An EPFL entrepreneur had contacted me about equity split between founders, employees and investors in a start-up. I mentioned my experience and related blog post on the topic: Equity Splits in Start-ups. Then he came back to me with a book he advised me to read. I am half way through it and it has interesting (and new to me) lessons. So thanks Justin 🙂
The book is entitled Slicing Pie, and subtitled Funding Your Company Without Funds.
I will probably go back when I am finished with this book, but already, here are some examples of what I liked:
The Gap
Somewhere between the inception of your earth-changing idea and the investor presentation to Andreessen Horowitz there is a gap. During that gap, you are expected to have actually built something that resembles a business enough that the gentle and kind venture capitalist will decide that you have your act together and write you a fact check. I call it “the Gap” because it’s during this time that you either fill the gap with behaviors that create a business or let is consume you and your wonderful idea. Most fledging businesses experience the latter.
The days of back-of-the-envelope deals are over. (In fact, they may never have actually existed.) Few investors are willing to provide capital to a company that is little more than a rough idea.
Nowadays, you need to have something worth investing in which often means a management team, a business plan, and, if you’re smart, a working prototype. For bonus points get a few beta customers who are actually paying you. Now you have something worth discussing. [page 2]
The need for Entrepreneurs
“Entrepreneurs give security to other people; they are the generators of social welfare.” The country needs entrepreneurs, the world needs entrepreneurs. Without them not much would happen.
In spite of the exciting life and important role of entrepreneurs, most people never become entrepreneurs. To most people, life is too risky. Most people can’t handle the ambiguity. Most people are afraid of failure. Every entrepreneur fails more often than they succeed. [pages 9-10]
Good and Bad Lessons
Failure is how an entrepreneur learns. Good lessons improve an entrepreneur chances for future success. If you created a product that nobody wants, if your employee leaves you, if a competitor comes out, if your marketing did not work, if you run out of money, you will learn.
Being an entrepreneur requires a lot of trust and confidence.
But if they get burnt by partners, they learn bad lessons. They spend more time covering their own butts. They learn to move more slowly and take fewer risks. They learn to be less like entrepreneurs and more like everyone else. [pages 10-11]
Grunts
Grunts are people who are willing to forgo cash compensation in exchange for a piece of the pie. Grunts do the work necessary to turn an idea into a reality. They will do the fun work and the dirty work. They are as comfortable licking stamps as they are building a strategic plan. [page 28] (I love grunts probably because in some aspects I am one, even if not an entrepreneur!)
As a conclusion to his first chapter, author Mike Moyer claims that an entrepreneur needs a method for slicing the pie that is easy to understand and
– rewards participants for the relative value they provide,
– provides motivation for them to continue to provide more ingredients,
– allows founders to fairly add or subtract participants to or from the company,
– is flexible in the face of rapid change.
After reading The Apple Revolution, I discovered Return to the Little Kingdom, subtitled How Apple and Steve Jobs Changed the World. It’s not just another book about Apple for 2 reasons: it was written in 1984 so when Apple, Inc was still Apple Computer, Inc and it was written by Michael Moritz, then a journalist at Time Magazine, but today one of the most famous venture capitalists, with investments in Yahoo and Google, just to mention two, although I must add that he has “a rare medical condition which can be managed but is incurable” and a result, he stepped back as managing director of Sequoia Capital.
It’s not that it adds a lot to the Apple Revolution, so no need to read both. Now, there are (very) interesting lessons, the best for me was probably in the Epilogue: “In 1984, faced with the challenge of managing a fast growing company in an increasingly competitive business, the board of directors were faced with the most important task that confronts any board: selecting a person to run the company. […] Only in retrospect have I come to understand the immense risk associated with hiring an outsider. […] It is not an accident that most of the great companies of yesterday and today have, during their heydays, been run or controlled by the people who gave them life. […] The founder, acting with an owner’s instincts, will have the confidence, authority and skills to lead. […] Experience is of little use in a young, fast-growing company in a new business that has a different pulse and unfamiliar rhythm. Experience is the safe choice, but often the wrong one.”
Now I could also refine my Apple cap. table as Moritz gave some nice details about employee shares. I also went back to the Apple S-1 document and slightly changed the content.
