Mark Cuban's Rules for Startups

Mark Cuban's rules for start-ups, and how my company broke almost all of them.

1. Don't start a company unless its an obsession and something you love. My company was started by some people obsessed and in love with the technology but my guess as to the primary motivation of the majority of the founders is that they say the dollar signs.
2. If you have an exit strategy it's not an obsession. Our founders all had exit strategies built in to the initial round of funding. The exit strategy was actually put in by a very unscrupulous investor but I think he got the founders to agree to it by giving them an out as well. None of them got the chance to use it.
3. Hire people you think will love working there. This we did in the tech department. Sales I can't really speak for.
4. Sales cures all. This is where we failed big time. We started off with decent revenues, built the revenues up to close to $1 million a month, and then let it die. We assumed credit risk for payments and got shafted for a couple million. Then we changed the business model to get rid of that risk and no more sales happened, and thus no more revenue. As a public company it seems that the CEO thought that our money should come from the public markets, not from sales.
5. Know your core competencies and focus on being great at them. This we did, although some people tried to do more.
6. An expresso machine ? Are you kidding me ? Shoot yourself before you spend money on an expresso machine. We didn't buy an espresso machine but we did spend tons of money on worthless crap that was not needed. Money that could have been reinvested into the company.
7. No offices. Open offices keeps everyone in tune with what is going on and keeps the energy up. We had offices. Big offices for some people. We had three suites in our building, two of them connected, the third, for C-level officers, was completely separate. The developers were in open cubicles. The developers were the only part of the company that functioned properly.
8. As far as technology, go with what you know. We did this to the most part.
9. Keep the organization flat. If you have managers reporting to managers in a startup, you will fail. This we did at first but as the company grew (spent more money) we started putting in hierarchies. Things were to the most part kept flat but in some departments there were long, complicated hierarchies.
10. NEVER EVER EVER buy swag. We didn't do this other than spending fortunes attending trade shows which didn't get us a single customer. We didn't make branded swag though. Actually there were some golf balls, but that was it.
11. NEVER EVER EVER hire a PR firm. We hired several PR firms and dumped them, hired our own PR guy, then hired more PR firms. This goes back to the C-level people focusing on the public markets rather than the core business.

Make the job fun for employees. I think I did this as much as I could.

Cutting costs at my company

We are in discussions with a potential buyer of our company at the moment. Unfortunately the final decision is not in our hands as all of our notable assets are now owned by some hedge fund guy who probably finds the however-many millions he spent on us to be like pocket change. I honestly don't know why he is spending as much time and money as he is, given the fact that at best he can make a couple million. I would think he would be better off focusing on bigger and better deals. But I'm not going to look gift horses in the mouth.

Anyway, this suitor wants to keep the development staff (what's left of it) but cut some costs. So I am thinking of what I would do if I was in their situation - picking up our assets and needing to cut costs. Of course I can't disclose any material information about the company for legal reasons, but here is a brief run through of our current costs:

• We have a large SAN data store that costs about $60k per month
• Our rent is about $40k per month for a huge 11k sq ft space, giving each employee approximately 1,000 sq ft of space.
• Payroll is probably about $80k per month
• Health insurance, etc. is probably around $10k per month.
• Our co-location facility is probably about $10k
  

I must be missing some stuff because the current monthly burn rate is about $250k which leaves about $50k unaccounted for. Let's write that off as general administrative overhead.

First thing I would do is get rid of the huge 5.4 TB SAN data store. We should never have bought it in the first place. We probably spent a million just getting it installed and set up. We can easily set up servers big enough to meet our data needs, everything is segregated anyway. The only reason I can think of for spending that kind of money on a data store is if we were expecting lots of transactions and data to be recorded over a decade or so.

Second thing I would do is fix the lease. We actually had another 8,000 sq ft of space previously, which was gotten rid of last spring. The space was always way too big. I think that maybe management believed their own predictions of exponential employee growth. By this time according to their old investor deck we should have about 400 employees.

The problem with this is that we spent a LOT of money rebuilding the space to suit our needs, including a huge server room that can't really be used for anything else. It's an air conditioned fishbowl type thing and we could easily cut it to a third it's size (it was never even really close to being filled) but that would require knocking down walls and rewiring stuff. We could easily fit our entire current Stav, including the boss's huge office, into the server room and move the servers into a closet or something, but that is extremely impractical. The logical thing to do is divide the space even further to allow the landlord to rent other parts of it out to other people. But that requires expensive construction which we would have to pay for, and it would be difficult to work while that was going on.

