The Ins and Outs of Startups
- My story.
I’m Wade Norris, a UCLA alumni and former president of Upsilon Pi Epsilon. I co-founded a startup, MassKnowtify, while in undergrad. We tied for first place in the UCLA Business Plan competition, got some early stage funding, and made some amazing early partnerships with government agencies in the Los Angeles area before ultimately deciding to turn the business down. After graduating I worked at Google in Venice Beach for about 6 years full time. At the end of my time there I was leading a couple of computer vision research projects within Google AI, most notably I helped co-found Cloud Vision API and Google Lens. I’m now working at a stealth startup that is trying to apply modern advances in artificial intelligence to robotics applications!
I was asked by the current officer board to write up this post based on the following topics they thought would be relevant. I hope that my insight helps!
2. How to make a startup.
This is a huge topic, that covers a vast breadth of areas. I don’t think I’ll be able to do it justice in one post so instead I’ll suggest a reading list that I’ve found tremendously useful in my career: The Lean Startup and Venture Deals: Be Smarter Than Your Lawyer and Venture Capitalist. Additionally, I found this free online class recently and have so far found a lot of the material very relevant and useful. Also, I love the podcast How I Built This.
Keep in mind starting a startup is a huge undertaking and the biggest prerequisite is passion and perseverance. For people who succeed, one thing is common — at some point in their journey most people would have given up, turned back, or not started down the road they took in the first place. So step one, decide if that sounds like something you want to take on.
3. Should you quit your current job to make a startup or join one?
I think while you’re in school, you have an awesome opportunity to get your feet wet with startups. The biggest reason for this is that you’re not sacrificing a full time salary while doing it. Further, the process of contributing to a project will directly help prepare you for any kind of career in software: startup or big industry. There is really no substitute for writing code on real projects with real users when it comes to preparing yourself to be a Software Engineer.
Ultimately the decision on if you should quit your job, join a startup, or create your own is largely a personal one. A lot of factors come into play here. First is where you land on the risk reward spectrum. If you want the highest upside potential, naturally being a founder is the best option, but it’s extremely risky. Most startups fail, and the earlier stage you go, the more likely that failure is. Joining a startup that is already well established and funded will naturally be a hedge on that bet: your upside potential will be a lot lower than founding a company, but the risk will also decrease. Getting a job at a big tech company is like buying an index fund, you really shouldn’t expect it to dramatically outpace the market, but the risk is extremely low that it will go to zero like a startup might.
Where are you in your life? Do you have student loans you need to be making payments on? Do you have a mortgage? Do you have a family that depends on your income? These are going to be important questions in how much risk you can tolerate. Maybe it makes sense to take a full time job for a bit, live below your means, and build up some cushion in your savings so that you can take bigger risks later. Extra cushion means extra runway when things get tight.
Another consideration is if your current work experience will be sufficient to get investors and employees onboard. If you’re trying to raise an early stage funding round (e.g. angel, pre-seed, or seed), one of the biggest questions will be why are you the most qualified person to build this business. If you’re an undergrad with little experience, it’s going to be a lot harder to answer this question than if you’re a seasoned industry veteran. That being said, there are a lot more options for equity free financing when you’re a current student or recent graduate, so keep an eye out for competitions with no-equity prize funding. These are a great option to bootstrap your business!
Finally, and maybe most importantly, is if you have a specific burning idea for what you want to do and you don’t see other people doing it. If no one else is working on it, then maybe your only choice to pursue this passion is to build a team and do it!
4. How do you know if you should create a startup?
I’d say the best test here is your personal passion around a specific space. If the business completely fails and you lose a decent amount of money in the process, will you still be proud of the path that you took and happy that you spent your time pursuing this idea? If your answer is yes, then it seems clear you should go for it. The only downside is the opportunity cost of not spending your time on something else.
5. How do you know if joining a startup is right for you?
I believe the biggest difference between going startup versus big tech is the culture and the work environment. Things in a startup are going to be a lot more chaotic and unstructured, whereas in big tech they’ve figured out the protocols and the policies and how best to handle most situations. Structure can be great in a lot of ways, it means most situations on average are probably handled better and the decisions and outcomes are likely more informed, intentional, and educated. That being said, red tape and bureaucracy can be incredibly frustrating at times. Trying to launch something new can get dragged out into a much longer endeavor than it feels it needs to be, or worse, the project can be killed for purely political reasons. This is usually for good reasons; big companies have a brand to protect. So at low key startups, you get to move faster and have more autonomy.