Here are the things I learnt: Both Jobs and Wozniak initally had 8’320’000 shares which they paid $2’654.48 so a price per share of $0.00032 in March 1977. Then Markkula bought the same 8’320’000 shares but for an amount of $91’000 so a price per share of $0.01094 in November 1977. The three of them were called the Promoters of the company. Then shares were sold to employees 1’280’000 to Michael Scott at a price per share of $0.01 in November 1977 and again 1’920’000 at $0.09 in August 1978. 800’000 to Frederick Holt at $0.01 in November 1977 and again 960’000 at $0.09 in August 1978. Same with Gene Carter, 160’000 to Gene Carter at $0.09 in June 1978 and 160’000 to at $0.09 in January 1979.
It should be noticed that employees were ranked as
#1 Stephen Wozniak
#2 Steven Jobs
#3 Mike Markkula
#4 Bill Fernandez had no share
#5 Frederick Holt
#6 Randy Wiggington (no info on his shares)
#7 Mike Scott – CEO
#8 Chris Espinosa had no share
#9 Sherry Livingston, first assistant, had shares
#10 Gary Martin – Accounting
#11 Don Bruener had no share
#12 Dan Kottke had no share
#13 John Draper
#14 Mike Wagner
#15 Donna Whitner
#16 Wendell Sander
Unknown Gene Carter had 320’000 shares
Unknown Jim Martindale
#34 Elmer Baum had no share
Jobs was so competitive, he did not like to be #2, so he asked to be #0! Buit Scott refused. Scott gave himself his number as a reference to 007!
Wozniak sold some stock to Fayez Sorfim, Richard Kramlich and Ann Bowers (Noyce’s wife). In the summer of 1979, Apple sold a total of $7M if existing shares are counted. Markkula and Jobs sold about $1M each. The “Wozplan” enabled some people including employees who had no shares so buy some of his.
I do not often talk about french start-ups, but after my recent blog on Parrot, it would be a mistake not to mention Deezer’s latest financing round. If you do not know Deezer’s music service, just try it!
Deezer has been founded by two young French entrepreneurs (28 and 32 at the time of foundation), its seed investor was Xavier Niel, the famous founder of Free, and was backed by AGF Private Equity, DotCorp (the holding of the Pixmania founders) as well as Orange. It made a lot of buzz yesterday when it announced its new huge round with Access Industries, the owner of Warner Music. The beauty of private companies in France is that, though they are not public, you can find information of their shareholders thanks to Infogreffe, the French register of commerce. It will only cost you a few Euros. So… here is the cap. table I could build from the info I grabbed. Not fully accurate probably. I do not have the CEO or COO shares. And Access may buy more shares from existing shareholders (which may explain why the news mentions a $130M round and not €70M I have in the table).
Dormehl, the author, is convincing when he explains that Silicon Valley is the result of the counter-culture as much as the Midwest engineers coming to SV. Noyce might have agreed! “This ideological divide is not uncommon. Silicon Valley has long been defined by the innate tension between the technologist’s urge to share information and the industrialist’s incentive to profit. […] There were aspects of the counterculture that were staunchly anti-capitalists in their views. […] One of them was definitely Marxist and the other was largely apolitical.[..] “Do you own thing” easily translated into “Start your own business”. [Pages 61-63] “Only in Silicon Valley could starting a business be read as an act of rebellion.” [Page 169]
There are so many (unknown-to-me) anecdotes that I will only mention a few. For example, I did not know about Ron English, the guerrilla street artist who circumvented Apple’s billboards using murderer Charles Manson.
“The people who built Silicon Valley were engineers.” Jobs told wired in 1996. “They learned business, they learned a lot of different things, but they had a real belief that humans – if they worked hard with other creative, smart people,- could solve most of the humankind’s problems. I believe that very much.” [Pages 7-8]
At the same time, the counter-culture, the hacker culture has been critical [page 17]: – Access to computers – and anything which might teach you something about the way the world works – should be unlimited and total;
– All information should be free;
– Mistrust authority – promote decentralization;
– Hackers should be judged by their hacking, not bogus criteria such as degrees, age, race, or position;
– You can create art and beauty on a computer;
– Computers can change your life for the better.
