High Tech Start Up, Revised and Updated: The Complete Handbook For Creating Successful New High Tech Companies [Hardcover]

You've got a hot idea for a new dot-com, and you're itching to join the folks who regularly show up on CNBC and at the Lexus dealerships in Silicon Valley. But you also know your odds of big-time success are about as long as Bill Gates's position in MSFT. What do you do? John Nesheim, an adjunct professor at Cornell's Johnson Graduate School of Management, who has personally structured over $300 million in new-venture deals, lays out the step-by-step skinny in High Tech Startup. Incorporating some two dozen case studies spanning the technology spectrum, he presents info specific to this industry that will help you get from concept to IPO. It begins with a 14-phase schedule itemizing time requirements, necessary assistance, typical participants, major costs, main risks, and desired results for each step. It then details all the critical stages (i.e., forming the company, preparing the business plan, assembling the team, dealing with venture capitalists and other funding sources). Nesheim focuses on practical strategies that should certainly improve your chances, but don't start prepping for that on-air interview with Mark Haines just yet: Only six out of 1 million high-tech ideas, he notes, ever become successful companies that go public. --Howard Rothman

Chih-Chao Lam founder, Acknowledge and ShoppingList.com This is the book I wish I'd taken to heart in my first start-up. ShoppingList.com is all the more well-grounded for my having read High Tech Start UP.

Ken Tidwell Vice President, Engineering, Clip2.com Next best thing after the founders to have at the kitchen table.

Thomas M. Uhlman President, New Ventures Group, Lucent Technologies Required reading for the next generation of corporate venture capitalists.

Donald T. Valentine General Partner, Sequoia Capital A must-read for all Internet era entrepreneurs.

Mario Rosati Partner, Wilson Sonsini Goodrich & Rosati Great book for high-tech entrepreneurs.

George Gilder Gilder Group, author of Telecosm Super book by the start-up guru of Silicon Valley.

John C. Dean Chairman and CEO, Silicon Valley Bank From idea to IPO, Nesheim provides a virtual road map to start-up success.

David Ben Daniel Professor of Entrepreneurship, Cornell University An invaluable, practical guide for high-tech entrepreneurs.

Chong Huai Seng Publisher, Asian Entrepreneur A must-read for entrepreneurs, angels, and venture firms seeking the best practices.

The phenomenal success of the initial public offerings (IPOs) of many new internet companies obscures the fact that fewer than six out of 1 million business plans submitted to venture capital firms will ever reach the IPO stage. Many fail, according to start-up expert John Nesheim, because the entrepreneurs did not have access to the invaluable lessons that come from studying the real-world venture experiences of successful companies. Now they do.

This revised and updated edition of Nesheim's underground Silicon Valley bestseller incorporates twenty-three case studies of successful start-ups, including tables of wealth showing how much money founders and investors realized from each venture. Acclaimed by entrepreneurs the world over, this practical handbook is filled with hard-to-find information and guidance covering every key phase of a start-up, from idea to IPO: how to create a winning business plan, how to value the firm, how venture capitalists work, how they make their money, where to find alternative sources of funding, how to select a good lawyer, and how to protect intellectual property. Nesheim aims to improve the odds of success for first-time high-tech entrepreneurs, and offers an insider's perspective from firsthand experience on one of the toughest challenges they face -- convincing venture capitalists or investment banks to provide financing.

This complete, classic reference tool is essential reading for first-time high-tech entrepreneurs, and entrepreneurs already involved in a start-up who want to increase their chances of success to rise to the top.

This book is aimed at assisting individuals attain their personal best in the process of creating a new enterprise. It is my sincere wish that every attempt succeeds. Learning from each other can contribute to more success and less costly attempts. That is good for all of us. If you wish to share or think I can be of some assistance contact me at jnesheim@aol.com. --This text refers to an out of print or unavailable edition of this title.

There are 600,000 new businesses started in the United States every year--about seven times as many as were started each year in the boom years of the Fifties and Sixties. Most of these new businesses will fail the first year.

A typical venture capital (VC) firm reviews 1,000 high tech business plans a year; it funds about six of them, and sees only 10 percent of the funded startups reach IPO (initial public offering).

