Art of The Lean Startup

76 · BUSINESS 2.0 JUNE 2006
Got a great idea?
There’s never
been a better
time to turn it into
a great company.
Here’s a 16-step
guide to help you
do it right.
BY MICHAEL V. COPELAND
AND OM MALIK
ILLUSTRATIONS BY
WWW.XPLANE.COM

JUNE 2006 BUSINESS 2.0 · 77
It’s the spring of 2006, and the sweet scent of entrepre-
neurship is in the air. Growing numbers of Americans are
pursuing their startup dreams. According to the National
Venture Capital Association, seed-level VC funding nearly
doubled in 2005. This year, based on current trends, it could
double again. In Delaware, the country’s incorporation cap-
ital, new business formation was up 19 percent last year,
the highest one-year growth rate on record.
In other words, there’s never been a better time to start your
own company. New technologies are creating new business op-
portunities on the Internet, on mobile phones, in consumer
products, and in information services. At the same time, many
of these technologies have radically reduced the costs asso-
ciated with launching a new venture. In the late 1990s, a typ-
ical VC-funded startup needed roughly $10 million to amass
the infrastructure and staff required to carry the company from
its first business plan to its first product launch. Today that
cost has been reduced to just $4 million—and in many cases
way, way less. The barriers to entry have never been lower.
While birthing a company is easier, succeeding is as diffi-
cult as ever. The general rule in the investment community
is that only about a third of all startups ever turn a profit.
Another third limp along at a break-even level, and the rest
end in failure. Top among the reasons young companies fail
are problems such as incorrect market focus and misguid-
ed executive leadership. With that in mind, we wanted you
to have all the benefit of hard-earned experience without
having to actually endure the pain of making your own mis-
takes. We spoke to dozens of experts—seasoned entrepre-
neurs, early-stage investors, venture capitalists, and first-
time CEOs—to understand what they’ve learned about the art
of getting a new company off the ground. Then we set out to
create a set of blueprints describing just how to do it.
There are no guarantees in the world of entrepreneurship.
But there is a right way to go about it, and we’ve mapped
the process out for you here. As for the rest—well, that’s en-
tirely up to you. You can thank us later.
PROCEED TO PHASE ONE

Your role as a spectator who merely watches as other adven-
turous souls launch their own startups is about to end. The de-
cisions you make at this early stage of the game will do much
to shape the long-term destiny of your venture. Most of all,
don’t procrastinate. If you don’t act on your burst of business
insight, someone else surely will.
You have a brilliant idea. It’s shrewd. It’s
timely. You think about it so much it keeps
you up at night. It might even make you
rich. There’s just one thing left to do: Make
sure it really has legs. The only way to do
that is by bouncing your idea off as many
people as possible. Friends and family
probably can’t provide the critical insight
you need. Track down at least a dozen
people with expertise in the market you
intend to enter. You want candor and hon-
esty, not diplomacy. Understanding why
your idea is flawed is as useful as knowing that
it’s pure genius. Many will likely express sup-
port, but the real question is this: Would they
pay money for your proposed product? Use
each conversation to sharpen how you explain
what your company will sell—if you can’t de-
scribe the product clearly and concisely, how
can you possibly sell it? Finally, before saying
goodbye, always get the name of another per-
son with whom you can discuss your idea.
STEP
1
Stress-Test Your Big Idea
OBJECTIVE: DEBUG AND PERFECT YOUR BUSINESS BRAINSTORM.
STEP
2
Starting a company isn’t just a full-time job; in
many cases, it’s three full-time jobs. The ideal
founding team is a triumvirate that includes an
ace technologist, a big strategic thinker, and a
dealmaker who focuses on sales and market-
ing. Although everyone must have relevant in-
dustry experience, a good Rolodex, and the
willingness to wear many hats, trust and good
judgment are the most essential ingredients.
Expectations should be clearly laid out, and
the founders’ financial interests should be mu-
tually aligned. “You need to feel confident that
your co-founder will fight for a deal as hard as
you would,” says Dan Gould, co-founder of on-
line news aggregator Newroo. It’s tempting to
partner with good friends, but that’s not nec-
essarily a pathway to success. In fact, it’s dan-
gerous—under the stress of running a busi-
ness, your friendship will surely be tested and
quite possibly destroyed.