A funny anecdote is a woman going to the Homebrew Computer Club because nearly all the attendees were male. Her verdict: “the odds were good, but the goods were odd”. (Page 25)
You will learn about the history of the Apple logo [pages 85-90] and the first killer apps (word processing and spreadsheets). I did not know Paul Lutus and John Draper. And what about Apple first ad campaigns!
You will obviously read about the mouse, about interactions with Xeroc PARC and also learn about the early days of the MacIntosh concept and its father, Jef Raskin who yanked sharply in the arm of a young developer when he saw his face and guessed his thinking, labeling as “wet-behind-the-ears marketing puke, dressed in a ridiculous chalk-pinstripe, complete with banker’s vest, shoes off, stinky feet up […] an abrasive punk in need of a slap” a Steve Jobs he had not recognized! [Page 189]
“The Macintosh project represented the first time – outside the Garage in which the Apple II had been built – that Apple would put together the kind of small, dedicated team that would produce some of the company’s greatest products in later years. Jobs referred to this company-within-a-company approach as returning to the “metaphorical garage”. The Macintosh team still had all the piss and vinegar of a start-up. “Innovation has nothing to do with how many R&D dollars you have” Jobs said. “When Apple came up with the Mac, IBM was spending at least one hundred times more on R&D. It’s not about money. It’s about the people you have, how you’re led, and how much you get it.” [Page 202]
You will also read about the legal issued Apple faced in the music field and the funny origin of the Sosumi. It’s not only about Apple, you will read about Next early team, Dan’l Lewin, Rich Page, George Crow, Bud Tribble Susan Barnes an Susan Care as well as Pixar’s founding team, Alvy Ray Smith, Edwin Earl Catmull and John Lasseter ; “Pundits even came up with a tongue-in-cheek name for the unlikely convergence of Silicon Valley technology and Hollywood moviemaking. They called it Sillywood.“ [Page 303] So you can comment my tentative cap. table of NeXT (see below) when acquired by Apple.
Another piece of video is Pixar first work, The adventures of Andre and Wally B. If Jobs did OK with Next, what about with Pixar. He got 70% for $10M then Smith and Catmull each had 4%. But jobs got 100% after putting $50M. [Pages 335-336] There is also the funny anecdote that the iMac could have been called the MacMan, sounding “like a cross between the video game Pac-Man and Sony’s handheld music player, the Walkman.” [Page 413]. There is also an analysis of intellectual property [Pages 430-431] “Whether or not a breakdown i traditional copyright laws odes, in fact, lead to a similar decline in creativity and innovation remains a hotly contested debate” adding that “Gates, typically referred as imaginative”, and having “never invented anything” is wrong. “Gates had invented the notion that Software (be it entire operating systems or simple files) could be sold. Jobs merely reframed the idea as a necessary protective measure for creativity.” Apparently Dormehl advises to read Lawrence Lessig’s The Future of Ideas.
In the final chapters, Dormehl addresses the Apple paradox of the counterculture becoming mainstream. He quotes Norman Mailer [Page 384] “One is Hip or one is Square” and he adds [Page 408] that “no one better summarized the new ruling creative class of boomer bobos (that’s bourgeois bohemians) than Steve Jobs. […] They are prosperous without seeming greedy; they pleased their elders without seeming conformist; they have risen towards the top without too obviously looking down on those below; thy have achieved success without committing certain socially sanctioned affronts to the ideal of social equality; they have constructed a prosperous lifestyle while avoiding the old clichés of conspicuous consumption.” Then [Page 456] Paul Lutus describes the App Store as a “classic marketer’s dream, with too many programmers with too many programs chasing too few buyer dollars, and the marketer in the middle the only really cashing in.” (Perfect capitalism, long if ever lost counterculture…) “Apple turning its back on its founding libertarian ideals.” […] “With the suggestion made that high-tech libertarianism apparently leans heavily towards the puritanical.” Still Jobs did not forget some elements of the start-up culture. “Jobs wanted the department to have only one hundred people, since that was the number of names he could remember.” “Apple was able to avoid unnecessary levels of bureaucracy. We’re the biggest start-up ion the planet Jobs proudly noted in 2010.” [Pages 462-463.] About innovation, “Gladwell’s suggestion (via economists Ralf Meisenzahl and Joel Mokyr) is that it is history’s tweakers – more so even than its inventors – who truly define the age: The visionary starts with a clean sheet of paper, and re-imagines the world. The tweaker inherits things as they are, and has to push and pull them toward some more nearly perfect solution. that is not a lesser task. [Page 474] And as a near final quote from Norman Mailer again “One is a rebel or one conforms, one is a frontiersman in the Wild West of American night life, or else a Square cell, trapped in the totalitarian tissues of American society, doomed willy-nilly to conform if one is to succeed.” “It is for this reason that musicians like Jim Morrison and Jimi Hendrix who passed away at the age of twenty-seven, will forever be seen as young, idealistic rebels.” “The sheer scale of the current Apple makes it difficult to consider it any kind of rebel.” [Page 502] “Despite being declared moribund 59 times since 1995” [Page 495] , Apple is a formidable capitalist story as the next graph shows.