One solution I've heard bandied about is moving all of our servers here to the colocated facility, including our development servers. That would allow us to abandon the space entirely and move to a normal-sized office. However that would force the developers to use painful slow VPN tunnels to access the code. A better solution is getting rid of the co-located facility and moving everything here. That still leaves us with the space issues. The only real solution to that is dividing the space, but it will be extremely difficult as we have all sorts of wiring and building to do. Our space includes a couple large rooms that are just used to hold junk. Closets and loading docks and such. That is totally wasted space. Let's count the savings from getting rid of the co-located facility and call the rest a wash, assuming that the costs of building and rewiring would offset the lower rent.

I have cut out $50k at this point, or 20% of our monthly burn. There is that unaccounted for $50k which I will say we can cut in half, though we really may not be able to. That brings our total savings to $75k, or 30%. We don't want to do anything with payroll or health insurance so that's pretty much all I can cut. We need our people and paycuts would send them scurrying for the jobs they already have lined up for contingencies.

We could sell some of our unused hardware assets to partially finance the buildout, I guess. The real problem is the space. Downsizing the space would save a lot of money but would cost a lot of money upfront as well. Even just to move everything to a new space would probably wipe out at least a couple month's worth of savings on the rent. Let's say we really need to cut some extra money. We abandon this space and move to a smaller space, cut the rent in half and spend however much on moving expenses. That saves an extra $20k per month, not counting outlays, bringing our total up to $95k, or 38%. That's about the best I can do without having a full budget in front of me.

These are all very hard decisions and I'm glad I don't have to make them. However if I had been in a position to make them before we would never have been in this situation. I would never spend money as quickly as the management team did. I would be unable to spend so much money so recklessly.

Noncompete Clauses, Advertising and Natalie Del Conte

Natalie Del Conte is moving to NY! Sweet! She is so cute. Although I will likely never meet her it is nice knowing that she is close by.

AdBrite is switching AVN Ads over to Black Label Ads and Etology is taking over AVN Ads. I use both AdBrite and Etology so it doesn't really effect me at all.

Fred Wilson on why start-ups fail, from a VCs perspective.

Some guy wants to get rid of non-compete clauses. That would be nice as I have one in my contract. However I have heard that they are extremely difficult to enforce from the company's perspective. Apparently the courts are not too keen on letting companies deny people the right to make a living. Something about the Constitution.

Still not ready for the week

Rare out-of-characters interview with Stephen Colbert, following his bewildering spot on Meet the Press this Sunday. Half the show dedicated to an actor playing a character who is fake running for president? And another article acting as if Colbert were a real, serious candidate. People - Colbert's got a monopoly on the fake real journalist thing. Give up. Please.


Take two: Colbert on comedy

Slide, a start-up that makes some sort of widget, is trying to raise money. Apparently they have a burn rate of about $1 million per month. For widgets. Seriously.

Weird video that has something to do with AOL. I'm really not sure.

I detest Julia Allison and everything she does and stands for... Yet I have a bizarre attraction to her. I'm not sure why but I think she is absolutely adorable and incredibly sexy.

I agree with the statement being critiqued here, but it's still not very nice to say.

Article on how Larry David, the comic genius behind Seinfeld and Curb Your Enthusiasm, may have some undiagnosed mental illness that makes him act like he does.

Article on Britney's new album and how it is really made by computers or robots or something. I love electronic music and find live instruments to be at times vulgar, so I have no comment on this, other than even as electronic music, her's sucks.

Financial Modelling for Start-ups

Guy Kawasaki's blog has some info from a guy at Redfin on how they did the financial modeling for their startup. Back when I was an Apple junkie I loved Guy Kawasaki. But regardless of that, this is a very interesting and informative article.

This is what my company did not do:

At least in the financial model, give yourself as much time to grow as you can.

Or this:

Since there's a natural limit on growth, be ready for the question: "What would your market-share be in year five?" If it's over 20%, take the jillion-dollar projection down a notch. Even a hit like iPod doesn't have 20% market-share. You'll be lucky to come close to 20% of any market.

But we just might do this, although revenues don't necessarily mean profit:

Hit $100 million in revenues within five years.

Startup Flash Game

Try to see how difficult it is to run a start-up in this awesome little Flash game. My one gripe - why does a Flash designer cost more than an Ajax coder? And why do PR people make so much more than both of them? In my experience that is not the case.

And here is someone who wants to do a reality show type thing to determine who gets funding and who doesn't. The "wisdom of crowds" is a well established fact but we also have notable exceptions, like George Bush and most of the American Idol winners.

Some other random stuff:
Top Ten Joe Pesci Beatings (from Cracked)
This is what it's like to be Britney Spears - no wonder she is so crazy. Poor girl.

I don't eat meat and this is pretty much why...

And for my own personal reference, how to get a book published.

Startups and Funding (A Cautionary Tale)

I am thinking about the Microsoft/Facebook deal and the absurd valuation it places on Facebook. Then I started thinking about my experience with start-ups. The previous start-ups I worked for I am not familiar with how the financing worked exactly, but my current employer I have been with since before the beginning so I am intimately familiar with all of the details.

