How to pick a co-CEO for your startup that will help you grow your business and not leave you feeling like you're in a bad marriage
Cofounders sharing the responsibilities and ownership equity at their startups are extraordinarily common, especially when each partner brings a unique skillset. Co-CEOs have successfully led several major publicly traded firms, but most tend to move away from the dual arrangement as the company matures. Venture investor Mark Suster of Upfront Ventures cautions founders to think very carefully about whether an even split is good for their startups. Here are three things Suster says founders should keep in mind when deciding whether coleadership and coownership is right for their business. Visit BI Prime for more stories.
One of the first questions that first-time founders have to tackle is how to divide the responsibilities and ownership equity of their startup. Cofounders sharing the top job at their startups is quite common, but there are fewer examples among major firms. Major tech companies like Salesforce and Oracle both had two CEOs, as did companies such as Chipotle, Whole Foods, and Deutsche Bank. But each have since abandoned their dual-CEO setups. Venture investor Mark Suster is particularly critical of what he calls the "cofounder mythology," which suggests that founders should have equal ownership and leadership roles in their startup. "It feels like heresy to even question it. It's a sacred cow, for sure," he said in a past blog post. Suster is a two-time founder who sold both his companies — the latest one to Salesforce, where he served a stint as the VP of product management. He is now managing partner at Upfront Ventures, the largest VC firm in LA. Suster cautions anyone considering shared leadership to discuss up front the details of how they will divide responsibilities, resolve conflicts, and handle questions over funding, risk, performance, and exit strategies. "I meet far more second or third time entrepreneurs who wouldn't do a 50/50 (or 33/33/33) partnership ever again than you would imagine," he wrote. "I am one of them." Still, there are several examples of successful co-CEOs at startups and large firms alike. Here are three things Suster said founders should keep in mind when deciding whether coleadership is right for their business. Matching complimentary skills makes sense There are times when a 50-50 partnership seems obvious. "Either you're not technical and you think you need a technical cofounder or vice-versa," Suster said. That explains why so many tech startups have dual founders: one has the programming chops, while the other has the business acumen. For Jenna Kerner and Jane Fisher, the cofounders and co-CEOs of the direct-to-consumer bra startup of Harper Wilde, that division of responsibility fell along their different strengths in of marketing and operations. Fisher and Kerner told Business Insider that the road hasn't been easy, comparing the business relationship to a marriage. Their union has proved successful so far. Since launching Harper Wilde in 2017, the startup secured $2 million in seed funding in 2018, closed a $3 million round of funding a year later, and Fisher told Yahoo Finance sales grew 300% for 2019. Harper Wilde is far from the first company to have two CEOs. Other direct-to-consumer startups, Harry's and Warby Parker, as well as candy company Sugarfina, have seen tremendous growth led by their cofounders sharing the top post. Matching personalities and appetite for risk is difficult The fast-paced early days of a startup can make a lot of things feel temporary, but co-equal partnership in the founding of a company can become a long-term relationship. Even if you're fortunate enough to have someone with whom you see eye-to-eye at the beginning, it's very natural for people to change as time goes on. "You often have very limited perspective on whether this person will continue to be a great partner two years down the line, four years down the line, eight years down the line," Suster said. "One person gets more risk averse, the other has more risk appetite," he continued. "One person loses the passion for what you do. Or you have disagreements about strategy, recruiting, funding, etc." It's important to remember that although the initial startup phase is challenging, the hardest work still lies ahead. Suster makes an exception for folks who have already gone through challenging times with you: "There are some people you trust like family. I have about two of those," he said. Shared ownership is a major commitment When it comes to dividing ownership of the company, an even split is just one of many options. The rights and responsibilities that come with even splits may not be appropriate for your business, or truly in the best interests of the members of your team. If you want to get the most upside from a cofounder arrangement and minimize the downside, Suster suggests offering an equity stake of up to 40% that kicks in gradually over several years. He also outlines a sort of founders' "prenuptial" agreement to make sure expectations are understood by all involved. More important than a matching share of ownership, is how you treat your partner. "Truly treat them like a cofounder," Suster said. "Give them access to all confidential information. Involve them in fund raising, hiring, strategy, etc. Publicly call them a cofounder." However, if (or when) a major disagreement comes up, one person will have the seniority to make a tough decision. Ownership tends to get more diluted as your company gets larger, so there will probably be less to decide in terms of equity, but arguably more to worry about in terms of management. Besides, when you have a board of directors, you'll likely have a bit less of a say in the matter. Most co-led companies experience criticism for their leadership structures, and in the case of Whole Foods and Deutsche Bank, company shares jumped immediately after appointing a sole CEO. Like many other aspects of launching a business, the key is to plan ahead and be ready adapt to changing circumstances.READ MORE: How to know if having 2 CEOs is right for your company, from the cofounders of a bra startup that grew sales by 300% in 2019 SEE ALSO: This couples counselor left his job to coach Silicon Valley tech workers — here's why he says a good business partnership should be like a good marriage Join the conversation about this story » NOW WATCH: Taylor Swift is the world's highest-paid celebrity. Here's how she makes and spends her $360 million.