Build Your Founding Team
Five Qualities to Look for in a Co-Founder
1. Loyalty to the business idea.
2. Honesty, including the ability to acknowledge errors and mistakes.
3. Versatility to focus on more than one aspect of the company.
4. Connections and the ability to attract talent to the team.
5. Flexibility in the face of changing circumstances.
TIP
PROCEED TO STEP 3
Establish a CompanyPHASE
ONE $$$ REQUIRED: $15K to $25K
WHITEBOARD: Treat it like an incubator for your best
thinking. Write. Revise. Erase. Repeat.
MOBILE PHONE: The one you have is fine, but make sure
you’ve signed up for 1,000 prepaid minutes.
NEW CREDIT CARD: American Express’s Platinum Busi-
ness offers zero percent interest for six months.
ACCOUNTING SOFTWARE: Nothing fancy for now. Quick-
Books Simple Start does the trick for $50.
T O O L S Y O U ’ L L N E E D
W O R D S O F W I S D O M
“People pooh-poohed our idea for more than a year.
We took that to mean either we weren’t explaining it
well or we were dead wrong. Yet the more we studied
the problem, the more clear it became that we weren’t
wrong. What you forget—because you’ve been living
and breathing this idea for so long—is that others
may not see what’s obvious to you. You need to con-
nect the dots for them. We did that by finding a
metaphor that explained what our company would
do.” — GIBU THOMAS, CEO and co-founder of personal
media synchronization startup Sharpcast
OBJECTIVE: JOIN FORCES WITH OTHER EXECS TO NAVIGATE THE CHALLENGES AHEAD.

A business plan is neither a core asset nor a sacred
text. It’s just a tool to help focus your ideas and a
conceptual summary to share with potential in-
vestors, advisers, and employees. The business plan
sells your vision for the company: why it’s viable,
why it’s better than anything else out there, and
why your team has what it takes to make it happen.
It should also detail key factors that relate to the
company—target markets, goals, product attributes,
revenue projections, competitive differentiators, and
founders’ resumes. Visit the Small Business Adminis-
tration’s website (www.sba.gov) or Bplans.com for
an overview of the structure and components of a
typical business plan, as well as links to dozens of
sample plans. But the most important thing is a
well-honed executive summary that’s no more than
three pages long. Grab the reader’s attention by
starting with a simple two-sentence description of
your company and what it will do. (Rest assured,
you’ll use those two sentences often.) And no mat-
ter what, don’t fall in love with your business plan—
it’ll change many times in the months ahead.
What’s in a name? Plenty. It will make a
first impression, carry brand equity, and
provide a foundation for every marketing
effort you’ll ever launch. Naming gurus like
David Placek of Lexicon Branding argue
that startups should look for names that
are either simple and easy to understand
(like Salesforce.com) or quirky and memo-
rable (like Google). Some names combine
the two: Narendra Rocherolle settled on
30Boxes, an easy-to-remember name for
his calendaring startup that also alludes to
a monthly datebook. But creativity is
only part of the naming challenge;
there are legal concerns as well.
Before you become attached to
any name, check the U.S. govern-
ment’s trademark website
(www.uspto.gov) to make sure no
company serving an overlapping market
has staked out a similar moniker. You don’t
need a lawyer to file a trademark of your
own, but the $500 to $700 you’ll spend
for a professional trademark search—from
a company like Thomson CompuMark—is
a smart investment before you sign papers
that make your name official.
STEP
3
STEP
4
Play the Name Game
Draft a Business Plan
OBJECTIVE: MAP OUT THE MARKET AND EXPLAIN HOW YOU FIT IN IT.
OBJECTIVE: GIVE YOUR STARTUP A HANDLE THAT WORKS.
Four Common Business
Plan Mistakes
1. ASKING POTENTIAL INVESTORS TO SIGN A
NONDISCLOSURE AGREEMENT. It’s a rookie
move. Besides, they won’t sign anyway.
2. SPENDING TOO MUCH TIME DESCRIBING THE
MARKET. Instead, provide lots of detail on
your strategy to dominate it.
