Category: Startup Tips

It’s no secret, the widespread idea is that there’s a Series A gap in startup funding. You can easily raise a $1 million seed round and $100 million Series D, but somewhere in the middle things get a little dicey.

But as I’ve said before, there’s really no such thing as a Series A gap. Some companies just try to swing for the fences a little too soon and don’t drum up a lot of interest. Rather, they don’t focus intently on what they need to prove to secure the Series A or they focus on things that they think investors want to see.

The key to understanding the supposed gap, is that if your startup is really ready for a Series A, you can most assuredly raise money. You just need to be able to prove that your company has a repeatable and validated business model that can be scaled before walking into those meetings.

And this doesn’t mean you need to have tons of customers and millions in revenue by any means — a common misconception in today’s startup world. To raise a successful Series A round, start by proving the pipeline — and making financial projections based on it.

The Difference Between Seed and Series A

Seed money is supposed to help your startup figure out its business model. Seed is where you tell the story of what you are going to do. Series A, on the other hand, is more about making sure your business model works. You’ll also want to execute your story, telling people what you’ve done and what you’ll do next.

Let’s say you want to sell new coffee cups. During your seed, you should first focus on landing one or two landmark customers; maybe a few Starbucks locations that are proving to be loyal and consistently fill orders. When you’re pitching the Series A, show the investors that you can scale your business to every other Starbucks in the Palo Alto region and beyond, as well as Peets and other coffee shops — and the investor’s money is what stands between you and accomplishing that growth.

The Wrong Approach to Series A

Today, because of the emphasis on hitting a revenue target to signal a new round of funding, a lot of startups are guilty of growing their revenue linearly.

Imagine Starbucks is buying your new cups and you’re generating $50,000 ARR from that account. Then you decide to do non-core business model activities that pad your overall revenue. Maybe you consult for Peet’s Coffee and help out other startups in exchange for quick cash to keep the runway looking a little better.

Sure, all those extra funds are lumped into your total revenue. But let’s face it, that’s not the organic, scalable growth VCs are looking for.

You’d be much better off getting that one customer that fits your model, making some revenue off that sale, and then trying to get one more customer to show the pipeline potential. Focus on your core business, and a Series A will become that much easier.

Startups Love Revenue

It’s no secret that startups will chase revenue wherever it’s coming from. When you’re chasing a Series A, you’ll try to make whatever money you can to prove you have a business that generates revenue.

But let’s face it, not all revenue is created equal. This doesn’t mean revenue is necessarily bad, but time spent chasing after any revenue in sight can be a dangerous game in the early days of a startup.

There’s a common misunderstanding in the VC/startup world that a $1 million run rate means you’re ready for a Series A. In reality, there isn’t a benchmark that indicates the exact time you’re supposed to start raising money. Your run rate doesn’t matter as long as you can talk to investors about projected metrics.

How does that work? Start with your pipeline and your pipeline’s future. Show repeatability and show scalability. Show investors your funnel and the pipeline that goes into that funnel and tell them how you’re going to get there. That way, when you ask for lots of money to hire a certain number of salespeople and marketing folks, your request will be validated by the data up on the screen.

Whether you’re in a SaaS, B2B, or B2C business model, the same rules will still apply. So if it’s projecting growth in sales, the viral coefficient, or whatever else to show future scale, investors need to see the pipeline view of that story as validation before taking part in the round.

Key Takeaway

If you’re still trying to tell your company’s story, rather than actually using sales data to project growth, you’re likely better off waiting and raising a seed extension round.

How do you do that exactly? First, go back and see if your original investors are willing to go further in with you to bridge the company through to the next round; this may require you to give up more equity, but it will also be crucial to keeping the proverbial lights on. Also take time to look for firms that aren’t necessarily specializing in “Series A and above” funding — there is an abundance of seed stage investors out there looking to fill that gap.

Once you have an idea of how your business model will become scalable, use the extra time and cash to refine that story, validate the numbers, and make it real before pitching to Series A investors. This allows teams to focus less on generating non-core business model revenue, and more on securing a few necessary customers to project a data-backed pipeline. Once that happens, and you’re getting great feedback that shows the product or service is truly valued, it’ll finally be time to show later stage firms a clear vision of what you plan to do next.

