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March 18, 2005

Taking One Too Many for the Team

Justin Hibbard

It's time for another dose of entrepreneurial wisdom. This week's lovin' spoonful comes from a recent field trip to Stanford University, where I sat in on a panel of entrepreneurs and VCs hosted by the MIT/Stanford Venture Lab. There were plenty of nuggets about how to pitch ideas and raise money, which I'll get to in a minute. But the part that stuck with me most was about the personal sacrifices and commitment that are required to live the life entrepreneurial. We hear plenty about the Google guys and their billions. We don't hear enough about the rejection, heartache, and ruined families that many entrepreneurs endure.

Rob Shostak, a long-time entrepreneur and founder of five-year-old startup Vocera, told a story about meeting one of the founders of software maker Lotus Development Corp. shortly after it had gone public. The guy had just cashed out $18 million of stock and invited Shostak back to his apartment to see a present he had bought himself. It turned out to be a modest Jeep Cherokee. Shostak followed the founder up to his apartment, expecting to find a palatial penthouse. But it was an average place furnished with only a mattress on the floor. "I was kind of dumbfounded when he volunteered, 'Actually, they just took all the furniture out to go to my ex-wife's place,'" Shostak said. "It was a striking and poignant moment for me to realize the cost of his commitment to the company."

It's a more common story than you might think. The long hours, low pay, and volatility of startup life takes a toll on the people who are close to entrepreneurs. "Make sure if you value the relationship with the person you’re living with that they’re up for this," Shostak said. In addition, make sure that you choose your co-founders carefully. "You literally will be seeing these people more than you’ll be seeing your spouse," Shostak added.

The trial-by-fire that determines how much entrepreneurs are willing to sacrifice is the rejection they face when trying to raise money from VCs. "Even if you have a great idea, you’re going to be humbled when you start to pitch it to potential investors," Shostak said. "They’re going to tear the idea apart if it can be torn apart." But that's a good thing because if the idea is flawed--or if the entrepreneur's confidence wavers--it's not worth forfeiting a personal life.

Here are Shostak's tips for vetting your idea for a startup:

* Is it too small? If it can't generate tens of millions of dollars in annual revenue in a few years, VCs won't be interested.

* Is it too big? Some ideas may be feasible for a large, established company to pursue. But if a startup can't get there in a few years with a small number of people, forget it.

* Is it well defined? Think of all the details. Who will buy the product? How will you distribute it? One answer you don't want to give a VC: "Hm, I hadn't thought of that."

The VCs on the panel offered some good perspectives from the investors' side. "What really qualifies presentations is when they show depth of primary research on customers," said Robin Vasan, a VC at Mayfield Fund. Before pitching VCs, entrepreneurs should interview lots of prospective customers about what they want in a product and how much they're willing to pay. Even better: approach VCs with some paying customers already in hand. "There's nothing more focusing for the team and investors than a purchase order," Vasan said. Unlike the VC climate three years ago, money is now flowing freely to good ideas. Ann Winblad, a VC at Hummer Winblad Partners, says her firm has funded 11 series A deals in the past 13 months. Let's hope the entrepreneurs at those companies are single or have very patient spouses.

04:12 PM

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