3. MAKING WILDLY OPTIMISTIC PROJECTIONS
AND ASSUMPTIONS. Nothing will get the
door slammed in your face faster. Save the
hockey sticks for the NHL.
4. EXAGGERATING YOUR EXPERIENCE.
They’ll eventually learn the truth, and
when they do, your credibility will be com-
promised. Permanently.
T H I N G S T O A V O I D
Become Master of Your Domain
About 30 million new dotcom domain names are reg-
istered each month. Which means that coming up
with a name for your company and matching it to an
available Internet domain is very difficult. Check
Instantdomainsearch.com to see what’s available. If
your preferred domain is in use, you have three choices:
1. ADAPT. In the Google age, it’s not quite as important
to get a URL that exactly matches your company name.
Come up with a relevant adaptation, like acmewidget.com,
instead of just acme.com. The Nameboy.com website
generates lists of available permutations.
2. BUY FROM A BROKER. Some names are owned by
squatters who sell online real estate through brokerage
services run by popular domain-name registrars. Prices
range from $10 to the tens of thousands. Discounters
like GoDaddy.com and 1and1.com offer brokerage ser-
vices, as do Networks Solutions and Register.com.
3. MAKE AN OFFER. If your desired name is already in
use by an individual, politely inquire about buying it.
Tony Conrad, co-founder of search company Sphere,
spent months tracking down the owner of Sphere.com,
which he then bought in exchange for cash and equity.
“The equity was the important part, because it allowed
[the former owner] to stay connected to the name,”
Conrad says. If cash is your only currency, don’t over-
pay: $25,000 should be your absolute top end.
T I P
PROCEED TO STEP 5

A prototype is where the rubber starts to hit the road: It’s the first
physical embodiment of your business idea, and a tool you’ll use
to attract the resources you need to grow. Don’t confuse a proto-
type with the final product—a distracting and potentially fatal mis-
take. Pretty looks aren’t important. A good prototype is just a
working demonstration that showcases what your product will do.
Show your finished prototype to a dozen or so potential cus-
tomers and investors who can validate your idea, define key fea-
tures, and guide your product development.
PHASE
TWO T O O L S Y O U ’ L L N E E D
Patents and patent law are a major headache for
tech and Web-based startups, so you’ll want legal
guidance. Gordon Davidson, a partner with Fenwick &
West in Mountain View, Calif., warns that the most im-
portant thing is to avoid falling afoul of a “blocking
patent”—one that defies any engineering work-
arounds. Just ask Research in Motion, maker of the
BlackBerry, how onerous that can be.
As you start to share your ideas with outsiders, you
also want to protect your intellectual property. For
that, consider filing for a provisional patent; it doesn’t
require the formal claims of a full patent but allows
you to lay claim to an idea as “patent pending.” Sub-
mitting a provisional patent application costs about
$200 if you do it yourself, while a full patent applica-
tion costs $12,000 to $15,000, including legal fees.
SPEC-DOCUMENT SOFTWARE: Omni Outliner and
Microsoft Visio simplify writing product definitions.
DEVELOPMENT SERVER: Lease one for $300 a month
from a Web hosting company like ServerBeach.
COLLABORATION TOOLS: Basecamp is a cheap Web-
based application for sharing files and documents.
VOIP CALLING SERVICE: Skype is a free application
that lets you make long-distance calls from your PC.
Patent Law 101
The U.S. Patent and Trademark Office will
grant a patent to any new and useful
process, machine, manufacture, composi-
tion of matter, or new and useful improve-
ment thereof. Confused? Just remember
there are two main types of patents:
TECHNOLOGY PATENTS describe and pro-
tect how a particular device, mechanism,
or software program works—the classic
“better mousetrap.”
BUSINESS PROCESS PATENTS describe and
protect a mechanism for making money
and how it interacts with underlying tech-
nologies. Amazon.com holds such a
patent for its one-click shopping feature.
Your startup may consist of just a few
warm bodies crammed into a living room,
but you still need to establish it as a legal
entity. A formal corporate structure solidi-
fies the standing of the founders and pro-
vides potential investors with the assur-
ances they need to participate in the
company’s financial evolution. Incorpora-
tion also provides tax benefits and all-
important liability protection. Hire an ex-
perienced lawyer who specializes in
setting up startups—many will even defer
payment until the first round of financing.
