The future of San Francisco startups is small and frugal teams working remotely
Silicon Valley has always changed rapidly over the years, and crises like this one accelerate the process. If you created your startup recently, think to trim the fat even in the founding team.
It's common to read about two co-founders in a "garage" building a tech startup. Nowadays, garages are called co-working spaces, places where anyone can rent a desk for a few hundred dollars a month. In San Francisco, you can have a flex desk starting at $400 a month.
At the very beginning, with no money in the bank account, the team is usually composed only of founders. Any member of the founding team works on multiple areas, and the most common configuration is two or three co-founders. Labels on business cards—like CEO and CTO—don't reflect what founders do every day, and anyone is busy executing anything that is needed to make the product evolve quickly and onboarding customers.
The founding team has to be assembled very carefully, and anyone on it has to be essential to the company's success. In the pure software space, you only need a couple of people to start:
One person—typically the CEO—who's excellent at working on the business side
One person—typically the CTO—who's a great—full-stack—coder.
If you are lucky, you can have a third person on the team helping writing the code. He usually is a company co-founder or the first employee with a minority stake in the company—from 2% to 5%.
The CEO should be someone very eclectic:
She as to take care of any boring company matters like compliance, accounting, tax filing.
She's in charge of selling the product to investors, users, and new workforce joining the company.
She's responsible for any marketing activities like content production, social media, and promotion to vertical communities.
She needs to be there to solve any possible problems and developing the business. The only exceptions are issues in software development, even if having a CEO who can code well is a good thing.
She takes care of talking to users and customers.
The primary ability I appreciate in a CEO is to decide fast.
The CTO's main task is to design the software architecture, create the application, and manage production—plus all the usual things that must be in place to get a fully functional product development cycle.
The most precious quality I love in a CTO is the ability to execute fast.
What about design? Design skills are becoming more and more essential to create a killer product. In an ideal situation, the third element in the team should be a designer with strong front-end skills as well. That would allow to the CTO to stay mostly concentrated on the application back-end.
Because a Pre-Seed round is usually in the $500,000 space, it is barely enough to give the company enough runway for 18 months for three people.
Many investors in Silicon Valley, including myself, love small and frugal teams with 2 or 3 co-founders max.
Pretty often, though, I see startups with four or five, even six co-founders, and the first question is:
What do all these people do?
Why does the CEO need those guys in the founding team to create a massively successful company?
I co-founder is a lot different from a valuable employee. I see teams with CMO, CFO, COO and CCO aboard since day one, and that's weird to me. Too many people tend to get investors worried because it's against the frugal approach thesis that most of the VCs in this industry share.
With bigger teams, there are also other factors to be considered, like the founders' equity split—and dilution.
Usually, every team has one or two people that are indispensable to make a successful company, and with too many co-founders, those guys get too diluted. The result is that they won't have enough "skin in the game" in later rounds. Of course, not all co-founders should have an equal portion of the company equity, but teams with the same amount of ownership for each member are more united and cohesive.
Most of the time asking people why the founding team is so crowded I get answers like:
We are friends and started this thing together in college.
So what? Do all the founders share the same level of commitment and obsession to make the company a tremendous success? Is anyone skills so unique and precious to the CEO?
Before adding co-founders to your team, always ask yourself many questions:
Do I need his or her unique skills to make this company a massive success?
Do my co-founders understand how much time and sacrifice they need to put in this company at least for the next ten years?
A unicorn needs at least 5 to 6 funding rounds, and the average dilution per round is 20-25%. Do anyone has enough equity to keep him or her motivated until the exit as a co-founder?
For example, if we simulate the ownership dilution of a founder with 50% of the company on day one, we come to the following chart:
If the company end up value is $1.5 billion, that's pretty good.
If the founder starts with 15%, it's hard to have him committed until the liquidity event:
The percentages I used are entirely random, but not that far from the reality for many companies in this space. My guess is pretty conservative here, especially if we take into the equation the dilution part that comes with the Option Pool creation during the years. The Option Pool is typically a part of the company value reserved for employee and management stock options.
Tomasz Tunguz venture capitalist at Redpoint in 2015 analyzed the fundraising patters of unicorn companies:
The median company raises $88M before IPO in year six. These companies typically raised $4-6M in their first and second year of existence. Then raised a Series B of about $15-20M, then a Series C of about $20M and finally a growth round of about $40M.
The problem is that nowadays companies stay private much longer than a few years ago and their valuations are in the tens of billions, so I suppose that the next years' stats will be much higher. Last year the post-IPO waters were rough, and COVID-19 will force companies to postpone their IPOs. That means higher dilution for founders.
The chances are that in 10-15 years, your company will go through some sort of market crisis, so you don't know how many rounds you need to go public or sell the company.
My suggestion here is that build a startup is a long journey, and you better be conservative. Start small and frugal, and try to keep that approach along the way. Be smart and invest in people with talent, not in fancy offices or useless perks. The chances are that the future of startups will be completely remote, as Twitter is telling us recently. That will make a lot easier to settle your company HQ in San Francisco without thousands of people in the same building. Talents are everywhere, and most of the time, they want to stay where they live.