My personal experience and more recently working with Fresco Capital’s startups has taught me that no matter how different each business and start-up process might be, nearly all new co-founders and CEOs eventually pose the same important, inevitable question: When do I hire a VP of Sales?

My response is always the same: When you really need one.

So, what does that mean?

Co-Founder and CEO Talent and Time Management

Most co-founders and early CEO’s prefer to focus their talent and energy on conceiving and building the new enterprise. The most successful CEOs come from backgrounds in finance and operations. Only 20% of Fortune 500 CEOs started out in Sales or Marketing.

Yet many company leaders also necessarily take on the crucial task of generating those early sales. While a CEO may excel at creating connections and relationships, few are sales experts and are typically overwhelmed with the task’s time commitment. So, during start-up and initial operations, when CEOs think in terms of building the company by building a stellar leadership team, they want to pass on those vital sales responsibilities as quickly as possible to a proven sales expert. After all, a good leader should hire other good leaders, right?

Not yet.

This Is Not The Time to Buy The Rolex

Although a new CEO and leadership team typically want to hire a proven VP of Sales from a very successful company, making a “Rolex” hire early in the company development — and paying Rolex prices for the talent — is not the answer. In fact, poaching an expert VP of Sales by offering a sizeable opportunity and compensation package is counterproductive.

Here’s why.

An extremely successful VP of Sales has become successful because they effectively manage a sales force. A new VP will want to replicate that success by building their new sales team and developing a sales process, complete with expensive sales automation tools. In the long term that is exactly what your company needs. In the short term, however, that is a potentially dangerous waste of resources for your new company during a crucial period. (Yes, I am saying that Google Sheets is a perfectly good CRM at this stage.)

While the VP of sales is putting together a team and developing long-term strategies, nobody is focusing on making actual sales. Lots of money going out, none coming in. The results can be disastrous. The VP of Sales and the team are either fired, quit, or the company runs out of money.

Build Your Sales Team from the Bottom Up

There is a much better option. Build your sales team from the bottom up.

It may feel counter-intuitive, but the bottom up process is more logical and practical for new companies. It makes much more sense to hire a junior salesperson – someone who will one day report to the VP you eventually hire.

The junior salesperson is expected to be out there making contacts and making sales, which is – at this point in time – what the company needs. Look for someone in the industry with knowledge and experience, demonstrated success, and capacity to learn.

I know that the CEO is eager to offload the sales process, but recognize you will need to spend time mentoring your new hire, and plan to give them at only 25% of the labor the first month or two. Don’t expect them to do all your sales work — understand that the CEO may still want — or need – to close these early, important deals and the new hire will only shadow the CEO for the first few weeks, growing into the role.

The point is that a co-Founder or CEO should be doing primarily what the CEO alone can do — especially in sales.

After the salesperson starts to take over more and more responsibility and sales start increasing, hire another junior salesperson and start slowly building your team. Most importantly, keep the team focused on generating sales. At this point, allow the team to start building a sales process and choose some tools that fit your environment.

Now You Need A VP of Sales

So, when do you hire the VP of Sales?

The answer is simple: Hire your VP of Sales when you’re generating enough sales for a VP to manage and your process is starting to strain at scale. That’s when you really need one.

That’s when it makes sense to hire a mega-talented VP of Sales with exactly the qualities and skills you need. That’s when you’re ready to recruit a proven, effective leader, someone qualified to create the big vision, continue building a sales force, make the strategic long-range plan, and facilitate the team’s success.

And that’s when you can afford to invest in the best VP of Sales you can find.

In the meanwhile, the “Bottom Up” strategy is a better short-term approach in terms of all primary company resources – money, staff, time- and it leads directly to stronger company success in the long term.

