Starting Your Startup

Unit of One

As we enter a new millennium, we find ourselves in the Age of the Startup. Everywhere, it seems, people have a new idea that they want to turn into a business, a new business model that they want to turn into a company -- or an old company that needs a new idea. If you're not incubating a startup, you're starting an incubator.

Which prompts us to ask a question: How do you navigate your way through this new era of startups? Whether you're launching your own "dotcom" or starting the restaurant that you've always dreamed of opening, how do you make the right decisions? Should you hold on or let go? Find the right partner or go it alone? Stay small or learn how to grow?

Here are tools, tips, and time-tested tactics from 17 advisers, founders, and professional managers, all of whom have made startups work. Each has soared -- and each has hit some bumps along the way.

Hey, you wanna start something?

Esther Dyson

Chairwoman
EDventure Holdings Inc.
New York, New York

Good people are in short supply. Whether you're an investor, a company owner, or someone strategically trying to figure out what to do in a business, you need to pay more attention to employee motivation and human relations.

The challenge is to find great people and then to inspire and empower them. The skills that it takes to start a company are not the same skills that it takes to keep a company going. In the beginning, you need to inspire a small team of people to meet deadlines and to deliver results. You need to micromanage -- because a lot has to happen, and you're responsible for all of it.

Later on, as the company gets bigger and the strategic challenges get broader, you have to be able to delegate. You need to bring in lots of good people, to give them responsibility -- and then to leave them alone.

Ultimately, in the world of startups, most consolidation occurs less for financial reasons than for management reasons. You'll hear a lot of people saying, "We've got this absolutely great company, with a great product, but there's no one to run it." There's an important point here: Consolidation doesn't necessarily mean failure. It's part of the natural order of things.

My biggest mistake? Believing too much in the power of a brand name or an alliance, and thinking, "We'll get a better CEO later."

EDventure Holdings (www.edventure.com) publishes "Release 1.0," a monthly newsletter that tracks developments in information technology. It also sponsors PC Forum and EDventure's High-Tech Forum, and manages EDventure Ventures, a fund that invests in technology startups in Central and Eastern Europe. Esther Dyson (edyson@edventure.com) also sits on the board of the advertising giant WPP Group and is the interim chairman for the Internet Corporation of Assigned Names and Numbers.

Regis McKenna

Chairman
The McKenna Group
Palo Alto, California

The key to a successful startup is networking -- both personal and professional. Money is just money. Who invests is more important than how much is invested. The questions that you should ask are all about networks: How connected is the investing company? Does it have connections with large companies, sources of money, or channels of distribution? Have the founders maintained relations at their old companies? Do they have the right connections with companies that can provide talent? Leveraging other people's assets is important when launching a startup. Look at how Yahoo! depended on Netscape. That alliance happened early.

Networks are the steel of the future. The global telecommunications industry is spending $1 trillion to update both analog and digital networks, because that's the new infrastructure. Ultimately, you have to build infrastructure. Look at Amazon.com. It's buying warehouses, software companies, and networks.

You have to assume that you're in business for the long haul. That belief will drive you to build value.

The McKenna Group (www.mckenna-group.com) is a business-strategy firm. Regis McKenna helped launch and market some of today's key technologies, such as the personal computer. He worked with several current brand-name companies -- including America Online, Apple Computer, Silicon Graphics, and Microsoft -- back when they were startups. He is a partner with the venture-capital firm Kleiner Perkins Caufield & Byers.

Robert E. Knowling Jr.

President and CEO
Covad Communications Co.
Santa Clara, California

When founders bring in an outsider to run a startup, they need to be very clear about what they want that person to do. If they want somebody to come in, build the company, and take it to the next level, then they've got to relinquish control. My board has been very supportive. From day one, my company's founders reported to me. I'm glad that somebody on the board had the wherewithal to arrange that. What an outsider like me can bring to a young startup company is a mission to increase scale to an unbelievable level.

But in your haste to put your spin on the place, you have to be sensitive. If you're not, you'll slow down the transformation process. As the new person, you need to spend time socializing throughout the business. Put more nurturing into it. People joined a startup; they didn't join you. Here I am thinking that we're going to be a great, huge company. But not everybody signed up for that.

Covad (www.covad.com) was launched in 1996 and went public in January 1999. It is building a digital network that will deliver data, voice, and video information, as well as high-speed Internet access, to homes and businesses. Robert E. Knowling Jr. joined Covad in July 1997. Previously, he was executive vice president of operations and technologies at US West, where he oversaw services for 25 million customers in 14 states.

