Taking the plunge - from idea to incorporation
All great companies start with a courageous founder who is willing to step out of the status quo and change the tide of innovation. Most founders look for a light bulb moment—an idea that leads them to stop in their tracks and start coding—but only a few, if any, companies are started through movie-like story arcs. Instead, most great startups begin with a founder or founders who have a drive to innovate and pursue a lot of very purposeful ideation.
As a repeat founder myself and an early-stage venture capital investor for over 13 years,
I have met with thousands of founding teams and seen clear patterns for success in the early founding days. For entrepreneurs who feel this calling to dive in and change the world, there are three key elements that you should focus on immediately:
(1) Find your killer idea,
(2) Draft the all-stars, and
(3) Make sure it is a real business.
Part I: Finding your killer idea (product concept)
It is rare to fall in love with one idea immediately. Instead, you should focus on learning and getting feedback on a number of ideas. Some founders I have met fear idea theft, but in the early stages it’s much more risky to go forward without candid feedback from experts and customers. Use your early days of ideation as an opportunity to brainstorm with smart people you admire—this could be founders you look up to or colleagues you have worked with in the past.
Anchor around your super powers - Try to find some unfair advantage you have over other teams and companies
Some founders are best suited to fix pain points they have faced in industries they know very well. Jeff Lawson founded Twilio out of technical shortcomings he experienced as the early CTO of Stubhub. As did Isaac, Jose, and Tim when founding SendGrid out of deep empathy for developer pain points around transactional email systems. The Procore Technologies product vision came directly out of problems that Tooey Courtemanche observed in the construction industry, having previously been a builder and technologist. Ara Mahdessian and Vahe Kuzoyan at Service Titan are building a cloud business for plumbing, HVAC, and electrical business owners after watching their family businesses struggle with poor software. All these founders had unique market insights from deep personal experiences and immense customer empathy and credibility.
Super powers do not have to be related to the field you have worked in previously—they can also be core talents that you have developed based on previous experiences. For example, if you have spent the early parts of your career building beautiful product, then design and user interface can be a core advantage and point of differentiation. Or, if you’ve worked for large Fortune 500 companies and have access to channel partners or early product partnerships, those too can help provide some early advantage.
Look for macro tailwinds
The goal is to be the winner in a massive market, but if you fall short of that goal, it is often better to be number three in a large market than number one in a medium or small market. Find your rising tide, your tailwind, or your hypergrowth market that is about to explode. It allows you to aim for the moon and still have a great outcome if you fall a bit short.
Admittedly, not all market sizes are obvious from the outside, and many so-called industry experts and analysts will read them incorrectly. The early days of “The Facebook” would have suggested a small market with little revenue targeting students on the Harvard campus, and similarly the massive potential of Google did not fully reveal itself until matched with a revenue model of paid search results. Often opportunity can come from finding large markets that you know are undergoing massive upheaval and disruption.
Customer feedback pre-product
Getting advice from smart people in the field is important for idea generation, and then you refine it further by talking to real customer prospects. Many founders will build surveys and organize focus groups to get the feedback of at least 100+ customers for small medium businesses (SMBs) and dozens of prospects for enterprise products. You do not want to fire your rocket off in the wrong direction, so the more refinement you can do in the early days, the more efficient your efforts will be as you build real product.
Build a prototype
Early customer feedback on design mock- ups is helpful, but real user feedback on a real product is even better. This can be done through a minimum viable product (MVP) on the SMB/ consumer side or a product pilot with a large enterprise that can help you build a product that is robust enough for enterprise players. For enterprise products, it is essential to involve partner companies to ensure that you are building a product they will use and to validate the return on investment (ROI) and price points for the value you are creating.
As with any early prototype, make sure you leave time for product iteration based on key customer feedback. Your first prototype should never be your last.
Product value proposition
Make sure you are able to succinctly describe what your product does and why it is best suited to deliver on a particular value proposition. Know why your product can be much better than all other existing approaches and competitive products in the market and why this is valuable to your future customers.
At the end of the ideation phase, you should have a tight and compelling product value proposition that is essentially your foundational idea. It is the product inspiration around which the early company will be built. While it will inevitably evolve—sometimes quite considerably—it is the cornerstone concept around which you will recruit and finance.
Part II: Building your all-star team
To cofound or not to cofound
It is a personal choice whether you want to be the lone wolf or part of a founding team of 2+ cofounders. Past experience shows that both models can be equally successful. But whichever path you choose, you need to surround yourself with “founder-like” advisors, employees, and contributors.
Personally, I have always enjoyed having thought partners on board as cofounders and have specifically sought to design around my technical limitations by working with a strong technical counterpart. For technically minded founders, you may find the exact opposite and want to involve one or more business-oriented team members. There is no single right answer for everyone, just the right approach for you and the company you want to build.
