Got a great idea? There's never been a better time to turn it into a great company.

Here's
a 16-step guide to help you do it right.
5 INCORPORATE

INTELLECTUAL 1 STAKE OUT PROPERTY

It's the spring of 2006, and the sweet scent of en trepreneurship is in the air. Growing
numbers of Americans are pursuing their startup dreams . According to the Nationa l
Venture Capital Association, seed-leve l VC funding near ly doubled in 2005. This year,
based on current trends, it could double again . In Delaware, the country's incorporation
capita l, new business formation was up 19 percent last year, the highest one -year growth
rate on record . In other words, there's never been a better time to start your own
company. New technologiesare creatingnew business opportunities on the Internet, on
mobile phones, in consumer products, and in information services.At the same time, many
of these technologies have radicallv reduced the costs asso-

While birthing a company is easier, succeeding is as difficult as ever. The general rule in
the investment community is that only about a thir d of all startups ever turn a profit.
Another third limp along at a break-even level, and the rest end in failure. Top among the
reasons young companies fail are prob lems such as incorrect market focus and
misguided executive leadership . With that in mind, we wanted you to have all the benefit
of hard-earned experience without having to actually endure th e pain of making your own
mistakes. We spoke to dozens of experts-seasoned entrepreneurs, early-stage investo rs,
venture capitalists, and firsttime CEOs-to understand what they've learned about the art of
getting a new company offthe ground . Then we set out to
Your role as a spectator who merely watches as other adventurous souls launch their own
startups is about to end. The decisions you make at this early stage of the game will do
much to shape the long-term destiny of your venture. Most of all, don't procrastinate. If you
don't act on your burst of business insight, someone else surely will.

WH ITEBOARD : Treat it like an incubator for your best thinking. Write . Revise. Erase.
Repeat . MOBILE PHONE : The one you have is fine, but make sure

you 've signed up for 1,000 prepaid minutes .

NEW CRED IT CARD: American Express's Platinum Busi-

ness offers zero percent interest for six months .

ACCOUNT ING SOFTWARE: Nothing fancy for now. Quick -

Books Simple Start does the trick for $SO.

Stress-Test our Big Idea Y

L OBJE~TIVE:
DEBUG AND PERFECT Y()UR BUSINESS

BRAINSTO~M.
~~~

You have a brilli ant idea. It's shrewd . It's "People pooh-poohed our idea for more than a
year. t imely. You thin k abo ut it so mu ch it keeps We took that to mean either we weren 't
exp laining it yo u up at night. It m ight even make yo u well or we were dead wrong. Yet
the more we studied rich. There's ju st o ne thin g left t o do : Make the prob lem, the more
clear it became that we weren't sure it really has legs. The only way to do wrong . What
you forget-because you 've been living t hat is by bouncing yo ur idea off as many and
breathing this idea for so long-is that others people as possible . Fr iends and fam ily may
not see what's obvious to you. You need to conpro bably can't provi de t he cri t ical insig
ht nect the dots for them. We did that by finding a you need. Track down at least a doze n
metaphor that explained what our company would peop le wit h expert ise in t he market
you do. " - GI BU THOMA S, CEO and co-founder of personal media synchronization
startup Sharpcast inte nd to enter. You wa nt candor and honesty, not di plo macy. Und
erstand ing why w hat yo ur compa ny wi ll sell- if you can't deyour idea is fl aw ed is as
useful as knowing t hat scr ibe th e prod uct clear ly and concisely, how it' s pu re ge nius.
Many w ill like ly exp ress supca n yo u possi b ly sell it? Finally, before saying port , but th
e real qu esti on is th is: Woul d th ey . _ D O f:\ r:H ")\ / O ~ hAl~\JC::: n t=lt th t:l n ~rn p n
f ~ ntl t ht=l.r n ~ Y .Y\3U ~DeH ltpr .. /R l ll r l ~";\.~~ l n lTr\~1 y--J2 Ic:o ~ I well or we
were dead wrong . Yet the more we studied rich. There's ju st o ne thing left t o do : Make
the prob lem, the more clear it became that we weren't sure it really has legs. The only
way to do wrong . What you forget-because you 've been living th at is by boun cin g yo ur
idea off as many and breathing th is idea for so long-is that others peopl e as possibl e.
Friends and famil y may not see what 's obvious to you . You need to con probabl y can't
pro vid e th e crit ical insight nect the dots for them. We did t hat by finding a you need.
Track down at least a doze n metaphor that explained what our company would peopl e w
it h expe rt ise in th e mark et yo u do." - GIBU THOMAS , CEO and co-founder of
personal media synchronization startup Sharpcast int end to enter. You w ant cando r and
hon esty, not dipl om acy. Under standin g w hy w hat yo ur co mpany wi ll sell- if you can't
deyo ur idea is fla w ed is as useful as know ing t hat scribe th e product clea rly and
concisely, how it's pure ge nius. Many w ill likely exp ress supca n yo u possibly sell it?