Melissa Bradley

Founder and president
BHC Inc.
New York, New York

Don't start a business unless you have enough money to invest in the business yourself and enough money to live on for a year. You're not going to be profitable for at least that long. How are you going to pay your rent in the meantime? And when you do take money from other people, be selective. So many entrepreneurs come to me and say, "It's no longer the business that I started." That's because they lost control. Control doesn't come with the title of CEO; control comes with cash.

You don't need to have a million dollars in the bank. Be creative, and understand how to get money. For the venture that I'm involved in now, we held a series of fund-raisers six months before we launched the company and raised $50,000 just to get things going. For example, we teamed up with a local theater, charged double the ticket price, and held a reception afterward. If we had taken $1 million from an outside investor, we would have lost more than half the company.

In the beginning, venture capitalists didn't want us. After all, being a financial educator for the poor isn't very sexy. Now they see that we have something to offer. But we feel that they would sell out our target market, and we don't want to become McStreet. Here are my tips for starting a business.

Make your idea your idea -- legally. Get the paperwork done for patents and trademarks.

Know your market. And don't just focus on traditional demographics, such as white males, ages 35 to 45. Dig deeper: What are the buying habits of your customers? What are their families like? Getting that kind of information takes time and money. So partner with universities to do market research.

Develop an exit strategy from the get-go. Go beyond strictly financial considerations. What is your personal exit strategy? You're not going to want to run the company forever. Step aside when the mission has to change, or when the market need shifts to involve something that you know nothing about. Otherwise, you're going to run your company into the ground.

BHC is a new-media company that helps women, minorities, and middle-class consumers to make informed financial decisions. Melissa Bradley (Bradleyml@yahoo.com) also teaches a marketing course at City College, New York. Previously, she founded the Entrepreneurial Development Institute, a nonprofit in Washington, DC that trained young people to develop small businesses. She also served as a financial regulatory-affairs fellow with the U.S. Department of Treasury and as a marketing specialist at the Student Loan Marketing Association.

Ronald Grzywinski & Mary Houghton

Cofounder, chairman, and CEO
Cofounder and president
Shorebank Corp.
Chicago, Illinois

Finding a business partner is like finding a life partner: You should try to find someone whose talents complement yours. A good team has both a visionary who keeps raising the bar and a good operations person who keeps things running smoothly. And each has to trust the other implicitly. In our business, team management seems to resolve a lot of conflicts.

Managing a startup requires learning to let go. And part of letting go is developing others -- creating opportunities for people to move up and run organizations on their own. Shorebank has 22 subsidiaries, and every one of them has a president or the equivalent. We keep watching to see who the leaders are. If we were to do something different, we would start investing in the development of general managers even earlier than we do. As we try to expand, we're finding that we don't have enough people with general-management skills.

When you start a business, don't underestimate the growing pool of potential investors who are interested in business ideas that have a social component. There's a growing group of wealthy people who want to invest some of their capital in something that has a social purpose. But those people aren't looking for idealistic dreamers; they want to be confident that their capital is going to be conserved. And if they can actually make some money, that's even better.

Shorebank (www.sbk.com), which focuses on serving underinvested communities, was one of the first community-development banks in the United States. It was started in 1973 (as the Illinois Neighborhood Development Corp.) with $800,000 in capital and a $2.4 million loan. It now offers real-estate development, debt financing, and other business services in five metropolitan areas.

Angus Davis

Chief Tellme
Tellme.com
Palo Alto, California

What's unique about a second-generation company like ours is that we draw not only on our own experiences but also on the experiences of the people with whom we've worked. At Netscape, we learned about the Internet economy -- but we never really cracked the consumer-marketing nut. We modeled our organization on Yahoo! That involved bringing in acquaintances from Yahoo! as well as people who understood how to build consumer services.

Our early experience with the Internet helped attract the amazing team that we recruited. And that helped us attract funding. The first people you hire form the DNA of the company, and that team will drive your valuation in the future. So it's important to get the funding that you need to build the right organization. These days, money is so much easier to come by than it used to be. But people are hard to get, and investors understand the costs of building a great team. It's much easier to tell an investor that you need $1 million to hire more people to solve problems than it is to tell an investor that you need $1 million to license a cool technology.

One of our challenges has been to keep the quality bar high. If we build great technology, that's only because we've been able to hire great engineers. We want to build a great consumer brand that serves millions of people -- in other words, a real business. And we're taking all of the organizational steps necessary to make that happen.