Beyond just the cofounder decision, the hiring of your early team members is the most important action of the founding CEO. For technology businesses in particular, the core asset of the company is the team, and it’s the main determinant in your ability to “out-execute” others in the market. Test your idea out with strong potential team members and get their candid feedback. The opportunity cost of your team members will far exceed your likely cost of early capital, so candid feedback from trusted early candidates can be some of your best feedback as you make the decision whether to launch the business.
Including advisors and mentors
Founding a business often proves to be the biggest professional challenge most executives undertake, so you will want to build a deep bench of advisors to get you through the extreme highs and lows. After several years that will come in the form of a formal board of directors, but early on it comes in the form of an informal network of prior bosses and mentors, many of whom hopefully become angel investors and advisors as the business takes shape.
It's ok to challenge conventional wisdom and go against the expert advice at times
At Bessemer Venture Partners, we have used the knowledge accumulated over our years of investing in cloud companies around the “Ten Laws of Cloud Computing,” and we encourage founders to challenge a known rule or two. We believe a challenger mentality can often bring forth real innovation. However, if you see yourself challenging a handful of assumed truths, you probably need to verify your assumptions.
One of my most frustrating experiences when founding Trigo Technologies was when the chief technical officer (CTO) of a large public company tore our idea apart. His exact words as we concluded the meeting were, “The number of miracles necessary to make this happen exceeds two.” We thought hard about the input, talked to as many other smart folks as we could with very different opinions, and decided we disagreed. In fact, we used these words as our rallying cry and posted his quote on our office wall for the full team to see. Years later, when reaching profitability and getting ready to go public, we still referenced that meeting and that challenge.
Part III: Have a clear business case
Don't waste your time on a business plan but do have a tight business case before founding your business
Ultimately all businesses should be valued as a sum of their current and future profits. Assuming you want to found a for-profit business, that means you should ultimately have a strategy for generating gains. That means you need to develop a sense for all the basics of pricing, costs, and team size to build the business over time. You should use these basics to put together a succinct one-to-two-page summary document that you can use for recruiting and financing.
Writing your executive summary
It is often difficult for founders to distill a product they have worked on day and night to a few key bullet points. However, having a precise executive summary that is no more than two pages is incredibly helpful as you seek advice and pitch your company to investors. In addition to the team and product elements highlighted above that should be major parts of this executive summary, you should also make sure to address the market size, financing strategy, and any customer or revenue traction to date.
To be a credible venture capital candidate, you’ll need to convince your prospective investors of your large market opportunity. Most investors make between one to three new bets a year, and they hope to make these bets in markets that can contribute to outsized returns. That means that you have to see a path to a large acquisition or an initial public offering (IPO). The best way to evaluate the probability of those outcomes is to calculate an honest review of the total addressable market (TAM). For example, if you are selling to SMB marketers, how many SMB marketers are there in the United States, and how much do they spend on average on marketing software? Beyond this basic calculation, you should address both an upside and downside case of being able to capture the market. Will you rely on word-of-mouth adoption or other acquisition channels to attract SMB marketers?
Financing strategy is also important to detail upfront to all prospective investors. Where do you think your first phase of capital is coming from? Some founders build initial prototypes based on capital from their own savings or friends and family investors. Other founders are advised to go straight to the venture community because their ideas have either been validated early in the market or their teams have had past startup success. Regardless of the path you choose, make sure you research how much capital you need and what you will spend it on. Clarity in raising capital, from an investor’s perspective, is always a good indication that the team and founder will manage money effectively.
Of course, the most powerful data you can include in a business description is real-world market research. With the rapidly decreasing costs of infrastructure services today, many founding teams are actually building and launching real products before raising their first financing dollars. Although that is not expected, or the norm, it is a huge positive if you can show some semblance of traction in your early product. For example, if you are building an enterprise product, make sure you have had real discussions with large enterprise players or even better, have locked down early pilots. For SMB or consumer-facing products, make sure your beta customers are coming back to your product and you have started to track daily or weekly user engagement. Any engagement or user growth increasing over time is a good indication that your company is finding relevant product/market fit.
Over time the executive summary will be complemented by other financing tools such as PowerPoint slides, product mockups, more detailed financials, and possibly a short introductory video. As investors, we often use the executive summary to decide whether to take the first meeting and the slide presentation to decide whether we want to go into deeper diligence around a potential investment.
With a killer product concept (“idea”), your early team members identified, and a business case around the revenue model and funding strategy, you have the necessary ingredients to start building your business. Now the real fun begins!
Byron Deeter, Managing Partner, Bessemer Venture Partners