How To Start And Grow A Tech Company

Mint CEO, Aaron Patzer, gave a presentation on building startups from the ground up. He started with an idea about handling personal finances more efficiently. He turned the idea into a company and built it from the ground up and sold it for $170 million in less than three years. This is one of the most revelatory resources I have come across in terms of providing real-world finance and start up details. Following are some notes from the video.

Three Phases of Startup Business Growth

• Phase 1: Garage (<$100K)
• Phase 2: Seed (<$1m)
• Phase 3: Funded (>$1m)

Phase 1: Garage Goal

• Main goal is to build a prototype
• Question: How do venture capitalists and angel investors determine the value of a company that has no product and no revenue?
  • Answer: Pre-revenue valuation:
    +$500K/engineer (prototype development)
    -$250k/business guy (idea, market research, biz plan)

Phase 1: Garage Expenses

• Founders: living expenses $30k/yr
• Engineering First Hires: low salary, high equity (1-5%) $30-50K year
• Office: by the cube, $400 /cube/month
• Tech: laptops, couple of servers, development software, $10K
• Legal: Corporate setup, deferred payment for 0.50 – 0.75% of company
• TOTAL with 2 founders + 1 engineer/contractor = $150k / year burn
  (Assumes 1 technical + 1 business founder)
• Need to raise seed money within 9 months

Phase 2: Seed Goal

• Main goal is an alpha launch of the prototype
• The product needs to be usable, but no polished or scalable product
• Headcount: 5-6
  • 3-4 engineers
    1 product developer / frontend specialist
    1 business generalist to do everything: fund raising, sales, marketing, recruiting, etc.

Phase 2: Seed Expenses

• Salaries:  Equity decreases, salaries rise, but below market, $50-90k  per yr, total $450K/yr
• Overhead:  Facilities + benefits + taxes + food + laptops, +20%, total $100k/yr
• Legal: VCs will make you pay for the financing, $25k incorporation, $2k/mo general, total $50k
• Total burn for 5-6 person team = $600k / yr
• Need to raise series A funding within 12 months

Phase 2: Seed Revenue Projections

• Your absolute revenue projections will be worthless.
• However, projections based on what you will make per product, per user or per transaction is best. If there’s a big market, investors can figure out realistic earnings.
• Walk investors through your revenue projections very linearly. Go from website, into revenue stream, scaling, etc.

Phase 3: Funded Goal

• Goal: Launch a real product and grow a profitable business

Phase 3: Funded Expenses

• Salaries and Overhead: Salaries at market + taxes + facilities – $200k /yr
• COG’s: Customer service, SMS, bandwidth, servers to scale – widely varying
• Legal: contracts, patents, employment scale up iwth headcount – $10-50k / month
• Total burn with 30 person team = $6.0m / yr
• “Hidden” expenses:
  • Legal: patents, trademarks, contracts, financing, employment, immigration
  • Consultants: SEO, SEM, design, logos, DB tuning, etc.
• Need to be profitable with 2 years

See the whole post on TechCrunch: Startups 101: The Complete Mint Presentation.

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