Tellme.com (www.tellme.com) was launched in February 1999 by a group of employees from Netscape and Microsoft. Former Netscape managers Angus Davis and Mike McCue head up the company, and former Netscape CEO James Barksdale and former Microsoft executive Brad Silverberg are key funders. The service aims to use the telephone to provide much of the information that people now seek from the Internet.

Lou Dobbs

Founder, chairman, and CEO
space.com
New York, New York

There's something metaphysical about taking a concept, making it a reality, and creating a great enterprise. The management of any startup is the administration of the unforeseen. And space -- the focus of my startup -- is a concept without limits.

Before you even get started, there has to be absolute enthusiasm about the idea behind the business. And love of the subject matter has to exist organizationwide: Those who will provide the capital have to share your vision.

You have only one chance to create a world-class business. We brought together a small group of people who had worked together before, who had participated in the success of CNNfn, and who understood what it would take to launch a successful business. Creating a world-class company may cost a little more money. At the margin, it may even create a diversion from your core business. But the payoffs can be profound.

We're all operating in Web time. It doesn't take much more than a year and a half for a new business to become encumbered by the same constraints that affect traditional companies. You want to avoid establishing ways of doing business too quickly, and you want to avoid establishing mind-sets and procedures that are not conducive to marketplace opportunism. Bureaucracy is a state of mind, and it's remarkable how quickly that state of mind can be created.

Space.com (www.space.com) is a Web site featuring space-related information. it launched in July 1999 -- the 30th anniversary of Neil Armstrong's moon walk. Lou Dobbs helped launch several ventures while he was at Cable News Network -- including CNNfn, CNN's financial channel, and CNNfn.com. He was also anchor of CNN's daily financial news program, Moneyline News Hour with Lou Dobbs, until his departure last June.

Andrea Williams

Managing director, Equity Research
E*Offering Corp.
San Francisco, California

Today, there are more companies competing for capital and more companies competing for mind share. How do you stand out? Here are three rules for startups. First, have a differentiated product or service -- one that can capture mind share. Find a beachfront property in an area that's not already crowded.

Second, obtain capital of the highest quality, so that your money will open doors for you. Sign up with venture capitalists who have the best track records and the most-recognized brands. Investors today are savvy about recognizing the money behind a company. And get as much capital as you can early on, so that later you won't have to worry about having enough money. Go to the private as well as the public market, and do both an initial round and a follow-up round.

Third, show that your company is able to evolve. If you're a commerce company, you want to show the lifetime value of each of your customers -- and the expected growth rate of your business, based on the number of customers that you have. And once you're established, you have to go beyond business as usual. You need to keep creating new initiatives for people to latch onto.

I don't have a problem with a company not making money during its first few years in business. It doesn't do any good to be profitable in the first year if you're not going to be around later. You're running a marathon -- so remember to focus on whether your company can stay in the race.

E*Offering (www.eoffering.com) is the investment bank of E*Trade. Andrea Williams has been valuing e-companies since the emergence of commercial Web sites. While serving as managing director at Volpe Brown Whelan, she became one of Wall Street's first Internet analysts. She was also a management consultant at McKinsey & Co. She frequently appears on CNN and CNBC to discuss e-commerce and the Internet, and she writes a column for CNet. Williams joined E*Offering in June 1999.

Fernando Espuelas

Cofounder, chairman, and CEO
StarMedia Network Inc.
New York, New York

A startup is the ultimate test of yourself as a professional. Why do people climb Everest? Because it represents the ultimate test: You have to be willing to die in order to climb.

My mother and I came to the United States with $100. In 1996, I left a high-paying job at AT&T -- I was one of the company's youngest managing directors -- in order to start my own company. My mother thought I was out of my mind, and perhaps I was. My partner and I started with funding that was generated through second mortgages, 12 credit cards, and money that I borrowed from my dentist.

The first months were very difficult because we couldn't find substantial capital. Investors who focus on Latin America didn't understand the Internet. And traditional venture capitalists didn't understand Latin America.

But the most important factor was our single-minded pursuit of success. We wanted to develop the Internet industry in Latin America. From the very beginning, our theory was that every 30 days we would have a major competitor in the marketplace. So, if we didn't create more barriers to enter the market every 30 days, we would lose. That didn't happen. But it was healthy for us as a company to have that kind of focus, that kind of drive -- and that kind of paranoia.

StarMedia (www.starmedia.com),which went public in May 1999, is a leading global online network for Spanish and Portuguese speakers. It offers a portal, Internet connections, and wireless service. It was one of the first new-media companies to tackle Latin America's media monopolies, and it now has about 160 advertisers and sponsors. Fernando Espuelas, a native of Uruguay, cofounded StarMedia in 1996, along with his best friend from grade school, Jack C. Chen. Previously, Espuelas was AT&T's managing director of marketing communications for Latin America.