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Meet the Silicon Valley 'talent agency' helping young tech workers land jobs at billion-dollar startups like Brex before they get huge
Silicon Valley-based entrepreneurs Armaan Ali and Baris Akis built Human Capital, a talent agency for engineers,...Silicon Valley-based entrepreneurs Armaan Ali and Baris Akis built Human Capital, a talent agency for engineers, after they realized that their peers weren't fully taking advantage of all the job opportunities available in Silicon Valley. Human Capital says it landed engineers early roles at 12 startups that have gone on to be worth over a billion dollars. The 25-year olds say that they uncanny success in placing engineers onto the early teams of hot startups like Brex and Robinhood, thanks to the relationships that they've developed with prominent VCs. The agency also has a $75 million fund dedicated to investing in any engineers looking to kickstart their own startup. "We see ourselves as a partner for an engineer's entire career," Ali explained, saying that the pair had looked to Hollywood's talent agencies as inspiration. Visit Business Insider's homepage for more stories. For many engineers looking to kickstart their careers, the dream is to work at a startup that is only just beginning to change the world — and then, ideally, cash out in an IPO or in a big sale to a tech giant. But startup life is risky, and the founders and early employees are more likely to end up with nothing — particular amid the current state of market tumult — than with a big payday. That makes it very important for would-be startup workers, fresh out of school, to stake their bets on the right company. That's how Armaan Ali and Baris Akis first came up with the idea for their company, Human Capital. As their peers at Stanford prepared to graduate, the pair found themselves wondering why so many were taking up jobs at Facebook or Google when the opportunity to create a greater impact at a younger company existed. "They had this conception of startups being too risky," Akis explained. "But there was a full spectrum of options that they had not explored. So I asked them if they would be interested in exploring those options, and having a partner who can assist them." The founders see Human Capital as akin to a Hollywood talent agency: they want to match promising tech talent to the right company in the same manner as a Hollywood talent agent matches movie stars to the latest Marvel superhero movie. So far, the 25-year olds boast of their success in placing engineers onto the early teams of high-growth startups like Anduril, Brex, and Robinhood — thanks to the relationships that they've developed with prominent tech investors and their portfolio companies. Ali told Business Insider that 12 of the startups that they connected engineers with had gone on to be worth over a billion dollars. "We've placed engineers that had been within the first 50 employees, at 12 companies that have gone to be worth over a billion dollars. Imagine how life changing that is when like you didn't even know you should consider a startup." Ali said. Growing the network About 5,000 engineers are part of the agency's network at the moment, according to the cofounders. Human Capital has a campus presence in around 20 universities and also has an open application on its website for interested engineers looking to join. Ali and Akis said they developed relationships with Silicon Valley venture capitalists like Hemant Taneja at General Catalyst and Brian Singerman at Founders Fund, to find out which startups that they were most excited about. They then pitched those portfolio companies the opportunity to connect with young, smart college graduates, ready to get to work. "The way that companies find people and people find companies is still pretty archaic," Ali said, adding that LinkedIn and resumes simply didn't say enough. "We actually have people go and speak to engineers and find out what they're passionate about, to make those matches. You can't discover those without actually probing and asking questions." Landing jobs at hot startups Orion Despo, who went to college with Ali and Akis, said he worked with Human Capital to land a job at Brex, just one month before the buzzy fintech came out of stealth mode and revealed itself to the world. Despo was one of the first 20 employees at the startup, which is now valued at over $1 billion. "I didn't want a normal job," Despo said, explaining the criteria he'd given Human Capital when he was out job-hunting. "I was looking for the most unique opportunity that I could find." Doug Qian, who interned at Google the summer before graduating, said he attended Human Capital events and met with various startup founders during that time because he already had a sense that he wanted to shift gears and join a high-energy startup. Qian ended up with a job at the cloud services startup Clumio through the agency. "I knew deep down that the startup scene would be right for me," Qian explained. "Human Capital gave me advice on what I was looking for - the kind of size, leadership, and engineering culture." Going Hollywood But Human Capital aims to go beyond job placement, and help support