I’ll give one concrete example: my starter project when I joined Google. It was to add a feature to our “hover-to-expand” advertisements that when a user clicks, it will automatically “short circuit” the 2 second delay and expand the ad immediately. I made the change and tested it in maybe 20 minutes. It was a two line JavaScript change. Huray! Onto the next project right? Wrong. I ended up having to write a LOT more code to run a side by side experiment where only some small portion of traffic had this feature enabled and the engagement rates, durations, and all of the other important statistics were calculated in a side by side analysis. I had to write up a report showing the impact on the metrics and justifying this change was worth submitting formally, then I had to do a series of changes to slowly ramp it up to full production traffic. Finally some more changelists to clean up all of the experiments. Ultimately, it was probably a month or two of work for what seemed like an obvious feature and was only a 2 line diff. Granted, I was a Noogler, and this was probably done largely to teach me how to run experiments correctly for what would later be much more risky changes, but still you get the idea. If you want to “move fast and break things” you might prefer to work for a startup over a big tech company.
6. How to get funding.
There are a couple of options here, I’ll touch briefly on a few of them: 1) bootstrapping, 2) prize money / grants, 3) pre-sales, 4) friends and family, 5) angels, 6) accelerators and VCs.
Bootstrapping is just funding the project yourself. This is probably a component of almost every startup. If you’re not putting your own money on the line because you believe in this project, why should anyone else? The second is prize money. This is more relevant while you’re in school or a recent graduate, and is a great option. Why? It’s free money. Basically you do a little work that’s likely helping you build your business anyways and you get funding without sacrificing any equity. There are also grants from the government or private industry that will help small businesses get started but these get a lot more competitive and become a lot more work to win. It’s always good to consider how much time these will take however and weigh if it’s worth the time or is a distraction from building the business.
Pre-sales is an amazing option that I highly recommend all founders explore if it’s relevant to the business you are building. Crowdfunding platforms like Kickstarter or Indiegogo are really just a form of “pre-sales” which you can also do on your own, likely for a much lower fee, on something like Wix or Squarespace. The reason pre-sales are amazing is that 1) you get the money to build up front, without giving away equity, and 2) you verify people actually want to buy the thing you’re planning to build. If you did your homework and read the books from the reading list, you’ll realize this is your biggest pitfall in building a startup. The biggest and most common issue is people building something that no one ends up wanting to buy. By doing a pre-sale you verify that people want to buy it and what they’re willing to spend to get it. The biggest risk here is your time and money marketing your pre-sale campaign. Get creative and try to bootstrap a low cost way to get the word out. The main downside to this is that most people underestimate the time and money that things will take to build at scale and what all can go wrong in that process. If a supplier gives you a few good samples of hardware, then when they deliver the next batch the quality is much lower, what are your options? You likely don’t have enough funding to engage in any legal battles. Make sure you’re prepared for things to go wrong and you have enough cushion in your profit margin to make it worthwhile.
Finally, there are the options that will dilute ownership by giving away equity in exchange for money. These are all theoretically the same, just the people doing it are increasingly experienced at doing so, and dedicate more of their time to it. First is friends and family. They likely have little or no experience “investing” and they’re likely doing it to help you get started. I would suggest to only go this route if the friend/family member would be happy for you even if the business fails and they don’t get their money back. Statistically speaking, that’s what’s going to happen. Next up is angel investors. These are wealthy individuals who make investments in startups regularly, frequently because they have built a company that had a successful exit event (acquisition, IPO, etc) and enjoy being involved in the process of growing businesses. This can be an extremely valuable person to have on your team because of their strategic experience and valuable network. Likely you’ll want to target angels that are in your space so that their experience and network are the most applicable to the business you’ll be trying to build.
Finally, there are venture capital firms. These are people who invest money full-time. Their day in, day out is finding companies and deploying capital. Reading Venture Deals will give you a very in depth look at this fascinating field. Trying to get funding from a VC will likely lead to giving away the most equity because their job is to get a good return on the money others have invested with them, but it frequently comes with a substantial amount of value. VCs are some of the best and brightest and they do this full time. They frequently have a whole staff dedicated to deploying capital and helping their portfolio companies succeed. Their network connections and guidance, especially for a first time founder, will likely be invaluable. Additionally, getting buy in from the VCs can provide you some validation that your business model is on the right track and frequently when pitching they will openly give you feedback on their concerns or hesitations. Don’t back down just because they express concerns. They aren’t infallible, but definitely use this as an opportunity to learn and refine. Double down on risks they identify that you think are worth taking, and maybe avoid some of the valid pitfalls that they point out.
Accelerators are another great option early on. It’s effectively a very hands on VC for early stage companies. In addition to funding, they typically give you a place to work and help you network and refine the business model during the early days. If you want that kind of hands on support, they are definitely worth considering. If your business is already roaring, maybe stay focused on growing the core business.
The feedback I have received is that an ideal set up for an early stage seed round is two reputable VC firms, one leading and one with a smaller investment, and one or two angels who are experienced founders in your space. Also keep in mind that a relationship with a VC firm is going to be a long one, and they have a lot of power to make your life uncomfortable down the road, so get feedback from other founders they have funded and make sure that you cautiously commit to this relationship.