Julie Wainwright

CEO
Pets.com
San Francisco, California

If you're trying to start a Web site from scratch, you need to have something up within 10 weeks. If you have an idea, someone else has it too. You'll never get there if you try to put up the perfect site. I tell people to stop talking about it and start doing it! It even helps with raising money. Venture capitalists like to see something concrete. While they do get thousands of ideas, they don't get thousands of ideas that can be executed -- and executed well.

People at large corporations really do not tolerate mistakes. But when you're doing things that haven't been done before, you're going to make mistakes. It's not the mistakes but how you react to those mistakes that makes all the difference. You have to iterate. Listen to your customers constantly. Give them what they want -- and a little more.

You have to take risks. And when you take risks, you may not be everyone's best friend. When I was at Reel.com, Paramount Pictures hated the promotion that we did for Titanic. Some people there thought that we weren't right for studio work. But we shipped 1.5% of all Titanic videos in the United States through our Web site. And guess what? We blew about 6% of those orders. Was it the right thing to do? Absolutely. Was it executed perfectly? No. Sometimes, you just have to live with that.

Pets.com (www.pets.com) was launched in November 1998. Julie Wainwright joined the company in March 1999, expanding the site to feature more pet experts and to include more reference materials and health information. She also helped to secure funding from Amazon.com and Hummer Winblad Venture Partners. Previously, she served as CEO of Reel.com, a leading Internet video store, until its sale to Hollywood Entertainment Corp. in 1998. She started her career at the Clorox Co.

Joyce Meskis

President
Tattered Cover Inc.
Denver, Colorado

Business is about community. It's about constant engagement. We're living in a time of mass consumerism, and it's hard to fight the battles associated with that trend: the price wars, the location wars. The most important asset that an independent merchant has is a community tie -- a relationship that has been built over time.

That's why we make presentations to the local Rotary Club, and why we work with literacy groups. In our two stores, we hold more than 600 events a year. These involve authors reading to kids, customers making pancakes with our gourmet chef, and people discussing philosophy. Sure, a comfortable environment is important -- but human exchange makes all the difference in the world.

Training programs are important to the success of a business. Even if you have unlimited capital, you can't expect to pour it into a location, fill that location with inventory, open up the doors, and wait for hordes of customers to arrive. You also have to treat people well.

Finally, I'd like to dispel a common myth about owning your own business. A lot of people who go into business for themselves do so because they've had a bad experience as a corporate employee. They think that they want to be their own boss. In some ways, when you are the owner of a business, you have many more bosses than you ever had before. You have to remain constantly vigilant.

The Tattered Cover (www.tatteredcover.com), which opened in 1971, is one of the nation's largest independent bookstores. Joyce Meskis bought the store in 1974, after closing her own bookstore. Under her management, the Tattered Cover has expanded to include a second location. Today, both stores carry 150,000 titles, and the original store also houses a restaurant.

Eliot Kang

Founder, president, and CEO
Kang & Lee Advertising Inc.
New York, New York

If you're going to be a pioneer in a market, you have to spend at least half of your time selling that market. I used to spend 70% of my time selling the potential of the Asian-American marketplace, and many other agencies do the same kind of thing. You sell the market first and your company second.

The first thing that you have to do when you start a company in a new market is to look at whether that market is big enough. In the ad business, a market needs to include at least 10 million consumers before you can convince a company that it should target those people. And with Web sites getting hundreds of millions of hits a day, the very concept of what represents a significant number has changed.

We now represent 30% of our total market. Within that market, we can't get any bigger, because we can't take clients that compete in the same category. We knew that if we stayed at this level, we'd never be able to grow. We looked at our people and asked, "If the business stays the way it is, will they still be here in two years?" At that point, we knew that if we wanted to get the right funding and an opportunity to grow, we needed to join either another company or a network.

Kang & Lee (www.kanglee.com) was founded in 1985 under the name AMKO advertising. It was one of the first Asian-American ad agencies, and today it is the largest buyer of Asian-American media for national advertisers. Its clients include AT&T's consumer and business units; Oxford Healthcare; Sears, Roebuck; and McDonald's. In 1998, the firm joined the Young & Rubicam family of agencies. Eliot Kang is a native of Korea.