Finally, before saying port, but th e real qu esti on is th is: Would t hey goo d bye, always
ge t th e name of anot her perpay mo ney for yo ur prop osed produ ct ? Use so n wi t h w
ho m yo u can d iscuss your idea. eac h co nve rsat ion to sharpe n how yo u expla in

Rl

BuildYourFoundingTeam
OBJECTIVE: JOIN FORCES WITH OTH.ER EXECS TO NAVIGATE THE CHALLENGES
AHEAD .

St arti ng a com pany isn't ju st a full-ti me job; in ma ny cases, it's thr ee full-t im e jobs .
The idea l found ing t eam is a t rium vir at e th at incl udes an ace t echn olog ist, a big st
rategic thin ker, and a dea lmaker w ho focu ses on sales and market ing. A lt ho ug h eve
ryo ne mu st have relevant indu str y expe rience, a go od Rolod ex, and t he w illing ness
to wea r man y hat s, tru st and good jud gm ent are th e mo st essential ingr edi ent s.

t he fo unde rs' f inancial inte rests should be mutu ally alig ned . "You need t o feel confide
nt th at yo ur co- founde r wi ll fight for a deal as hard as yo u wo uld," says Dan Gould ,
co-foun der of online new s agg regato r Newr oo . It's te mpt ing t o partn er w it h go od
fri end s, but tha t 's not neeessarilya pathw ay t o success. In fact , it's dangerous-und er
th e st ress of runn ing a bu siness, your friend ship wi ll surely be tested and
l·l]2t3 -1=~
PROTOTYPE BETA

_11 11

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Draft a BusinessPlan
A business pl an is neith er a core asset nor a sac red t ext. It's ju st a t ool t o help focu s
yo ur id eas and a co nce pt ual sum mary t o share w ith po te nt ial investo rs, adv isers,
and emp loyees . The b usiness plan sells yo ur v isio n for th e co m pa ny: w hy it 's v iab
le, w hy it 's better th an any t hing else out th ere, and w hy yo ur t eam has w hat it tak es
t o make it happen. It sho uld also de ta il key fact ors th at relat e t o th e co m pa ny - t
arge t mark et s, go als, pr odu ct att ributes , revenu e p roj ecti on s, co mpe tit ive diff
erenti ator s, and found ers' resum es. Visit t he Sma ll Business Admini str ation 's w eb
sit e (w ww. sba.g ov) o r Bpl ans.com for an ove rv iew of th e st ruct ure and co mpo
nents of a t ypi cal bu siness p lan, as we ll as links t o doze ns of sam ple p lans. But t he
most imp ort ant t hing is a we ll-ho ned exec ut ive sum ma ry tha t' s no m or e than t
hree pag es lon g . Grab th e read er' s at te nt io n by sta rt ing w it h a sim p le t w o- sent
ence desc ripti on of yo ur co m pany and wh at it w ill do. ( Rest assure d, yo u' ll use t
hose t w o sente nces ofte n.) A nd no mat t er w hat, do n't fall in love with yo ur bu siness
pl an it'll change many t imes in th e month s ahead.

OBJECTIVE: MAP OUT THE MARKET AND EXPLAIN HOW YOU FIT IN IT.

THINGS

TO

AVOID

Four CommonBusiness PlanMistakes

1. ASKINGPOTENTIALINVESTORS TOSIGNA NONDISCLOSUREGREEMENT. a rook ie
A It's move . Besides, they won't sign anyway . 2.SPENDING TOOMUCH
TIMEDESCRIBINGHE T MARKET.nstead , provide lots of detail on I your strategy to
dominate it. • 3. MAKINGWILDLYOPTIMISTIC PROJECTIONS ANDASSUMPTIONS.
Nothing will get the door slammed in your face faster. Save the hockey sticks for the NHL.
4. EXAGGERATING YOUREXPERIENCE. They 'll eventually learn the truth, and when .t
hey do , your credibility will be compromised. Permanently .

Play the Name Game

OBJECTIVE : GIVE YOUR STARTUP A HANDLE THAT WORKS .

Wh at' s in a nam e? Plent y. It w ill make a fir st imp ression , carry brand eq uity, and
",rov ic!e ,'i' , ~ , I I'}rt>.~ \!;> ",~%,"\\'~~v. ,'ll& ~ti.. R ~~ n

BecomeMasterof YourDomain
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you 'll use t hose t w o sente nces ofte n.) A nd no mat t er w hat, do n't fall in love w it h yo
ur business pl an it'll change many t imes in th e month s ahead .

Play the Name Game

OBJECTIVE : GIVE YOUR STARTUP A HANDLE THAT WORKS .

