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Friday, January 13, 2006

Life-graph of a Startup

There are hundreds of articles around the web from entreprenuers on the 'gotchas' of a starup and what to expect. One of the best visuals I saw anywhere is represented here. These folks are investors who work in the Indian market. I have personally known and worked with some on them in the past, and I mean it when I say that some of those folks running the show are the smartest I have ever worked with. This particular company, to the best of my knowledge ran a job placement website along with some social networking.

So here is a lifecycle graph of their company, which began as a startup, crashed during 9-11 and the dot com bubble, refocussed their priorities, got bought by a big company and eventually stabilized. Besides the last part, I am sure many of us have seen this exact scenario in the Valley.

The graph represents "team" optimism over a time scale (click for larger version) [reproduced after due permission from the author]

I think this graph has a lot of touchpoints for anyone who has gone through the pains and joys of starting a business (or being an integral part of it) : (let's ignore the sharp decline between Sep 2000 - Dec 2000 - no amount of planning and vision could have seen that 9-11 impact. Let's write it off as a sudden occurrence that simply couldn't be planned for).

I hope the authors of the article help us in answering some of these questions, that could be key learnings for us.

  • First signs of Dotcom burst: One of the most important things in a startup is to have people who have a finger on then nerve of their market. For this company "first signs of dotcom burst" occurs at June 2000 and the sudden sharp decline begins at around Sep 2000 (which obviously is due to the 9-11 attacks adding to the sliding dot com burst). What were the 'first signs' of June 2000 as seen by their leaders ? Was it the first 'customer hit directly impacting them' ? Since this graph talks about motivation of the entire team, it is hard to figure out when the leadership team really detected the 'burst' and what was their strategy to be pro-active in sensing the market as opposed to being hit first and then wake up.

  • 3 months from Death: One of the hardest times to retain employees who are not founders. The reason for this is actually quite simple and has direct correlation to monetary gains. The financial gain a founding member has from a successful business is usually magnitudes higher than what anyone else can hope to gain (10x, 20x or even much more ,depending on different companies). Motivation can essentially be broken up into 'intrinsic' and 'extrinsic' motivation (HBR on Breakthrough Thinking). 'Intrinsic' is when the motivation is fuelled internally within the employee (the desire to solve) while 'extrinsic' is fuelled due to monetary awards and the like. Founders and key employees usually have more intrinsic motivation (whether they like it or not, it is significantly also linked to the fact that they have financially more to gain or lose by the failure or success of the company, in addition, ofcourse, to wanting to 'make a difference'). Intrinsic motivation, however, usually decreases as you go further down into the employees and is usually minimal in the 1-4 year experience range. If you need to recover from the "3 months from Death" stage, you need to chip away at the overheads and ensure that the folks directly contributing to building the product remain. This stage is tricky, because it is hard to offer extrinsic motivation at this stage. So how do you go about retaining the employees at this stage ? What did the leaders of this company do different ? How different was the strategy that took them out of this stage when compared to their original desire when the company started ?

  • Monster acquires Jobahead: An acquisition could either be a great thing or a bad thing. Several companies here in the US get acquired for pittance (I've seem companies here sold for a total of $20m when their burn rate was twice this amount) while others, like Skype get acquired for ridiculously high amounts. Looking at the optimism graph here,one of two things might have happened: a) An acquisition was an exit strategy of this company to begin with - the company was modelled around selling out after a few years, or, b) Acquisition as an exit strategy was an evolution during the "3 months to death period". Either way, a job well done. However, one must ask at this stage: It is very unlikely that the level of optimism during an acquisition is the same across the company. An acquisition, being an exit criteria in a business plan usually implies payouts and/or conversion (for the investing VCs, preferred series A holders and founder stock pool). At this stage, it is hard for me to understand how this optimism can permeate throughout the entire company - it seems more like 'euphoria' (I define 'euphoria' as 'possibly irrational optimism', while 'optimism' is 'possibly irrational reality' :-) )

  • Business Settles: Interesting to note that the level of optimism seems to be a tad higher than when the company first started. Speaking from personal experience, this usually signifies a truly successful business and most importantly, a business that has executed well. People start out with great ambitions but very few can execute a business so that every employee feel a part of the whole as opposed to a hole in the part.
All in all, a very nice graph and trend.


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