A lot of startups—even ones with enormous valuations—are really just two-sided marketplaces.

eBay connects buyers and sellers. Uber connects drivers with those who need rides. Airbnb connects homeowners with travelers who need a place to stay. YouTube connects content creators with those looking to be entertained. Dating sites—like OKCupid—connect daters with dates. The list goes on and on.

In each of these two-sided marketplaces, there is supply and demand. There are a finite amount of people selling memorabilia on eBay, a finite amount of drivers on Uber, a finite amount of hosts on Airbnb, a finite amount of (quality) videos on YouTube, and a finite amount of “dateworthy” individuals on dating sites.

When companies are just starting out, there comes a time in every founder’s life when he or she has to ask themselves whether their startup is going to focus primarily on enhancing the supply side of the equation or nurturing the demand side. When I mentor early-stage companies just getting started out, it’s a question I get seemingly every day.

So which is it?

Why You Need to Focus on Supply

There’s only one clear answer to the question: Follow the pattern of the most successful startups, and focus like a laser on supply.

Why? Switching costs, or the costs incurred—money, energy and time—when a supplier or consumer switches platforms.

There are a lot of barriers standing in the way between a seller on eBay and the potential buyer, for example. The seller needs to create an account. Then he or she needs to take pictures of whatever’s for sale. Next, it’s time to create a listing. Finally, the seller needs to cross his or her fingers and hope that a buyer is interested in conducting a transaction with someone who hasn’t been reviewed by peers.

Over time, if the seller conducts successful transactions, his or her rating will go up. All of this, of course, doesn’t happen overnight.

But once a seller commits to establishing a presence on eBay, it’s unlikely he or she will abandon the platform and set up shop elsewhere. The switching costs are too high.

Why You Shouldn’t Focus on Demand

Thanks to technology, the switching costs associated with customers not finding what they want are negligible.

Imagine a customer goes to eBay and finds only one seller offering the item he or she is looking for. Unfortunately, the item appears to be extremely overpriced. To solve the problem, the customer simply needs to click on the search bar of his or her browser and navigate over to Amazon. Should that fail, the person might head to Jet or conduct a simple Google search. They might seek out even other alternatives.

The associated switching costs are infinitesimal. All shoppers need is a few seconds.

Examples of Startups Targeting Supply

Need a little more convincing on the virtues of focusing on the supply side of your platform? Consider these three cases:

• Airbnb works super hard to get its hosts online. It provides free professional photographers to help make listings beautiful. The company also provides helpful advice (e.g., provide soap!) that hosts can leverage to increase the chances their guests have enjoyable stays. This handholding helps bring hosts into the Airbnb family. Which is a good thing, considering how boring the site would be if it only had three hosts (i.e., three suppliers) in each city.

• YouTube helps content providers produce better videos. The site offers a ton of free tools, including digital studios, editing support, and analytics. It also offers revenue sharing. Altogether, these perks translate into the reality that there are practically countless users uploading infinite hours of footage to the site. Not only can you make better videos, you can make money.

• Ashley Madison, the online dating site that encourages infidelity, infamously went as far as creating fake supply to encourage users to engage with the platform—something that was uncovered when the company’s private data was posted online. According to its own statistics, Ashley Madison had 31 million male users and 5.5 million female users. Turns out up to 95% of those female users weren’t real, but the site’s owners had to figure out how to keep the male users coming back.

If you build it, they (customers) will come—assuming there’s enough supply of whatever it happens to be. By focusing on the supply side of the equation, it becomes that much easier for your startup to reach the next level.

As I write this, I am sitting in a hotel in Moscow, Russia. I was recently invited to speak at an event called Startup Village, a 15,000 person strong summit encouraging tech and entrepreneurship in Russia. The organizing team at the Skolkovo Foundation reached out to me several months ago offering to fly me to Russia to give a keynote speech about our global investment approach at Fresco Capital. What can I say, I’m a curious character and have the tendency to say “Yes!” to new and strange experiences, so… here I am.

Now, as I sit here alone and slightly intimidated in a new, strange city I never even knew how to imagine, I thought it would be a good moment to reflect on why and how I ended up here. While that’s a fun personal exercise, the point is really for you, Dear Reader, to understand exactly what is the point of venturing out of your comfort zone. Why take a global approach if your market is right in your own backyard? Whether it’s for your life, for building your startup, or for your investment strategy — what are the reasons why taking a global strategy is worth the trouble?