If your lawyer likes your business plan, he
or she may also become a crucial source
for later introductions.
STEP
5
STEP
1
Stake Out Intellectual Property
OBJECTIVE: AVOID INFRINGING ON OTHERS’ PATENTS AND SECURE SOME OF YOUR OWN.
Incorporate Thyself
OBJECTIVE: ADOPT THE CORPORATE FORM THAT’S BEST FOR YOUR GROWTH PLANS.
What’s Right for You Inc.
There are three main types of incorporation. Here’s
how to figure out which is most appropriate.
S CORPORATION: Fine if you don’t plan to raise money
from outside angels or VCs. Only one class of stock is
allowed. Taxed at a lower rate than larger corporations,
but enjoys the same liability benefits.
LIMITED LIABILITY COMPANY: Functions like an S-corp,
but with no outside shareholders. A good choice for
professional services firms that don’t need to solicit in-
vestment. Can be converted to a C-corp later.
C CORPORATION: Preferred by most medium-size to
large companies. Allows for multiple classes of stock (a
common requirement for angel and VC investors). Tax-
ation rates for C-corps are higher than for S-corps.
T H E F I N E P R I N T
T H E F I N E P R I N T
Prototype the Product
$$$ REQUIRED: $100K to $500K
PROCEED TO STEP 2

Prototyping is an iterative process.
Start simple, with a basic mock-up,
artist’s rendering, or Photoshop
screen shots. Show these to a few
potential customers and use their
feedback to define the specifications
of your working prototype. Hire inde-
pendent contractors if you need spe-
cialized expertise to build or code
the thing, but it’s best to stay local.
You’ll be gathering input on a daily
basis and making revisions al-
most as often, so you’ll want
your contractors nearby—in
town, if not under your roof.
Keep them close, but be para-
noid. Your attorney should draw
up confidentiality agreements
and noncompete clauses; make
all contractors sign them.
The right time to raise the first round of
money varies from startup to startup.
Some companies—mostly software or
Web-based ventures—need little cash to
get off the ground. But if you’re building
a physical product, you’ll be looking for
funding earlier in the game. That’s
where angel investors come in: Unlike
venture capitalists, who usually wait un-
til a company has a working product,
they specialize in early-stage startups.
The main thing to understand is that
not all money is the same. Friends and
family are a natural place to start, but
keep their investments modest to avoid
throwing your relationships off balance.
Never take investments from anyone
who is not a so-called accredited in-
vestor—an individual with a net worth
of at least $1 million. Remember, it’s not
just money you want; you also want
brainpower, connections, and experi-
ence. “You always want at least one
heavy hitter in an angel round,” says
veteran Silicon Valley angel Jeff Clavier.
Instead of treating their investment as a
loan, some angels may expect a stake in
your company, so set aside 10 to 15 per-
cent of your equity to allocate among
early-stage investors. Get used to giving
away ownership: In a venture-funded
startup, the original founders may ulti-
mately retain as little as 5 to 10 percent
of the original equity.
SEARCHING FOR ANGELS
What to look for in early-stage investors.
Prototyping Essentials
DESIGN AND PHOTO EDITING: GIMP is an excellent and free alterna-
tive to expensive programs like Adobe Photoshop.
PRODUCT DESIGN: QCad is an open-source, 2-D computer-aided de-
sign package that sells site licenses for $260.
COLLABORATION SOFTWARE: Subversion is an open-source tool for
tracking changes in files or code.
Your advisory board is a group of six to 12 people
who will provide expertise in the industry you hope to
tackle, useful connections, potential funding, or (ide-
ally) all three. At this early stage, it makes sense to
load the board with people who can provide techni-
cal insight about your product, but you’ll also
want a few startup veterans who can answer
questions about running a young company. In ex-
change for equity in the company—typically 0.1 to 1
percent—you should expect at least four hours a
month of their time. Avoid big group meetings;
they’re inefficient. Instead, bring in specific advisers
for task-oriented discussions as needed.
Finding Contract Talent
DESIGN: Scour local schools. The American Institute of
Graphic Arts (www.aiga.org) and Creative Hotlist (www.
creativehotlist.com) list designers looking for work.