Wh at' s in a nam e? Plent y. It w ill make a fir st impr ession , carry brand eq uity, and
prov ide a found ati on for every marketin g effo rt yo u'll ever laun ch . Namin g gurus like
David Placek of Lexicon Brandin g argue th at sta rtu ps sho uld loo k for names th at are
eit her sim ple and easy to und erst and (like Salesfo rce.com) o r quirky and mem orable
(like Goog le). Some nam es co mb ine t he t wo : Narend ra Rochero lle sett led on 30
Boxes, an easy-to- remem ber nam e for his calenda ring star t up t hat also alludes t o a
monthl y dat eb ook . But creat ivity is o nly part of th e namin g challenge; t here are legal
conce rns as we ll. Before yo u beco me attac hed t o any name, check t he U.S. govern
ment 's t rademark webs ite (www .uspto .gov) to make sure no co m pany servi ng an
over lapping market

BecomeMasterof YourDomain
About 30 million new dotcom domain names are registered each month. Which means
that coming up with a name for your company and matching it to an available Internet
domain is very difficult . Check lnstantdomainsearch .com to see what's available. If your
preferred domain is in use, you have three choices: 1.ADAPT.In the Google age, it's not
quite as important to get a URL that exactly matches your company name. Come up with
a relevant adaptation, like acmewidget.com, instead of just acme .com . The Nameboy
.com website generates lists of available permutations. 2. BUYFROMA BROKERSome
names are owned by . squatters who sell online real estate through brokerage services
run by popular domain-name registrars. Prices range from $10 to the tens of thousands.
Discounters like GoDaddy.com and 1and1.com offer brokerage services, as do Networks
Solutions and Register.com. 3. MAKEAN OFFER.If your desired name is already In use
by an individual, politely inquire about buying it .
.d===~~==:;c=:--,,2: .-J~ ==::",
PROTOTYPE BETA LAUNCH

Your sta rt up may co nsist of ju st a few wa rm bodi es cram me d int o a livin g roo m, but
yo u st ill need to esta blish it as a legal ent ity. A form al co rpora te st ruct ure solid if ies
th e sta nd ing of th e fo unders and provides pot ential investor s wit h t he assurances th
ey need to part icipate in th e co m pany's fin ancial evo lutio n. Incorp orat ion also prov
ides tax benefit s and allimp ort ant liabilit y pro tec t ion. Hire an experi enced law yer w
ho spec ializes in sett ing up star t ups- ma ny w ill even defer paym ent until th e fir st
round of fi nanci ng . If yo ur law yer likes yo ur busi ness plan, he or she may also beco
me a cr uc ial source for lat er int rodu ct ion s.

What's Rightfor You Inc.

There are t hree main types of incorporation . Here's how t o figure out which is most
appropr iate. S CORPORATION : Fine if you don't plan to raise money f rom out side
angels or VCs. Only one class of stock is allowed . Taxed at a lower rate than larger
corporations , but enjoys the same liabili ty benefit s. LIMITED LIABILITY COMPANY:
Funct ions like an s-core, but w ith no out side shareholders. A good choice for
professional services firms t hat don 't need to solicit investment . Can be converted to a
Cocorp later. C CORPORATION : Preferred by most medium -size to large companies.
Allows fo r multiple classesof stock (a common requir ement for angel and VC Investors).
Taxation rates for C-corps are higher than for s-cores ,

SPEC-DOCUMENT SOFTWARE: Omni Outliner and

A prototype is where the rubb er st arts to hit th e road: It' s the first physical embodiment
of your busines s idea, and a tool you'll use to attract the resource s you need to grow.
Don't conf use a proto type with the final produ ct -a distra cting and potentially fatal
mistake . Pretty looks aren't important. A good prototype is ju st a working demonstration
that showcas es what your produ ct will do.
c::.._, •• , .......... .
~;

Microsoft Visio simplify writing product definitio ns.

DEVELOPMENT SERVER: Leaseone for $300 a month

from a Web hosting company like ServerBeach.

COLLABORATION TOOLS: Basecamp is a cheap Web-

based application for sharing files and docume nts.

VOIP CALLING SERVICE: Skype is a free appli cation

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that lets you make long -distance calls from your PC.

SPEC-DOCUMENT SOFTWARE: Omni Outliner and

A prototype is where the rubb er st arts to hit th e road: It' s the fir st phy sical embodiment
of your business id ea, and a tool you' ll use to attract the resource s you need to grow.
Don't conf use a proto type with the final product -a distra cting and pot entially fatal
mistake . Pretty looks aren't important. A good prototype is ju st a working demonstration
that showc ases what your produ ct will do. Show your finished prototype to a do zen or so
pot ential customers and investors who can validate your id ea, define key features , and
guide your produ ct development .

Micro soft Visio simplify wri ting product definitio ns.

DEVELOPMENT SERVER: Leaseone for $300 a month

from a Web hosting company like ServerBeach.

COLLABORATION TOOLS: Basecamp is a cheap Web-

based application for sharing files and docum ents.

VOIP CALLING SERVICE: Skype is a free application

that lets you make long -distance calls from your PC.

_
D

Stake Out Intellectual Property

[C? SJECTIVE: AVOID INFRINGING ON OTHERS'

PA~~~TS A ':II? ~E~~R! SOME OF YO~~ OWN .

