This is part four of a five-part series by 6Wunderkinder CEO Christian Reber. This text originally appeared on christianreber.com.
So far I have shared with you nine simple steps to start your own tech business. To date I have focused on finding your way into an entrepreneurial environment in Part 1, identifying a good idea in Part 2, and starting your own business with purpose and style in Part 3.
Today, in steps ten to 12, I want to discuss with you raising your first round of money, hiring to develop and maintain your company culture, as well as defining your role in the management of your startup.
10. Raise your first round of money, or bootstrap your company
There are two ways of starting a tech business. You either do it on your own, taking all risks and responsibilities yourself (known as bootstrapping), or you find investors that believe in your company. Both ways are great; I’ve tried both, but personally I wouldn’t try to start something again without partners. Wunderlist is the first business where I secured the interest of experienced investors, including Atomico, Earlybird and T-Venture. They have worked with hundreds of entrepreneurs, and built huge tech companies themselves (e.g. Skype), and I wouldn’t be where I am without them.
Both working with and without investors are challenging paths to starting your own business. An investor’s job is to provide assistance and guidance while at the same time to challenge you. They need to challenge your way of thinking, your way of doing business, and your way of building products. Beware, it’s not always fun. If you don’t like to work with many different opinions, don’t do it. Investors can make your life much harder than it has to be, especially in tough times. But they can also boost your business into completely new dimensions, that you may not have even thought possible on your own.
When you start your first tech business, avoid the common mistakes. Don’t pitch too early, and don’t pitch to world-class venture capitalists before you are ready. Prepare a working prototype, showcase the product you actually want to build, or at least demonstrate that you are able to build it. If you want to get an investor on board, try to understand what investors care about – it’s mainly the team and the product. Most first-time entrepreneurs write huge business plans, instead of creating a short pitch-deck. Focus on building a prototype, test your business model and create a clear strategy to become a sustainable and scaleable business fast. Talk to investors when you are ready, not when you have something on paper – build up your story.
Before you start talking to large VCs, find some early stage investors. Stefan Tirtey, partner at Doughty Hanson Ventures, created this document with Berlin early stage investors.
If you raise money for the first time, you better understand the basics of venture capital. Brad Feld wrote a great book about venture capital. Still, raising money for the first time is difficult.
Another important factor investors care about is how the business is structured (like who owns what). I’ve seen a few businesses where the first investors took huge pieces of equity for very little money. Avoid making those mistakes and define a fair structure. While every business is structured differently, here is how I believe you should structure a tech business in Europe (as a first-time entrepreneur):
15-20 percent equity for first investors
Depending on your team and the risk of the business, you should reserve 15 to 20 percent of equity for the first investors you get on board.
10-20 percent for employees
Be generous with shares to your employees, they are your capital and most important resource. But never give away shares without clear vesting rules.
60-70 percent for founders
60-70 percent sounds like it’s not a lot, but at this stage, at least 80 percent of the company is owned by the team – that’s a fantastic way to start.
Again, starting a business with investors may sound easier, but it clearly isn’t. You just share the risks (and the outcome). If you decide to start something without an external investment, you usually start more carefully and slowly with a lot less room for mistakes.
11. Learn how to hire and maintain your company culture
Determining who to hire is a powerful skill to have and it’s very difficult to learn. As a founder you need to develop this skill very quickly. You will make mistakes early on, and it’s vital that you identify them and correct them very quickly. Creating a sustainable, healthy and positive company culture in a fast-growing and fast-changing startup environment is tough, and many companies fail at it (many because they simply don’t care enough).
When I started my first business, I often got advised to hire ‘A people’. I had no clue what it meant, but I assumed it meant “very good”. Now, after having hired more than 60 people, and after firing a few of them, I think it’s pretty much nonsense. ‘A people’ do exist, but if you are starting a business for the very first time they are most likely not in your reach.
When I started hiring my first engineers, designers and marketers, I was mainly focused on passion, energy and most importantly potential. I hired very junior people, many directly from college, or from their first jobs. When I interviewed, I tried to quickly get an understanding of how much they understood their actual role, how fast they wanted to improve, and how badly they wanted to be successful. I also tried to determine how well they would fit into the team, and specifically I wanted to get a feeling if they could develop as quickly as the business would require. I didn’t hire them because I thought those people were incredible, but because they showed promise.
I am often asked, where do I find these people. I honestly had a very simple strategy: I hired Wunderlist users to build Wunderlist.