engineers through their entire career — wherever it takes them. "The reason that the talent agency is actually an interesting analogy, is because we see ourselves as a partner for an engineer's entire career," Ali explained. The agency wants the engineers to reach out when they're ready to embark on their next career move — be it landing another startup gig or kickstarting their own startup. Human Capital has recruited advisors outside the realm of the tech to help guide that process. Michael Ovitz, the cofounder of the famed talent agency CAA, is both an advisor and investor in the agency. "We don't like to think super transactionally in this business," Ali explained, describing the agency's focus on relationship-building. "We like to think long return." And Human Capital has the means to to be able to do so. The agency, which was the first to invest in Brex alongside startup accelerator Y Combinator in 2017, raised $75 million at the end of last year, according to the Wall Street Journal. In total, Ali says the agency has raised $200 million to invest in the engineers in their network. Join the conversation about this story » NOW WATCH: Jeff Bezos reportedly just spent $165 million on a Beverly Hills estate — here are all the ways the world's richest man makes and spends his money
Tech startups have a new 'exit' strategy. Why private equity firms have started plowing billions into acquiring startups.
Among startups that don't fail, most are acquired instead of going public. Although most startups that...Among startups that don't fail, most are acquired instead of going public. Although most startups that are acquired are still purchased by other independent companies, a growing number and proportion are being snatched up by private equity firms. In the past, private equity firms were largely considered bottom feeders, buying up companies on the cheap for their cash flow, but increasingly, they're buying companies with the intent to help them grow or to combine them with other startups to reach a larger scale — and they're more willing to pay up for them, industry experts say. The trend is being driven by a surge of cash into private equity firms and the growing number of companies that are avoiding the public markets, they say. Click here for more BI Prime stories. It used to be that the goal of every startup founder was to take their company public. That may still be the goal for most, but in the last several decades, a much more realistic option for startups that managed to stay afloat was to be acquired by another company in the same sector. In recent years, though, a third option has emerged for startups — being purchased by a private equity fund or by a company owned by one. Those kinds of buyouts now far outnumber IPOs and account for one out of every five so-called exits for venture capital-backed companies in the US, according to data PitchBook compiled for Business Insider. The growing influence of private equity on the startup market has "really reshaped the industry," said Wylie Fernyhough, a senior private equity analyst at PitchBook. The kinds of startups being targeted by private-equity firms likely would have gone public 20 years ago, industry experts told Business Insider. But today, they're generally considered too small or don't have bright enough prospects to hit the public markets. For such companies, private equity has become "an attractive exit opportunity," said Pete Flint, a managing partner at venture capital firm NFX. The vast majority of startups that don't fail are acquired Venture capitalists back startups with the intent of cashing out those investments at some point in the future, either by being able to sell their shares to public investors when or after the companies go public or by selling the startups to other companies. While initial public offerings get lots of attention, they've become relatively rare. In part that's because many startups never make it to the exit stage at all, because they go out of business first. But also it's because the vast majority of startups that don't go out of business are acquired instead of going public. Last year, for example, of the 934 startups that had some kind of exit event, 853 — about 91% — were acquired either by another company or as part of a private equity-related deal, according to PitchBook. That rate has been relatively steady over the last 18 years. "The vast majority of exits that all of us are thinking about are things that are not the public markets," said Sean Foote, a member of the professional faculty at the Haas School of Business at the University of California, Berkeley. Acquisitions, he continued, are "the major way in which companies find their home." While such deals have long been important, what's changed over the last 20 years is the growing influence of private equity. In that time period, private equity firms have gone from bit players in the startup ecosystem to major actors in it. In 2003, just 17 startups were acquired by private equity firms or companies owned by them, according to PitchBook's data. That amounted to just 5% of total exits that year. By 2012, 88 startups were snatched up in private equity-related deals, accounting for 10% of all exits. Last year, 