didn't have the operational experience before, but he really wants to, how he will decide? To go or not to go? What's the difference between begging and negotiating? Leverage, his answer is 'Yes, I agree with you, I don't have the experience, we can have a new CEO, but let me be part of it. I can be the temporary CEO for 9 months, while we are looking for a new CEO. We don't have new strategy for the next 9 months, and no one knows the company better than me'. Remember, the last thing VC wants to do is to find a new CEO. When we interview someone, we should give them the feeling of special. If you give the offer to soon, they may think it is cheap. One example is from the instructor, when he had interviews with his previous company, he interviewed many candidates, but none of them is good enough. One day, he met two really good candidates, and he gave them offer soon after the interview, but both of them refused the offer. Because they didn't feel they've been chosen. Therefore, making some difficulties for them is good. ## Acknowledgements: All the materials are from the entrepreneurship class at UC Berkeley taught by Naeem Zafar ## Friday, March 24, 2017 ### Entrepreneur training 5: Product Development & Project Management ## Product Development & Project Management This week we talked about all the product development and project management. We first answered the following 3 questions: • How are companies organized? • How do projects get approved & executed? • Who does what? To whom? These are the answers for the 3 above questions: • Product manager - the one to connecting the dots, listen to sales, customer, competition. What we are building and why? • Project manager - making sure the project, tasks is done, schedule. Is making sure things on schedule. What should be on time? • VP of engineering (or R&D) link • Architects - Conceiving the idea • CTO - look Horizon • CFO - financial • CEO - glue of all people Waterfall method - sequential process for software development #### Agile method • Simple structure, simple rules • Whole team communicates every day • Delivers in small fixed time intervals • Refine, test, see something working, repeat! • Reflect & improve your product, plan, process ### Waterfall vs Agile You should get customer feedback fast and make the testing customers as part of the team. But different customers may have different feedback, it is product manager to make the decision. Starts with the smallest, cheapest features, and add more features incrementally. In this phase, perfection is the enemy. Before dropbox have a product, they did a demo online to get customer feedback, it was a great success, see the demo below: Don't let the developer as the tester, you really want someone different to test the product. You should have your customer as the first and worst customer. #### Product team roles 1. Product owner/product manager • The primary customer advocate • Intimate knowledge of customer needs • Defines the product requirements 1. Developers • Chief Architect/Chief Engineer/CTO (owner of the product) • Expert in all of the technologies used in the product • Senior Engineers/Technical Leads (owner of the subsystem) • SME for their area. Own a module or a subsystem • Developers (owner of some codes) 1. Testers (destructive mind) • Chief Test Engineer: sets test strategy • First and worst customer for the product • Tries to emulate all customer use scenarios • Gatekeeper of the releases alpha release - I have a product but I haven't tested yet. This is not a final product. This is limited to a few testers and you have to talk with them on a weekly basis. Beta release - Should be usable by a large number of people. #### Development resources 1. Break down effort for every subsystem into “byte-sized” (1-2 week) • Senior engineers should be able to find tasks they’ve done in the past as a reference for the estimation. • Find dependencies between tasks • Group features into “sprints” (2-week time-box) • This will give you the total number of drops you will need to get to your first release • You can add more developers to shorten the delivery time • This is just an estimate - typically it will take longer • Add reasonable contingency (25% 50%?) to your estimates • Decide on ratio of Test Engineers to Developers for your product • You will typically need 1 tester for every 2-4 developers in SW • GUI-heavy products will require more SQA engineers • Developers can also do QA as long as a developer doesn’t test her own code #### Tracking development progress • Weekly/biweekly sprints • timebox: if a feature doesn’t make it to the current drop you push it out to the next sprint • Daily standup (10 min) • Remove obstacles fast • Identify & resolve new dependencies • Kanban Board Micro-management - Tell people how to do it. This is not good Management is - What to do? And ask people how you will do it? Management is also gluing people, delegate is really important. Managing and leading, difference. Manager’s job is to break down the elements, and connecting the dots. Summary • Get customer feedback fast • Release frequently • Fail fast - always assume you are building the wrong thing • Fail frequently ### Acknowledgements: All the materials are from the entrepreneurship class at UC Berkeley taught by Naeem Zafar ## Friday, March 17, 2017 ### Entrepreneur training 4: Financials - Statements, Models & Unit Economics This week we talked about all the finance a startup founder needs to know. We first talked about how to interview your customers, i.e. what kind of questions you should ask. I think this is really useful since if you ask the wrong questions, you can not get what you