As a conclusion, let me quote Jobs again, and I discovered this on the Wikipedia page for Think Different: “When you grow up you tend to get told the world is the way it is and your life is just to live your life inside the world. Try not to bash into the walls too much. Try to have a nice family life, have fun, save a little money.
That’s a very limited life. Life can be much broader once you discover one simple fact, and that is – everything around you that you call life, was made up by people that were no smarter than you. And you can change it, you can influence it, you can build your own things that other people can use.
The minute that you understand that you can poke life and actually something will, you know if you push in, something will pop out the other side, that you can change it, you can mold it. That’s maybe the most important thing. It’s to shake off this erroneous notion that life is there and you’re just gonna live in it, versus embrace it, change it, improve it, make your mark upon it.
I think that’s very important and however you learn that, once you learn it, you’ll want to change life and make it better, cause it’s kind of messed up, in a lot of ways. Once you learn that, you’ll never be the same again.”
I did not check how many times I blogged about Finland, but it is certainly one of the most interesting and entrepreneurial countries in Europe. However, when I attended the REE conference at Aalto University last week, I have been shocked by the talk of Risto Siilasmaa. He is not only the chairman of the struggling mobile giant, but also the founder and chairman of F-secure, a successful software start-up. If you have time, watch his talk and listen carefully. Here are may notes, hopefully correct: “Entrepreneurship should be cherished, because it will be critical of the future of the world. It is not a profession, it is a state of mind.”
“In 1924, Finland got 37 medals and 14 gold medals in the Olympics, much less in 2012. Finland was poor but at that time Europe was 25% of the world population and 33% of the GDP. In 2050, it will be 7% of population and 15% of GDP. And we will not be able to give to everyone all the wealth Europeans enjoy today. Not even talking about climate change and aging. Today, out of 100 people, 46 work in Europe including 8 in health care. In 2050, 38 will work and 18 in health care. Less than 20 will create wealth for the others. The equation does not work. European subsidies are 1/3 to coal mining and agriculture and 6% to R&D and technology. This is also meaningless. Europeans citizens need to elect leaders who have vision and courage… Entrepreneurship is making an impact and there is no point in doing small innovations when you are going to fail.”
Risto founded f-secure when he was 24 years old, but began making pocket money when he was 12. He studied at Aalto but found more negative elements than positive ones. Entrepreneurship was not valued, teachers did not value their teaching or if they taught well. “It was very disappointing”. He did not have classmates with an interest in entrepreneurship BUT he has to thank Aalto for pushing him to create a company with a friend when he began doing business. It was a consulting/project firm and he hired many Aalto alumni. He also remembers “the aversion to transfer practical skills” and an attraction for theory [something we should think about – why is that?]. “Management science was disappointing, the more complicated you were, the better (do you know what are “diseconomies of time compression?” [see next line]). CEOs never read management research, researchers want they fellow researchers only to read them, or why would not they use “lead-time” instead of the complex concept before? Whereas there might be hidden gems in research but how can CEOs know.” “Again entrepreneurship is a state of mind, which implies pragmatism, ambition, dreams, perseverance, optimism and give-up-&-start-again. It is also about a desire for results. We need to wake up, try, kill what fails and start again.” Siilasmaa quoted George Bernard Shaw: “Some men see things as they are and ask why. Others dream things that never were and ask why not.”
Then there were Q&As about:
– The Taboo of Money. Yes, the new French president said he hates rich people. Money is a by-product, but success should be celebrated. Once you have enough, you do not need money, but it is an outcome.
