Resources for founders and wannabe founders

I structured along 6 core stages of a startup’s/founder’s way links to the most succinct and applied best practices I know:

  1. Decide/self determination + open-mindedness + find co-founder(s). Doesn’t need investments
  2. Build MVP (minimum viable product) to check initial vision/hypotheses. Could be done in a part-time. Angel funding may be needed
  3. Reach PMF (product market fit), which is proven by either stable revenue growth or viral/exponential adoption if no revenues. Seed funding by VCs
  4. Growth, growth hacking and team scaling. So-called Series A funding by VCs
  5. Late stage –> Unicorn. How to delegate everything through teams. Series B..C..D etc. funding by VCs & PEs
  6. Exit and growth after it, usually via M&A or [rarely] via IPO

Each such stage assumes solving of a few core issues:

Stage I – Decide + open-mindedness + find co-founder(s)

Courage and psychology

  • World is full of critics/nihilists and will challenge you or don’t even get you, that’s a feature of people – majority is sceptical, and some fraction are even haters. Friends also –> so, simply seek your tribe/peer group – people who work(-ed) on comparable challenges and you understand each other
    • Founders are really friendly to their peer group. Simply find your friends or contacts who already founders, check former colleagues and university alumni, tell them you do own endeavor and want to ask questions from time to time. People surprisingly like to reflect how did they get there or scaled themselves
  • Radical open-mindedness vs. stubbornness = many great founders are ultra-fast learners daily yet maintain their course through the year (follow your purpose, nature has built us differently. Elon Musk in 2003 planned spacemen launches in 3 years, actually it took 17)
    • Founders are clearly more open-minded and experimenting than the general public or corporate value-keepers
    • Btw, I have seen privately that majority of unicorn founders are not less stressed, and that’s a secret, people outside believe that unicorn is like you are in Eden already, while in reality they are very humble and even more curious & open-minded than before
  • “What’s with me? You are fine”
    • Founders are extremely different and should not compare themselves with other founders at all
      • Naval Ravikant even formulates that founder references are useless, because founders are always unique: compare the creator of the anti-capitalist Craiglist or fintech founders who quickly pitch banks and regulators
      • There is interesting metamodernist observation on increasing people’s neuroatypicality by Daniel Görtz
    • Sometimes you may go through period (even 1 or 2 years) of “doing nothing” and research of yourself through spiritual practices before you decide to do a startup, that’s called the Individualist stage (page 20-22 here in Cook-Greuter) in so-called vertical development theory

Сo-founder search

  • Offline search is on hackathons/meetups (preferable) and startup conferences (less preferable) – people indeed tend to socialize with like-minded people. In-person meetings allow faster understanding/deeper communication/more trust. In UK entire Entrepreneur First was based on idea of matching co-founders. Online search e.g. on YCombinator co-founder dating platform (100k ppl matched)
  • Trial projects to check: people cannot predict themselves, so, simply do trial projects together (or first steps of your startup) to get to know each other
  • Roles of founders are usually complementary: typical duo is “hacker” (CTO) + “hustler” (CEO, sells/hires/fundraises). Also, there are “hipsters” = designers, people with extreme level of aesthetics
    • CTOs and designers stick to non-interrupted schedules with long blocks of time, hustlers may have 15 different zooms during the day

Half of YC startups were part-time at the moment of acceptance into YC batches – so, no need to over-dramatize and leave your job if you have important one or a family. (I saw startups where 20 people worked part-time till a multimillion seed round happened and people left employers). That’s because many 0to1 startups need time to emerge/like pregnancy (= hard to speed up), yet for rapid copy of something proven in one geo to another may indeed need fulltime run

Stage II – Build MVP

Why startups exist? Because nobody has a full monopoly on the future

Ideas

  • It looks like today all 3 approaches to startup ideas work well:
    • (1) Customer research to find problems, when founder seeks opportunity
    • (2) Bottom up visions based on deep understanding of customer pains by observing it from first-hand experience as a user or a manager
    • (2) Irrational desires to do something/mission/direction (“Colonize Mars” of Elon Musk)
  • There is a looking simple but very deep 30 mins video by YC in 2022 on how to get and evaluate startup ideas
  • Anyway and anyhow, lean startup approach assumes that you run weekly sprints, doing only the most important product features AND instantly getting user feedback. YC’s Mike Siebel has top speech on how to plan MVPs, with transcript