want. Also, if you don't design your question good, then you will just get a 'Yes or No' answer, which is also not that useful. Instead, you want to get into the customers' head and try not bias them. Ask them what problems do they have, did they look for or used some methods to solve the problem, how that works. You try to understand how they decide, how they do, how they try different things. ## Case study We discussed the Elite Personal Training case. In this case, two people are planning to start a one-to-one gym training business in London. They face the questions as: Who is the target market? What's the right price to start? It is a very nice case study to show you how to do a survey for the target market, and how to calculate the income, costs etc to get a break even price. Some key concepts are: fixed costsvariable costsbreak-even point. Indeed, as an entrepreneur, these are essential to know and estimate before you decide to do the business. It is also interesting to see that even though the market size is not that large for them, but because the break-even point for them is really low, therefore, it is relatively easy for them to start the business and get a profit. ## Lecture After the case study, we talked about the concept of Unit Economics. In a simple word, it is the cost and revenues associated with every transaction you make. We then talked about the following 3 concepts: 1. Income statement (also known as P&L - Profit and Loss statement) - this is the continuous movie 2. Balance sheet - this is more like a photograph, two tables showing all the money you have, and all the liabilities. 3. Cash-flow statement. Here is a difference between P&L and Balance sheet Your 'real' business plan is (this is what investors will be looking for): • cash needs • hiring plans • profit projections • fume-out date • sensitivity analysis Why we do financial modeling? To answer the most important & fundamental question: Does this make sense? The financial model is clarity about your business, it is built from common sense: • sources of revenue • sources of expenses • net income Basic concepts: • Price • Cost • Revenue • COGS (Cost of Goods Sold) • Gross profit = Revenue - COGS • Operating expenses • Net profit • Fixed costs vs. startup costs vs. variable costs • Gross margin = gross profit / revenue or GM = (Price - Cost)/Price What do you need for VCs 1. List of key assumptions 2. 5-year P&L statement P&L statement, how much negative you need raise, and this is the money you need to raise. First year + Second year + cushion. As the CEO, you should be the first one to do. For the investor, they will challenge your assumption. You need to build this by yourself, since if you hire someone to do it, then you will be in trouble in the first 5 min in front of VCs. Basic Structure of P&L • Sources of revenue • Hardware, software, or services • Realistic & conservative in year 1 & 2 • Hopeful in year 4 & 5 • Gross profit • Revenue minus direct cost of sales (COGS) • Sources of expenses • G&A (general and administration) • Sales and Marketing • R&D • Capex or any other big expense peculiar to your business • Net profit Cheat Sheet to make P&L • Make sure that Year 5 revenue is between50m to $100m (unless you are after Angels only) - State assumptions • Net Income typically does not exceed 30% - Don't under estimate Y5 expenses • Ask for enough money to get to the next stage of de-risk (tell us what it is) The numbers should all within the zone of reason. For example: When investors look at your P&L, they focus on the percentages. In a software, Research is 8 - 16%, 35-55%, 8-12%. 50 - 100 million in the 5th year. ## Take aways 1. Know your key assumptions & have plans to always validate them 2. Financial model provides real insights to your business - do 'what-if' analysis 3. It is not complicated! ### Acknowledgements: All the materials are from the entrepreneurship class at UC Berkeley taught by Naeem Zafar ## Saturday, March 11, 2017 ### Guitar: Song for Father ## 父亲 (Father) This is the song I played for my father for his birthday, it is by Chopstick Brothers. Now myself is a father of a two-year-old, and I realize how difficult my parents were to bring me up. I found the English lyrics: 总是向你索取 却不曾说谢谢你 I’m always been asking and demanding, but I’ve never said thank you 直到长大以后 才懂得你不容易 Only after I grew up did I understand it wasn’t easy for you 每次离开总是 装做轻松的样子 Every time I left, you pretended to be at ease 微笑着说回去吧 转身泪湿眼底 gently smiling and told me to go on, only to turn away with tears in your eyes 多想和从前一样 牵你温暖手掌 Oh how I wish it was as it were in the past, to hold your warm hand 可是你不在我身旁 托清风捎去安康 but you are no longer by my side. May the wind brings you peace and health 时光时光慢些吧 不要再让你再变老了 Time, time, please go slow, so you won’t keep getting older 我愿用我一切 换你岁月长留 I’m willing to give everything I have so that you can live longer 一生要强的爸爸 我能为你做些什么 Dad, who has always pushed me to be better, what can I do for you? 微不足道的关心收下吧 Please accept my care for you, however incomparable it is [to what you gave me] 谢谢你做的一切 双手撑起我们的家 Thank you for everything you do, for supporting our family with all your might 总是竭尽所有 把最好的给我 always doing whatever you can, always giving me the best 我是你的骄傲吗 还在为我而担心吗 Am I your pride? Are you still worrying about me? 