Ideal Startup Team Composition

[Original post written @http://startupiceland.wordpress.com]
A Startup team composition is like putting together a winning sport team. You need to balance the strengths and weakness for every team member so that the Whole is greater than the sum of the parts. It is easier said than done. I learnt this very early on in my career, I started working for a startup in India that was developing database applications for the Financial Services industry. Even though we were small, I started as an intern and I was 20th employee or something like that, the account teams that had the right mix of people seems to out-perform the other account teams. I did not realize that then but when I look back, it is obvious. I started seeing this in lot more detail when I joined Ernst & Young Management Consulting Practice in Houston, Texas after my Graduate Program at LSU. E&Y did not put a lot of emphasis on the majors, we had team members who were recruited with English or History major. I learnt that diversity was very important in a team. I got very involved in the recruiting teams for E&Y, we would visit many universities and take part in identifying, scouting and recruiting talented individuals to form high performance teams. If you think about it E&Y, had no product but Professional Service, so the team basically was the product. I also learnt the power of mentoring, coaching and on-the-job training. Every project that I took on while at E&Y was like a startup, I learnt very quickly that rapid prototyping is the key to keep your customer engaged, in our case it meant whether we continued to have billable hours or not. If you have been part of a professional services organization you know that you live or die by your billable hours or sold billable hours. I also got trained on performance management, goal setting, executing and metrics. If we could not communicate our value to our clients we just got fired as simple as that. I think Startups are just like that. So, what is an ideal team composition for a startup? I want to say it depends on the stage you are in. Lets assume you are starting up and you have this brilliant idea and you have done enough work to see there is a market potential and you can validate the hypothesis. 

Technology in you DNA - Maven One of the team member has to have technology in her DNA, I don't care which business you are creating if you don't have one of the founders with a technical background, I strongly encourage the team to go and get one. There is no substitute, you cannot outsource it and I don't care how efficient or skilled the team you have outsourced your solution to, it will not work so don't bother. Find and convince a technical team member to join your effort. I am big fan of the book Tipping Point by Malcom Gladwell. The technical team member should be a Maven in the technologies that you are using to build the solution.

Vision, Spokesman - Connector and Salesman The second team member should be a Connector and Salesman, she should be able to communicate the vision, the solution and why you are doing what you are doing in your Startup in any medium. She also needs to be a fantastic networker and connector, she needs to know everyone and be able to relate to different cohorts in the community.

Discipline, housekeeper and operations This team member should be the one that takes care of all the other stuff i.e. are the books in order, are we making sure our legal stuff is in order. Is everyone being fed, is our house clean. Keep the other members in line with regard to executing and being disciplined about the milestones and tasks as it relates to the overall agreed objective of the Startup. This is in my opinion one of the important and over-looked role within a Startup, understandably because you have so many moving parts that it is hard to be efficient and disciplined, but it is a paramount requirement. All the team members need to have the qualities as described by Paul Graham in his post on How to Start a Startup, look under the heading People. Or try to have your team members like the A-Team.

#BMD - Value Proposition II

This is the second of the posts related to defining the Value Proposition. The original post is here and the first post is here. I am using Startup Iceland as an example. Value proposition needs to address multiple stakeholders. The first post was the value we bring to the Entrepreneur, this post is going to focus on the Value to the Investors and Limited Partners (LPs) of Startup Iceland. We invest money on behalf of our investors and LP: What value do we deliver our Investors and Limited Partners? Traditional methods of measuring Return on Investment or Return on Capital Invested are good metrics, however the biggest value we bring is transparency. We plan to run the operations of the Venture Capital Fund in a transparent, inclusive and open manner. We clearly state our investment thesis, the timeline of investment, decision criteria for investing capital, our performance, time invested and effort in a team. Which one of our customers problems are we helping to solve? Mentoring, advising and creating an environment where the entrepreneurial teams get motivated to execute, win and be a world class company on a tough compressed timeline is a lot of work. We solve that problem for our limited partners and investors. Typical investors are passive and look at Venture Capital Asset class as risky, we asked the question ourselves why is that? the answer is it takes a lot of effort and handholding to make startups succeed. Eric Rise, the author of the Lean Startup defines Startups as an "Organization dedicated to creating something new under conditions of extreme Uncertainty". We strive to reduce the uncertainty through our disciplines approach, working harder and smarter, bringing the power of the network to increase the odds of success and following the time tested methods of building companies. We are entrepreneurs at heart, we have had experience building companies and we want to ensure that our experience gets translated into our portfolio companies. What bundle of products or services are we offering to each Customer Segment? Investors and LPs are always looking for avenues to invest their capital. We believe we provide a platform that is underserved. Venture based investments have outperformed typical asset classes over a 15 year period. A Venture Fund dedicated to creating valuable internet based companies out of Iceland is a unique value proposition. Our intention is to use Iceland as a good testing ground to validate the product quickly and help launch it in the global market place. We understand the world of Technology, being technologists, architects and geeks. We understand the direction the social networked world is moving to. A platform to invest in this new trend is the product and service we provide to the customer segment of Investors and LPs. Which customer needs are we satisfying? Diversification in capital allocation. High Return on Invested Capital and Being responsible stewards of capital. We want to earn the trust of our partners. We understand we do not exist without their trust. Our values of Integrated, open, transparent, fair and trusting relationships in building wealth and return to our Investors is our gospel. We don't just say it we live it every day. We will NEVER put our interest before that of our investors. We will measure ruthlessly our performance and we will be transparent about communicating our failures and wins. Transparent Governance is the core belief of our operation.