THE FINE PRINT

Pat ent s and pat ent law are a major headach e for tec h and We b-base d star t ups, so
yo u'll wa nt legal guida nce. Gordo n Dav idso n, a part ner w it h Fenw ick & West in
Mounta in V iew, Calif., wa rns t hat t he most im port ant thin g is to avo id fallin g afo ul of
a "b lock ing patent "- on e th at def ies any engi neering workaro unds. Just ask Research
in Moti on, maker of t he Black Berry, how onero us th at can be.

Patent Law 101

The U.S. Patent and Trademark Off ice will grant a patent to any new and useful proce ss,
machine, manufacture, compos it ion of matte r, or new and useful improvement t hereof.
Confused? Just remember there are two main types of patent s:
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YOU ARE HERE

PROTOTYPE -

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1
BETA

2 3 lAUNCH

Createan AdvisoryBoard
OBJECTIVE : FORMALIZE THE NETWORK OF PEOPLE WHO CAN HELP YOU MOST.

Your adv isory board is a g ro up of six to 1 peop le 2 w ho w ill p rov ide expe rtise in th e
indu str y you ho p e to tack le, useful co nnec t ions, po te ntia l fun din g , o r (ideally) all
th ree. At thi s ear ly stage, it m akes sense t o load th e boar d w it h peo ple w ho can pr
ovi d e t echni ca l insight abo ut yo ur p ro d uct, b ut yo u' ll also wa nt a few star t up
vetera ns w ho can answer qu estion s abo ut running a yo ung co mpany . In exchange fo
r eq uity in th e co mpa ny- typ ically 0.1t o 1 percent - you shou ld expect at least four hou
rs a month of th eir t im e. Avo id b ig g roup m eetin g s; th ey're ineffi cient. Instead , b
ring in speci fic advisers fo r task-o rient ed di scu ssio ns as need ed .

" We wouldn 't be here today without the advisers we picked specifically for their expertise
in our technology . They led me to my co-founder and CTO and were able to help on
technical issues. It doesn 't work to bring on general, name -brand technology peop le as
advisers. They end up frustrated that they don 't have much to contribute , and though you
think they 'll impress potential investors, they don 't ." - MUNJAL SHAH, CEO and
cofounder of photo search startup Riya

BuildYour Prototype
Prot ot ypin g is an iterat ive process . Start simp le, w it h a bas ic mock- up, art ist's rend
erin g, or Phot osho p screen shots. Show th ese to a few pot enti al custo me rs and use t
heir feedb ack to de f ine t he specif icat ions of yo ur wo rk ing proto type . Hire independe
nt co nt ractors if yo u need specialized expe rt ise t o bui ld o r code th e thin g, b ut it's
best to stay lo cal. You'll be ga t hering input on a da ily
J ...
FindingContractTalent
DESIGN: Scour lo cal schools . The American Institute of

Graphic Arts (www .aiga.org) and Creative Hot list (www. creati vehot list .co m) list
designers looking for work . HARDWARE : If you need help with the electronic ,
mechanical, or physical conf iguration of your prototype , try the directory at Coroflot
(www.coroflot.com) to find freelance professionals. SOFTWARE : You can post jobs to
Craigslist, Dice.com, Monster.com, and SimplyHlred .com . Marketplaces like Elance,
IPswap, and RentACoder match ta lent with projects .
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Prot ot ypin g is an itera tive process . Start simp le, w it h a bas ic mock- up,
FindingContractTalent art ist's rend ering , or Phot osho p DESIGN: Scour local schools .
The Amer ican Institute of screen shots. Show th ese to a few Graphic Arts (www
.aiga.org) and Creative Hot list (www. pot enti al custo me rs and use t heir creati vehot list
.co m) list designers looking for work . feedb ack to d efin e t he specif icat ions
HARDWARE : If you need help with the electronic , mechanical, of yo ur wo rk ing proto ty
pe . Hire indeor physical conf iguration of your prototype , try the directory pe nde nt co nt
ractors if yo u need speat Coroflot (www.coroflot.com) to find freelance professionals.
cialized expe rt ise t o bui ld o r code SOFTWARE: You can post jobs to Craigslist,
Dice.com, Month e th ing, b ut it's best to stay lo cal. ster.com, and SimplyHired.com.
Marketplaces like Elance, IPswap, and RentACoder match ta lent with projects . You'll be
ga t hering input o n a da ily basis and making rev isions al. . mo st as ofte n, so yo u'll
want PARTS LIST yo ur co ntrac to rs nearby-i n PrototypingEssentials town , if not und er
yo ur roof. DESIGN AND PHOTO EDITING: GIMP is an excellent and free alterna Keep th
em close, but be parative to expensive programs like Adobe Photoshop. noid . Your at to
rney sho uld d raw PRODUCT DESIGN: QCad is an open -source , 2-D computer-aided
deup co nf ide ntia lity ag reements sign package that sells site licenses for $260 . and
non comp ete clauses; make COLLA80RATION SOFTWARE : Subversion is an open-
source tool for all co nt racto rs sign th em .