你牵挂的孩子啊 长大啦 The child you’ve always been concerned about, has grown up ## Friday, March 10, 2017 ### Entrepreneur training 3: Positioning & Business Models ## Lecture ## Today's class is about Positioning & Business Models, Customer Value Proposition. We talked different type business models, I found a very nice cheat sheet of common business models. What is business model? Summation of core business decisions & trade-offs employed by a company to earn a profit. In a simple word, a business model is the box that you put into$1, and it outputs more than $1 that we can have a profit. We then discussed some important concepts: Gross profit Net profit Customer Acquisition cost Revenue per customer Lifetime Customer Value (LTV) Churn (2% churn rate is typical for phone companies) Also, the teacher showed us how Walmart, Dell, Grateful Dead, 7-11, Dropbox, Airbnb, ebay, HP printers, google, skin vision, freeconference.com and so on to change the existing business model and become success. All these examples really strike me, by changing the business model, sometimes you can reshape the whole market. Business model is really important, by doing things differently with existing resources, you can achieve success as well. To success, technology is not the only thing. Change business model, channel all can make a difference. ## Case discussion ## This week's case study, we discussed how to enter into a crowd, mature market - Virgin Mobile USA: Pricing for the Very First Time. This is very nice case that showed us the process how to evaluate. We worked through an example, which I will try to summaries here. First, let's think as a phone company, what cost we may have. Advertisement$75 - $105 Sales person$100 Subsidy for phones $150 Credit check$15 - $20 Stores$20 Infrastructure very high Bill - printing/mail $2 Hotline -$4 Collection - $5 What they decide to do is aiming for the Youth segment, which are the ones with age 15 - 29. This is unmet need, since these people are treat as non-profitable group before by main carriers, since they don't have high buying power, they don't have nice credit history to sign a contract, they have very high churn rate. How Virgin mobile decide to go into this market? Since aiming the youth group, they don't need Ads in CBS, CNN, instead in comics, and the ones youth likes, these will be much cheaper, therefore, they can reduce the Ads to$60 For sales, they decide to put the product into cool packages, and sell it as the toothpaste that hang in the store, that don't need sales person Subsidy for phones, they found a company from Japan with new phones ( Kyocera) instead of big names Nokia, Moto, which saves money. They can also advertise, new, cool phones.  For the youth, they choose to give them pre-paid option, which you don't need contract and credit check, removed all the fees Instead of telephone stores, they decided to display the products in bestbuy, target, music stores that the youth usually go, and this also saves a lot of money Since the youth have totally different calling behavior, they are more active from 5 pm to 8 am instead of business men 8 am to 5 pm. Therefore, they decided to rent Sprint's network, and collaborate with them to avoid build and maintenance fee They choose online form of bills to get rid of cost for printing/mailing. Also, this will protect the privacy of the youth from their parents seeing their bills.  Add FAQ online, this removes most of the hotlines.  The pre-paid approach also get rid of the collection fees.  They still have risks, this is hwo they reduce it: The youth has very high churn rate. They actually providing more content for the youth, such as MTV, Music hit list, etc, these unique features are the youth pay attention most How do they keep the channel partners. Target, Bestbuy may not provide the stores for them. Make them shareholders.  Sprint may not rent the infrastructures. Make them shareholders Kyocera may sell to others. Sign exclusive contract.  The results, they achieved their goal to attract the youth and surprising old age groups (they like the idea of pre-paid phones). They went public, and sell to Sprints ~$500 million for the rest of the 28% share they have at last. Key points: You must have your own story, since people like stories, like Bible, fairy tales. Your business model must have nice story. Educate customer is really hard, and needs tons of money. This is especially difficult for startups. To success, technology is not the only thing. Change business model, channel all can make a difference. Targeting the right customer is really important, and then you can dig deeper as shown in the case study. Positioning requires intense customer & market knowledge Immerse yourself in user experience to see positioning Observe, not just ask users Identify your user & your customer to a much finer level that you may have thought You start with the specific customer target, and then you can have all the questions, where they shop, what they need. ### Acknowledgements: ## All the materials are from the entrepreneurship class at UC Berkeley taught by Naeem Zafar. ## Sunday, March 5, 2017 ### Wife's painting: Tools at home ## Wife's painting: Cubism My wife worked on two new paintings this week. I am impressed again and learn something new - Cubism. It is really a cool idea that originated from paintings and inspired music, literature, architecture and so on. In Cubist artwork, objects are analyzed, broken up and reassembled in an abstracted form—instead of depicting objects from a single viewpoint, the artist depicts the subject from a multitude of viewpoints to represent the subject in a greater context. You can check out all my wife's paintings. ## Wife's tools at home This is the original painting my wife drew. According to her, this painting clearly shows her nature and characteristic at home. When you first look at it, you will soon get the idea that she is doing shopping and cooking at home - these are her tools in daily life. You can see different materials in the painting, including