Most high tech startup proposals go unfunded because their business plans and market strategies were poorly thought out. Fewer than one out of 47,000 business plans that are submitted to VCs reach IPO. Private and corporate venture capitalists complain that everyone is wasting a lot of valuable time and money-and they say that the chances of success in launching a new high tech business could be dramatically increased if the startup entrepreneur and/or corporate new business manager had access to, and used, the lessons learned from actual venture experiences. They could avoid the common pitfalls in starting a business.

High Tech Startup presents a classic strategy for starting a high tech company and for securing multi-round financing. It provides more than 23 case studies that were carefully chosen to reveal how the classic strategy can be modified to fit the special objectives of the founding team. --This text refers to an out of print or unavailable edition of this title.

Since 1976, John L. Nesheim has coached more than three hundred new ventures that have raised over $2 billion in financing. Nesheim is CEO of the Nesheim Group in Carmel, California, which he founded after serving as treasurer of National Semiconductor, CFO of Valid Logic, and CEO of Flagship Software. He is also the author of High Tech Start Up. Nesheim lives in Carmel, California, with his wife, Gisela.

Chapter One: Introduction to Start-Ups and Their Funding

The research on which this book is based provided a lot of data about start-ups of all kinds that use technology, from semiconductors to Internet sites. The findings include their probability of success and how they are typically organized. Let's begin with thirty-one facts about typical high-tech start-ups -- many of them contrary to popular stereotypes.

1. The chances are 6 in a million that an idea for a high-tech business eventually becomes a successful company that goes public.

2. Fewer than 20 percent of the funded start-ups go public.

3. Founder CEOs own less than 4 percent of their high-tech companies after the initial public offering. Boom periods like the early Internet years often raise that to 10% and higher.

4. Founder CEOs can expect their stock to be worth about $6.5 million if the company succeeds in going public. Boom periods like the early Internet years produce billionaires.

5. Successful venture capitalists expect to personally earn about $7 million (in addition to cash wages) over five years for each $50 million pool of capital they share in managing.

6. Business plans are typically poor and are not well received by venture capitalists.

7. "Unfair advantage" and "sustainable competitive advantage" are missing in most business plans but are considered by investors to be critical if the high-tech start-up is to have an acceptable chance of succeeding. Plans lacking such an advantage rarely receive venture funding from experienced, successful venture capitalists.

8. On the average, a venture capitalist finances only 6 out of every 1,000 business plans received each year.

9. Venture capital investors own a large 70 percent of the start-up by the time it goes public: 70 percent of hardware companies, 60% of software companies and 50% of Internet companies.

10. The personal costs of doing a start-up are high, affecting families and friends as well as individuals. Fear and burnout are common. However, many CEOs have balanced those costs with the rewards of personal and professional satisfaction and the potential financial paybacks, which can be more gratifying than the rewards of working for a large corporation.

11. Bankruptcies occur for 60 percent of the high-tech companies that succeed in getting venture capital.

12. Mergers or liquidations occur in 30 percent of start-up companies.

13. A vice president's stock is worth about $2.5 million or one third of what the CEO is worth at the time of the initial public offering. Boom periods can increase the wealth tenfold.

14. The average worth of the stock for each of the employees (not including vice presidents and other key employees) on the date of the initial public offering is about $100,000.

15. Investors in venture capital pools aim to earn in excess of 25 percent each year on their money, about 8 percent more than if they had invested in all the stocks of the companies making up the Standard & Poor's 500 company index. In boom periods they can triple their returns.

16. The 10 percent of the start-ups that succeed compensate for the other 90 percent of the poorer performing companies in the venture capitalist's investment portfolio. In essence, the successful founders are paying for the substandard performance or bankruptcies of the bad investments.

17. Cash compensation for U.S. start-up managements remains below levels offered by larger corporations in spite of the scarcity of start-up talent and tax law reductions in the United States. Technical talent is paid near or at the going rate for such employees.

18. The median annual starting salary for a founder CEO in 1990 was about $120,000. By 1998 it had risen to about $150,000. Pre-IPO cash bonuses had become common by 2000 and increased total pay to $190,000 by the time the company went public.

19. The vice president of sales in a start-up often earns more cash compensation than the CEO. This occurs when incentive compensation plans are linked to sales that exceed those of the business plan.

20. Of the start-ups that get to an initial public offering, the median company takes at least three and typically five years to get to the public offering stage. Internet and biotech companies have been able to go public based on their "stories," that is, without earning profits by the time of the initial public offering.

