Inaki Berenguer, MBA '09

"How to recruit excellent people in startups", Paul English (founder of Kayak)

Paul English, founder of Kayak, gave us a talk about how to recruit excellent people in startups.

Kayak is a travel search engine (I use it regularly). It does not sell directly to the consumer; rather, it aggregates results from other sites and then redirects the visitor to one of these sites for reservation. Thus, Kayak makes money from pay per click advertising, when the consumer clicks-through to one of the compared websites. In my opinion, the best thing about Kayak is its user interface and the options to search and filter flights.

Kayak's second founder is Steve Hafner (co-funder of Orbitz) and is funded by Sequoia and General Catalyst and on the board they have the legendary Michael Moritz, and cofounders of Travelocity and Expedia. They have raised $30M since 2004 and now they are already the 8th travel portal on the Internet. Their goal is to displace Expedia as the number 1 and do it with less than 100 employees (compared to Expedia that has ~700).

Paul sounded very focused, sharp, confident and aggressive and a clear winner in whatever he does. Paul is a serial entrepreneur and has started 4 other compones before Kayak. Among those, he sold one company to Intuit for $33M  after one year without having received any VC funding.

Among the things he looks in his employees he mentioned:

• Bandwidth: Smart and fast people that can handle change quickly
• Attitude: Team players that do whatever it takes to win
• People that feel confident enough in what they do so they can laugh at what they suck
• Extreme confidence and commitment to try to be the best
• Experience: It does not matter if you had done the same thing before. For him experience means success in something, not necessarily in the same domain. Success can mean awards, publications, promotions, sports, degrees, etc. And try to look for a track record of successive success
• Lack of disfunctional behavior: Rule of "NO NEUTRALS": everybody wants to engage with everyone. People that you get excited to work with. Fun is important if you are building for scale. Fun drives success and viceversa. This is much better than having an excellent programmer. The best programmers would be good for Microsoft or Google but not for a startup.
• Try to hire people that are in high demand and are not looking for a job
• Fire people after 30 days if they do not fit. Startups cannot afford having them longer. If he fires somebody it does not mean that he is incompetent (he mentioned that he has also been fired in the past), it only means that he does not fit in the startup.
• Google people before interviewing them. He wants people to have a presence on the web (profile in linkedin, blog, citations, references, etc.)
• He spends a lot of time evaluating candidates

Paul is also an investor. He weights a business idea this way:

• 70% - the team: Do I love them? are they aggressive? are they ethical? are they smart? are they committed? do I want to have a beer with them? can they recruit good people?
• 20%  - the market: is this a growing and changing market? am I interested in this market?
• 10%  - the idea: what is the widget? what are they doing?

Visit to Salesforce.com

In our visit to the main offices of Salesforce.com, we met with a group of MBAs working there, including Jason Garoutte, VP of Sales and MIT Sloan alumni. The visit was organized by Freddy Kerrest, who spent various years working with them.

Salesforce.com is the leader in on-demand Customer Relationship Management (CRM) solution vend. It was founded in 1999, has ~$7B in market cap, >$700M in revenues, ~40K customers, ~1M subscribers, and ~2,500 employees. Their vision is to be "the world's first multi application, multi category on demand company".

In the past, you had to install SW, maintain and update new releases. Now there is no SW installation: you use internet and log with your credentials. Customers are happy for not having to deal with Hardware, servers, wires, etc. Half of their business comes from small and medium size companies that cannot afford SAP.

Interestingly, Jason cited a quote of Ken Morse (who was also with us) about the difference between sales and marketing "Marketing is something you do alone in your room in the dark and sales is something you do outside with other people"

How much money should you raise?

During the last two weeks I have been in the following 3 talks about raising capital and term sheets (typical terms):

1. Sarah Reed (partner, Lowenstein Sandler) and Santo Politi (founder and General Partner, Spark Capital): "Negotiating Term Sheets with Venture Capitalists: What Really Matters"
2. Noubar Afeyan, PhD (Managing Partner and CEO of Flagship Ventures): "How to raise capital"
3. Jonathan Gworek and Emily Hayes (Morse Barnes-Brown Pendleton) together with Jon Chain (partner at Dace Ventures): "Don't be fooled by VC fundraising"

The typical questions were: when to raise capital, how much and at what valuation.

They all agree that you should RAISE AS MUCH MONEY AS POSSIBLE whenever you can. But be disciplined in how you spend it. Raise when you can because if you raise only when you need it you will be in a difficult situation to negotiate. You do not want to negotiate when you are desperate because VCs know it (and it will probably mean that you have not reached a milestones or something else is going wrong). You want to raise when everybody is optimist and convinced about the idea. Moreover, raising capital takes a lot of time and you do not want to keep spending time pitching your idea to VCs and negotiation terms.

Also, they all agreed that when you receive angel funding, you should try to avoid having a valuation. Instead, try to have a convertible note with a discount rate (e.g., ~30%). That means that next time you raise money (e.g., round A), you convert it into equity at the valuation of the round A (+ applying a discount rate). This helps for 2 reasons: 1) you avoid discussions and arguments with friends and family and angels about how much equity you need to give them; 2) you do not want to signal the premoney valuation of the company at a crapy price.

