In 2005, Shirish was vacationing with his family in Spain. While heading to the hotel from the airport late in the evening, they got lost. Their rental car didn't have GPS and Shirish had to turn to the locals for directions. Unfortunately, no one spoke English. Shirish thought his teenage kids who had studied Spanish for years in school could help, but to his surprise all they gave were blank stares. That years of language learning at schools didn't teach real conversational skills was an eye-opening insight for him. Thus was born Livemocha, a social platform for language learning.

An entrepreneur's journey is never boring. "From Startup to Exit" is no different.

In five sections, Shirish Nadkarni, a US based serial entrepreneur, covers various aspects of an entrepreneur's journey. The book is an invaluable resource to understand how tech startups work and I highly recommend it. There are plenty of lessons in the 300 odd pages.

1. Ideation

1.1. What makes for a good startup idea?

You have a brilliant idea for a startup. You have done preliminary market research, talked to potential customers and got positive feedback. How do you know if the idea would work?

This is a difficult question to answer even for VCs who are paid millions of dollars in management fees, but can only find one or two real winners among ten ideas.

• VCs look to fund aspirins, not vitamins. Understand how big a pain point you are addressing. Is your solution significantly better than the existing ones? Example: Email overload destroys productivity in large companies, and Slack sought to fix it.
• Emerging technology platforms have created a ton of opportunities for the startups. KenSci is leveraging AI/ML in healthcare space to predict risks for the patients.
• Marketplaces and social networking apps have powerful network effects. When more people use the product or service, its value increases. Example: eBay, Facebook, Airbnb…
• Elements of virality can drive rapid customer growth. Example: Hotmail with its "Get your free email at Hotmail" footer got free advertising every time someone sent an email.

1.2 Product/market fit

"With real product/market fit, you'll see material customer growth without significant marketing dollars because word of mouth for your product is powerful."

• Initial concept testing: Before launching your MVP, test your concept. Interview potential customers from your target market segment. "Don’t ask leading questions that give you the answers you are looking for."
• Use customer surveys mainly to validate the results of your interviews and to add statistical validity of the responses.
• Create a landing page and use web/mobile ads to drive potential customers to the landing page. Target Click-through rate of >= 0.5% for text ads with at least 300 impressions and 1% for video ads with at least 20,000 impressions.
• Listen to customer pain points and experiences with competitive products from online sources like social media posts, online communities, reviews etc.
• Narrow customer focus: Nail product market fit in a single market and then expand into other customer segments/market. Example: OfferUp, a competitor to Craigslist focused only on female shoppers in specific zip codes in Seattle. This allowed it to raise the funding to expand to additional markets.
• Rapid iteration and testing: Prefer "Minimum Delightful Product" to "Minimum Viable Product (MVP)". Don't just partially build a bunch of features. Rather build out a "specific set of features with a certain level of depth, reliability, usability and differentiation that delights the customer." (Ref: The Lean Product Playbook)

• Focus on engagement and retention: Track the ratio of DAU (Daily Active Users) / MAU (Monthly Active Users). Measure critical user activities that signal engagement, e.g. users creating vs. consuming content. Measure retention by tracking daily cohorts of users. See how many are returning on Day 1, Day 7 and Day 30.
• Example of a few of the metrics that show if you're achieving strong momentum with your product. Consumer product: 30% of users are active the day after signup. Enterprise SaaS: 5% conversion rate from free-to-paid, < 2% monthly churn

1.3 Pivoting your startup

Burbn was a social check-in iPhone app that was "cluttered and overrun with features." The founders soon discovered that the users didn't care about telling their friends about their location. But they shared a lot of photos of the places they visited.

The founders decided to cut everything in the app, except for the photo, comment and like features. What remained became Instagram.

• If your idea fails to achieve product/market fit, try everything possible to make the original idea work. Conduct usability studies, change the business model (Example: free trial to freemium), "understand what is the lacking in your value proposition."
• Deciding to pivot is never easy as it can look like a failure. But know that "it can take multiple pivots to get to product/market fit."
• Founders are afraid the investors would shut down the company and take the remaining money back. However investors are supportive most of the time.