Related articles

• Limited Partners Deal With Venture Industry Contraction, Restructuring (blogs.wsj.com)
• Bill Gates: It's 'Crazy' How Little Is Invested in Clean-Tech (blogs.wsj.com)
• Conference Showcases Promising Clean-Tech, But Funding Remains Uncertain (blogs.wsj.com)

Power Law presentation

I presented my paper in October, 2009 to an audience of 20, including some economics professors and students. I got the feeling that they agreed with my assessment and my conclusions. There was a good set of questions, of course the chairman of the proceedings commented that if everyone agreed with my conclusion then people would not take any risk! At that point I realized that there is a lot of work needed to educate ourselves with what we define as risk.

Risk and perception of risk are two entirely different things. When we say something is risky, it our heuristic shortcut telling us that we don't understand this or it seems risky. But when we are not sure, is it real risk or our perception of risk!

Taleb goes to Congressional committee hearing

Image via Wikipedia

Nicholas Nassim Taleb discussing the Financial Crisis causes and solutions with the US Congress. His advice is quite simple:

1. De-leverage the system
2. Stop transferring debt from private sector to public sector through bailouts
3. Do not do deficit spending i.e. Stop printing money
4. Reduce the size of banks, have many banks and remove the Too Big To Fail syndrome
5. Do not pass laws thinking you understand or stop Risks to the system, because we don't understand Risk as we live in a Complex world. Putting rules to stop bad behavior in this complex world is naive thinking.

I agree with Mr.Taleb...

Related articles by Zemanta

• Idea of the day: Replacing VaR with leverage ratios (blogs.reuters.com)
• Banks told to break themselves up to' restore trust' (telegraph.co.uk)
• How to reduce the mountain of debt (blogs.reuters.com)
• Fresh thinking needed on debt (telegraph.co.uk)
• Taleb : Convert debt to equity, stimulus packages repeating the mistakes of the bubble era (sluggerotoole.com)

10 things Great Companies and Great Investors do...

Image via Wikipedia

Given that I have been thinking about starting out a Venture Capital company, I have been reading the blogs of veteran VCs
and Entrepreneurs. I like Fred Wilsons blog and here he talks about what 10 things great companies do, to counter that Matt Blumberg has written about what 10 things great investors do. I thought both were worth noting.

Related articles by Zemanta

• VC's care about the upside case, not the mean (cdixon.org)
• Pros and Cons of 5 Venture Capital Websites (ariwriter.com)
• The worst time to join a startup is right after it gets initial VC financing (cdixon.org)
• Incubators (cdixon.org)
• Measuring Impact Investing (myventurepad.com)
• Venture funds 'fail to deliver performance' (telegraph.co.uk)

VC fund allocation and Conditional Probability

Image via Wikipedia

I had a very interesting discussion with a friend of mine yesterday. I was suggesting to him that Venture Capital funds should allocate funds such that 15% of the capital goes into VC companies, 5% goes into growth companies (i.e companies that have stabilized the products or services, are generating cash and have broken even) and 80% should be cash or cash equivalent.

He made an argument that an investor wanting to invest in a VC funds would not choose the above allocation. I asked him to ellaborate and he said that the investor will not get the total bang for his buck... he said that if the above fund´s VC allocation returned say 100% of the allocated capital the investor would only get 15% of that 100%. Sounds logical but this is precisely the problem with our view of the world and our ability to calculate probabilities. We think about only the success scenario, we don´t think about failure and the proabilities of failure.

Lets do a thought experiment of comparing two funds:

1. A fund that invests all the capital into VC companies

2. A fund that does capital allocation similar to the one described in the first paragraph

We need to think of alternative universe of outcomes to calculate the expected return from the above two funds, lets conjure one for simplicity:

VC companies return 100% of capital invested with a probability of 50% and return -100% (i.e you loose all the capital) with a probability of 50%. Growth companies return the capital invested and Cash returns the same at the end of the investment time for simplicity sake.

Given the above outcome what is the Expected return for the above two funds, say for an investment of $100m?

Expected Return = P(success) x Return + P(failure) x Return

Fund 1: 50% x $200 + 50% x (-$100) = $50m

Fund 2: 50% x $30+ 50% x (-$15) + $5 + $80 = $92.5m

Even the above simple payoff matrix gives the second fund a return higher than the all VC fund. However the real world is much more complex and the payoffs and probabilities are much harder to calculate. In addition to the above when we do capital allocation there are time frames, return expectations and conditional probabilities involved, this further skew the results.

The above payoff matrix gives us different results when we add conditions to the problem:

What is the probability of Fund 1 giving a lower return than Fund 2 given VC companies all return 100%? or we can flip the question

What is the probability of Fund 2 giving a higher return than Fund 1 given VC companies all return 100%?

The above question needs us to calculate the probability of a VC company being a success or a failure and the distribution for VC success follows a Power Law. I think most VC fund managers understand that but I don't have data to prove it. My fear is that maybe fund managers do not compute probabilities using the Power Law but the Normal Gaussian Bell Curve, when we do that all the above analysis and results are incorrect.

My previous post about ISK

I started writing a blog entry about the ISK on Friday and completed it only today, but while I was doing that I found an interesting link through Zemanta, a tool I use with blogger. It was a question posted by Fred Wilson, in his blog:

Does Venture Capital funds fall within a power law?

I have been thinking about that myself and maybe his question and analysis needs to be revised again. He is analyzing the exits by VC funds and trying to figure out what is the exit percentage and size... it is an interesting problem as VC funds are often made to justify their existance with their return rate and sucess rate.