– Stock options. Q: Is it accepted in Finland like in SV? A: yes but down rounds and lack of exits make stock-options less successful not less accepted.
– Values: they should come from parents not from school. Now it is true some leaders succeed with strange values, such as “cult leader”. Not easy to blame them when they are successful but then how do we align this with values… not easy.
– Research on entrepreneurship again: if a paper is not complex, it is not accepted, too bad! CEOs read 300-page books with 1 idea, unfortunately. So you need to select teachers with the right values & ambition. Why not entrepreneurs? There is a book about picking the right people. Google it…
The REE conference was rich in quality speakers but nothing close to Siilasmaa. I noticed some good things such as “being an entrepreneurs is making an impact. Just like scientists or artists, it is about do you want to be remembered. Therefore we should “expose as many people as possible to entrepreneurship and hope that diversity will induce wealth. Again it is about a Darwinian process. And we should also be aware that entrepreneurship is not just about satisfying needs, but also answering to frustrations and desires.
I was less convinced about the fact that creativity can be taught (but I am not creative so maybe I should follow such courses!), about the idea that customers may be better to fund your start-up than investors (it is not my experience but I might be biased) or even that teaching can replace the state of mind. But there was a funny analysis that I restate my way: “If 100 students follow a course, 10 may launch a company, 5 will fail because they did not listen / learn, 4 will survive because they learnt the tools to avoid fatal mistakes, and 1 will succeed because he did not fully listen and did it his way on top of surviving.”
Let me finish with something loosely related. As you may know if you a regular visitor here, I love to put cap. tables of start-ups when available (at time of an exit), and here is F-secure.
It is in discovering the Parrot investment in two EPFL start-ups, senseFly and Pix4D, that I was reminded a start-up which recent success I did not know. I am sometimes very much disconnected! I had indeed met its founder, Henri Seydoux, in one of these start-up conferences that were popular in the late 90s. The start-up had already received support from Sofinnova, but it was less than 5 years old and was far from its € 250 million turnover achieved in 2011 and its 700 employees it has hired since!
As usual, I could not help but get its IPO filing document, and also some older material on the French register of commerce, which allowed me to build the following capitalization table.
(Click on image to enlarge)
To learn more about Parrot, the following video is quite refreshing …
Finally, I also wanted to try to learn more about Henri Seydoux, intrigued by a fairly famous family name in France … this work is probably closer to the tabloids than this blog but hey, I find the genealogy interesting!
I was lucky to be invited as a panelist at the Global Semiconductor Conference in Geneva on May 8-9. The round-table topic was “how to create more successful start-ups”. But before mentioning that discussion, I’d like to mention the previous panel, which gathered Stan Boland, former CEO and co-founder of Icera Inc, Dennis Segers, CEO of Tabula and Remy de Tonnac, Chief Executive Officer, INSIDE Secure. Stan has sold Icera to nVidia for $367M after raising $250M (a nice but small 1.3x return). Dennis has raised about $200M for Tabula and apologized for preventing start-ups to get that money, whereas Remy just took INSIDE Secure public on the Paris stock exchange, raising €70M after the company raised more than €100M in venture money since its inception.
I was very impressed by INSIDE Secure long history (it was founded in 1994), including unfortunately washout rounds. What was great is de Tonnac’s message stating that start-ups can only survive if they keep their entrepreneurial spirit and innovation DNA. Here is my usual cap. table format for the company. [The history, the list of investors and number of financial rounds are so long that the numbers might be approximation only…]
click on picture to enlarge
This shows once again that it is possible to try and succeed in Europe, but it seems to take much more time than in the USA. Now back to my panel. The motivation for the topic is the smaller and smaller number of funded semicon start-ups as the next figure shows.
click on picture to enlarge
And apparently, the main reason for this “crisis” comes from the huge amount of money these start-ups needs to reach profitability. click on picture to enlarge
Well, if it was just about the amount of financing needed, biotech would be dead too, and my recent post Biotech IPOs, not so different shows it is not true. There might be at least two other reasons which explain the difference:
– you cannot go public without any revenue as it is the case with biotech, and I am not sure why (is it because the life cycle of semicon products is much shorter?) and
– the financial ratios of semicon companies are not great (Intel, the market leader is worth 2.5x its sales and 10x its profits).
But I am not fully convinced by the argument.