186 were acquired in private-equity deals, amounting to 20% of all exits. Private equity firms are big players in the acquisition market In 2004, IPOs outnumbered private-equity buyouts by a ratio of 3-to-1, according to PitchBook. But private equity acquisitions have outnumbered IPOs every year since 2008, and for the last three years, there have been more than twice as many of those kinds of deals as public offerings. What's more, even as startup acquisitions of all kinds have skyrocketed — jumping from 279 in 2002 to 853 last year — private equity-related ones have accounted for a growing portion. They accounted for 22% of all startup acquisitions last year after making up less than 7% in 2002, according to PitchBook. "I think it's a trend that's going to keep growing," said Lanham Napier, the cofounder of startup investment firm BuildGroup. The amount of money startups are seeing from selling to private equity firms is still a small portion of the total value of all exits, varying from less than 1% to about 8% annually over the last 10 years. But it's grown significantly, going from just $690 million in 2012 to $6.3 billion last year. And some individual deals have become quite large. In 2017, for example, private equity-backed PetSmart bought online pet supply retailer Chewy for $3.35 billion. And last year, PE firm Thomas Bravo acquired ConnectWise, a maker of mobile device management software, for $1.5 billion. Generally, the private-equity firms are snatching up more mature startups. On average, the companies they're acquiring are around 10 years old, according to PitchBook's Fernyhough. By contrast, startups that went public were about 9 years old at the time of their IPO and those that were acquired by other companies were about 7 years old, he said. But increasingly, private equity firms are backing more mature companies and using them to buy younger startups, creating larger companies or "platforms" that potentially offer better growth or market prospects, the industry experts said. "You can sell early stage companies to PE-backed platforms," said Dan Malven, a managing director at 4490 Ventures. "I think we're going to see more and more of that." Fewer companies are going public Part of what's driven the surge of private-equity buyouts — and acquisitions overall — is that fewer and fewer venture-backed companies are going public. That's a trend that dates back to the 1990s and one that's linked to the growing dominance of small numbers of firms over large sectors of the tech industry, according to research by Jay Ritter, a professor of finance at the University of Florida who has been studying the public offering market since the 1980s. But that trend has arguably been accelerated over the last 20 years by regulations that added to the costs and burdens of being a public company and, conversely, made it much easier for companies to remain private for far longer periods. "The public market has evolved to a point where it's not that you couldn't have these companies go public, but there are significant regulatory costs that you can avoid if you stay private," said Robert Hendershott, an associate finance professor at Santa Clara University's Leavey School of Business. "Private equity is a natural way to give someone an exit." The kinds of startups generally favored by the public markets these days are those that are growing quickly, operate in a large market, and are either profitable or have a clear path to profits, NFX's Flint said. Unfortunately, there are lots of good companies that don't meet all three of those criteria. But they can be a good fit for private equity firms, because such firms can invest in their long-term growth or combine them with other startups to give them the scale they need to be more attractive to public investors, he said. "They are perfect opportunities for private equity rollup or acquisition," Flint said. Private equity firms are swimming in cash The surge in private equity buyouts has also been stoked by a huge gust of money into the industry, particularly in the last 10 years. In 2010, US-based private equity firms raised $59.2 billion, according to PitchBook. Last year, that amount had swelled to $301.3 billion. While only a portion of those amounts are going to tech-focused funds, that portion has been growing. Tech-focused private equity funds based in North America and Europe raised just $3.7 billion in 2010, according to PitchBook. By last year, that amount was up to $68.3 billion. By contrast, the US venture capital industry raised $46.3 billion in new funds last year, according to PitchBook. Private equity funds have access to "a staggering amount of capital," said Mike Smerklo, a managing director at Next Coast Ventures. But another reason why private-equity acquisitions have become increasingly popular for startups and their venture backers is because the deals can be more attractive than either going public or being acquired by another operating company, industry experts said. It used to be that private equity firms acted kind of like bottom feeders in the startup market, paying relatively small amounts for firms that had few other options and focusing on the cash flow those companies could generate for them. But