Lessons from starting a deep tech startup
CloudAEye, Inc. is focusing on delivering intelligent cloud operations. We are a pre-seed startup based in Bay Area, California. We are currently developing our MVP (Minimal Viable Product). Before I bore you with all the great solutions we are building (topics for future blogs), let’s talk about our journey and what I learned from it.
Becoming a Founder
From my executive MBA cohort and network, I met few friends who were thinking about taking the plunge. But most were not sure if s/he should do it full-time. I once asked a reputable VC about this topic. His answer was very clear (I am paraphrasing): If you are not confident about your business idea to fully commit yourself, why should I invest millions in that business?
You will go through lots of ups and downs in your startup journey. If you are not fully committed to the idea of grinding it out for next few years, you may not be ready for this arduous journey. One VC stated succinctly, look before you leap! Once you decide to do this, own the decision. Remove any and all backup plans that would give you pause to go back to your comfort zone. After that, you are fully committed to making your startup successful.
Validating Your Idea
Most of the people with engineering background are eager to start building. This is not recommended. Reach out to your network and validate your idea first. See if others also feel the pain. You will be pleasantly surprised what you learn from these early discovery calls. During customer discovery, it is important to understand the benefits at the heart of the venture’s customer value proposition. This means confirming that potential customers have a strong unmet need for the venture’s proposed solution — even if they may not be fully aware of that need. Your job as an entrepreneur is to develop verifiable hypotheses: What problem(s) does your customer face? What result(s) would yield more satisfaction than currently available solutions? What are the functional, emotional or social dimensions of a satisfactory solution?
Finding a Co-Founder
Finding a co-founder is like falling in love. You will know when you find your co-founder. Both of you must have respect for each other’s abilities and be able to trust each other during the tenure of your startup journey. You must be aligned on expectations from each other. At the end, VCs look at the team and evaluate what skills and experience the team has to execute the idea.
If you are starting a business now, you may have heard about lean startup concept. I recommend this paper from HBR: Why the Lean Start-Up Changes Everything. The traditional thinking of establishing a business plans and executing it may not be optimal. Business plans rarely survives first contact with customers. Focus on doing experimentation instead of elaborate planning, get customer feedbacks instead of relying on intuition and do iterative design and implementation over big upfront development.
Here are few other insights I learned to focus on:
- Don’t run out of money — Many startups die because they don’t manage their expenses well and commit this cardinal sin. Trying to raise money at the last minute may also require you to accept terms that are less than ideal. Make sure you have thought through the financing and have a clear strategy about when you plan to raise funds. Be frugal when it comes to operational expenses. You will be amazed how far you can go without spending your pre-seed funds. For example, we use Jira, Confluence from Atlassian, Slack, Github, Postman and Google Workspace for our day-to-day operations. If you look around (see link), you can get credits from AWS, GCP, Azure. Before making a decision on a project and associated expenses, carefully think about the NPV (Net Present Value) of that project.
- Tackle the Right RISKS First — Not all risks are created equal! Removing critical risks will increase the value of your venture. Do targeted experiments to pinpoint a deal-killer or path-dependent risks. For example, we initially did POCs to flush out our ideas. I also focused on recruiting AI talents first.
- FIRST to Market, First to FAIL? — Failure rate of market pioneers is 47 percent! Sometimes it is better to be a fast follower.
- Business MODEL and STRATEGY are not the Same — Business model isn’t the same thing as a strategy! Business model describes how the pieces of a business fit together. Dealing with competitors is strategy. Challenge competitors by playing a differ game. Think Southwest airlines and how it changed the rules of the airline industry when it chose to fly its planes point-to-point rather than through hub cities.
- Your product is not the STAR of the Show, your USER is — With empathy comes deeper understanding for your users. Pivoting to find product/market fit is critical. Coca-Cola looked to help their consumers have ‘moments of happiness’ every day of their lives. P&G’s products aimed to help teen girls feel as free and confident as possible.
- Remember the Golden Circles: WHY-How-What — People don’t buy what you do, but why you do it! See the TED talk video.
- Know what Business you are In — Common mistake people do is define the business by product features rather than by customer benefits. For example, railroad rather than the transportation business. If you are myopic in your approach, you may fail to properly perceive market opportunities, potential substitutes, and customer motivations to buy or not buy.
- Understand what your VC brings to the table — Consider the scenarios for your firm’s success and calculate the outcome when choosing a VC. Use your bargaining power wisely to decide on your funding and term sheet. One of the leading causes of start-up failure is who you have as your support system (aka board members). I recommend this paper to learn more about this important topic: Why Start-ups Fail.
- Product/Market fit — Everyone is familiar with this! To become a viable venture, your idea must become an innovative product or service. “Pivoting” allows you to evolve the initial thoughts into a viable venture. Most successful startups has pivoted. For example, PayPal’s business model changed several times from being a cryptography company to a business enabling people to transmit money via “smart” cell phones, etc. Facebook was initially an exclusive site open only to college students. Starbucks began as a single retail site selling roasted coffee beans and equipment to coffee connoisseurs.