1.4 Entrepreneurial attributes

• Capacity to take financial risks, potentially without a salary for 12-18 months
• Deep customer empathy and product orientation. "You need to be knee-deep in defining your product strategy and features."
• Salesmanship: You'd be selling all the times to potential co-founders, customers, investors, employees. "You need to have strong communication skills to convince people to your point of view."
• Perseverance and mental fortitude: "The stresses of running a startup never end… You have to really believe in your vision and love what you are doing."

2. Company formation

2.1 Company incorporation

• Consult with a business attorney with startup experience. Form a legal entity as soon as possible to avoid personal legal responsibility. Without a legal entity, the default status would be sole proprietorship or general partnership with unlimited personal liability.
• If you are working on your startup while doing a full-time job, check your employment-related agreements. To protect your IP from your employer, work on your own time, on your own laptop/cell phone at a location different from your work location.
• If incorporating in the US, do so in the business friendly state of Delaware. It doesn't make sense for startups to be organized as LLCs. If you want to benefit from the losses in the initial years, incorporate as an S-Corp. Else a C-Corp from the start is far more preferable. C corporations have fewer restrictions and you can have multiple classes of stock. S Corp and C Corp are governed by a board of directors.

2.2 How to split founder equity

• Often to avoid conflict, founders decide to split up equity in the company equally. However if some of the founders are making an unequal contribution, 50/50 split can cause conflicts. Discuss equity splits in the beginning.
• Local angel investors can help you determine an appropriate valuation. Treat your personal cash investments as any other outside investment.
• Set aside 15-20% of the company's equity for the employee option pool.
• Find a well-respected arbiter (investor/founder) who can understand the contribution of each co-founder and recommend the equity split.
• If you are a technical co-founder, you should get 5-10% premium. CEO role is the most valuable and should get 5% premium. A founder who brings previous successful startup expertise may command 50-100% premium. While it might seem unfair, the business savvy CEO might help raise funding at a higher valuation.
• Agree to a vesting schedule for the equity allocated. Typically the vesting takes place monthly over a 4-year period.

2.3 Cap Tables

• A cap (capitalization) table is a ledger of all the equity owned by founders, investors, employees…
• Common shares will have a much lower value than that of the preferred shares issued to the investors.
• Tools like Carta and Capshare can be used to manage your equity.

2.4 Startup options

• Options are valuable incentives you can offer to the employees to keep them motivated. 
• Understand incentive stock options (ISOs) and Non-qualified stock options (NSOs)

3. Fundraising

This is a fairly dense section with a lot of complicated concepts.

3.1 Early-stage funding sources

• Family and friends are often the first source of funding. Make sure they understand the risks.
• Angel investors like to invest along with other angel investors they know. The due diligence process can be haphazard.
• If you are a very early-stage founder and haven't validated the idea, consider partnering with an incubator to validate your idea and build your team. An incubator can take as much as 25% of equity post seed funding.
• Accelerators typically work with startups wit at least two founders and a product that is ready to be tested. Top accelerators like Y Combinator, Tech Stars etc. provide valuable guidance through their programs, make you visible and connect you with well-known investors.
• Avoid getting seed funding from large VC firms, rather go for VC seed funds. They would join your board and devote their time and resources.

3.2 Fundraising process

• "If you are raising funding at a pre-seed stage, you will typically be dealing with angel investors who are writing $25,000 to $50,000 checks. It can take a fairly long time to round up enough investors to fill your round."
• Identify a lead investor who can negotiate the terms and introduce you to other angels. Pitching to angel groups is more efficient.
• When you move to seed stage or series A funding, you'd mostly deal with VC firms.
• Time your initial investor pitches around the same time so that you can compare the term sheets.

3.3. A compelling investor pitch

• A well developed investor pitch can also help you pitch to potential customers and employees.
• Demonstrate your deep understanding of the problem space, your long-term vision and how you are playing to win.

What VCs look for in a pitch?