Right legal setups

  • One word you should know is vesting (and, probably, cliff) – it is when shares of founders or in employees’ options or advisors’ shares are transferred from company linearly monthly during 4 years of working together, with a right to stop. Because you cannot have a co-founder who says after 1 year “I gotta go” but still keep half (or a third if you were 3 co-founders) of the company. Shares should be deserved.
  • Majority of [future and current] unicorns are established in Delaware in USA as C-corp, due to understandable laws by Silicon Valleys VCs. Some EU startups decide to domicile in EU when they criticially rely on EU grants, but looks like this is not a necessary
    • C corp requires board of directors and formal resolutions from time to time (easily – lawyers do them almost like ChatGPT), but is a tax efficient if you don’t distribute profits till the company is sold (and startups don’t pay dividends, they reinvest everything till exit)
      • For non-US tax residents it is basically an offshore company and you will pay your national taxes after exit of where do you have your tax residence (although yes, annualy it has to pay taxes for American revenues)
    • It is less than $1000 to open a Delaware LLC remotely from almost any country in the world at Clerky.com, and have all basic contracts which startup is needed for fundraising + hiring/NDAs
      • Or ask great lawyers here (same price) who could then work on-demand with if you when you will do full-scale equity rounds like on Series A (laywers may cost $10-30K per one equity round, but for a multimillion $ cash-in you are fine)
    • Corporate bank account is easily opened from anywhere in the world in a US fintech for startups Mercury.com or Brex

Hiring of employees and advisors 

  • First 100 employees should be value creators (“we can do it” attitude, ownership mentality, strategic thinking), only then value protectors (skilled pros, who are more important on Seried B+)
  • Advisors should be also vested across 4 years like co-founders and employees via simple advisory agreement. 0.2-1% of equity per 1 advisor. Advisors’ names don’t matter in fundraising, so, they should deliver real weekly value

Angel stage fundraising

  • First of all, VC fundraising is like dating: if somebody doesn’t like you it doesn’t mean anything. VCs are like this – they have different tastes and opinions.
  • If you are not a seasoned founder with exits (then VCs will love to fund you on an idea stage), then your first investors will be friends, family and professional angels (people who take maximum risk by being first investors)
  • Accelerators are helpful but only those who invest $ in you and organize demo-days with investors, not charging you. High-level long-term macro comparison of top accelerators (2023.06) is here, gives lots of insights how differently accelerators operate
    • Don’t apply to accelerators before talking to founders graduated from them
  • Startup studios could be helpful, but should be carefully verified by you through their actual alumni for pros and cons. Because they usually take majority of company’s equity for their initial funding, thus it may demotivate you enormously later (“perform as a founder, reward as an employee”)
    • Because if the startup is growing well and raises next rounds, dilution will accumulate a lot. And when founder even started with minority stake…
  • Legal: Angel funding (and seed) funding now is done mostly via SAFEs (simple agreement for future equity), a derivative invented in 2013 by YCombinator to decrease legal costs for early startups, they outsource docs here
  • Angel stage/pre-seed stage valuations:
    • In USA, according to Carta as of 2021q1 to 2023q2 it was $3-10 mln. for those who raised $250-500K and for those who raised $0.5-1 mln. rounds valuation was $7-15 mln. (7 for 25th percentile, 15 for 75th percentile)
      • All other countries are 2x or even 3x lower valuations for first time founders 

Stage III – Reach PMF

There is no same way to reach PMF, this is unique for every startup, hard to make generalizations

Product-market fit is usually understood through metrics: customers start to pay even for your rough MVP, or, if free (a) userbase + (b) active users grow exponentially

  • (a) Users start to pay even for MVP, where only core product functions are implemented
    • And retention of paying users is stabilizing (sometimes even growing) among user cohorts at 15-20% after 2-3 months, with 25% and more being extremely cool/90th percentile according to Mixpanel bigdata. Cohorts should look somewhat the same and not first cohort is 50% and last is 5%
  • (b) If no revenue, then exponential adoption of free users (both userbase and use), usually it is based on viral mechanics
    • Exponential growth is when the rate of new users registrations / monthly usage (MAU) / revenue in % terms is constant from week to week (or from month to month)
    • Too fast exponential jumps sometimes may lead to fall examples like Clubhouse
  • For purely B2B companies, linear growth of metrics is fine (month to month or quarter to quarter), although projections/extrapolations of it into 4-5 years should give annual revenue of $15-20 mln. and more

Sales: it is investing into marketing channels if B2C, and go to market outreach and sales demos/pitches if B2B (+ channel sales if B2B is done with external partners like resellers or system intergators)

Seed stage fundraising

How funds are working inside?

