By Richard D. Harroch, Mike Perlis, and Mitch Zuklie
CEOs and founders of startup businesses face many challenges: raising startup capital, building a management team, developing competitive products, starting a marketing program, finding early customers, and more. The prospect of launching a new startup can be daunting.
We have collectively been involved in hundreds of startups—as founders, CEOs, angel investors, Board members, leadership coaches, venture capital investors, and business and legal advisors. In this article, we seek to provide advice and lessons for startup CEOs and founders based on our many years of experience.
When trying to motivate a team to perform at the highest levels, it’s critically important that a shared understanding of what constitutes success is crisply and clearly communicated to every member. Spell out in no uncertain terms, for the core management team, what success looks like in 18 months, in three years, and beyond.
CEOs and founders of startup businesses face many challenges—are you prepared?
© Olivier Le Moal
The ten key lessons below then become strategic priorities to achieve the well-defined success that is your ultimate goal.
1. Hire the Right Team
Of course, you should hire the right people for your team—that is a truism. Smart hiring is an incredibly important factor to get right for the long-term success of the business. And CEOs should not be reluctant to terminate those employees who just are not working out.
Here are some key questions a startup company should consider before hiring an employee:
- Does the employee have the requisite skill set?
- Will the employee be nimble and entrepreneurial, or are they too used to being in a slow-moving corporate environment?
- Will the employee fit in with the company’s culture?
- Will the employee be adaptable and able to play multiple roles within the company?
- Does the employee exhibit a passion for the business?
- Has the company been able to obtain credible positive references?
- Will the employee add to the diversity of the company’s workforce?
- Is the employee smart and quick thinking?
- Will the employee work well with other team members?
2. Focus on Keeping Employees Motivated and Happy
A big part of the job of a startup CEO or founder is to put programs in place to incentivize employees and keep them satisfied with their jobs.
Here are some ideas that many startup companies use to motivate employees:
- An employee stock option/stock incentive plan that grants equity incentives to all or nearly all employees (subject to continued employment vesting requirements as an employee-retention mechanism). The typical vesting schedule is one-year cliff vesting for 25% of the incentive, and then monthly vesting over 36 months for the remainder.
- Flexible work hours
- Ability for the employee to work remotely from home from time to time
- Quarterly and yearly bonus payments to high-achieving employees
- Health and wellness perks
- Generous PTO policy
- Recognition for great work
- Fun team-building activities
- Regular employee feedback and encouragement
- Celebration of team successes
- Learning and training opportunities
- Goal-setting programs and career-advancement conversations
- Transparency from the management team
- Company focus on work-life balance
3. Be in Continual Fundraising Mode
Raising angel, seed, or venture capital financing for a startup is often difficult and time consuming. Savvy CEOs and founders know they must be in continual fundraising mode, or at least always be fundraising ready. Being ready entails a number of things, including:
- Having a complete up-to-date investor pitch deck available to be sent to prospective investors
- Being open and responsive to investor inquiries (even if you have recently closed a round of financing)
- Having an ongoing PR and marketing campaign that can reach potential investors
- Being introduced to new investors by Board members, company lawyers, and existing investors
- Having a great 30-second elevator pitch ready to give at any time
- Having an online data room housing the company’s key contracts, corporate documents, intellectual property information, and other documents that an investor will want to review for due diligence purposes
4. Expect Big Challenges and Be Prepared for Them
The biggest challenges to starting and growing a business include:
- Coming up with a great product or service
- Having a strong plan and vision for the business
- Securing sufficient funding and maintaining reasonable cash reserves
- Finding great employees
- Terminating bad employees quickly in a way that doesn’t result in legal liability
- Working more that you expected
- Not getting discouraged by rejections from customers
- Managing your time efficiently
- Maintaining a reasonable work-life balance
- Knowing when to pivot your strategy
- Maintaining the stamina to keep going even when it’s tough
- Understanding that you will have to keep at it for the long run
5. Build a Great Product But Don’t Take Forever to Launch
Your product or service has to be at least good, if not great, to start out with. It has to be differentiated in some meaningful and important way from your competitors’ offerings. All else follows from this principle. Don’t dawdle on getting your product out to the market, as early customer feedback is one of the best ways to help improve it. But you do want to launch a minimally viable product to begin with.