We have had a lot of success promoting job openings through newsletters to our user base as well as through our social media channels. More than half of our team has been recruited somehow through our product.
The next big lesson you need to learn is to fire people. If you are a passionate entrepreneur, and you care about your team, firing is the hardest thing you will do. You will fire people for different reasons. Maybe they don’t fit into your team, or they aren’t good enough (which means it’s your mistake for hiring them), or you need to reduce costs. Firing people is emotional, and hard. People tend to cry, or to get angry. If you are good at firing, you can still look in each other’s eyes after ‘the talk’. Same goes for people who decide to leave, for whatever reason. Respect the decision, don’t stop a traveller (but try really hard to keep the ones who struggle), and be professional. It’s a long road to learn those skills, but you will get there.
It’s very hard as a young entrepreneur to correct hiring decisions. Don’t be scared to correct your mistakes quickly. Also, if your business grows, don’t lose the skill to objectively judge your team. It’s often hard for your initial team to keep up with the progress of the business, you are entering new stages very quickly. It’s often hard to talk about, but when a business grows up, it’s often time to improve the team, rather than grow it.
Fred Wilson wrote about this phenomenon:
The people you need at your side when you are just getting started are generally not the people you will need at your side when you have five hundred or a thousand employees. Your technical co-founder who built much of your first product is not likely to be your VP Engineering when you have a couple hundred engineers. Your first salesperson who brings in your first customer is not likely to be your VP Sales. And your first community person is not likely to be your VP Marketing.
I have written this a couple of times now, but I want to make it clear: I think the key to creating a healthy and sustainable company culture is serious transparency. I know everyone talks about honesty and transparency as a good thing, but many entrepreneurs simply suck at it. Don’t try to hide anything from your team, talk openly about any kind of expectations and challenges, and try to be positive about it. Being a good motivator is very hard, but it can be learned.
12. Prepare yourself to become a manager
The road from being a founder, to becoming a CEO or a manager is a very long and bumpy one. Most good founders somehow are crazy, in a good way. They often have ridiculous work ethics, are naive, and ignore what others say. They are often simply not the ideal person to work with. It rarely ends well if those founder attributes meet the pressure of a young company trying to survive.
We had a pretty intense year in 2012, experiencing an unsuccessful product launch. Most of us had a hard time dealing with the pressure we had, many were close to giving up. Startups are not always fun, and for us, that year was not much fun at all. Luckily we’ve managed to get through it, but it seriously wasn’t easy. Those times are tough, but you know what? Those times see you earn your stripes. They help you to become a seriously good manager.
There is an insanely good article written by Ben Horowitz, that I recommend every founder read, both in hard and in good times – ‘What’s The Most Difficult CEO Skill? Managing Your Own Psychology‘.
Being a manager and being a founder are two different things. You need to learn this very quickly. A founder often sets the tone, the mission, the speed, the ethic, the culture. Being a founder – a programmer, or a designer, or a salesperson – requires a totally different skill set than being a manager. Being a founder means to work – being a manager means to think. The job of a manager is to carefully make decisions, easy ones and tough ones. You need to define the business strategy, recruit people, build teams, motivate employees, set and measure goals, empower ownership, create partnerships, take care of financials etc. These skills are hard to develop, many founders actually decide to hire a CEO at a later stage. Becoming a CEO is not for everyone, it’s a huge challenge in addition to the challenges you already have as a business.
I remember clearly when I started this business, I didn’t want to be the CEO most of the time. I was a programmer, building the first version of Wunderlist for Windows and Mac. I loved helping our developers to build the first sync servers, I loved designing the product and defining the marketing strategy. I had a seriously hard time turning away from the actual work and focusing on the business side. The additional pressure as being ‘the person in charge’ didn’t make it easier for me to deal with that transition, and I honestly think the transition process will still take a few more years to be finally over. I’m a hands-on manager, I love diving into things. But it also often makes me operate as a micro manager, which rarely gets us where we want to be.
As a founder I was involved in every little detail, from design, to development, to PR and marketing, but today I focus mainly on internal tools and processes, defining goals, business development and other more high level areas of the company. I still am (and still want) to be part of our product team, but the time I can spend on the little details is very limited (down to a few hours per week). I became a CEO, and I wasn’t fully prepared. I would strongly recommend that if this is the role you want to take on, prepare yourself early, right from the very beginning.
Next time, I’ll be sharing my final three tips. I will be discussing thoughts on finding advisors and mentors, thinking internationally and aiming to dominate the world as well as working hard and being nice to people. Follow me on Twitter or subscribe to my blog.