"
-~ ~~-~._._~ ~ ~ ~

tracking changes in files or code .

SEARCHING FOR ANGELS

What to look for in early-stageinvestors.
The righ t tim e to raise th e fir st round of t hey specia lize in early-stage sta rt ups .

ju st m on ey yo u w ant ; yo u also wa nt br ain pow er, co nnec t ions, and expe rience .
"Yo u always want at least o ne heavy hitt er in an ange l round ," says veteran Silico n
Valley ange l Jeff Clavier.
PHASE Develop the Beta Product THREE TOO L S $500K to $lM
$$$ REQUIRED:

YOU'

LL

NEE

ENTERPRISE -LEVEL E-MAIL: Provider s like the MessageCenter off er

If a prototype is the first manife station of yo ur big idea, the beta transform s it into a
produ ct you m ig ht actually sell . The fo cu s here is on usability and desig n. Your task is
to create som ething so simp le, so powerful, and so effect ive that people beg to become
beta testers . As you am ass comm ent s and feedback, look for opportuniti es to sim p lify
produ ction and keep your cost structure lean -th at's much harder to do after the product
is relea sed .

hosted exchange service for about $10 a month per user.

PHONE SERVICE : A hosted system from M5 Networks costs about

$50 a mo nt h per exten sion fo r unlimited calling.

T-' BROADBAND : $500 per month buys you heavy-d uty service from

a prov ider such as AT&T Covad, or Verizon Business. ,

FEEDBACK COLLECTION : SurveyMonkey is a handy tool for setting up

online question naires and compiling user comment s. Prices st art at $20 per month .

Start StaffingUp II.----~-----,I

You're ready to make some pe rmanent (or sem iper manent) hires. For most start ups, th
e bulk of yo ur hiring here w ill be techni cal- peo ple w ho ca n get yo ur product to bet a.
A lt ho ug h it' s shrewd t o source t alent gl o bally, yo ur core prod uct-deve lop ment te
am sho uld be local. Ent husiasm is a precio us co mmo d ity; look for peo ple w ho are
excited abo ut yo ur p lanned produ ct. Hire t he best yo u can afford, but as a ge nera l
rule, Silicon Valley sta rt ups assume a burn -rat e cost of $1 000 pe r person per mo nt h.
1,
CONTRACT ING: Part-timers can help get a

perma nent) hires. For most start ups, th e bulk of yo ur hirin g here w ill be techni cal- peo
ple w ho ca n get yo ur product to bet a. A lt ho ug h it's shrewd to source t alent g loba lly,
yo ur core prod uct-deve lop ment te am sho uld be local. Ent husiasm is a precio us co
mmo d ity; look fo r peop le w ho are excited abo ut yo ur planned produ ct. Hire t he best
yo u can affo rd, but as a ge neral rule, Silicon Valley sta rt ups assume a burn -rat e cost
of $1 000 pe r person per mo nt h. 1,

Better LivingAcrossTime Zones rJ= ljIff ',EI,'l~t""-eJ,q\el~rnl'ld~~~X-~b',~Ji~~,i90 Rn! c lJj

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company started , but director- level staff should be permanent hires. Always visit new
overseas contractors to launch the relationship. Nasscom.org provides listings of India's
top outsourc ing shops. Russoft.org does the same for Eastern Europe. RECRUITING:
Job boards can be useful, but old-fashioned networking often yields better results. When
you interview, go with your gut: If t he potential hire doesn't feel right, it probably isn't.

Where to Find Workers

CONTRACTING : Part-timers can help get a

Better LivingAcrossTime Zones

Contract talent is a global commodity , but location matters if you want to avoid middle-of-
the-nlght te leconferences. On the East Coast, that means hiring in Eastern Europe,
where the end of their workday corresponds to the middle of yours. West Coast
companies should opt for China and India, where your day ends as theirs is getting
started.

company started , but director- level staff should be permanent hires. Always visit new
overseas contractors to launch the relationship. Nasscom.org provides listings of India's
top outsourc ing shops. Russoft.org does the same for Eastern Europe. RECRUITING:
Job boards can be useful, but o ld-fashioned network ing often yields better results. When
you Interv iew, go with your gut: If t he potential hire doesn't feel right, it probably Isn't.
POACHING : Snatching worke rs away from rivals is Ideal for adding sales staff or
seniorlevel talent. You'll need to offer better com pensation than they have now, but the
most effective lure is the opportunity for them to put their stamp on an all-new vent ure.

H I'

AssembleYour BackOffice

OBJECTIVE: LET PROS HANDLE THE ADMIN SO YOU CAN FOCUS ON THE REST .