What strikes me the most is how an unscrupulous investor totally screwed us over by formulating a deal which would allow him to pocket millions while screwing us. He had obviously been planning this since the beginning since the terms of the deal contained many bizarre terms that, to me, screamed out "I am going to screw you over!" But I guess the "founders" were too blinded by the site of a couple million dollars to really think about the future. This guy's plan was to "financially engineer" an artificial valuation for our company, and everyone thought he was the bee's knees until he screwed us over, except for me - I never really trusted him at all.

Once the plan put in place by this investor (who has a reputation for doing this with companies) and the company and stock structure was in place the "founders" went out and started finding other investors. They did the whole dog and pony roadshow thing, at a ridiculous valuation for our company of $600 million. But they raised a good amount of money - most of which went right back into their pockets. It seems that the "founders" were not quite as stupid as one might have thought, and had arranged for themselves to be owed money by the company, payable either in monthly installments or once $x million had been raised. Some of the founders went even further and did their own private placement, the proceeds of which were ostensibly to pay off debt from their old company, but which actually went directly into their pockets.

So the "founders" made millions of dollars, in addition to their high salaries and ridiculous severance packages, right off the bat. I should have gotten 5% of those millions but they kind of screwed me out of that. Nevermind though, because they ended up giving me .5% of the company instead of the 5% I had originally been promised, which under the initial ridiculously high valuation of the company was worth several million dollars.

The plan put in place by this devious investor involved bypassing an IPO and becoming public through a reverse merger which allowed us to bypass FCC regulations and become public way before we were ready. We became public well before our stock was even registered to be able to be traded, which kept the valuation artificially high. Once the registration statement went through the price immediately dropped as 99% of the shares became tradeable.

Since then the price has dropped to 0.0167% of it's original price, the price which had been used for the first round of financing. A bunch of people lost a lot of money, including me, because I foolishly held on to 95% of my stock hoping it would go back up after the initial dive. I wish to god now I had sold more of it, even 10% would have made for a nice cushion and savings that would come in really handy now, but no, I just sold the bare minimum I needed to pay off my credit cards and other loans. The only people who made money were the initial investors and the founders, who had to defer their fat salaries as the company started to run out of money and the creditors came knocking. The problem was that since we were public, and so thinly traded that anyone can move the stock price around with a few hundred shares to trade, and the stock price was so low, they couldn't raise money anymore. If we were private I am sure we would have a high valuation and VCs lined up out the door as we have a great idea and a great product. But being public, and having this first investor holding the share price down, we would have to sell 1/2 of the company to raise even a couple million dollars.

The next chapters in this book are yet to be written. The company recently got its main new backer to extend the terms of the deal which we used to borrow money from them. Other people have been interested in the company but the terms of the deal with this new backer make it ridiculously stupid for anyone to invest in us. As far as I know the "founders" salaries are still deferred, though they may have paid themselves once the new deal was put into place.

This makes me think that they way to get rich is to start a company and make sure you have deals in place that ensure you get paid no matter what happens with the company. It might scare off some investors (I nearly peed my pants when I read the first 8k and finally learned about all of these backroom deals) but as long as you can get someone to invest you can still make money without having to do anything. Of course the people who lose are the people who invest in your company, but they presumably have enough money that it's not going to hurt them too badly.

As soon as I come up with a salable idea this is exactly what I am going to do.

Getting Start-ups Funded

I found this from Paul Graham on how to keep your start-up alive. From there I followed a link to a page on his YCombinator company that supposedly funds start-ups. I then found this page where he details what they do as far as actually funding companies.

It says that they usually start people off with $5,000 plus an extra $5,000 per founder, in exchange for 2% to 10% of the company. Take a company with 4 founders, they will get $25,000. The site says that this should be enough to cover 4 months of living expenses. Maybe in Iowa it is, but certainly not in NY and not in the Bay Area. You would be lucky to find a closet in SF or NYC for $1,000 a month and that would leave you with $250 a month for food, utilities, and other expenses.

And in exchange for this pittance you give up up to 10% of your company (the say the median is 6%). Maybe I should get into this racket because any company that succeeds is going to be worth a lot more than the $250,000 to $1,250,000 you are being initially valued at (the median is $417,000) for a company with four founders. For one founder you would be valued at $100,000 to $500,000 with a median of $167,000. Unfortunately I don't have enough money saved up to fund more than 1 company which is not a very good risk vs reward scenario.

For that I would rather just bankroll it myself and keep that 10%. If it's an idea I believe in you would be silly to give up 2-10% of it for one month's pay working at an average job. You could easily take out a bank loan for more than that amount at under 10% a year. Instead of giving up 10% of your company you could pay 10% interest. Sounds like a no brainer to me.