• How passionate is the founding team about solving the problem?
• Traction: User adoption, engagement, revenues
• Market size
• Competitive moat: Does the company have an unfair advantage over the competition
• Pitch deck outline (Ref: Sequoia Capital)
• Company purpose, key value proposition (Airbnb: Book rooms with locals, rather than hotels)
• Why the problem matters and the existing solutions fall short
• Your solution, cost savings, customer ROI, IPs
• Have you achieved product market fit
• Market opportunity, Total Addressable Market (TAM)
• Competition: How crowded is the market? Avoid feature comparison lists.
• Go-to-market strategy
• Business model: How do you expect to generate revenues (Conversion from free-to-paid, churn rate, distribution fee, LTV/CAC)
• Team: Past experience, expertise, patents, successful exits
• Financials: 5-year P&L projections aren't realistic. If you are at seed stage, can you achieve $1 million ARR before series A round. (Ref: SaaS model by Chris Janz)
• Ask a single number for the money you'd like to raise. Outline how you'd use the funds. Don't mention the terms of the raise, unless it is an angel raise.
• Appendix: The pitch deck would have 12-15 slides. Include 5-7 slides in the appendix as needed.

3.4 Funding Vehicles & Term Sheets

• A convertible note is the most common form of funding for startups during the seed stage. Understand the pros and cons.
• SAFE (Simple Agreement for Future Equity) is a financing instrument developed by Y Combinator that avoids many downsides of a convertible note. "SAFEs are increasingly used instead of notes, especially in Silicon Valley."
• "Series seed financings are increasingly used for financing under $1 million instead of a convertible notes."
• "A term sheet is a document that investors put together to capture the key terms of their investments. The book includes a sample term sheet from National Venture Capital Association. Understand financial provision and control provisions in a term sheet."
• "Preferred shares have the right to get their money first in the event of a liquidation or acquisition."
• If your pre-money valuation is $4 million and you raise $1 million in funding, your post-money valuation would be $5 million.
• Investors would ask you to set aside an option pool so that they don't get further diluted when you issue option grants to employees.
• Understand how share price is calculated, types of liquidation preferences, cumulative vs non-cumulative dividends, conversion/automatic conversion of preferred shares into common shares, anti-dilution provision.
• Early investors want to protect themselves when future investors invest at a lower valuation. Founders want to reduce risks with investors wanting to cash out their investment if the company hasn't been able to sell or go public.

3.5 Crowdfunding

• With Kickstarter, you don't get any funding if you don't meet the minimum goal you have set for your project. 37.5% of projects on Kickstarter achieve their minimum funding goal.
• Kickstarter is a viable option to fund video games and hardware based startups.
• With Indiegogo, you can receive funds even if you don't meet funding goals.
• Co-ordinate all your marketing efforts for the day one of the campaign and try to catch the attention of the crowdfunding platform.

4. Running your company

4.1 Recruiting

• Salaries at Microsoft, Google, Amazon etc. have skyrocketed. Without creating a lot of buzz for your startup, it is difficult to attract high-quality people.
• Create a good founder profile on LinkedIn. Invest in writing posts and articles on LinkedIn & Medium about industry trends and your vision for the company.
• Don't leave hiring only to your HR. Directly connect with strong candidates who might fit well.
• Hire great leaders who can bring their former team members with them. Be aware of non-solicitation clause, if any.
• Hire doers across the board - people with execution mindset as well as with the ability to provide strategic direction.
• Build a brand that will attract high quality candidates. Sponsor tech or startup related meetups.
• Make job postings creative. Don’t mention salary ranges. The candidate might feel insulted even if you offer at the mid-level.
• During interviews, determine if the candidate would be a good fit for a startup environment, taking initiative, dealing with ambiguity etc.
• Don't give any reasons why you didn't make an offer - it would only get you into trouble.
• Hiring managers should do the reference checks. If you have specific concerns, ask if your reference agrees with you.

4.2 Creating a vibrant company culture

"A company culture can take a long time to establish. It is important for founders to live their values every day and set an example of employee behavior."

4.3 Becoming a great leader

• Clearly articulate your vision and strategy and be able to defend it when the going gets tough.
• Have an in-depth understanding of all aspects of the company's business.
• Keeping your company financially viable at all times is one of the biggest challenges.
• "The sales team needs to have the confidence that, if they bring the CEO into a sale, the CEO can help them close the deal."

