Archive for the ‘startups’ Category

Total cost of working in a startup (read: opportunity cost)

Sunday, March 30th, 2014

opportunity costI have seen many starting business saying that cost of running their operations is very low. Usually they say that they have to pay for servers, maybe some ads and that’s it – a few people working and total cost just under 100EUR.

Unfortunately people often forget the biggest cost – opportunity cost. Lets take simple example that you are a good programmer and building your very own business without taking any salary.  You also have great value server from Hetzner with monthly payment of 50EUR. Total cost of running this business is 50EUR a month because no salary is taken or is it?

Because you are a good programmer the you could work for any other startup(or Google/Facebook in Silicon Valley) and get 4kEUR of net income every month. You could also hire exactly as good programmer as you are with exactly same salary to build your business. When adding up the 4000EUR of salary and 50EUR of server fees you get 4050EUR of the monthly burn rate.

What is the difference from business point of view in above 2 situations? In both cases there is one good programmer working full time on the business. In both cases you end up without any money in the end of the month and of course each month there is 50EUR of server fees. Situation is exactly the same.

If you look further then actually there is slight difference. If you hire someone then because of the taxes you have to pay approximately twice the amount taking 4000EUR up to 8000EUR. This would suggest that working on your own is more cost effective than hiring someone. However if Google is hiring you then it also sees you creating value of at least 8000EUR a month.

Make sure that when calculating the ROI of your business then you consider the real total cost of 8050EUR instead of 50EUR. I also recommend you to ask yourself if the business even theoretically is able to bring back that money? Consider also need for many people: developers, salespeople, support, QA, managers etc. Your burn rate can be 100kEUR a month very easily. If it is hard to make that kind of a income then maybe it is worth helping other more potential startups make it happen?

 

Founder Equity Agreements – required but only if you want to start making money when establishing a new startup.

Sunday, March 30th, 2014

startup_foundersLets say that you get a brilliant business idea with your friend. You will establish a company 50-50, change the world, earn a lot of money in the process and live happily ever after. Statistics have shown that plans like this usually don’t work out. It is fairly common to have changes in founding team. If there is also money involved and everything is not clearly written down beforehand then major problems can happen.

Its clear that everyone in the company must be compensated according to his value. Simplest way to compensate is with salary – you will work and I will give you money. For entrepreneurs the compensation is also in form of the shares. Entrepreneur will work and get the shares in a company as a result. Funded company founders usually get mix of shares and salary.

It is fairly uncommon to pay workers 3-4 years salary upfront when joining the company for obvious reasons. Similarly business partners should not receive full amount of company ownership immediately on the day of establishing company when building full company takes at least 3-4 years.

There are different approaches of how the shares are earned by the entrepreneur. Common thread is having vesting schedule with contribution requirement, for example both founders will get 1% of the shares every month of full time contribution. When investors are involved then they are very interested in long term partnership which may add condition to term sheet that minimum vesting period is 1 year. If founder leaves the company before first year then he is considered compensated only with the salary he got an no equity is received.

One example of reasonable and popular founders collaboration agreement can be downloaded from http://www.seedcamp.com/2011/09/seedhack-founders-collaboration-agreement.html. Read also http://www.inno-hub.com/wiki/view/20 for in-depth analysis of Equity agreements.

How to win Seedcamp week from winners perspective

Thursday, February 27th, 2014

I am one of the founders of GoWorkaBit which won the Seedcamp week London in February 2014. Here you will find here ideas about what is crucial for winning the event and becoming top 1% of European startups.

In case you have not figured it out Seedcamp week means having aroundseedcamplogo 20 startups together in a free and intensive business development training. If your business looks impressive then you will win the Seedcamp week which means getting small investment and access to Seedcamp family together with all the benefits listed on their webpage. Bear in mind that you are not competing with other teams for winning the event but you are competing with yourself. There is no predetermined number of winners and you will win if Seedcamp team finds something extraordinary in you above the threshold.

Firstly and most importantly the startup must have the baseline by having solid business with good management team and it must be able to communicate it very clearly. Communication is important from day one and needs good preparation. Event itself starts by having introductions and practice pitches on day one followed immediately with day two where you pitch in front of the 10-15 investors who are the people making the actual decision during the week.
These people will be following you all week as many of them will take part in mentoring sessions also. In addition the Seedcamp team will ask from other mentors what they felt about your startup.
Pitch is its own big category. It would be best to master the pitch before you stand in from of the decisionmakers but anyway you are guaranteed to have great pitch by the friday due a lot of practice and assistance from Seedcamp week people.

Secondly the team must be full of energy, know what they are doing, have clear responsibilities and share the vision. Carlos and Reshma are watching you very closely and you can expect to have private conversations during the day or parties in the evening alone with one founder. If founders stories don’t add up then it comes out very quickly.

We also printed a roll-up and paid a lot of money to take it with us in the airplane. We rolled it open everywhere, even when we went to coffeeshop in the morning to discuss our idea with the team.We was asked to relocate the roll-up only once which is good because we were noticed and found the limits.
We made even more preparations by taking enough local sweets to share with mentors during the session as you normally do when meeting business partners. People liked it, they were more positive and only a few times it was called “bribery”.

Olle-Kaidro-Margus-Pala-Gerli-Veermäe-Kei-Karlson-at-Seedcamp-2014Seedcamp team is looking for progress during the week. Most visible progress is pitch. Another way to see progress is what you actually say about your idea in the beginning and end of the week. With such an impressive list of mentors you meet is not logical if your business idea will not become much more sensible and clear. If you don’t make any changes to your plans then most probably you are stupid beyond help or pure genius(which happens not so often).

Last crucial item is preparation ahead of arrival to Seedcamp. The most important preparation is for meeting with mentors. It is best to think of your business and write down everything you need to know about it during the once in a lifetime opportunity of discussing it with up to 100 experienced business people. If you have the questions then you can browse the mentor list and direct the question to specific mentor. We also tried to browse mentors and think of question to ask but it did not work out because its very time consuming and you don’t have much free time available. I even recommend to have accommodation near the facilities to save time on travel. ROI will be good enough.
I already mentioned the pitch, even if you are trained well during the week then pitch must be still great when you arrive. Also please take care of gadgets, business cards and other stuff to share. When you have the prerequisite, good business with great team, and follow the advice in this article then you can be confident that you will win the Seedcamp also. Please send me feedback if this advice helped you, I will be very grateful.

Best measure to get more successful startups.

Monday, September 23rd, 2013

startup-curveWhat is the biggest problem causing many great people not to start successful startups? The answer is making the first step out of safety of good salary and into uncertainty with no income. How government can help to resolve the problem? It is actually very easy, support similar to unemployment benefits will help.

Here is my suggestion. Support is best suitable for top notch specialists identified by well above average salary and business in IT area where most of expences are salaries. For applying is needed process similar to accelerator application. It is required to have Business Model Canvas plus answering a few business critical questions followed up by interview with government specialist. Government will get around 10% of company shares in return of support so the money is not totally free.

Once approved then new entrepreneur will get enough money to survive for 6 months if he leaves his previous job. Each month he must meet with government specialist and update on business progress. Government evaluates progress and decides whether to continue making the payments.