6. Focus on Becoming a Great Salesperson
Most CEOs and entrepreneurs are not natural born salespeople. But high sales numbers are often the biggest indicator of business success. Here are practical ways to become better at sales:
- Be prepared to spend a large amount of your time in sales mode
- Talk frequently to customers, in person or on the phone
- Communicate regularly with customers via email
- Try to understand the key issues for your customers: Is it features, price, ease of use?
- Understand the product/market fit and why your product outperforms the competition
- Have constant contact with your sales team to motivate them and to be aware of the challenges they are encountering
- Understand your sales cycle and determine what you can do to shorten it
- Practice and refine your sales pitch
- While not everyone can be an extrovert, strive to be confident and positive
- Listen to your customers and follow up with them
- Ask for the sale
7. Make Sure to Continually Monitor the Company’s Key Financial Metrics
Even if a CEO or founder does not have a financial or accounting background, it is imperative that he or she constantly monitor and analyze the company’s key financial metrics. Failure to do so can have serious negative consequences for the business. Depending on the nature of the business, the following monthly key metrics will be important:
- Cash burn (or monthly positive cash flow)
- Gross revenues (and key components thereof)
- Gross expenses (and key components thereof)
- Gross margin (the difference between revenue and costs of good sold divided by revenue, expressed as a percentage)
- Lifetime value of a customer
- Customer acquisition cost
- Customer funnel metrics
- EBITDA (earnings before interest, taxes, depreciation, and amortization)
- Customer churn
8. Be Open to Suggestions, Advice, and Criticism
If you have a good team, you should listen to their suggestions and advice. Be open to new innovations and changes to your products, sales approach, and marketing strategy. Here are some ways other successful entrepreneurs have done this:
- Hold company-wide meetings where employees at all levels can provide suggestions, insights, and improvements.
- Practice an open-door policy for employees.
- Get advice from other entrepreneurs who have dealt with similar challenges.
- Set up an Advisory Board with people who can help your business and regularly consult with them (and motivate them by giving them stock options in the company).
- Consider working with an outside CEO coach/mentor.
9. Keep Your Board of Directors and Investors Up-to-Date
Board members can be a great resource for challenges and problems faced by a CEO or founder. Keep in mind that Board members hate to be surprised at Board meetings with bad news.
One useful strategy is for the CEO to have a 30-minute call with each Board member individually before a Board meeting, previewing what will be presented at the meeting. This will allow the CEO to inform the members in advance and obtain advice that might impact what is actually presented at the Board meeting.
The CEO should also contact each Board member promptly when material developments occur. Depending on the nature of the matter, such contact should typically be by phone versus email, especially if potential litigation is involved (to avoid litigation discovery issues). Material developments could include:
- Loss of a major client
- Litigation or threat thereof
- Claims of sexual harassment or discrimination
- Material deviations from the Board-approved budget, especially if it affects cash on hand
- Proposed hiring or firing of executive officers
- Inquiries from potential acquirers
- Governmental or regulatory inquiries
- Data breach or cybersecurity issues
It’s also good practice to keep your investors updated on a monthly basis via email. The updates don’t need to be incredibly detailed, but here are some general items you should consider including in your updates:
- Summary of the progress of the company
- Summary of product development
- Team and recruiting update
- Recent press or PR
- Key metrics you are paying attention to
- Financials, including monthly burn rate and current cash position
- Strategic issues you are facing
- Request for help by introduction to prospective investors, partners, and customers (you want to leverage their networks)
You want to maintain great relationships and connections with your investors. And you don’t want them to be surprised when you need to go back to them for additional financing.