In fact I had another argument which might be simply said a lack of creativity combined with a culture of collaboration which has been lost. Indeed, the day before, another panelist said “why the heck would I share it, if I had the killer app”. Well, one might not share a killer app, but in Silicon Valley, there has been a lot of sharing:
Even today, people at LinkedIn and Facebook help each other even if they compete. I am less sure this happens at Google or Apple though! And here is what the NPR Radio “Morning Edition” had to say about the Silicon Valley ingredients. I strongly believe and agree with de Tonnac that we need more Entrepreneurial Spirit and Innovation DNA.
I just read Biotech IPOs Start to Show Some Modest Signs of Life from Xconomy. It’s an interesting article because it focuses on Biotech, a field that many people consider as very different from other high-tech start-ups such as Internet, Software or IT in general. The general idea is that it takes much longer to succeed in biotech. You should read the article if biotech is of interest for you and I will not comment it more than mentioning that the good news is that there have been recent biotech filings and IPOs, the less good news being that the market capitalizations are not huge.
What I am more interested in is updating my regular analysis of start-up data (I have now 131 start-ups; see my latest analysis in March 2012 for example with 116 companies) and see how biotech behaves. Here is the synthesis (if you are interested the detailed list is provided at the end).
So what do I see as specific to biotech start-ups? First it does not take them longer to go public. 8 years vs. an average of 7 years. The difference is not in the exit time. They raise $98M on average, but this does not look so special either. But, and here is the but, their sales are only $11M when they go public. So, it takes them much longer to reach revenues. But it does not prevent them from going public (or even be acquired when they begin to have good results in clinical trials).
Another specific element is about founders. The founders’ average age is 41 (similar to medtech and semiconductor) whereas it is 35 on average. Why is that? because many founders are established, recognized university professors. Often times, they do not work full-time in the start-up but have a role of chief scientist. Indeed, the ownership of founders in the start-up is smaller than average (8% vs. 15%).
I should also add that the founders/employee shares ownership is much smaller too (25% vs. 40%) and the reasons are manyfold:
– founders have fewer shares as I just mentioned
– investors have more equity (50% vs. 45%)
– IPO shares are higher (25% vs. 16%). This comes from the fact (I think) that in order to raise the same amount of money, it is more dilutive for a company with less revenue…
– I did not mention another statistical element, which is they have fewer employees. The detailed table below imples about 100 employees (and you may see many of them have even less than 50 or 20 employees). This induces a smaller amount of stock options… (On average my 130 companies have 500 employees when they go public).
I thought this data was of some interest. Please react or comment!
Appendix: detailed data (notice that I am missing the Amgen data)
In my regular work of compiling equity structures of start-ups, I fell twice in a row on Chinese start-ups. And twice, Sequoia was a large investor. And twice, they were incorporated in the Cayman islands. I do not know much about China, but this simple “discovery” is of interest. One start-up is in the Internet field, VIPShop, and the other one in biotechnology, NewSummit.
Click on table to enlarge
Here is the rather complex holding structure, which probably made possible a Sequoia investment in a Chinese start-up.
I tried to find some common features among the founders: none seemed to have studied or worked outside of China, which I think is interesting and somehow unusal with high-tech entrepreneurs. Their age: 32, 33, 36 and 37, which makes an average of 34.5. My overall average (see my analysis) over 257 founders is 34.9. I could not find any picture of them but this could be linked to the fact that the sites are usually in Chinese.
IPOs do not seem to stop in 2012. Now it’s Yelp before Facebook! You’ll find below my usual cap. table format. As with many stories, there is no data on one founder. He left Yelp before the IPO, I am always surprised where there is nothing on him in the prospectus…
The Founders and Their Army Russel Simmons (left) and Jeremy Stoppelman, plus a few of the hundreds of thousands of Yelpers who post regularly on their site. Ref: Inc.
More interestingly is statistical data, that I have updated with now 116 companies. You can check founders’ age, years to IPO or VC amounts relatively to fields, geography and times of foundations. I also add % ownership of founders, employees and investors after IPO.
As a reminder, you can have a look at the full data in the attached pdf (or by clicking on the picture),
Click on picture to access full pdf data
Some final graphical illustrations about
– the age of founders relative to year of foundation
– some correlations (or not) between sales, VC amounts, nb of employees.