4.4 Managing the board of directors

Primary responsibilities of the board

• Hiring/firing the CEO
• Executive compensation/ option grants
• Fundraising, M&A, Debt issuance
• Strategy, performance, financial review
• Approving major third party deals

"Board meetings can enable you to think deeply about your business and get feedback from the experienced board members." (Ref: Sequoia Capital board deck)

4.5 Developing a business model

• A business model defines how you'd acquire customers and how your customers would pay for the product/service.
• For B2C (Business to Consumer) offering, you'd rely on SEO, SEM, Web/mobile ads to drive traffic and sign up customers.
• For B2B (Business to Business) offerings, if you are targeting large enterprise customers, you'd utilize a sales force and deal with longer sales cycles.

Common business models of tech products

• Advertising: May not generate huge revenues without millions of active users. Impacts user experience.
• Affiliate marketing (Example: TripAdvisor gets feeds from hotels when users click on the links to hotels listed)
• E-commerce model (Example: Stitch Fix has a subscription-based pricing model delivering AI driven customized clothing) Amazon has ~50% share of US e-commerce market.
• Freemium model: Feature limited (Spotify), Capacity constrained (Dropbox), Time-limited (Apple music). Good conversion rate from free users to paid users is around 5-10%. 45% of monthly active users of Spotify are paid users.
• SaaS model: Conversion to SaaS model is a key reason behind Microsoft's stellar performance in the recent years. Offer tiered pricing.
• Usage-based pricing: AWS. Also offers a pre-payment option (AWS reserved instances).
• Transaction Fees: Stripe charges for each successful transaction.
• Lead generation model: Provide reviews of enterprise software and sell the leads for example.
• Selling Data: Increasingly regulated. Mint sells aggregated financial data.

4.6 Understanding unit economics

• "Most startups are unprofitable for years on end, but if they have strong unit economics that are trending in the right direction, then VCs will continue to fund them."
• VCs like it when LTV/CAC ratio is at least 3:1
• Don't use revenues to calculate LTV. Use the gross margin of your offering.
• LTV and CAC for a small business would be very different from a large enterprise customer with a long sales cycle. So your pricing strategies for customer segments should be different too.

4.7 Protecting Intellectual property

• To be patentable, an invention must be useful, novel, and nonobvious to a person with average skills in the field.
• "It is worthwhile filing a patent application if the invention is core to your business model and offers critical competitive advantage."
• "Software parents these days are quite difficult to obtain."
• Google Patents is a powerful patent search engine.

4.8 Managing in downturns

One of the most poignant chapters as Shirish talks about the painful decisions one must take to survive in a downturn.

• Assess and secure your revenues
• Reduce expenses
• Handle layoffs with care and dignity
• Secure venture debt
• Renegotiate vendor contracts
• Be flexible with customers
• Be transparent with employees

5. Finding an exit

5.1 Selling your company

• Since 2007, the average successful startup has raised $41 million as venture capital and exited for $242.9 million. (Crunchbase)
• Planning for an acquisition: the best time to sell is when you company is experiencing strong growth. The key is to "Get bought, not sold."
• Building relationships with potential acquirers well before an acquisition.
• Hiring an investment bank to identify potential acquirers, determine appropriate valuation range and help negotiate the sale.
• Acquisitions can be highly distracting to employees. Keep information about potential acquisition as confidential as you can, for as long as possible.
• To drive a high price, understand how your technology fits into the acquirer company's growth strategy and which of their groups would gain the most.

5.2 Going public

"While achieving a successful IPO is a major accomplishment and validation of the founders' vision, it is just the beginning of a critical phase in the company's life."

• Average tenure of companies staying private has increased from 6.5 years to 10.5 years from founding. Late-stage funding from entities like SoftBank has played a role.
• IPO provides liquidity for investors/founders/employees, helps you raise significant additional funding, attract wider customer base, attract talented employees…
• Are you ready to go public? Evaluate revenue growth at scale, predictability of revenues, path of profitability, competitive position in the market…
• Cost of going public is quite high. Direct listing can work for well-known brands with easy-to-understand business models. Spotify, Slack and Palantir have taken this path in the recent years.

Shirish ends the book with inspiring stories of Icertis, Snowflake, Apptio and UIPath and connects the myriad concepts of ideation, product development, funding, GTM strategies, sales, competition, culture and leadership.

"From Startup to Exit" is a wonderful book and I loved the direct and no-nonsense style of writing. I'd sure read it again to absorb the content better.