By way of background, let me tell you a little about Fresco Capital, the global, early stage venture fund where I am a Managing Partner. We are different from other VC firms in that our core focus is helping companies expand globally. All of our partners have built cross-border businesses. We have all lived in different parts of the world. We have ventured far away from what we know, both personally and professionally.

We know first hand why it makes sense to take a global approach. We also know how fucking hard it is. Moving beyond where you came from takes a lot of guts, perseverance, and help. So, that’s exactly what we do. We invest in companies and help them expand globally.

In order to do that, our team is global at its core. We have team members in Silicon Valley, in Oakland, California, in Dubai, Hong Kong, Singapore, and I am based in Tokyo, Japan. We have more than 45 portfolio companies in California, Canada, Utah, New York, Texas, London, Barcelona, Estonia, Hong Kong, Shanghai, and Manila. Over the past few years, I have been lucky enough to spend time with startups and looking at companies across the United States, South America, India, Asia, and New Zealand. And now, Russia apparently!

I guess I feel a bit egotistical telling you all this, because frankly, I never thought I’d ever be qualified to be talking about international opportunities. In fact, who I am and where I came from is actually the opposite of global.

Yep, I’m from a boring (sorry Mom and Dad, but it’s true), suburban town in Illinois. Below, you will find a picture of me playing with corn, because the area where I grew up used to be farmland. I went to a big, public high school. The same one that my parents went to. And even some of their parents went there too! When we went on family vacations, we loaded up our car and drove out West to Colorado, Wyoming, and Montana. Don’t get me wrong, I had a wonderful upbringing for which I am eternally grateful — but my point is that it was very American, and not very global at all.

Why then? Why go through all the trouble of not only building a global business myself, but now raising a global venture fund, from LPs all around the world, that specifically invests in businesses and helps them expand globally? Lucky for me, the number one thing I’ve learned is being “global” is not about where you’re from. It’s not even about where you’ve been. It’s about how you think, and what you do about it.

Here are the TOP 5 REASONS why you should be thinking and investing globally, no matter where you are from.

What are the largest companies in the world? In fact, the largest companies are global. They are selling internationally because no mater where you live, even if you live in China, I 100% guarantee you that there are more people in the world outside of your country than there are in it. Apple now derives 25% of it revenue from China, +170% growth over the past 3 years. Facebook is seeng its fastest user growth in Asia. Amazon. Uber. Airbnb. All worth billions and billions of dollars and all have expanded globally to fuel their continued growth.

Bonus Reason: Meeting different types of people, being exposed to different ideas, opportunities, and challenges, opens your mind to things you never thought possible. I don’t know about you, but I’m in this whole technology and startup thing to change the world. It so happens the world is a pretty big place, so it’s a damn good time to get started exploring it.

You need more than hope and good intentions if your startup relies on viral growth. You need data and metrics to drive decision making.

Going viral isn’t an exact science, but data plays an important role in gauging how successful your customer acquisition efforts will be. Focus on the virality coefficient before all other metrics. It shows the impact of each product choice on growth. The formula, developed by David Skok, illustrates how each new feature impacts your customer base.

Virality-dependent businesses need to craft their strategy, and every decision they make, around the virality coefficient to be successful..

Otherwise, you’ll sound like these businesses.

(Not) Finding Growth

A number of companies have pitched me by saying they will “go viral” and attract users when it’s obvious that they have no believable plans to make it a reality. Many don’t even have share buttons on their apps!

One company made it so difficult to share their app with others that I never used it again. That’s a virality coefficient of -1. Clearly, their focus wandered.

Let me explain what that means.

The Virality Coefficient Explained

There are four variables used to determine the virality coefficient:

• Initial customers (custs)
• Number of invites sent out (i)
• The Conversation rate of customers (conv%)
• The number of days it takes to complete a full Viral Cycle (ct)

Combine these factors to calculate it using this spreadsheet.