21. Equipment lease financing and leasing of facilities and leasehold improvements have proven to be reliable and competitively priced sources of capital to augment equity raised to finance a start-up.

22. Having as a founder a person experienced with the responsibilities as CEO greatly increases the chances of getting a start-up funded. A close second is having a complete management team ready to go to work, with experienced people for each of the key functions, including the first CEO willing to step aside for a new, experienced leader when the business begins to grow rapidly.

23. About $100 billion is committed to pools of venture capital. It is managed by more than 2000 actively venturing individuals in over 500 firms, mostly in the United States, mainly in Silicon Valley, with a few in Europe and Asia.

24. The intensity of competition between venture capital firms has swung back and forth. It favored the entrepreneur at the height of the boom days of the personal computer, biotech, and Internet eras. However, whatever the trend, venture capitalists still end up owning the vast majority of the stock of a start-up, typically in excess of two-thirds of the company.

25. Mergers and acquisitions of start-ups increase when the market for initial public offerings cools off and when initial public offering valuations are historically very high.

26. Investors' interests in new issues rises and falls depending on the interest of institutional investors in the stocks of public companies traded over the counter, as well as in blue chip stocks traded on the New York Stock Exchange. In general, windows for IPOs open and close, based on whether there is a hot market for stocks in general. E*Trade and other Internet era financial service firms have brought access to IPO offerings to the general public. By 2000, "day traders" were a factor in moving stock prices.

27. Pricing of private rounds of venture capital by investors follows the same financial guidelines and measurements used to price securities of publicly traded companies. Investors translate risks and rewards into acceptable levels of expected return on investment, which becomes the basis for the dilution of founders' shares.

28. Competition for the shares of a start-up is the best way to increase its valuation and to reduce dilution for founders. Competition is enhanced by careful planning of the strategy for the capital-raising campaign. However, such deliberate planning is noticeably absent among founders of high-tech companies, especially those started by engineers.

29. Venture boom-to-bust cycles have become a way of life. The boom times of the personal computer of the 1980s ended. Biotech arrived and ended. The Internet boom arrived in the 1990s. These caused wide swings in the financial return on portfolios of venture capital firms. Many firms failed and closed their doors, leaving nothing to their investors. Other venture firms survived and some thrived. This resulted in a hierarchy of venture firms, interrelated deal-making ("deal flow"), and politics. Portfolio returns have dropped as low as single digit ROIs and a few have risen above the 60 percent range.

30. Mixed sources of venture funding have become a way of life. As a number of venture firms died out, a need and opportunity was created for funds from other sources. One new source of venture funds is large public corporations whose business development leaders became very active in the Internet boom. There continues to be funding from non-American sources. Angel investors grew and were prominent in the early years of the Internet. Friends and family funding, as well as bootstrap funding, has continued since the earliest days.

31. Internal start-ups within established corporations are now a frequent phenomenon; they have allowed emerging growth companies to sponsor an entrepreneurial spirit while retaining an uninterrupted focus on the parent company's bread-and-butter business. For internal start-ups to be successful, special attention must be paid to the unique characteristics of such new enterprises, particularly freedom and compensation.

Critical Issues

There are a number of key economic forces driving the venture capital funding of high-tech business.

• ROI -- return on investment -- drives the start-up business. It is measured in two ways: (1) A crude measure is that of how many times the value of one share invested rises by the time the initial public offering is over. This is called the "multiple." (2) A more sophisticated measure -- the only number that really counts -- is the annual compounded return, or percent per annum (p.a.), that the general partners in the venture capital firm return to the limited partners, pension funds, university endowments, and so on. To put it another way, how long the limited partners had to wait for the multiple to be returned determines the true percent annual ROI.

• Cash flow (the "burn rate") is what is managed. All the accounting in the world does not matter to the founder who is struggling to meet payroll while launching the start-up's first products into a very competitive jungle.

• The IPO (initial product offering) is the holy grail. Everyone has their eyes on that final goal. Mergers stand a poor second in attraction, because companies can generally negotiate higher valuations for a public issue.

• Liquidity ("exit strategy") is everything for the VCs (venture capitalists). Anyone inhibiting attainment of liquidity quickly learns why VCs have earned a reputation as "vulture capitalists." A business plan must have an acceptable "exit strategy" that converts ...