Navigating Startups from Seed to Series B

The allure of startups has rarely seemed stronger. Much of the tech industry is built on the backs of multi-billion dollar giants that came out of the startup space, and while tech appears to be in the middle of another bubble, the lure of relatively free-flowing investor money is hard to ignore.

But what does it take to build a successful startup in this environment? Two long-time veterans of the startup space took some time to offer their advice at a recent meeting of the Chicago Payments Forum.

“There are a very small number of startups that are about true innovation – about building the next frontier,” said Farhan Ahmad, founder and executive chairman at payments startup Bento for Business. “You have to be somewhat crazy to do that. Everyone tells you you’re wrong – that if it were such a good idea, someone would have done it already. You either have to be stupid or onto something.”

That vision can be difficult for many; swimming against the current requires thick skin and a lot of self-certainty. And the culture shock – and shock to the pocketbook – can also be too much for many coming from a corporate background.

“There’s a pace of business at a startup that corporate employees aren’t used to,” said Peter Tapling, managing director of financial services consultancy PTap Advisory. “There’s no HR, no one makes your travel reservations – when you’re the first one in for the morning you make the coffee, you know?

“A lot of people come to startups for the wrong reason; they’ve read too many stories about Google or Facebook or Paypal.  Frankly, a lot of the people who joined Paypal in the early days left without ever making a dime on that venture, because they got so sick of being poor.  It took them eight years to make something of themselves.”

And that’s an adjustment not only for employees, but one that entrepreneurs looking to start their own companies also need to internalize early.

“The lifestyle of a startup CEO is not glamorous,” Ahmad said. “You’re like any other team member and have a job to do. And one of the hardest jobs is to hire the right team.”

It takes a special kind of hire to thrive in this kind of environment, and finding those kinds of candidates is among the biggest challenges startup entrepreneurs face.

“It starts with trying to scare people away – set realistic expectations,” Tapling said. “Don’t do this because you think you’re going to make $400,000 a year and be a billionaire at the end. The really valuable people, they understand and internalize the startup’s story, and if there was a chance that story was going to happen, they wanted to be there to tell the whole story at the end.”

Ahmad agreed, noting that these qualifications, what makes for the right kind of person, can shift as your product evolves.

“You have to be equally adept at moving on from people quickly,” Ahmad said. “You have to adapt to the fact that some people you hired were great for one phase, and aren’t for another phase of the company. To solve complex challenges at a great pace, you really need a team of A-players, and in a startup you don’t have the time to turn a B-player into an A-player.

“For example, I have an engineering team of 10 people—all our competitors have multiples more. Yet I believe our product is better and that’s due to our team. They’re all incredibly good engineers, and better than 30-40 B players in that space.”

Once you have a solid, innovative idea in place and have figured out a strategy for building a solid team, you’re still going to need investors to make that shift into getting real work done. And while the current tech bubble may make money seem easy to come by – in figures that dwarf even the dot com bubble of the early 2000s, with valuations seemingly entirely disconnected from real revenues – finding a sustainable strategy to actually build a workable product can be more difficult.

“For Founders, there are pocket-friendly ways or soul-friendly ways to build their startups,” Ahmad said. “Pocket-friendly is where companies raise gobs of money at valuations that don’t align with the business. In these cases, a few execs still make a lot of money, but the rest of the team typically ends up with little. Soul-friendly is about doing things the right way, being transparent with every constituent, and building towards a sustainable business. I’ve always chosen the latter option and whenever Bento has an exit, I expect everyone to benefit from it, not just a few people.”

That choice is even harder depending on where you look to make your money; same as it ever was, those wallets are the most open in Silicon Valley.  To raise money in markets like Chicago, you need a stronger business plan and a more solid foundation to build upon.

“Investors in Chicago are much more conservative,” Tapling said. “Your access to money is much more difficult. There’s not near as much by order of magnitude – venture investment sourced out of Chicago is probably two orders of magnitude less than Silicon Valley. And the money you can find here – they made their money building things, through family offices. They think much differently about what they want to do with their money.”

And of course, whether or not to access venture capital in the first place is another decision that requires serious thought on the part of entrepreneurs.

“That’s not a no-brainer; VC money comes up with a whole lot of baggage,” Ahmad said.  “You have to sign up for multiple rounds of funding, and you’re only going to own 6-7% of the company when all is said and done.  If you want to bootstrap as long as you can, you can build it differently.

You also need to be able to choose between the right VCs and the wrong ones – not all money is good money.

“It’s much worse than a real marriage, in some ways,” Ahmad said. “If you want to divorce a VC, it’s very complicated.”

If you can navigate the difficulties, however, you can find a real mental agility and business acumen that most people inside a corporate boardroom will never learn.

— Jessica Purdy