HARDWARE: If you need help with the electronic, mechanical,
or physical configuration of your prototype, try the directory
at Coroflot (www.coroflot.com) to find freelance professionals.
SOFTWARE: You can post jobs to Craigslist, Dice.com, Mon-
ster.com, and SimplyHired.com. Marketplaces like Elance,
IPswap, and RentACoder match talent with projects.
STEP
2
Create an Advisory Board
OBJECTIVE: FORMALIZE THE NETWORK OF PEOPLE WHO CAN HELP YOU MOST.
STEP
3
Build Your Prototype
OBJECTIVE: TAKE YOUR PRODUCT OUT FOR ITS FIRST TEST-DRIVE.
T I P
P A R T S L I S T
“We wouldn’t be here today without the
advisers we picked specifically for their
expertise in our technology. They led me
to my co-founder and CTO and were able
to help on technical issues. It doesn’t
work to bring on general, name-brand
technology people as advisers. They end
up frustrated that they don’t have much
to contribute, and though you think
they’ll impress potential investors, they
don’t.” — MUNJAL SHAH, CEO and co-
founder of photo search startup Riya
PROCEED TO PHASE THREE

You’re ready to make some permanent (or semi-
permanent) hires. For most startups, the bulk of
your hiring here will be technical—people who can
get your product to beta. Although it’s shrewd to
source talent globally, your core product-develop-
ment team should be local. Enthusiasm is a precious
commodity; look for people who are excited about
your planned product. Hire the best you can afford,
but as a general rule, Silicon Valley startups assume
a burn-rate cost of $11,000 per person per month.
STEP
1
Where to Find Workers
CONTRACTING: Part-timers can help get a
company started, but director-level staff
should be permanent hires. Always visit new
overseas contractors to launch the relation-
ship. Nasscom.org provides listings of India’s
top outsourcing shops. Russoft.org does the
same for Eastern Europe.
RECRUITING: Job boards can be useful, but
old-fashioned networking often yields bet-
ter results. When you interview, go with
your gut: If the potential hire doesn’t feel
right, it probably isn’t.
POACHING: Snatching workers away from ri-
vals is ideal for adding sales staff or senior-
level talent. You’ll need to offer better com-
pensation than they have now, but the most
effective lure is the opportunity for them to
put their stamp on an all-new venture.
T I P
If a prototype is the first manifestation of your big
idea, the beta transforms it into a product you might
actually sell. The focus here is on usability and de-
sign. Your task is to create something so simple, so
powerful, and so effective that people beg to be-
come beta testers. As you amass comments and
feedback, look for opportunities to simplify produc-
tion and keep your cost structure lean—that’s much
harder to do after the product is released.
Start Staffing Up
OBJECTIVE: BUILD THE CORE TEAM THAT WILL CARRY YOU INTO THE FUTURE.
STEP
2
Accounting, payroll, and benefits administration
aren’t glamorous, but they’re important parts of
maximizing limited resources and keeping staff
motivated. Early on, many startups tap one of the
founders to keep the books using software like
QuickBooks. That’s fine when you have fewer than
a dozen employees, but as you grow, a part-time
bookkeeper or administrative assistant can help.
Call in professionals for the heavy lifting, in the
form of outsourced payroll and benefits adminis-
tration services. Staffing is the opposite: In a small
company, each personality impacts the team, so
avoid using outside recruiters and headhunters.
Who’s Who in Administrative
Outsourcing
PAYCYCLE automates payroll processing and
tax reporting. Best for smaller companies.
PAYCHEX works with small to midsize firms to
manage payroll and tax compliance.
CERIDIAN provides services ranging from
payroll to benefits administration.
TRINET provides health-plan and benefits
services to larger firms. May be too expen-
sive for early-stage companies.
Better Living Across Time Zones
Contract talent is a global commodity, but location
matters if you want to avoid middle-of-the-night
teleconferences. On the East Coast, that means hir-
ing in Eastern Europe, where the end of their work-
day corresponds to the middle of yours. West
Coast companies should opt for China and India,
where your day ends as theirs is getting started.