that's no longer the case. Private equity firms — particularly the tech-focused ones — are increasingly looking at companies that can offer revenue growth and they're often willing to pay top dollar for them, the experts said. Startups used to see the biggest exits by going public or by being acquired by an operating company, said BuildGroup's Napier. Now, though, "some of these private equity firms have gotten so good at [buying startups], some of their valuations are just as big as those other things," he said. PE firms can move quickly and offer fewer restrictions Private equity firms also tend to be far less bureaucratic than corporate merger-and-acquisition departments, they said. Such firms also can often throw far more resources to bear on analyzing potential deals than corporations can. And the deals they strike typically don't have to go through the kinds of shareholder votes or board approvals that corporate deals often require. "They're able to move a lot more quickly," said PitchBook's Fernyhough. What's more, venture investors and founders often confront more obstacles to accessing their promised returns when they sell to corporations or take their companies public than when they sell to private equity firms. Typically in an IPO, there's a lock-up period of up to six months during which early investors are barred from selling the company's stock. Meanwhile, in corporate acquisitions, there often are conditions put in place that allow founders or early investors to see the full value of the buyout only if the startup hits certain financial or performance targets after the acquisition. "When I sell a company to a private equity firm, it's clean," said Foote, who in addition to his role at Berkeley is a managing director at venture capital firm Transform Capital. "There's often very few strings attached." It's not unusual for acquirers, whether they are large, independent enterprises, other startups or private equity-backed conglomerates, to pay for their purchases with shares of their own stock. But the private equity-backed roll-ups often are perceived to have greater prospects for growth than big, established corporations, potentially making their shares more desirable. "We try and analyze that growth potential," said 4490's Malven. They try to figure out if "we want to ride on their equity." The fast pace can also cut against startup founders and VCs To be sure, the growing influence of private equity does have some drawbacks for venture capitalists and startups. The fast pace of those firms and their large research teams can go against founders and their backers, Malven said. The private equity firms can have their teams analyzing multiple companies and potential deals at once, he said. If a startup doesn't act on an offer quickly, the firm can threaten to move on to doing a deal with a rival company, he said. "They can put you in a squeeze," said Malven. And the firms can have their shortcomings when it comes to evaluating startups, industry experts said. Because they're typically focused on analyzing the financial health of companies, they can be very good at evaluating companies that already have established a market for their products and have a revenue stream, they said. But they're not as good at sizing up companies based on the potential of their technology or their intellectual property or their unproven ideas, they said. "They're much at better looking in the rear-view mirror than they are in through the windshield," Malven said. Still, by and large the venture capitalists and other industry experts said the venture ecosystem has benefitted from private equity firms providing more exit options for startups. Venture capitalists are often looking for home runs with their investments — companies that have the potential to deliver huge returns on their investments. That remains the primary focus of firms like his, said NFX's Flint. But not every startup is going to be a home-run investment, and having the ability to get a modest return on those kinds of companies is a good thing, he said. "More options for more capital is great for the ecosystem," Flint said. "It's great for founders, it's great for early stage VCs, it's great for customers." Got a tip about the venture-capital industry or startups? Contact this reporter via email at email@example.com, message him on Twitter @troywolv, or send him a secure message through Signal at 415.515.5594. You can also contact Business Insider securely via SecureDrop. Read more about the venture-capital industry and startups: SoftBank's $100 billion Vision Fund had a no good, very bad year in 2019, but was still in the black overall. Here's why experts are still struggling to make sense of it. Here's why Casper's disappointing IPO could spell disaster for other unicorns This LA founder just raised $40 million for his startup. Here's his unconventional advice to founders on putting together a pitch deck. Stunned venture capital investors say the government's move to kill the $1.4 billion acquisition of shaving upstart Harry's is a 'wakeup call' that could leave some types of startups unviable SEE ALSO: Here are the top 10 best performing venture funds that launched at the turn of the decade, which posted returns as high as 50% Join the conversation about this story » NOW WATCH: Watch Google reveal the new Nest Mini, which is an updated Home Mini