Virality in Action

Let’s say you have ten users and send them ten invites each (100 total invites). With a 20% conversion rate, you’ll finish with a total of 30 customers after the first campaign. Using the sheet I linked to previously, that gives you a virality coefficient of two. Invites * the conversion rate or rather 100 * .2 = 2.

For the next campaign, send out 10 invites to the 20 new users (200 total invites). Assuming there’s no churn or change in the virality coefficient, a 20% conversion rate will bring in 40 new users for a total of 70 users.

Look at the below chart to see just how much of impact each campaign can have. Due to its compounding effects, even small changes in your virality coefficient will have massive impacts on your business.

There needs to be a coefficient of at least one for there to be growth. Anything less means you’re churning customers.

Crafting a Plan

To determine which feature to develop in your product backlog, sort the features based on the predicted increase in the virality coefficient. The backlog should look something like this chart.

You need a virality business plan to map out exactly how you’re going to acquire new customers. The plan should determine what features to prioritize, what incentives there are for users to share, and what level of engagement you want to focus on. Don’t forget to determine which promotion channels to use too.

Determining what makes user acquisition work might seem like an art, but using the virality coefficient can change that. Use your data to drive the decision-making process. Even a small increase could mean (hundreds of) thousands of new customers over time.

Going on a trip to Silicon Valley with your MBA program or government incubator? Don’t fool yourself into thinking that those weeklong Silicon Valley immersion programs are anything other than startup tourism. Spending a week visiting Facebook and Uber and attending talks and events, while interesting and potentially educational, will not teach you what it’s like to build a startup.

Sure, you might make some connections and come closer to figuring out what you really want to do for a living. But if you really want to benefit from a trip to Silicon Valley, you are better off reaching out to one of the several early-stage startups here and asking whether you can intern for a few weeks.

You’ll Understand How Startups Work

While immersion programs are designed to introduce you to the world of startups, they don’t go far enough when it comes to actually shining a light on the intricacies of Silicon Valley. Sure you can see the free food at Twitter, swimming pool at Google, and the hiking trail at Facebook, but that is like visiting Disneyland and thinking it is reality.

By reaching out to a startup instead and interning there, you will develop real relationships and potentially kickstart a career. You will understand how startups work behind the scenes, and you’ll be influenced by their way of doing business. Actual work experience is going to look a lot better on your résumé than spending a week hardly scratching the surface of the startup world.

Think of it like studying abroad. There are two ways to go about it. One is to study at a university where the classes are taught in English, you have no homework, and you can hop around to a bunch of different countries every weekend. You get a broad overview of another culture, but no lasting and profound understanding of it.

On the other hand, you could spend a year in another country, live with a host family, and learn the language. You’ll struggle and it will be challenging, but in the end you’ll have an in-depth understanding of that culture, and how it differs from yours. At the end, you’ll belong to two cultures, rather than just one.

It’s up to you, but I’d take the latter experience over the former any day.

You’ll Gain Unique Insights

When you attend a weeklong immersion program, you’ll get a light taste of what you could expect should you move to Silicon Valley at some point in the future.

But by interning with a company out there — and living and working in the environment itself — you’ll gain unique insights that you can’t get anywhere else. You need to experience them on your own, organically.

How to Find Startups to Work For

You might be wondering how you can actually get hired? Maybe you don’t have startup experience yet. Maybe you’re a developer who wants to work for Google, but you’ve only been coding for a year and you just don’t have the necessary expertise.

Head on over to AngelList, the best place to learn about which companies are hiring out in Silicon Valley. AngelList connects startups with jobseekers interested in working for them. The site provides you a clear view as to what you can expect should you land a gig (e.g., salary and equity is disclosed up front).

The best part? By sending out one application, you can apply to over 40,000 jobs in one fell swoop. Talk about efficiency.

How to Get a Startup to Hire You

Don’t think any startups will take you? Don’t be so hard on yourself.