TIP
PHASE
THREE
ENTERPRISE-LEVEL E-MAIL: Providers like the Message Center offer
hosted exchange service for about $10 a month per user.
PHONE SERVICE: A hosted system from M5 Networks costs about
$50 a month per extension for unlimited calling.
T-1 BROADBAND: $500 per month buys you heavy-duty service from
a provider such as AT&T, Covad, or Verizon Business.
FEEDBACK COLLECTION: SurveyMonkey is a handy tool for setting up
online questionnaires and compiling user comments. Prices start at
$20 per month.
Develop the Beta Product
$$$ REQUIRED: $500K to $1M
Assemble Your Back Office
OBJECTIVE: LET PROS HANDLE THE ADMIN SO YOU CAN FOCUS ON THE REST.
P A R T S L I S T
PROCEED TO STEP 3

The product your company was created
to sell may not be the thing you later un-
veil in the marketplace. “You’re going to
change your business three times by the
time you’re ready to launch,” says angel in-
vestor Jeff Clavier. “Get used to it.” You
may be focused on the wrong market, or
even the wrong product. Listen carefully,
keep an open mind, and revise your pro-
jections and analysis accordingly. The as-
sumption these days is that software and
Web companies should break even after
$20 million in investment; a hardware or
consumer product company should do so
with $30 million.
Most venture capitalists will tell you that
they invest in people, not business
plans. They like experienced entrepre-
neurs they’ve worked with before. With
luck, you’ve got one of those people on
your team, preferably as CEO. But if
you’re not a veteran and can’t find one,
don’t fret. A common misstep is to
pitch the wrong partner at a VC firm—
that will get your business plan nixed
immediately. Find the partner whose
expertise aligns with your business and
send that person your well-honed exec-
utive summary. (Save the full-blown
plan for later.) If you get a meeting,
highlight your experience and what dif-
ferentiates your startup from others,
but keep your ego in check. In such a
close-knit business relationship, VCs
much prefer to work with people they
get along with easily.
In an early-stage round, VCs will
want 40 percent of the company in re-
turn for their investment. VC term
sheets are notoriously demanding, but
the place where entrepreneurs can suf-
fer most is in the liquidation prefer-
ences. In essence, liquidation prefer-
ences determine how money gets
divvied up if your company is sold.
Your VCs are entitled to protect their
downside, of course, but not to the ex-
clusion of common stockholders—man-
agement and employees—who also
want their equity to be worth some-
thing. Proceed with caution.
WHAT A VC WANTS TO SEE IN YOU
How to woo those fussy venture capitalists.
STEP
3
Beta testing used to be a drawn-out ordeal, but for
software, Web services, and online media companies,
“agile development” has redefined the rules by em-
phasizing the release of fully functional products, ask-
ing end users for input, and addressing suggestions
quickly to iron out bugs or add features. The lessons
of agile development apply to other kinds of startups
as well. Physical objects are obviously harder to alter,
but the important thing is to solicit large amounts of
user feedback (often by e-mail), respond to each
comment, and incorporate changes quickly. Keep in
mind that the factors that distinguish a successful
product from a dud aren’t always obvious. Guidance
comes from highly granular research that measures
the effectiveness of individual attributes and features.
“Test everything with real people—it’s un-
believable how helpful this is. Go find civil-
ians, real people who use [products like
yours] because they have to and not be-
cause they love to. Find them in Starbucks
or at the library or in a college computer
lab. Give them $20 for 20 minutes, and
you’ll be paid back a hundred times over.”
— “Entrepreneurial proverb” from MARC
HEDLUND, entrepreneur-in-residence at
O’Reilly Media. (For more of Hedlund’s
proverbs, visit radar.oreilly.com/archives/
2006/03/entrepreneurial_proverbs.html.)
Launch Your Beta Test
OBJECTIVE: SOLICIT THE COMMENTS YOU NEED TO PERFECT THE PRODUCT.
STEP
4
Revisit the Business Plan
OBJECTIVE: TRANSLATE ALL THAT YOU’VE LEARNED INTO A MORE REALISTIC BLUEPRINT.