Richard Foos

President
Rhino Records
Los Angeles, California

My philosophy is simple: Love what you do. Don't do something because you hear that it's a great way to make money. When we started our record label, disco music was selling. We could easily have said, "Let's produce disco records." But we had no passion for disco music. By the time we got into business, disco was dead. If we had chosen disco, we would have failed miserably and gone bankrupt. Instead, we went for a niche that nobody else was filling. But it was a niche that we were passionate about.

Start as small as possible: To achieve 100% success, you need to grow organically. Pass up outside financing until you know that you can run the company. Starting with limited financing forces you to learn every single aspect of a business: how to balance a ledger, how to collect receivables, how to draw up contracts. If you don't understand all aspects of your business, you've set yourself up to fail.

Rhino Records (www.rhino.com), which offers more than 2,500 reissues of rare recordings, was acquired by Warner Music Group in 1998. Richard Foos and his partner, Harold Bronson, started the label in 1978. At first, Rhino issued novelty recordings, but over time it began licensing and remastering recordings from other labels. Foos got his start by selling used records from the trunk of his car.

Kirk Perron

Founder, chairman, and CEO
Jamba Juice Co.
San Francisco, California

People who start a company want to hang on to it. They want to protect what they've started. But they really need to let the people inside the organization -- and even those outside it (subcontractors, vendors) -- bring ideas to life. You have to let go a little bit.

At Jamba, we became too bureaucratic and tried to control everything, and that slowed us down. We had an idea: We'd offer juice boosts that people could take home for times when they couldn't get to Jamba. Two years later, we still hadn't implemented that idea in even one of our stores. The old way would have been to test the idea by conducting an internal project. The new way is to partner with a vitamin-supplement company and tap into its resources to bring our idea to life.

Back when I was the sole owner of the company, we didn't have a strong network. A few years ago, the question facing us was "Do we want to be a small, regional company, growing slowly and controlling everything? Or do we want to be a national brand?" For us to be national required growth, and that required us to raise more capital. Realizing our dream meant owning a smaller piece of a bigger company.

Jamba Juice (www.jambajuice.com) has 270 stores nationwide and brings in about $150 million in annual sales. Kirk Perron previously worked at Safeway and Vons grocery stores.

Didier Benchimol

President and CEO
iMediation
Paris, France

There's a new wave of managers and leaders who can quickly build a company and take that company global. They start up in many countries at once, so that after 12 months the company has a balanced business in Europe, the United States, and Asia. The old, restricted view that you can start in your domestic market and then progressively expand, taking countries one by one, is completely obsolete. You need to find the right leaders and managers -- people who are used to living in various countries and dealing with various cultures.

At iMediation, our managers represent eight nationalities, and we launched the company simultaneously in Germany, the United Kingdom, France, and the United States. Of course, that approach is a little more costly: You have to provide sales, marketing, and personnel services in many places. On the other hand, it forces you to be much more aggressive from a business and marketing standpoint, because investors insist on seeing revenue right away. We started to sell and market our product six months earlier than a Silicon Valley company would.

The challenge is to build a company that is global in its reach but local in its execution. The point is not that we have our headquarters in Paris and that we tell our people in America what to do. The local team knows better, so we assign clear duties and emphasize communication.

iMediation (www.imediation.com), founded in March 1998, is a global provider of e-commerce solutions to manage cross-selling, comarketing, and distribution. Before joining iMediation in the fall of 1998, Didier Benchimol spent four years serving as vice president and general manager of Netscape Communications Europe. Previously, he ran Vulcan Ventures for Paul Allen's multimedia companies in Europe.

Daymond John

CEO
FUBU
New York, New York

You have to start with knowledge of your consumers. In our case, we are the consumers: We live the same life. It was easy to jump in because we had that knowledge. We knew that there was a huge void: We saw that there were no young African-American designers -- even though young African-Americans spend heavily on fashion.

From the start, we also dealt with consumers one-on-one. We learned a lot that way: How do you find that magic price point at which everything starts to move? How important is quality to consumers? Will they come back again, or were they just buying a novelty item?

Exposure was critical for us. We were the first clothing maker to use music videos to market our products, asking celebrities and friends like LL Cool J to wear our clothes in their videos. That's the best way. We would place a garment in a video and have it running as a "commercial" on TVs throughout the whole country. As a result, we got a free endorsement.

FUBU (www.fubu.com) sells its clothing through more than 500 stores, including Macy's, Foot Locker, and Nordstrom. Recently, FUBU expanded its line to include swimwear, eyewear, and timepieces. Daymond John started FUBU in 1992, creating tie-top hats embroidered with the "FUBU" logo and selling them from his home. Later, he added baseball caps, T-shirts, hockey jerseys, and other items to his collection.

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