Pitch attractive would-be employers a short project that utilizes your skills. For example, if you’re a communications major, offer to come in for two weeks to consult and intern with them for free, in exchange for a reference. Most startups don’t have any communications or PR plan, and are happy to take free labor.

Are you a political science major? Offer to come and do an analysis on the effects new policy or the upcoming elections will have on them. Think no startups care about this? Just ask Uber what they think.

If you don’t have any “practical” skills whatsoever? Offer to clean the coffee machines and work your way up.

Maximize Your Trip to Silicon Valley

Those weeklong programs aren’t the worst thing in the world. I’ve even hosted them before at my office in Palo Alto. But the payoff is much higher if you actually immerse yourself in the experience for an extended amount of time.

Remember, if you’re part of one of these programs, your trip doesn’t have to end once a week is up. Stay a little bit longer. You won’t regret it.

—

Photo by flickr user christian.rondeau

Imagine if your startup meets with one of the world’s largest companies to talk partnership. You tell them about your latest product full of excitement and passion. What if the following week they have a team working on a copycat product?

Danger
Large corporates have become much more involved with startups during the past several years. Especially the ones from Asia. And yet it’s difficult for startups to successfully do reverse diligence on these large corporates. Especially the ones from Asia.

Fortunately for startups, we’re doing that work on their behalf. Core to our model is finding the right corporate partners, especially in Asia, to help startups scale into local markets and provide other strategic benefits.

When startups pick the wrong corporate partners, it’s worse than nothing. Because takers and fakers can suck your limited time, energy and resources like vampires and zombies. They simply bleed your startup to death. And then move on to their next victim.

There are actually plenty of fantastic makers who know that their success comes from building the future with you. But connecting with them is hard. Here’s a rough guide to finding these makers, ignoring the fakers and protecting yourself from the takers.

Fakers
The discussion with fakers tends to start off strong. They typically know how to work the media and get favourable press coverage. They love to attend networking events.

And they name drop. Right away they let you know that they know people. Not just any people but the people who know people and the people who people know. They are also always busy. This combination makes them seem like makers at first.

Except they’re not.

Because when it comes time to actually get things done, fakers gonna fake. They have convenient excuses, mostly related to schedule. Because fakers are very busy…doing not very much at all. Fortunately, that reduces their ability to inflict serious damage. They’re so busy doing nothing that their main negative impact is the opportunity cost of missing out makers.

As long as you don’t get stuck in a long-term zombie relationship, the downside of fakers is usually limited.

Takers
You should be much more worried about the takers, which come in various forms and sizes. Some are famous names. Some hide in the shadows. Some are shape shifters.

What all takers have in common is a zero sum philosophy that for them to win others must lose. These are the companies that meet with startups and have a team copying the product the next day. They negotiate complicated legal agreements and then find a backdoor. They suck your blood as quickly as possible because that’s how they stay alive.

So what can you do?

The main thing to remember is that, no matter what, takers gonna take. So when you start spending time with them, you’ll notice an odd pattern. They’re constantly finding ways to suck blood from others. The most obvious habit is to take from people who are weaker, so watch how they behave around people who can’t help them or hurt them. In the early stages of speaking with you, it may be less obvious because you have something they want. But even then you’ll notice hints of their desire to take.

The reality is that many takers are in positions of power and you will probably have to deal with them, so be prepared and keep your option open to walk away if needed because the downside could be deadly for you.

Makers
These are the ones who get stuff done. Once a maker becomes well known, their challenge becomes time allocation. They simply have too many opportunities and too little time.

First, you need to stand out. Because you’re not the only one who wants to get their attention. This does not mean coming up with gimmicks, sending them messages every hour or shouting louder at events. It means understanding what the maker truly needs or wants and only approaching them if you have the answer. Otherwise, you’ll be wasting your time and energy.

But there’s another kind of maker.

Instead of targeting the makers who are already famous around the world, consider looking at the large number of companies who are also makers but less famous. How do you find them? Especially in Asia? Through a trusted network. There are many amazing maker companies who quietly build huge value for their customers, partners and themselves and yet are not famous.

The best part of working with makers who are less famous is that they will actually have more time for you precisely because they don’t have to deal with as many distractions.