J
LIST

Acco unti ng, pay roll, and be nef its adm inistrat ion aren't g lamoro us, but th ey 're import
ant parts of maxim izing limit ed resources and keeping staff moti vat ed . Early on, many
star t ups t ap one of th e
PARTS

Who's Who in Administrative Outsourcing

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PROTOTYPE

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lAUNCH

LaunchYourBeta Test II.--------~,

OBJECTIVE: SOLICIT THE COMMENTS YOU NEED TO PERFECT THE PRODUCT .

Bet a t estin g used to be a draw n-o ut ordea l, but for softw are, W eb serv ices, and o
nline medi a co m pa nies, "agil e developm ent " has rede f ined th e rules by emphasizin
g th e release of full y fun cti onal prod ucts, asking end users for input , and ad dressing
sugges t ions q uick ly to iron ou t bugs or add featur es. The lesson s of ag ile deve lopme
nt app ly to ot her kind s of star t ups as we ll. Physical ob jec ts are obvio usly hard er t o
alte r, but th e impo rta nt thin g is to solicit larg e amo unts of user feed back (ofte n bye-
ma il), respond to eac h co mme nt, and incor porat e changes quick ly. Keep in mind th at
th e fact o rs th at di stin gui sh a successful produ ct from a d ud aren't always obv ious.
Guida nce ~~ co mes f rom highl y g ranular research th at measures ~ th e effec t iveness
of ind ivid ual att ributes and featur es.

.. .

••

"Test everything with real people-it's unbelievable how helpful this is. Go find civil ians,
real people who use [products like yours] because they have to and not because they love
to. Find them in 5tarbucks or at the library or in a college computer lab. Give them $20 for
20 minutes , and you 'll be paid back a hundred t imes over." - "Entrepreneurial proverb "
from MARC HEDLUND , entrepreneur -in-residence at O'Reilly Media . (For more of
Hedlund 's proverbs, visit radar.oreilly.com/archives / 2006/03/entrepreneuria,-
proverbs.html .)

m 1Revisitthe BusinessPlan 0
OBJECTIVE: TRANSLATE ALL THAT YOU'VE LEARNED INTO A MORE REALISTIC
BLUEPRINT.

The produ ct yo ur co mpa ny was created t o sell may not be th e th ing yo u later unveil
in th e market place. "You' re go ing to change yo ur bu siness thr ee t imes by th e t ime
yo u're read y t o launch ," says ange l investor Jeff Clavier. "Get used to it:' You may be
foc used on th e wro ng market , o r even th e w rong prod uct. Listen carefully, keep an o
pe n min d , and rev ise yo ur pro-

CASE

STUDY

Flickr's New Image

Ludicorp, the original parent company of online photo site Flickr , began as a startup
developing a massively multiplayer game called the Game Neverending. As part of the
initial software development, the company developed a tool that allowed people to share
photos and chat about them. As more and more of the internal team and their friends
began to use the tool, it became clear that.orovldtnc tecbnolo .Qvto shaee.ohotos

eVlslt'tlle -SUsfness'Pfa ''-- -'ff'"

The produ ct yo ur co mpa ny was created t o sell may not be th e th ing yo u later unveil
in th e market place. "You' re go ing to change yo ur bu siness t hree t imes by th e t ime
yo u're read y t o launch ," says ange l investor Jeff Clavier. "Get used to it:' You may be
foc used on th e wro ng market , o r even th e w rong prod uct. Listen carefully, keep an o
pe n m ind, and rev ise yo ur projecti on s and analysis accord ing ly. The assumpti on th
ese days is th at softwa re and Web com pa nies sho uld b reak even afte r $20 milli on in
investm ent ; a hard ware or co nsumer produ ct co mpa ny sho uld do so w it h $30 milli
on .

OBJECTIVE: TRANSLATE ALL THAT YOU'VE LEARNED INTO A MORE REALISTIC

BLUEPRINT.

CASE

STUDY

Flickr's New Image

Ludicorp, the original parent company of online photo site Flickr , began as a startup
developing a massively multiplayer game called the Game Neverending. As part of the
initial software development, the company developed a tool that allowed people to share
photos and chat about them. As more and more of the internal team and their friends
began to use the tool, it became clear that providing technology to share photos in a
unique way was the real opportunity-a shift that led to the creation of the Flick r website
and an all-new business model. The Game Neverending was never launched , but Flickr
was acquired by Yahoo in 2005 for an estimated $30 million.
,.

WHAT A VC WANTS TO S
How to woo those fussy venture capitalists .
Most ve nt ure cap it alists will t ell yo u th at t hey invest in peopl e, not bu siness p lans.
They like ex perienced ent repreneu rs th ey've w o rked with befor e. With send th at
person yo ur we ll-ho ned exec uti ve summa ry. (Save th e full -blown plan for later.) If yo
u get a meetin g, highli gh t yo ur experience and w hat dif-

IN YOU
sheets are notoriou sly demanding , but th e place wh ere entrepreneurs can suffer most
is in the liquidation prefer ences. In essence, liquidation pref er -
PHASE Launchthe Product FOUR.. . ---------------------------P • • • • '.