Airbnb's cofounder made an incredibly compelling pitch for startups to join Y Combinator: 'We were 13 weeks away from walking away from it all'
Airbnb's cofounder Nathan Blecharczyk was asked at an event if there was a time when they...Airbnb's cofounder Nathan Blecharczyk was asked at an event if there was a time when they almost shut down the business. In 2008, the startup couldn't raise a dollar of venture capital. It had two customers, including Airbnb chief executive officer Brian Chesky. The cofounders made a pact that if they came out of startup accelerator Y Combinator and were "not in a materially better place" after 13 weeks, they would walk away. Blecharczyk said the accelerator gave the company the guidance and focus that it needed to survive. Visit Business Insider's homepage for more stories. There are pages and pages of Google search results that answer the question: "Is Y Combinator worth it?" For some, the storied startup accelerator has been a springboard for success. Y Combinator has spun up 102 companies that are valued north of $150 million, according to the most recent count in 2019. Stripe has the highest valuation of any graduate, followed closely by Airbnb, which is expected to have an exit through a direct listing sometime this year. At a recent event, Airbnb's cofounder Nathan Blecharczyk said there might not have been an Airbnb without Y Combinator. In a fireside chat at New York University Stern School of Business last week, Blecharczyk was asked if the founders ever almost shut down the business. Blecharczyk, who is also Airbnb's chief strategy officer, reflected on a time when it couldn't raise a dollar of venture capital. The business had two customers, including chief executive Brian Chesky. A 13-week stint in the Silicon Valley accelerator gave the company the jolt it needed to survive, Blecharczyk said at the event. You can watch a video here. Y Combinator gives founders the chance to move to the Bay Area for $150,000 in seed funding and three months of mentorship from some of tech's most recognizable entrepreneurs and investors. The program isn't entirely altruistic. The accelerator takes 7% of the company's ownership and gains the right to invest in future financing rounds, or pro rata. Still, Blecharczyk's recollection of the experience makes a compelling pitch for founders on the verge of walking away. Here's the story of how 13 weeks at Y Combinator saved the Airbnb cofounders from shutting it down: "There was really only one time where we almost gave up," Blecharczyk said, "and that was at the end of the first year, where we had been unsuccessful in raising the capital. The recession had just began, this was the end of 2008. And after trying for a year, when do you know that it's just not a good idea and it's time to give up? "There were three of us. No one of us really wanted to abandon the other two. Because we were all really dependent on one another." They made a pact, Blecharczyk said. "We would apply to Y Combinator, an accelerator program. It's only 13 weeks long. They give you a small, small amount of money, at least now they give you more. And it culminated in demo day. "And we thought, OK, if we can get into this program, then we can admit to each other that we'll give it 13 more weeks. And we'll be super serious and regimented. But at the end of the 13 weeks, if we're not in a materially better place we all agree that it will be time to quit, and it won't be an awkward conversation." The cofounders hustled over the next 13 weeks, Blecharczyk said. They were living together in an apartment where they worked from 8 a.m. to midnight, breaking only to eat, work out, or buy groceries. The startup was on a mission to get hosts to love the service. The cofounders met all of their hosts in New York on stays at their homes. They wrote reviews and hired professional photographers for the properties to bolster their listings. "Things really turned around during that period, so we never had to have that difficult conversation," Blecharczyk said. "But it really came down to that. We were 13 weeks away from walking away from it all. "It was during that period that we got some advice that caused us to reflect about meeting our users, doing things that don't scale, photographing the properties, that really started the flywheel going and allowed us to show growth every single week. "At the time, we had been making $200 a week every week for the last five months. Nothing we did moved that number. So that's why we were in such a state of despair. And our goal over the 13 weeks was to get $1,000 a month. "We ended up getting to $4,300 a week and basically every week showing progress. And we were then able to raise money and never had to have the awkward conversation." About a year later, the startup changed its name from Air Bed & Breakfast to Airbnb. It was last valued at $31 billion in 2017.SEE ALSO: How 3 guys turned renting air mattresses in their apartment into a $31 billion company, Airbnb Join the conversation about this story » NOW WATCH: Inside a $12,000-a-night Airbnb in Hollywood