Shortcut
Sadly, there will never be a way to get rid of all the fakers and takers. But we’re in a fortunate position to give startups a shortcut to work with trusted partners. This creates a competitive edge for you to build more value faster.

We connect makers with makers so you avoid the fakers and takers.

In the early days of your startup, you might have heard you should have a hacker, a hustler, and a hipster on the founding team. That makes a lot of sense in the initial stages of your company due to the experimental nature of the business. Remember what Steve Blank says: a startup is not a “real” business but rather “an experiment searching for a business model.”

Once you start to move out of the coffee shop and build your initial team, you’ll have to make some careful hiring decisions. I’ve seen founders hiring for new “formal” positions right out of the gate when all they need are operators to validate the business and find product market fit. Instead of finding your next VP of whatever or Chief whatever Officer, you should have no titles until you have paying customers and a product market fit.

I advise all the founding team to call themselves “product” on slide decks and email signature (if you do that sort of thing). Early stage team members should not be going to conferences and don’t need business cards, so the title doesn’t matter.

Here are a few other ways to manage the early stage hiring processes, and run your startup more effectively.

Maintain Equilibrium

Last year, I wrote a piece called “The Holy Trinity of Product Development.” I argued that it’s important to maintain balance in a company. Often, a startup’s first hires (besides the founders), tend to skew either to the technology side (we need 5 developers!), or the marketing side.

Generally, if the founding team is more marketing-minded, they overhire engineers, and vice-versa. Instead, a company should be customer-centric. To achieve this “holy grail,” the company needs both technology and marketing expertise.

Be Well-Rounded

In another article, “Why CTOs Should Know Accounting,” I suggested that CTOs also need to understand the business side of your company. It’s important for all of the high-level employees in a company to be able to converse with the rest of the employees.

Just like the CEO of a company should be able to at least pronounce the word “kanban,” (con-ban not can-ban) and know the difference between Java and JavaScript, a CTO should be relatively familiar with balance sheets, income and cash flow, annual statements, and budgets.

How to Hire

I’d argue that it’s better not to even bother with interviews. Rather, have coffee first. Discuss why they want to work at such an early stage company and review their skills there.

If that goes well, then have the potential employee give a presentation to the entire team. It can be on any topic (Was “The Force Awakens a remake or not?” is a perfect choice), and it gives the team a feel for the candidate’s analytical skills, seriousness about the position, and ability to do something different, while it also provides a unique experience for the candidate.

If the person is successful on their hiring presentation, I’d suggest the “can we have a beer with them” final check. This one’s really complicated – take them out for a beer with the team (or another social engagement if team members don’t drink). Get to know them on a personal level. When companies scale to be over 25 people, it is much harder to do this with the whole company, but each functional area (marketing/sales, tech, backoffice) can do it with their group and a select few members from other functional groups to join.

Avoid Founder Disputes

Early stage companies sometimes have no cash and bring on someone as a “co-founder” with little to no pay. It’s also crucial that you do your best to avoid founder disputes. I wrote a piece on this called “Dynamic Founder Agreements,” but I’ll give you a short summary. I described this agreement like a typical IF/THEN/ELSE.

IF:

The CTO works full-time and performs all of coding and technical duties of V1, his equity is 50% vested over 4 years, 1 year cliff.

ELSEIF:

The CTO works part time, is disengaged, or we need to hire developers sooner than expected, his vested equity is reduced by half and he forfeits his unvested equity. Loses board seat.

ENDIF:

The CTO has to leave the company because he needs a job or a family emergency: if the CTO built V1 then the buyout is a one time payout of $50,000 USD cash or 2% vested equity, if the CTO did not build V1, the buyout is 0.5% vested equity. Loses board seat.

While you might not avoid all disputes, this agreement will go a long way.

Hiring for Bigger Companies

Once your company grows and matures, deliberately hire slow. “Scale” and “move fast” does not mean “hire crazy fast.” Rather, hire for a role only when it is obvious the company is suffering without it.