TOOLS

YOU

'LL

NEED

-f

IN -HOUSE NETWORKING: Make it your own . You'll

The testing is done , the pr odu ct has been refin ed, and it 's almo st ready for release .
Now you need t o find pay ing cust omers, whi ch me ans it's time to reassess yo ur sta ff
ing need s. A rule of t hum b is that a company shou ld have about 20 employe es at th e
time of laun ch, with roughly 60 per cent of it s head cou nt devot ed to p rod uct
development and engineer ing and th e rest foc using on manag ement, sales, and
marketing . Ide ally, thi s is ju st the f irst of ma ny launches to come . Try to nurture t he
momentu m yo ur team will need to think beyond the excit ement of th e initi al rel ease.

need networked storage, commod it y servers , and a place to put it aU.

SOFTWARE: Zimbra is mo re aff ordable th an Microsoft Exchange . A PBX PHONE

SYSTEM: Ast erisk PBX Is a free tele phone exchange that can be inst alled on any cheap
server. E-MAIL/COLLABORATION BUSINESS PROCESS SOFTWARE : NetSuite and

Salesforce.com offer mon thly subscript ions for customer-relat ionship management too
ls.

11 ,-.-.-

Builda New Board of Directors

-, 1
You have new invest ors, a broa de r networ k of co ntac ts, and a slew of ent husi"The
peop le on my board are people I would love to ast ic backers. Put t he best of th em
tohire but cou ld never afford . They sit on our board because they're excited about our
company and want to get her to create a form al boa rd of have a real impact. " - BRAD
OBERWAGER. CEO and directo rs. Your boar d w ill likely include at founder of startup
juice and produce company Sundia, least on e represen tat ive f rom yo ur fund who just
landed outgoing Sunkist CEO Jeff Gargiulo to ers. A nge l investors may not de mand a
serve on the board of his year -old company seat on th e board , but most VCs insist on it.
The rest of yo ur boa rd should co nsist of peopl e w ho understand yo ur business, have
chand ising. The excit em ent of being involved in pract ica l ope rat ing experience, and
can levera red-h ot st art up is usually th e main incentive age th eir relat ionships to ope n
door s w it h pofo r prospecti ve board memb ers. Equity is sect ential custo me rs. Cult
ivate a range of exper o ndary, but here's a ge neral guideline: Board wor k of co ntac t s,
and a slew of ent husi"The peop le on my board are people I would love to ast ic backers.
Put t he best of th em tohire but cou ld never afford . They sit on our board because
they're excited about our company and want to get her to create a form al boa rd of have a
real impact. " - BRAD OBERWAGER, CEO and directo rs. Your boar d w ill likely includ e
at founder of startup juice and produce company Sundia, least on e represe ntat ive f rom
yo ur fund who just landed outgoing Sunkist CEO Jeff Gargiulo to ers. A nge l investors
may not de mand a serve on the board of his year -old company seat on th e board , but
most VCs insist on it. The rest of yo ur board should co nsist of peopl e w ho understand
yo ur business, have chand ising. The excit em ent of being involved in pract ica l ope rat
ing experience, and can levera red-h ot st art up is usually th e main incent ive age th eir
relat ionships to ope n door s w it h pofo r prospecti ve board memb ers. Equity is sect
ential custo me rs. Cult ivate a range of exper ondary, but here's a ge neral guideline:
Board t ise on yo ur board, spanning fin ance, memb ers sho uld receive t he same eq uity
packt echno logy, marketin g, managem ent , and merage as yo ur d irector- level
employees.
..

_
.

Developthe Salesand MarketingPlan

, OBJECTIVE: ESTABLISH A TEAM TO IMPLEMENT A TARGETED STRATEGY.

J
S TUD Y

As yo u ge t ready t o come t o market , yo ur staffing pr io rit ies wi ll shift f rom th e tec

hnical t eam th at bui lt t he produ ct t o th e mark etin g and sales t eam th at w ill sell it.
Your VP fo r sales and ma rketin g sho uld need only o ne o r two salespeo p le t o start po
und ing o n cust omers' doo rs. It 's great if th ey can close a few early deals, but th e initi
al emp hasis should be t o assess how pote nt ial cust omers re-
CASE

Focus! Focus! Focus!