OTHER INTERESTING TOPICS DISCUSSED

• A typical rule is to raise capital for 18 months plus a buffer of time to raise next round
• It is typical to vest the stock of the founders in 4 years (usually, 25% per year). That means that if a founder leaves the company after 3 years, he would keep only 75% of his equity. If the company is acquired or the founder is fired/replaced, then you can have accelerated vesting.
• In a typical exit/liquidation after 2 or 3 rounds of financing, the whole founding team would have between 15% and 20% ownership (i.e., 2 founders, 10% each).
• A typical option pool is 15% to 20% in a post round A investment.

For those interested, a typical term sheet for a round A can be found here.

"Just do it", Ray Stata (founder of Analog Devices)

Last week we had Ray Stata as a guest speaker in our Entrepreneurship and Innovation lecture series.

Ray is an MIT alumni, co-founder and Chairman of Analog Devices (market cap of ~$9B). He also provided the funding for the Stata Center. Now he is involved with Stata Venture Partners.

He mentioned that "if you want to be an entrepreneur, JUST DO IT, do not wait for the big idea or opportunity... anyway, business plans usually change over time".

Among the characteristics that define entrepreneurs, he mentioned:

• COURAGE
• CONVICTION
• PERSISTANCE

and as Gartner mentioned three weeks ago, entrepreneurs must "identify a transition that is going to happen in the market place and take advantage of it"

His motivation to start Analog Devices was that he wanted autonomy, change the world, and do something different. He wanted to have a technology driven company, which sold to engineers. As a company, you are either an innovator or a cost reducer and he decided to be an innovator.  He also created the concept of fellows within Analog Devices. This was addressed to great engineers that want to influence the company but do not want to have the typical management path. With this prestigious position, you signal that in your company, innovation matters.

He considered that a big difference between companies and research in academia is that in companies, you search for a solution optimization whereas in academia you search for local optimization.

Entrepreneurship panel in Silicon Valley

During our Silicon Valley treck we had an interesting panel about entrepreneurship. Some of the participants (see picture below) included Neeraj Choubey, Sloan alumni and VP at Venrock Associates or Ronjon Nag, MIT alumni and CEO and founder of Cellmania.

Some interesting quotes:

• "Entrepreneurship is always hard until you exit; then you think it wasn't hard"
• "Being a VC vs. being an entrepreneur": It is like Jerry McGuire: "do you want to be the agent or the athlete?"
• Who is the business guy in a startup? "If you do not make it or sell it, then you are the business guy"
• "2002 was a very educational period: what to do when you do not have money and customers"
• "Ideas are everywhere (e.g., universities). The problem is execution"
• "Raise more money Thant what you need (or for more time) because you do not know when you are going to have a recession"
• FAMILY (spouse, etc.): "You need family support... the family needs to be on board and risk profile must be similar. And be honest if you want to be an entrepreneur" (it takes a lot of your life).
• "Try companies like Facebook, VMWare or Salesforce.com before going to start your own company: those are excellent places to find partners and contacts and gain experience"
• "When you are in a startup, you are a VP of X plus 15 other positions"
• Consulting provides good skills for entrepreneurship, such as attention to detail
• "Do not assume that you are normal"

 

 

Gideon Gartner in our E&I lecture series

We had Gideon Gartner as a guest speaker in our Entrepreneurship and Innovation lecture series.

Gartner is an MIT and Sloan alumni, entrepreneur and philantropist. He is best known for founding Gartner Group (market cap of ~$2B) in 1979 and Giga Information Group (now part of Forrester).

He was asked about what is needed to succeed in entrepreneurship and he mentioned: "Look at what will happen next and put yourself in a position to take advantage of it".

He mentioned some other characteristics to succed in entrepreneurship:

• Overcome obstacles
• Question the status quo
• Be opportunistic
• Be risk taker and resilent
• Be a change agent
• Be different (stand out of the crowd)
• Be creative

He also mentioned that luck is important in entrepreneurship but "you need to stablish preconditions to have luck" (e.g., build a network of people)

Interestingly, Howard Anderson (founder of competitor the Yankee Group) also came to the talk.

We just finished our project with Care.com

We just finished our project with Care.com, an online marketplace for families to find babysitters and nannies, tutors, pet sitters and dog walkers, senior care providers, and housekeepers. Javi Torres, Jeff Vyduna (also Sloanies) and I spent the last 3 weeks of January doing an externship at their offices. We were waiting for some market data to complete our analysis and last week we gave the final presentation.

Care.com is the premier source of trustworthy care options for children, pets and elderly parents. The idea is quite simple but there was a customer need and an opportunity to create this marketplace. On one side you have Craigslist, which is free but you cannot trust and you do not want to leave your kids with people that could potentially have criminal records. In fact, there are some very sad stories with babysitters found in Craigslist. On the other side, you have nanny agencies which are quite expensive (up to $2K) and provide a limited service compared to Care.com. Some of the interesting value added services they provide include references, testimonials, SSN verification, address verification, criminal record verification, maps, etc.

The goal of the project was to get experience in a promising new startup with experienced founders. Care.com has all the ingredients of a success story: Superb management team (with whom we spent most of our time during the project) all of them graduated from HBS in the 80s and 90s and with plenty of previous experience in the Internet sector; Clear strategy and disciplined execution; Large and growing market with no leader yet; Funded by Matrix Partners and Trinity Ventures, two of the leading VCs in the US; Amazing board and angel investors, including Reid Hoffman, CEO of LinkedIn, and Brian Swette, former COO of eBay.

I have no doubt that they will be very successful and I am happy to say that the experience has exceeded my expectations.