- Modern Sales Model — Engage with prospects as soon as possible, even before your product(s) or service(s) is fully developed. Research shows that it’s easier to get people to commit to an idea if they are involved in its creation. This model may also ease the challenges founders face in getting appointments with customers.
Your Brain’s Reticular Activating System (RAS)
A friend once said, entrepreneurship is very lonely. It is true! Sometimes you need motivation and need to trick your brain.
Launching a tech startup has been a lifelong dream of mine. But, I always found reasons (excuses) to not do it. I remember attending a talk from one of the PayPal founders (Elon Musk) at Stanford. He just sold PayPal to eBay. From him amazing PayPal journey, I remember one interesting details. He mentioned that he had a poster in his office of the competition that motivated him every day.
One of our EMBA executive coach at Ross once advised me to do something similar with a vision board I created as part of an exercise.
I hope you will place this in a place where you look at it daily, and here is why:
When you visualize your goals as already complete each and every day, it creates a conflict (structural tension) in your subconscious mind between what you are visualizing and what you currently have. Your subconscious mind works to resolve that conflict by turning your current reality into the new, more exciting vision.
This conflict, when intensified over time through constant visualization, actually causes three things to happens:
1. It programs your brain’s reticular activating system (RAS) to start letting into your awareness anything that will help you achieve your goals.
2. It activates your subconscious mind to create solutions for getting the goals you want. You’ll start waking up in the morning with new ideas. You’ll find yourself having ideas in the shower, while you are taking long walks, and while you are driving to work.
3. It creates new levels of motivation. You’ll start to notice you are unexpectedly doing things that take you to your goal.
And, I listened! I look at this vision board to keep me motivated. When things get confusing, I ask myself — What changes do I want to create?
Hiring is probably the single most important thing you would do in your startup journey. I spent a lot of time to do this part.
Establishing a Talent Strategy
In “Leadership Development” class at Michigan Ross, professor and former dean of business school taught us Congruence Model that focused on how to design organization to achieve strategic objectives and how to design talent strategy that is aligned with the business strategy. This class and particularly the talent strategy framework shaped how I approached recruiting the team to build our MVP at CloudAEye. I recommend reading this paper: Building a Game-Changing Talent Strategy.
Establish Your Brand
There are many things that would establish your brand. Initially, you need to be able to answer the following question succinctly: Why should I work at your startup? You need to be able to articulate that with thoughtful and competitive offer (equity and compensation) package.
It feels like a no brainer now during the pandemic, but, original plan of CloudAEye was to be a ‘remote first’ company. Why? We wanted to hire top talents across the globe and be able to solve AI problems that have not been solved in the industry before. Limiting the talent pool based on office location and geography would drastically reduce who we can hire. I also looked at the growing list of very successful companies who are remote first — GitHub, Git Lab, Brex, Zapier, Slack, etc. When asked about top 3 things Brex did well to reach from beta to unicorn status in 6 months, employee #1 Larissa Maranhao Rocha stated ‘remote first’ as one of them.
Identify Your Culture and Values
It may sound like a cliché, but it is important to identify what type of company you want to build and why. You will need to design your interview process to reflect that. For examples, I did not want any jerks in the company no matter how brilliant they were. Here are the top three things we (CloudAEye) focused on.
- Purpose-driven: We focused on building a purpose-driven, performance-oriented, and principles-led positive organization. We aspire to have a culture that is invested in continually improving. We value the importance of creating a company that is guided by a collective sense of purpose. See this video from professor Robert Quinn to understand why being purpose-driven may be a game changer.
- Fair & Inclusive: We believe in building a fair and inclusive culture where respectful interactions are a norm. We committed ourselves to investing, finding and developing the right people to execute its vision and strategy. Our team comes from diverse background and we actively embrace and celebrate diversity and inclusion in our culture. I recommend this article: To Retain Employees, Focus on Inclusion — Not Just Diversity.
- Bold & Impactful: We seek team members with moral courage and instincts to lead. We encourage all members to take ownership over decisions, be bold, focus on impact and contribute to a thoughtful, dynamic team culture.
I found Angel List to be most effective in finding talents. I stayed lean when it came to office and other expenses. We use Wise for payments. We used Clerky for incorporation, foreign qualification and setting up the employee stock options pool.
Put Empathy at the Heart of Everything
At the end, I decided to put empathy at the heart of everything I am trying to do. Why? 62% of team performance can be explained by leader’s behavior. Whether you are leading an organizational change (see article), trying to pivot with a deeper understanding of your customers’ pain point or scaling a company (see interview by Reid Hoffman of Jeff Weiner, former CEO of LinkedIn), they all have one thing in common — empathy! If you are able to establish trust with your team and build a positive organization with highly talented team, everything else seem achievable.
A seasoned engineering executive, Nazrul has been building enterprise products and services for 20 years. Previously, he was Sr. Dir and Head of CloudBees Core where he focused on enterprise version of Jenkins. Before that, he was Sr. Dir of Engineering, Oracle Cloud. Nazrul graduated from the executive MBA program with high distinction (top 10% of the cohort) at University of Michigan Ross School of Business. Nazrul is named inventor in 47 patents.