An aside: Thoughts on being involved in a tech start-up

Some thoughts on a tech start-up

We were "spun-out" by a large (government funded but not a government organisation) ICT research organisation. The spin-out process appeared to being made up on the spot and was very haphazard. Some of the motivations included (a) KPIs of the organisation and individual executives appeared to include X spin-outs in next year etc, (b) funding looked like it was coming to an end in next few years so  the implication was that we would need to find other jobs soon (c) there wasn't an obvious research group to be absorbed back into (in Canberra at least), and (d) we were in the middle a large reasonably interesting externally funded client project which presented the opportunity of maybe small pay rises (and maybe future work).  Part of the spin-out process was supposed to involve having an experienced board member appointed on behalf of the organisation to our board. This gave me (the false) confidence that we may be working with someone who actually knew what they were doing with tech spin-outs. (he turned up for 1 board meeting and vanished forever afterwards).

Pre-spin-out checks

The advice is to get independent legal advice before the start up to review/draft things like the shareholders agreement, company constitution, IP agreement with parent company, any loan arrangements from the parent company, how to approach share distribution, who should be directors, how company should be run (including financial management - who will do book keeping, accounts, monthly reporting, etc).  Turns out this is expensive (I had a mates rates quote for about $10,000 for an initial look with open ended costs on top if anything needed changing, negotiating etc. Needless to say I couldn't afford it so didn't get any advice. Stupid idea.
How else could this be done? Not sure if this is legal or practical, but perhaps get one lawyer to give "generic" advice (based on the specifics of the spin-out but assume all directors are the "same")  for all the potential directors and split the bill?

What do you really know about the low level financial and practical business aspects (e.g. accounting, company law, company reporting requirements, contact and legal drafting and negotiation, sub-contractor law and potential problems that can result in not being paid by the prime contractor). I've been on the board of several larger non-profits over several decades, but we had specialist lawyers, accountants, treasurers, and company experts also on the boards and as on-tap advisers (e.g. expert HR professionals for when things went wrong, etc).  In the absence of these you are going to have to do it yourself along with multiple other roles (leadership, R&D, sales, product management and architecture, partner management, legal negotiations and reviewing and preparation of contract documents, marketing, project management, etc).  The work is varied but sometimes specialised and requiring more skills than you have.

Take a least one online psychology test to see if you are well suited to a start-up role. Turns out I wasn't (I took it about a year into the start-up, bit late then). It was no wonder I was constantly stressed (and therefore not working at full efficiency and longer term health impacts).

Do you have a spare 6 months salary saved up or a partner in current (guaranteed, whatever that means these days?) employment? If no to both then think seriously how you will afford to eat, pay essential bills, and pay the Mortgage if the company has no income for months at time, or if things go "pear" shaped.  Post start up it's not obvious if you will have employable skills anymore as small start-ups are often highly niche/specialised, and if the company runs out of work then there's a good chance your own skill set won't be much more employable either.

(Try to) Negotiate a potential path back into the parent company as part of the spin-out process? Maybe, not sure this would have been (a) possible and (b) actionable after the spin out (as the parent organisation was taken over by another and all the executives involved in the spin-out "moved on").

IP was  big part of the spin-out process, the Research organisation's IP people met with us numerous times and helped us develop IP documentations and plans. However, their advice was that we didn't have anything worth Patenting (maybe they were right in hindsight, particularly from a business perspective). We eventually received independent advice and payed for a provisional patent ourselves - this was expensive, and had to be done in a burry. I drafted the patent in under a week and the IP firm put the finishing touches on it in a few days and we submitted it.  I subsequently rewrote it as an "Innovation Patent" and resubmitted it.

"Business Plans" drafted as part of the spin out process were entirely fictional. They predicted upwards increasing work over time. In reality we had decreased income over time. Another hint: If regression analysis of income over time predicts you will run out of income on a specific month then believe it - we didn't and we did.

Post spin out

It's difficult to do innovation and delivery at the same time (I saw a Ted talk on this a few years ago, I think this was it). Our approach to innovation during the start-up was to do it on-demand in response to client specific requests/problems. This caused some problems. E.g. insufficient time to do it correctly (i.e. wrong answers!) or robustly (needed redoing next time). Also wasted a lot of time with "features" that turned out to be very client specific (either by design - e.g. please integrate your tool with our proprietary APM product that no one else has access to, or by accident - e.g. please invent a method and tool support for a completely manual method for building and calibrating models from "no data" - oh this actually won't work, or because we are clever and they don't want to pay for an APL - e.g. please build us a custom APM that sucks data from SPLUNK and integrate it with your tool - ok tried it but doesn't work as (a) building an APM is hard (correlation isn't trivial) and (b) all the data needed isn't actually in SPLUNK, etc).

It's expensive and difficult to fund building of a product purely on the basis of services/consulting income. In practice no one was interested in using, licensing or buying the software as part of the consulting engagements, all they wanted as "the answer" (as pretty power point slides). In practice the tool was for our own internal use only and therefore well and truly over engineered (as a SaaS with a database etc).

Boring but essential, keep track of employee leave and activity attempt to keep untaken leave down as this will bite you if/when you have to pay them out when they cease being an employee (Also had this experience with non-profits, people get busy and don't want to take leave, or want to keep it all for a around the world holiday or to use their employer as a bank for "insurance" if they loose their job etc).

Try and maintain academic and professional linkages after the spin-out. This is vital to your professional and mental health, but difficult to do in practice. It often takes money (e.g. for conferences) and time (e.g. for attending conferences, writing papers and giving talks etc). In the best case frequency drops offs, and in worst case you stop receiving invites for workshop and conferences and journal PCs and reviewing (probably because I wasn't on the parent R&D organisation web site as a staff member anymore and my Adjunct status at the local university also ceased). Have a think and take action on how to maintain a professional presence (web site and email address) that can persist across and beyond the startup.

If you have to be a service based company to pay the bills and do whatever else you actually want to do then what happens when you start to get squeezed by other service companies? I.e. as you cut into their business, even if you can do something that they can't do (because you have a magic tool), then having the tool probably won't help as they will try to squeeze you out by winning large chunks of the work which cover everything including your niche area (e.g. everything related to "performance" including performance modelling even if they can't/don't do that). They may sub-contract the performance modelling to you but (a) pay you peanuts or (b) just not pay you.

You may waste a lot of time an $$$ working with potential partner (e.g. service) organisations trying to assist them get more specialised work in your niche area, by customising your method and tool and training them, developing proposals and demos for POCs for their clients etc, but in the long run not getting any work (e.g. they may not win the contract, the client may not want the extra work for the niche area, etc, it just may not be possible to do because their client doesn't have the maturity or the particular APM product etc).

PS
I came across the spin-out Business Plan that was developed prior to the spin-out occuring today.  It makes for an interested work of fiction.  In hindsight I would have a asked a few more questions, particular about financial projections and risks.   It contains a realistic and pessimistic projection of growth (what about optimistic?)  Turns out even the pessimistic projection was optimistic. There was no credible statistical error margin analysis of the projection, and assumed an increased growth in staff (in fact the opposite happened).  The major risk (that wasn't identified) was that we had too many staff at spinout, insufficient funds to pay for salaries for 1st year, and insufficient demand for the product and service.  If the "realistic" projection had occurred there is not way we could have scaled out to this number of clients with the estimated staff (and associated costs). NB the other thing I noticed was that the "projections" were skewed by the presence of a single larger than average (much) sale in the previous year. The correct way in hindsight to treat this would have been to determine the average sale over previous few years, and number of scales, and make any future projections based on a small increase (5%?) in value and number of sales only.