six startup lessons & the essence of venture capital

The Art of the StartSix lessons for startups

Allan Martinson, MTVPLatvian IT Cluster/RBS, Nov 26, 2010

Valley of Death

Startup: A vehicle to drive thru

Death Valley

The One Million Land

A startup is a human institution designed to deliver a new product or service under conditions of extreme uncertainty

Eric Ries

My startup (and not so startup) life

Baltic

6 lessons on how to grow your stupid little startup

into SOMETHING

How does a startup start?

Lesson 1: It’s all about people

It does not start from a business idea

Incubation takes years

2 founder ruleLeader

Skeptic

Multi-skilled talentsTeam &

Values

It starts from people

Pick your friends wisely

• Your future income will be the average of 5 of your closest friends

Pick your friends wiselyYour future income = average of your

5 closest friends

Lesson 2: The origin of great business ideas

Povarskaya St, MoscowMarch 1990

My moment of epiphany?

This does not happen

Three origins of great startups

• Copycats: Copy existing business model to new markets

• Evolutionary: Seek better solution to existing problems

• Revolutionary: Seek unknown solution to unknown problemsThe best ideas come on cross-roads

of trends and disciplines

• The 30-seconds pitch: tell your granny– Who is your customer– What does your company

do for this customer– Why are you better than

competition• Do you pass the “Google

test”?

The What

Why I will never invest in IT services any more

1 2 3 4 5 6 7 80

5

10

15

20

25

30

SalesExpenses

1 2 3 4 5 6 7 80

5

10

15

20

25

30

SalesExpenses

Company 2: IT services

Company 1:Platform business

Lesson 3: The art of pivot

The life of any startup can be divided into two parts – before product/market fit and after product/market fit

Marc Andreessen

Why pivot?

Not a single great company follows its original business idea

Failure is not a problemSlow failure is a problem

The importance of milestones

• MVP (Minimum Viable Product): 48 hrs – 3 months• Initial customer validation: 1 week – 6 months• One million something (users, $$$, etc): 1-2 years

• You shall pivot if:– Your solution seeks a problem, not vice versa– Nobody wants to use your product – even you– You have ceased to believe into your company for >1

month

Lesson 4: The Need For Speed

Why speed?

• Startups, by very definition, are probabilistic

• Success seems intentional only in retrospective – impossible to compute

Works in startups, too

20% of more effort will result in many times better result after some time

In probabilistic environments, speed and focus

are the best boosters of success rate

And hunger is the best factor contributing to it

The ultimate example of being focused

“I was too busy, I didn’t do things like that… I just didn’t go and meet new people who were involved in investments.”

Bill Gates on initially refusing to meet Warren Buffet Interview with Financial Times, Oct 2010

Lesson 5: Importance of right signals

Importance of the right signals

• With whom do we compare ourselves?• What do our customers, investors, partners

really think?• Are we insiders or foreign?• Nothing replaces human interaction even in

internet era• Silicon Valley is the focal point of information,

emotions and ideas• It is the mental state

Being Latvian is a full-time job

Lesson 6: Where to find smart investors

Raising venture capital is the art of younger men seducing older men

- Anonymous

Idea

Prot

otyp

e

“Bet

a” Commercial la

unch

Market s

hare

Breakeven!9-

18 m

o

18-2

4 m

o

2-3

Y

3-7

Y

Users &

traction

Revenues

Profits

0

+

-

Paid CEO

Sales structures

Bureaucracy

2 10 50 200 500 employees

FFF$10-500K

A-round$1-10m

B-round$5-50m

IPO orexit

Typical lifecycle of a high-tech company

Typical life cycle in figures

Year 1 2 3 4 5 6

Phase Startup Early growth Growth Exit

Revenues ($m) 0 1 4 10 20 30

Growth % 300% 150% 100% 50%

Investment phase Angel A-round   B-round    

Pre-money / exit valuation ($m) 0,5 3   40   150Investment ($m) 0,4 2,5   25    

Post-money valuation ($m) 0,9 5,5   65   150

Post-money ownership of founders 56% 30%   19%   19%

Value of founders’ stake ($m) 0,5 1,7   12,1   28,0

IRR to angel investors 124%   Money-back, angel 56 times

IRR to A-round investors 102%   Money-back, A-round 17 times

IRR to B-round investors 52%   Money-back, B-round 2,3 times

What shall you know about VCs

• Venture capital (LPs) and venture capitalists (GPs) are not the same

• VCs are in the business of saying NO and then making money

• You can divorce your wife but you cannot divorce a VC

• You shall like, but not love each other• If in doubt, pick the smartest

Thank you!

allan.martinson@mtvp.eu