When Krug le launched at the Demo conference in February, it beca me on e of the gre at
successes of the semiannual startup dog- and-pony show-not so muc h for what
happened at the show , but for what happened aft erward . Krugle is a search,com pany
that helps pro grammers find open-s ource soft ware code . Most start ups at Demo don't
have a marke t ings t rat egy for the event, beyond just showi ng up. But the Krugle team
Open an Office
OBJECTIVE: BRING EVERYONEUNDER ONE ROOF AS CHEAPLY AS POSSIBLE . A lt
ho ug h seaso ned ent rep reneurs recom m end t oil ing in yo ur pr ove rb ial ga rage as lo
ng as poss ib le, The Four Deadly Sinsof th ere co mes a ti m e w he n wo rking rem ot ely
b egin s Office Real Estate t o ta ke a t o ll o n pro d uc t iv ity- ty p ica lly w he n yo ur 1
OVERPAYM ENT. Rent should be no more . co m pa ny has m or e th an 10 full -t im e
emp loyees . In than 4 to 6 percent of total operating costs. th eo ry, o pe ning an o ff ice
sho uld be ca use for ce le2. OVERIMPROVEMENT . Resistthe temptab rati on : It 's an
oppo rt unity t o hang yo ur sh ing le ove r tion to renovate an existing spaceor an ac t ua l
f ront doo r. In prac t ice, it 's p eril ou s: Many splurge on furniture and fixtures. yo ung co
m pa nies go be lly -up af te r loc kin g th em 3. OVERCOMMITMENT . Assume that your
selves into ex pe nsive real esta te d eals. Treat yo ur first office is temporary. Try to avoid
signfir st off ice as a tem po rary exped ient. Figur e o ut t he ing a leasefor longer than
12months. minimum t ot al sq ua re f o ot ag e yo u need today, and 4. OVEROPTIMI SM.
Planconservatively. Short-term overcrowding is lesstroubleho w mu ch yo u mi ght need in
th e next 12 m onth s. some than paying for unused space. (Ass ume 80 t o 10 0 sq uare f
eet of f loo r space p er worke r.) Execut ive suites aren't p rest ig io us, b ut th e leases
are fl exibl e, and m o st co me wi t h high -sp eed Int ern et co nnec t io ns, ph on e syste
ms , pr inte rs, and cop iers. (Searc ho f f icespace.co m is a gqo d o ne-s to p reso u rce .)
A no t her o pt io n is to share space w it h ano t he r sta rtup o r sub lease space fr om a
m or e we ll-estab lished co mpa ny - moves th at ca n redu ce leasin g cos ts by as mu ch
as 50 perce nt.

Hit the Market II.-------~I

OBJECTIVE: STOP FIDDLING AND STARTSELLING! Th ere are two ways t o brin g a
new pr o d uct int o th e wo rld . W it h th e qui et app roach a p rice tag is at tac hed and
bet a , .. . . c usto me rs tr ansiti on Int o payin g cus-

BuildingBuzz on the Cheap

. . No money for an elaborate marketing campaign?Here are three relatively
inexpensiveways to jump-start sales.
I",..VI r'r a ny

t.f~..r~.filrsu~~~F7at # N O' 111tT\ IRJl' GI ~I ~-I,.CnJII:;':1 ICO

I~l 'v ..,-c~

l~tr·~--------'

ca n redu ce leasing cos ts by as mu ch as 50 p ercent.

Hit the Market II.-------~I

OBJECTIVE: STOP FIDDLING AND STARTSELLING! Th ere are two ways t o brin g a
new p ro d uct int o th e wo rld . W it h th e qui et app roa ch , a pri ce t ag is at tac hed
and bet a c usto me rs tran siti on int o payin g cust om ers. That 's g reat if yo u have a cl
ear noti on of w ho yo ur custo mers are and yo ur sales t eam has a co m p rehensive list
of th em . Mor e likely, how ever, yo u need t o attr act a lit t le att ention . Ind ust ry tr ade
shows are a co m mo n way t o int rodu ce yo urse lf, but th e best reaso n t o laun ch at a
show has nothin g t o d o w it h makin g a gr and ent rance: It's th e hard d eadlin e a trad
e show c reates . A pu bli c launch im poses a d ro p -dea d co m p let io n tim eline f or
every t hing yo ur t eam is wo rk ing on, and th at co unte racts th e impul se to keep tin.
kering . Set spe cif ic but realisti c pub licit y goa ls: a sho rt list of journ alist s t o reach , th
e numb er of bl o g m enti on s yo u wa nt, a t arg et for we bs ite hit s and regi strati on s.
Treat early c usto me rs like V IPs. ( Each early

BuildingBuzz on the Cheap

No money for an elaborate marketing campaign?Here are three relatively
inexpensiveways to jump-start sales. GIVE IT AWAY. If you're selling a physical product or
feebased service, compile a list of the people you'd most like to have as customers. Then
give them the product for free. That's how Brondell built buzz for the launch of its
Japanese-style electronic toilet seats.Everyone on a marketing agency's list of "the 100
most influent ial people in Silicon Valley" received one of Brondell's seats for free, and the
product is now sold in Home Depot and Bed Bath & Beyond. THINK LIKE A SLO G.
Weblogs are the obvious guerrilla route to publicity , but don't treat them like other media
outlets. Online, it's essentialto hone your messageto an easy-to-digest length and keep it
consistent.For example, Krugle's "Find code. Find answers."Saysmarketing consultant
Don Thorson, "Three words is ideal, seven is OK. If it's 15, you're screwed." CREATE A
CLEVER GIMMICK . A simple stunt can generate a major splash if it's surprising, focused,
and well targeted. In the early days, Salesforce.com employees