  • Investment memos: Are used by VCs for their internal discussions with other general partners – VCs try to understand and predict product/competition + market + team. For example, page 10 and further here is Sequoia’s memo on YouTube in 2014. Twilio seed stage investment memo by Bessemer Venture Partners or WIX seed stage also by BVP
  • Here you can see 10 fundraising presentations of real VC funds (due to regulation it is rarely available publicly) – Signature in 2022 (scroll down till “Fund deck collection”): how do they formulate thesis, their value proposition for funds’ investors, how they think about target startups. This helps you a lot to understand how complicated is VC business on every part of the value chain

Stage IV – Growth after PMF

Growth hacking – In modern days startups can benchmark themselves:

  • E.g. there is an expensive but ultra-high quality Getlatka site/metrics database for SaaS across a variety of industries/geos
  • E.g. there are appstore analytics companies like SensorTower

Series A stage fundraising

  • Investment memo examples: BVP’s Series A investment memo on Pinterest in 2011 or Shopify in 2010
  • Logic: Series A..B..C.. etc. are just how equity rounds are marked by lawyers in shares purchase agreements, nothing more complicated. On Series A all previous SAFEs by angels and seed funds convert into equity, captables are usually managed now on Carta
  • Dilution comes into play as many rounds happen
    • In optimistic case (high valuations, small options for employees) let dilution be 0.9 on angel round, 0.8 on seed, 0.8 on Series A, 0.9 on Series B, 0.9 on Series C = 0.9 x 0.8 x 0.8 x 0.9 x 0.9 = 0.46x of initial shares per each founder after Series C of this hypothetical company. With stock options for employees it will be rather 0.25-0.3x of initial shares per each founder. Good news: company’s valuation here is in the range of hundreds of millions of $

Stage V – Late stage –> Unicorn

After Series A startups scale intensively, raising more and more expensive rounds, like this Series B investment memo by BVP for SendGrid or Series C memo for Linkedin by BVP, and become late stage startups: well-known products, lots of capital raised, may be even cash-flow positive

Late stage companies, basically, compare themselves with public peers. E.g. Here is nice and updated monthly multiples for SaaS sub-segment of public tech, 2 years ago (2021) revenue multiple was 11x, now (2023) 7x.

Unicorns, decacorns and $100 bln. companies

Unicorns are startups valued over $1 bln = quite rare species. Some examples of unicorn investor presentations are here via Brett Adcock (mostly deeptech such as Lucid Motors, QuantumScape etc.)

From founder’s perspective – all founders of unicorns pass quite specific filter – teams creation/teams management filter, because you can build $100 mln. biz without delegation, but it is impossible for unicorns

Stage VI – Exit and reaching conditional milestones

Exits are events when startup is acquired (it is called M&A) or does an IPO (or IEO aka ICO) – investors get returns on their $, and founders get rich for their bravery and achievements. Exits happen mostly for 3 reasons:

  1. The company is growing its revenue and EBITDA so well, that either:
    • (a) public markets can price it (when the company has a few years of audited revenue) and is big enough to raise at least hundreds of millions of $ in IPO, or
    • (b) some other (usually public) company wants to increase own revenue or market capitalization by consolidating startup’s revenue
    • (с) sometimes huge private equity firms buy unicorns to make them public later, like Insight Venture Partners bought Veeam for $5 bln.
  2. No revenue but exponential growth and fears of competitors, like Whatsapp for $16 bln. etc.
  3. Acquihire / IP acquisition – to get a bunch of already hired employees into corporate talent pool even if no revenue or whatever. Often linked to cyclical hypes and FOMOs in selected industries

Founders are very different: some go away instantly after IPO, some stay for decade like Android co-founder after acquisition by Google