August 22, 2016 by Fred Haney
The Chickens and Eggs of High Tech Startups
“How to solve the most difficult ‘chicken and egg’ problem affecting startup company funding.”
Building a high tech startup company involves working through multiple “chicken and egg” problems. The most overwhelming of these is, “I can’t get capital without an experienced and successful chief executive officer, and I can’t get an experienced chief executive officer without capital.” This is probably one of the reasons that so many founders try to be the CEO of their own startup, but there is a much better approach to solving this “chicken and egg” problem.
Let’s assume that you do, in fact, have a “fundable idea,” that is, an idea that will appeal to angel and venture capital investors. The only thing between you and a big check is a “fundable chief executive officer,” that is, a CEO that venture capitalists will be willing to invest in.
What do angel and venture capital investors want to see in a CEO? Their preference is to invest in CEOs that have a track record of success in the same, or a closely related, industry and in venture-capital-backed companies. This is asking a lot, and they don’t always get everything they’re looking for, but this is where they start.
Working through a “chicken and egg” problem is largely a matter of adopting the right attitude. You have to believe that there are no “unsolvable” problems. While you seem to be confronted with a dilemma, there are, in fact, practical solutions. The trick is to make small steps in the direction of both the chicken and the egg.
If there’s a way to scrape together a few dollars, that might be the right thing to do. Usually this is “friends and family” money. With limited capital, you probably won’t be able to attract your dream chief executive officer, but an executive with some good skills can help “build a bridge” to your ultimate CEO.
Why not go out and grab the ultimate chief executive officer right off the bat? Well, stranger things have happened but, unfortunately, most CEOs — especially the good ones — have a nasty habit of wanting to be paid, and, remember, your start up doesn’t have much money.
You might find a chief executive officer who is eager to join your company, but a CEO eager to work in and unfunded startup is often one with little or no previous experience. He or she might be eager for a first-time CEO assignment. You’re not in the business of offering “on the job training” to CEOs, so be careful about hiring a first time CEO. The CEO you hire should be one that has a track record that will get venture capitalists excited.
So what’s the answer?
Ask yourself, “What does my company need to look like in order to attract a fundable CEO?” Is there some way I can make enough progress that a seasoned CEO would grasp the opportunity and want to get involved?
Some of the most successful tech startups find a way to “bootstrap” themselves to a stage where they are attractive to a seasoned and knowledgeable chief executive officer. Some of the steps involved are usually to:
- Use founders stock to retain a small, part time team of technical people
- Create either a product or a working prototype of the product
- Obtain a few customers, or, possibly, a “Beta test” customer
- Create one or more strategic partnerships.
All of these events add value to your start up and reduce the risk. They increase your chances of attracting a fundable CEO. They can help you “build a bridge” to the right CEO.
As you build value around your company, your options begin to expand. You might find it a little easier to raise capital. And you might find it easier to attract the kind of CEO venture capitalists are looking for.
What kind of CEO should you look for? Remember, angel and venture capital investors would prefer someone with prior success in your industry. This is certainly a place to start. But frequently tech startups are so inventive and such a leap from anything that currently exists that it’s difficult to find someone with experience in exactly the same industry. So you may have to relax that requirement a bit a bit
You are looking for a CEO who has good “company building” skills. This is extremely important. “Company building” skills include tasks like:
- Creating a capitalization structure,
- Writing a Business plan from scratch,
- Building a team of people and getting them to work together affectively
- Managing the development of new product
- Managing the introduction, marketing, and sales of a new product.
It’s best if your chief executive officer has past experience and success performing these tasks.
CEOs who received all of their training in large organizations do not always have these skills. They may be good at managing existing organizations, existing product lines, existing technologies, and existing personnel staff. But do they have the skills to create new teams, products, and market strategies starting from scratch? These skills will be a critical prerequisite for your fundable CEO. This is a reason that it’s best fo find a CEO who has worked in venture-capital-backed companies, if possible.
I have helped my clients “build a bridge” to a “fundable” CEO in multiple ways. Here are three very different examples:
Virtual Computer Corporation developed a very powerful “reconfigurable computing” technology, which allowed computers to “reconfigure” their internal architecture at “run time.” The company obtained a few small contracts and a small staff, but it was never able to raise venture-capital because the technical found her insisted on remaining as CEO. The company failed when the “dot-com” bubble burst in 2000. I went to the founder, Steve Casselman, and said, “We can build a company, but we’ll need to recruit an experienced chief executive officer. After extensive searching, we found Larry Laurich, who had been the chief operating officer at Tandem Computer and was “between assignments.” Larry liked the technology; he agreed to come on board as a founder. With his help we raised $7 million in venture capital. In 2011, a DRC computer was the most powerful genomic processing computer in the world.
For NovaDigm Therapeutics, manufacturer of vaccines for MRSA, recurrent vulvovaginitis, and candida, I acted as founding CEO for almost 5 years, developing the business plan, negotiating a technology license and generally organizing the business aspects. After we received an $18 million capital commitment from Domain Associates, one of the top biotech venture capital firms, we recruited a very experienced chief executive officer from the vaccine industry to advance the company through FDA clinical trials and, hopefully, to an exit. NovaDigm would not have been able to hire this CEO before receiving the $18 Million commitment.
LiveSafe, developer of a very popular crime reporting app, implemented an effective bootstrapping strategy. Founder Shy Pahlevani created a small team of technical people, which developed the first product and received some effective national level publicity. This initial team also developed several partnerships, and it made a few initial sales.
LiveSafe developed a very persuasive business plan presentation. As the company approached angel investors, it received interest from one potential investor who was serving as CEO of a different company, but expressed interest in becoming CEO of LiveSafe once it got funded. The company raised $1.5 Million from Angels. Subsequently, it raised $5 Million from the IAC venture-capital fund parentheses (Barry Diller), and, later, another $5 Million from Fred Smith, founder of FedEx.
A carefully implemented sequence of value creation steps can lead to a fundable chief executive officer and a solution to the most difficult “chicken and egg” problem.