Flickr’s New Image
Ludicorp, the original parent company of online photo
site Flickr, began as a startup developing a massively
multiplayer game called the Game Neverending. As
part of the initial software development, the company
developed a tool that allowed people to share photos
and chat about them. As more and more of the inter-
nal team and their friends began to use the tool, it be-
came clear that providing technology to share photos
in a unique way was the real opportunity—a shift that
led to the creation of the Flickr website and an all-new
business model. The Game Neverending was never
launched, but Flickr was acquired by Yahoo in 2005
for an estimated $30 million.
C A S E S T U D Y
PROCEED TO PHASE FOUR

The testing is done, the product has been refined, and it’s almost
ready for release. Now you need to find paying customers, which
means it’s time to reassess your staffing needs. A rule of thumb is
that a company should have about 20 employees at the time of
launch, with roughly 60 percent of its headcount devoted to prod-
uct development and engineering and the rest focusing on manage-
ment, sales, and marketing. Ideally, this is just the first of many
launches to come. Try to nurture the momentum your team will
need to think beyond the excitement of the initial release.
PHASE
FOUR
You have new investors, a broader net-
work of contacts, and a slew of enthusi-
astic backers. Put the best of them to-
gether to create a formal board of
directors. Your board will likely include at
least one representative from your fund-
ers. Angel investors may not demand a
seat on the board, but most VCs insist on
it. The rest of your board should consist
of people who understand your business, have
practical operating experience, and can lever-
age their relationships to open doors with po-
tential customers. Cultivate a range of exper-
tise on your board, spanning finance,
technology, marketing, management, and mer-
chandising. The excitement of being involved in
a red-hot startup is usually the main incentive
for prospective board members. Equity is sec-
ondary, but here’s a general guideline: Board
members should receive the same equity pack-
age as your director-level employees.
IN-HOUSE NETWORKING: Make it your own. You’ll
need networked storage, commodity servers, and
a place to put it all.
E-MAIL/COLLABORATION SOFTWARE: Zimbra is
more affordable than Microsoft Exchange.
A PBX PHONE SYSTEM: Asterisk PBX is a free tele-
phone exchange that can be installed on any
cheap server.
BUSINESS PROCESS SOFTWARE: NetSuite and
Salesforce.com offer monthly subscriptions for
customer-relationship management tools.
Launch the Product
$$$ REQUIRED: $1M to $3M
As you get ready to come to market,
your staffing priorities will shift from the
technical team that built the product to
the marketing and sales team that will
sell it. Your VP for sales and marketing
should need only one or two salespeople
to start pounding on customers’ doors.
It’s great if they can close a few early
deals, but the initial emphasis should be
to assess how potential customers re-
spond to your sales pitch. Once they find
the pitch that works, institutionalize
it throughout your company. Mar-
keting efforts should have a specif-
ic goal that supports your company’s
strategic objectives. Make sure all your
sales and marketing initiatives are pre-
cisely targeted to achieve them.
STEP
1
Build a New Board of Directors
OBJECTIVE: EXPAND YOUR NETWORK AND CREATE THE PERFECT BRAIN TRUST.
STEP
2
“The people on my board are people I would love to
hire but could never afford. They sit on our board be-
cause they’re excited about our company and want to
have a real impact.” — BRAD OBERWAGER, CEO and
founder of startup juice and produce company Sundia,
who just landed outgoing Sunkist CEO Jeff Gargiulo to
serve on the board of his year-old company
Develop the Sales and Marketing Plan
OBJECTIVE: ESTABLISH A TEAM TO IMPLEMENT A TARGETED STRATEGY.
Focus! Focus! Focus!
When Krugle launched at the Demo conference in Feb-
ruary, it became one of the great successes of the
semiannual startup dog-and-pony show—not so much
for what happened at the show, but for what happened
afterward. Krugle is a search company that helps pro-
grammers find open-source software code. Most start-
ups at Demo don’t have a marketing strategy for the
event, beyond just showing up. But the Krugle team
had specific goals: Position itself as the most formida-
ble player in the market, attract beta testers, and se-
cure additional investment. With its VCs in tow, Krugle
came to the show, trumpeted $1.2 million in funding,
and wowed everyone with its polished demo. The re-
sult? The company signed up more than 35,000 beta
testers, landed another $5 million in funding, and is
now recognized as the market leader.