wood, metal, paper, glass, plastic and brick wall. You can imagine the diversity of the food she makes, i.e. noodles, fried dishes, soups, etc. The only spoon that placed outside of the glass cup highlight the fact that she really enjoyed making soups - she has her own unique way to make delicious soups. The ones in the glass cup form a bundle of flower, which shows her love of life, and can find enjoyment from boring things. I know shopping and cooking take a large part of my wife's time (since I am not doing any of cooking at home), this is a big support for my study. Also, I am glad that she always seems energetic while cooking, which also affects my mood every day. ## Wife's tools at home (Cubism) 2017-03-01 The Cubist version of the tools. Now we are not focusing on some of the tools. We start to see the same things but from a completely different viewpoints. According to her, this is real life - we can not always see perfect things. Most of times, we only see some aspects of an object that scattered in our life. This is also a metaphor in our life. Nowadays is an age of knowledge explosion, and we get information from different resources - such as friends, Internet, TV, radios... However, just like the tools in the second painting, this information is often scrappy and in disorder, even conflicting with each other at times. In this situation, everyone should screen and reorganize all the information we get in order to see the truth of our world. More important, when our conclusions are inconsistent with others, we should be more tolerant and inclusive. Because people from different culture backgrounds often see things differently. But that doesn't simply mean we are wrong or they are wrong. Only if combining all different views together rather than sticking to our own thinking, we can have a better view and understanding of our world. ## Friday, March 3, 2017 ### Entrepreneur training 2: Opportunity identification ## Opportunity identification This week's topic is opportunity identification. We actually first discussed who should be in the Board of Advisory, there are 5 categories: 1. export in the domain 2. someone who knows the technology 3. channel 4. personal coach 5. celebrity Usually the share should be around 0.25% 2-3 years, more useful 1 - 2 %, and less useful is 0.1% In the lecture, we revisited the 'RightNow' example from the Bootcamp, and how to spot opportunities. Deep insights + expertise + shift (new law, new regulation, new tech) = spark! Filters to identify good ideas 1. unmet need 2. market size 3. differentiated position 4. scalable business model 5. why us & why now ## Case study For the case study, we discussed Veridicom (A): If You Build It, They Will Come. It is a very interesting case shows how the Veridicom went up and downs in its path to sell to Apple. The things I learned from this case are: 1. the fingerprinting sensor system is a very interesting system. It includes scan the image of the ridges and valleys of the finger using thousands of built-in capacitive sensors, the matching algorithm to match the pattern, and data protection software then erased the actual fingerprint image, but did store a set of characteristics unique to the fingerprint (that even if stolen could not be used) for future identification. 2. The different views of the founder and the technical lead is very interesting, the technical lead saw the founder as a way to get money for their projects, not necessarily because they wanted to build a company. The same vision is very important for companies, especially for startups. Also, we can see that the start of the company, all the founders actually live in different places, and this also reflects the team dynamics. 3. VC invest in technology, people, and markets order. 4. Timing of starting a specific company with the technology is really important, if you don’t have outside support, even your technology is really advanced, you can not success. Think about you are a smartphone app developer before there is a smartphone. 5. “The number one lesson that I learned when you are starting a company with just the technology, is that you need to hire a marketing guy before you hire a sales guy” 6. The early fail of the company is due to they did not figure out “who exactly are the customers”, therefore, the transform from OEM manufacturer to a solution company that aiming for then banks is a very wise move, and leading to some big customers first to advance the business. 7. It is a little crazy to see that the board fire the founder CEO, but I guess this is how the company evolve. 8. Identifying the existing competitors are important. 9. If the market size is really small, you can not grow, and you will not attract investors. Usually VCs like to invest market size$1B, and angel investors may have a lower threshold ~$100M. Less than$100M, is a niche market, and you can not attract investors, or only hobbits. Public good, and some foundations maybe interested in it.
10. Crisis management is very important because you will have a lot of crisis on the way.
key points
• Opportunity identification is paramount – understand unmet need of the user
• Velocity of execution is more important than over planning
• Simple ideas, well executed, yield best results
• Aligning like-minded people and executing with convictions, surrounding yourself with the right advisors works real well
• Fast beats good!
• The number 1 killer of the company - you never find customers
• Too many opportunities will be distractions
• Why do companies fail? They ran out of money

### Acknowledgements:

All the materials are from the entrepreneurship class at UC Berkeley taught by Naeem Zafar