10. Be Aware of Important Legal Issues
Ignoring key legal issues can sink a startup. CEOs and founders should ensure that the company is taking steps to comply with applicable laws. Here are a number of the key legal points to focus on:
- Has the company been properly organized?
- Has the company complied with applicable securities laws in issuing stock or options?
- Are appropriate steps being taken to protect the company’s intellectual property (such as through trademarks, copyrights, patents, non-disclosure agreements, etc.)?
- Is each employee and contractor required to sign a comprehensive Confidentiality and Invention Assignment Agreement (assuring that any intellectual property developed by the employee or contractor related to the business of the company is deemed owned by the company)?
- Does the company have appropriate policies in place to prohibit sexual harassment or discrimination?
- Is the deal with any co-founders clearly documented, and in the event of a departure is it clear that there won’t be a dispute about the company’s equity ownership?
- Does the company have a great form of customer contract, protecting the company and mitigating liability exposure?
- Does the company obtain all the required documentation from employees (e.g., at will employment letters, benefit forms, IRS Form W-4, USCIS Form I-9, etc.)?
For startup founders and CEOs, it’s key to articulate to the team a clear vision of what constitutes success for the company. Offering that clear, shared vision of what you are all trying to accomplish helps to galvanize and energize the entire company. Incorporating the ten key lessons set forth in this article can help a CEO or founder achieve this success.
About the Authors
Richard D. Harroch is a Managing Director and Global Head of M&A at VantagePoint Capital Partners, a large venture capital fund in the San Francisco area. His focus is on Internet, digital media, and software companies, and he was the founder of several Internet companies. His articles have appeared online in Forbes, Fortune, MSN, Yahoo, FoxBusiness, and AllBusiness.com. Richard is the author of several books on startups and entrepreneurship as well as the co-author of Poker for Dummies and a Wall Street Journal-bestselling book on small business. He is the co-author of a 1,500-page book by Bloomberg, Mergers and Acquisitions of Privately Held Companies: Analysis, Forms and Agreements. He was also a corporate and M&A partner at the Orrick law firm, with experience in startups, mergers and acquisitions, and venture capital. He has been involved in over 200 M&A transactions and 250 startup financings. He can be reached through LinkedIn.
Mike Perlis is an accomplished CEO, investor and Board member. He served as the CEO and Executive Chairman of Forbes Media LLC. He was a partner at Softbank Capital, a venture capital firm. He served as the President and CEO of Ziff Davis Media Inc. He was the President at Playboy, IDG Peterborough, and Runner’s World. He is on the Board of Directors of Conde Nast, IDG, and other companies. His expertise includes media, Internet, venture capital, angel investing, startups, corporate governance, mergers and acquisitions, and digital media. He served on the Boards of Beliefnet, Buzzfeed, GSI Commerce (sold to eBay), Enpocket (sold to Nokia), and was Chairman of Associated Content before its sale to Yahoo! Previous Board observer positions include Huffington Post (sold to AOL) and KickApps (sold to KIT Digital). Mike speaks regularly on leadership, digital transformation and branding.
Mitch Zuklie serves as Chairman and Chief Executive Officer of Orrick, an international law firm. Under Mitch’s leadership, the firm has pursued a strategy to be a leading advisor to the global Technology & Innovation, Energy & Infrastructure, and Finance sectors. Mitch is an experienced business and legal advisor who has completed hundreds of venture capital financings and numerous public offerings, mergers, acquisitions, and licensing transactions. He counsels technology companies at all stages of their life cycles, as well as their founders, advisors and investors. He serves on the Board of the Berkeley Center for Law and Business and the Advisory Boards of the Stanford Law School Center on the Legal Profession and the Harvard Law School Center on the Legal Profession. He is also a member of the Board of the Wild Salmon Center. Mitch posts regularly on social media about Orrick, venture capital, innovation, and other interests. Follow him on Twitter and Instagram. Be sure to check out Mitch’s article The Surprising Business Lesson I Learned From Salmon Conservationists.
Copyright © by Richard D. Harroch. All Rights Reserved.