Trade Secrets

The Founding Team

By The Chilli analysts

Previously in Trade Secrets, we looked at incubating your idea with The Chilli value test. Assuming you passed five of the ten criteria, you need to take further advice on the remaining five before you proceed too much further. After that you'll need to decide on either creating a good business plan or deciding on your core team. Some will argue that a good plan comes before choosing a team, while others will recommend having a team that will help you crystallise the plan. We believe you need to do both in parallel. The Chilli will be covering the development of business plans and corporate pitches separately but we will focus on the founding team in this issue, as it is absolutely vital to have the right team. Take a look at The Chilli's criteria for a founding team:

1. Some people are entrepreneurs and some are employees
2. Motivation
3. Committment
4. Expectations
5. An odd bunch
6. What does a vc look for in the founding team?
7. Consigliore: mentors, advisors and non-execs
8. Your baby is all grown up now

1.Some people are entrepreneurs and some are employees

Starting your own company will take you on a long journey. It is therefore time to do a quick reality check on oneself. If you are undaunted by the following, then you can take the first steps on the entrepreneur's road. You can expect five or more years of sheer hard work and a lot of personal, emotional and financial sacrifices. In the early days it will be financially risky, and the buck will stop with you, as you will be responsible for your company and any employees. You may not have time for your cherished hobbies. You will have to live off your savings for a while, until you raise the seed round. You will have to talk this through with your friends and family, as you will need their full support. You need to be persistent, confident and somewhat thick-skinned. There will be a lot of people around you, who will advise you to give up before you start - stay away from those people for a while. There will be those who will encourage you, but may ask a lot of tough questions - stay tuned in to them and listen carefully, as they are very useful people to have around, especially when things get tough. Then there are those you really enjoy spending your time with work-wise, those that believe in the same things, share the same vision, and have the same attributes. These are the people you want to add to your list of potential co-founders.

A key trait of an entrepreneur is not how they handle success (most of us cope well with that), but how they handle failure. If failure leads you to learn valuable lessons and get back in the saddle, then you have what it takes. If the thought of failure makes you cringe, it's advisable not to take the plunge. It is perfectly respectable to be in full-time employment in a corporate entity. You must do what works for you. It's also possible to create some entrepreneurial activity within your existing company, using the existing infrastructure, funds, manpower to start something new. Such people are nowadays referred to as corporate entrepreneurs or intrapreneurs

2.Motivation

What is your motivation for doing this? Financial reward is not enough on its own, and at any rate, you will not be earning much for the first couple of years. To start and grow a business will take determination and sacrifice. Ask yourself what it would take for you to be willing to spend the next five years pursuing this idea, come hell or high water. Many people decide that they will do what they have to do to get up and running. The view here at The Chilli is that it is better for you to decide what it is you want to do, and do it in the context of your overall life goals.

3. Commitment

The founders have to be committed to the idea, the company and doing whatever it takes to make it fly. This will involve talking and travelling to potential customers, angels and venture capital (vc) investment partners, and so on. It is therefore important that they are free of any work commitments. This is partly due to any contractual issues, but it's also the realisation that starting a new company with part-time staff is a very strenuous exercise. If you treat the role of founder as a part-time job, why should a prospective customer, partner or investor take you seriously? To put it simply - if you don't invest your own time, money and effort, nobody else will. The founders should be prepared to work full-time without pay until they can secure funding. It is therefore advisable that each founder has about one year's worth of savings to cover their living expenses. Yes, this is a substantial cushion, but having a year's security will stop you worrying and allow you to focus on the business. We will cover this issue in future instalments.

4. Expectations

It is important for the founders to have their expectations set correctly. It is worth adopting the philosophy that you can be paid now or later, with a substantial premium attached to a later payment, when the business has demonstrated its value. Expect a cut in salary, so work out a liveable housekeeping budget. You will have no company car, so invest in an economical form of transport - you don't need to drive a luxury car, and in fact that would send the wrong message to potential investors and customers. The founders will have to clean their own premises, travel by the cheapest means possible, work long hours, and will sometimes be unable to read bedtime stories to their children. Ruthless time management and clear objectives for your business will allow you to spend quality time with your family. Just remember to postpone any of your personal hobbies for a period.

5. An odd bunch

One of the advantages of start-ups is their speed. They are nimble and can respond quickly to changes in the marketplace - far faster than established companies. In order to facilitate quick decision making it is advisable to have an odd number of founders, removing the possibility of a tied vote. The composition of the founding team should include a commercial expert, a technologist and a finance specialist, giving an odd group of three. Don't worry if you don't have all three of them from day one, but recognise that you will need a balanced team. Additional skilled personnel can be brought in later.

6.What does a venture capitalist (vc) look for in the founding team?

Following the dot bomb shakedown, the grey hairs of business experience are again valued highly. An investor will look at the motivation and commitment of the team, and their credibility with potential employees and customers. Skills that they will be looking out for will include industry, technology and market knowledge as well as leadership capabilities and a track record of delivery. Creating value is of no consequence if it cannot be delivered to those who will pay a premium for it.

7. Consigliore: mentors, advisers and non-execs

Having a trusted adviser cannot be recommended highly enough. An experienced adviser can provide connections, via personal introductions, to sources of finance, potential customers and partners and above all, practical advice borne out of having been there before. It is ideally someone from within the industry who has a track record and is widely respected. It is important that they understand what you are trying to achieve, and that you both have a good rapport and shared vision. A good adviser will have considerable commercial and management experience.

8. Your baby is all grown up now

Starting a company has been likened to bringing up a baby - you protect and nurture it in the early days, and when it's all grown up and strong, it is very hard to let go. It is vital to remain objective in the interests of the company, especially when recruiting new executives to take the company forward to the next stage or to seek additional investment. Remember that it is better to own 10% of a company worth $10M than to own 50% of a company worth nothing.

So given the key criteria, you are in a position to assemble the team that will create the business. If you have any comments, please e-mail editor@theChilli.com. Future issues of Trade Secrets will address various elements of the secrets behind building successful enterprises in the technology industry. In the next instalment we will be looking at overcoming customer inertia, by convincing a customer that as a start-up, you can deliver.

© Chilli Publishing Ltd 2003

06NOV2002