There is a Silicon Valley secret that dictates that “you make a decision to join a company ONLY if they are resource-constrained. Once they have enough people, time to move on.” The idea behind this secret is that creativity needs constraints. Translation: if your plan calls for ten people, see what you can do with five.

Use these tips when building out your initial team. Don’t fall into the hiring trap.

As venture capital investors, we are constantly looking for positive fat tails, companies that have the potential to generate extreme positive outcomes.

At the same time, not all fat tails are positive. There are negative fat tails. And as we look towards 2016 and beyond, it’s important to think about the risks. While there are many potential risks to consider, the following list of five fat tails focuses just on finance and economics because I don’t have the time to write a book this month.

To be clear, these are not predictions. In fact, the world may be better off if none of the following fat tails happen in 2016. But at least we should be prepared and resilient, just in case.
 

1. US dollar squeezes dramatically higher

 
If the US dollar rises steadily, that would not be a fat tail. But if it rallies sharply higher, that would fall into the category of fat tails. Why would that be negative? Historically, a strong US dollar is associated with tighter liquidity conditions globally. And so if we see a sharply stronger US dollar, that will be a clear warning sign of potential risks ahead. Currencies are typically the first financial markets to move. They lead bond markets, equity markets and private markets. As an early warning indicator, keep an eye on the US dollar. If it squeezes higher, get ready for more fat tails.
 

2. Unexpected rise in interest rates

 
The last interest rate increase by the Fed was in the summer of 2006. At that time, Facebook was only open to students, the iPhone had not launched and Tesla was an early stage startup. An entire generation of young people has grown up without understanding what happens when interest rates rise. An entire generation of old people has forgotten what happens when interest rates rise. It’s highly possible that we’ll finally find out in 2016. Historically, rising interest rates could not be called a fat tail event because this was a normal cyclical process. But if there is an unexpected rise in interest rates during 2016, it is best to approach this as a fat tail event because we really cannot predict how the results will play out.
 

3. Unicorn contagion

 
In every cycle, certain ideas capture the essence in a single word. In the current cycle, Aileen Lee’s concept of unicorns is that word. Now that some of these companies have started to show signs of being less than perfect, their connection as unicorns creates the risk of contagion within the group. More broadly, it’s still unclear what weakness within the group would mean for the broader startup and financial ecosystem. Perhaps nothing. Perhaps they are a leading indicator. At the very least, it’s worth keeping an eye on sentiment around unicorns.
 

4. Crowdfunding backlash

 
Crowdfunding is a transformational and positive idea overall. Like any transformational idea, markets have a habit of taking things too far. We’re now seeing new crowdfunding sites pop up weekly and some of the players are using very aggressive marketing tactics. There will inevitably be fraud, so the only question is the magnitude and the level of backlash. The fat tail event would be a larger than expected level of fraud, which would then lead to a strong backlash. This could impact both crowdfunding itself and also fintech generally. Compliance is already one of the fastest growing job in the finance sector. Unfortunately, a fat tail event in crowdfunding could accelerate this trend.
 

5. The Euro breaks up

 
Politically, it seems unthinkable. To be clear, this is not expected to happen in 2016, but it needs to be considered as a fat tail risk. If the Euro were to break up in some fashion, that would be the unwinding of a trend not simply going to the start of the Euro itself, but many decades earlier. The impact would be felt by everyone and while financial markets would take a back seat to the social issues, there would clearly be a massive impact on financial markets as part of the process.
 

The paradoxes of fat tails

 
Fat tails are full of paradoxes. The good news is that, individually, each of these events are unlikely to happen in 2016. The bad new is that fat tails are not independent. A stronger US dollar may actually happen along with an unexpected rise in interest rates and this in turn could trigger a unicorn contagion, a crowdfunding backlash and even a Euro break-up. And so, rather than thinking about them as five separate fat tails, we need to be aware of the possibility that they could cascade into one giant fat tail.

Fat tail events are almost impossible to predict. The only consistent prediction is if you can stay resilient during negative fat tail events, you’ll be around to take advantage of the remaining positive fat tail opportunities.