C A S E S T U D Y
PROCEED TO STEP 3

Although seasoned entrepreneurs recommend toil-
ing in your proverbial garage as long as possible,
there comes a time when working remotely begins
to take a toll on productivity—typically when your
company has more than 10 full-time employees. In
theory, opening an office should be cause for cele-
bration: It’s an opportunity to hang your shingle over
an actual front door. In practice, it’s perilous: Many
young companies go belly-up after locking them-
selves into expensive real estate deals. Treat your
first office as a temporary expedient. Figure out the
minimum total square footage you need today, and
how much you might need in the next 12 months.
(Assume 80 to 100 square feet of floor space per
worker.) Executive suites aren’t prestigious, but the
leases are flexible, and most come with high-speed Internet connections,
phone systems, printers, and copiers. (Searchofficespace.com is a good
one-stop resource.) Another option is to share space with another start-
up or sublease space from a more well-established company—moves that
can reduce leasing costs by as much as 50 percent.
There are two ways to bring a new prod-
uct into the world. With the quiet ap-
proach, a price tag is attached and beta
customers transition into paying cus-
tomers. That’s great if you have a clear no-
tion of who your customers are and your
sales team has a comprehensive list of
them. More likely, however, you need to at-
tract a little attention. Industry trade
shows are a common way to introduce
yourself, but the best reason to launch at a
show has nothing to do with making a
grand entrance: It’s the hard deadline a
trade show creates. A public launch im-
poses a drop-dead completion timeline for
everything your team is working on, and
that counteracts the impulse to keep tin-
kering. Set specific but realistic publicity
goals: a short list of journalists to reach,
the number of blog mentions you want, a
target for website hits and registrations.
Treat early customers like VIPs. (Each early
adopter is typically in a position to shape
the buying behavior of 10 prospective cus-
tomers.) Then pause for a moment to ap-
preciate all that you’ve accomplished. It’s
probably too soon to know what happens next, but you’ve suc-
cessfully reached the end of the beginning. Good luck! ■
Michael V. Copeland (mcopeland@business2.com) and Om Malik
(omalik@business2.com) are senior writers at Business 2.0.
STEP
3
Open an Office
OBJECTIVE: BRING EVERYONE UNDER ONE ROOF AS CHEAPLY AS POSSIBLE.
STEP
4
The Four Deadly Sins of
Office Real Estate
1. OVERPAYMENT. Rent should be no more
than 4 to 6 percent of total operating costs.
2. OVERIMPROVEMENT. Resist the tempta-
tion to renovate an existing space or
splurge on furniture and fixtures.
3. OVERCOMMITMENT. Assume that your
first office is temporary. Try to avoid sign-
ing a lease for longer than 12 months.
4. OVEROPTIMISM. Plan conservatively.
Short-term overcrowding is less trouble-
some than paying for unused space.
T H I N G S T O A V O I D
Hit the Market
OBJECTIVE: STOP FIDDLING AND START SELLING!
Building Buzz on the Cheap
No money for an elaborate marketing campaign? Here
are three relatively inexpensive ways to jump-start sales.
GIVE IT AWAY. If you’re selling a physical product or fee-
based service, compile a list of the people you’d most
like to have as customers. Then give them the product
for free. That’s how Brondell built buzz for the launch
of its Japanese-style electronic toilet seats. Everyone
on a marketing agency’s list of “the 100 most influen-
tial people in Silicon Valley” received one of Brondell’s
seats for free, and the product is now sold in Home De-
pot and Bed Bath & Beyond.
THINK LIKE A BLOG. Weblogs are the obvious guerrilla
route to publicity, but don’t treat them like other media
outlets. Online, it’s essential to hone your message to
an easy-to-digest length and keep it consistent. For ex-
ample, Krugle’s “Find code. Find answers.” Says mar-
keting consultant Don Thorson, “Three words is ideal,
seven is OK. If it’s 15, you’re screwed.”
CREATE A CLEVER GIMMICK. A simple stunt can generate
a major splash if it’s surprising, focused, and well tar-
geted. In the early days, Salesforce.com employees
“picketed” competitors at industry events, marching
and carrying signs emblazoned with the hosted appli-
cation provider’s battle cry: “No more software.”
T I P

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