We can’t discount the impact of having big name success in your company pedigree.  We see it all the time at Open Mountain as we work with start-ups and investors.  We had one prospect use the pedigree of advisers to a consultant he briefly hired in his pitch.  Sort of like his company hired the guy who dates the sister of the guy who walks Steve Job’s dog if you know what I mean.  Another case the person with the pedigree had joined one of the Internet giants after the battle had been won and during the time the business plateaued.   In both cases, we observed first hand that the viewing audience accepted the pedigree on face value.

Remember Webvan?  Webvan was one of the high flying companies of the first Internet boom that spent obscene billions on grocery delivery infrastructure only to go belly up at first sign of trouble.  Who would ever hire a person with that on their resume?  If you were to hire that person, the first thing he or she would tell you is don’t over build and make sure you have ways to reduce  costs during economic down turn.  That seems like really valuable advice to me.  If you hired someone who had been at Amazon, he or she might tell you to build like crazy and run up huge debt because it’s a land grab and we’re playing for keeps.  This is exactly what Amazon did and it certainly worked for them.  Which approach would be better for a start-up in today’s market?

Let’s dispel a few myths of our own.  With the exception of the leadership at the top, the job done by most people at say etoys, Webvan or uBid was not much different than the same people at eBay, Yahoo or Amazon.   There were plenty of good people at the first three companies just as surely as there were bad people at the success stories.  We tend to assume that everyone who worked at a runaway success was a home run hitter.  Yet we all know many great lessons are learned by failure.  Your experts need to know how to succeed for sure, but they also need to know how to avoid failure.

Here are 3 tips on how to get the best people and avoid the glossy eyed acceptance from talking to someone who worked at a runaway success story:

1) Don’t hire anyone who doesn’t have at least one significant failure they are willing to talk about.  The failure means they have learned.  The “talk about” part means they are being as honest as reasonably possible in the vetting process.  Here’s an interview tip.  After hearing about the failure, ask them for the name of someone else who also went through the failure with them that they still like. Then ask the candidate to describe their impressions of the themselves from perspective of the other person.  In an excellent interviewing class I had a while back, the teacher explained that the possibility you may actually know or contact the third person increases the chance your candidate will give you an honest answer.

2) Go rent season 4 of the TV show House.  In season 4, House is forced to build a a new team.  The process is entertaining but also valuable if you are interested in characteristics of a great team.  You should probably watch some of the earlier seasons so you understand the show.  House understands that to build the best team, you have to hire people who compliment your skills, who are not afraid of failure and who are willing to look for the best solution no matter the cost or process.  Most importantly, don’t just hire people who think like you if you want to benefit from the unique experiences of individuals with different points of view.

3) Hire people with great pedigrees in their past too!  Yes, I know the focus of this post was about how not to let pedigree cloud your thinking.  Simply put, experience matters and working with people who have done great work and achieved great success makes a difference.  My point is that you need to look beneath the surface and make sure the experience is real.  That is also the point of Eric Ries in his post.  He provides all the ways people with pedigree experience may not have earned that experience or learned from that experience.  I would suggest you review the post before the interview and do your best to determine if the person in front of you fits one of his profiles.

Any day of the week, I’ll take the person with substantial experience that includes brand names and failures over the person with only one great success story in their past.  I like to see some start-up experience, but I like that most when it is balanced with large company experience too.  After all, I’m not saving people’s lives like my good friend Dr. House, but I do want to have a team that can save a company in need and to do that they must know what to do when things don’t go as planned.

For reference, I have been an executive or individual contributor at several VC funded startups, one of which went public. I was at another startup that was entirely angel funded. And finally, both Open Mountain and our development partner Avantica are bootstrapped efforts. We have clients in all 3 categories as well.

Here are my observations:

Venture funded

• Venture funded companies have more knowledgeable and powerful people associated with the company. The board tends to be loaded with people who have deep knowledge and/or wide connections in the industry. The knowledge helps to guide the company while the connections help the company become known.
• Venture funded companies do more faster and spend more faster over time. Even the young companies feel more mature since job offers may be more competitive thanks to the larger bank account. The venture dollars provide for bigger salaries and the name behind the company gives the impression the stock is already more valuable.
• The one down side is that venture funded companies have more pressure to have better success faster (not always, but for the most part). The investors are definitely looking for the big hockey stick to show up sooner.
• For clients who have big ideas and a strong possibility for the home run, this is definitely the way to go!

Angel funded

• Angel funded companies can have knowledgeable advisers and boards but some times do not have the big names found in venture companies. This means you get good advice, but you may have to add advisers with connections or have to work harder to become known.
• Your investors may be very good or may just be someone who joined the right startup at the right time. You generally need to be a bit more careful when selecting from your angels who will have active participation within the company.
• Angles often invest for interest along with profit. This takes some of the short term pressure away. If you are self-motivated, which you most certainly are if you are starting a company, this is probably a good thing for you.
• The pressure comes back in terms of cash management. You will most likely have less to start when using angel funding. If you start to run out of cash, you’ll probably need to find new investors. VC’s tend to work harder to preserve their initial investment than angels do.
• In the end, leadership teams from angel funded companies feel more empowered and more in control of their destiny. That’s because they are! But if the company starts to fail, you don’t have the larger institution behind you.

Bootstrap

• The plus side is easy here. You own it all and have complete control. You can make all the decisions because you have not taken any money from anyone.
• Many bootstrap efforts fail because they run out of cash. Sometimes, it is worth it to give a little ownership in the company away for security and help. Plus, with cash, you can hire more people and produce results faster. This means you just might not miss your window of opportunity.

So back to Open Mountain, we’re bootstrapped because services businesses take a long time to grow and require a great deal of effort to carve out their niche’. We wanted to take the time to do it right and without the influence of external investment. That’s not to say we don’t speak with advisers and industry experts. It’s just that, after 20 years in the business, the mission of what we are trying to do is crystallized in our heads and we like marching to that drum beat.

The good news is that we’re over the hump and have healthy and profitable growth. We have found that we can provide better service to our customers because our mission remains controlled by us as defined when we started the company. That may change some day. But for now, I can say bootstrapping the company feels like it was the right choice for us.

That said, if I were starting a product company, I would create a prototype, project some revenues and then definitely start calling every VC I know with knowledge and interest in the market. My experience is that product companies require money and backing to succeed. I recommend the backing of a venture company with strong expertise, funding and passion for the industry where your product will thrive. A key data point is how many portfolio companies they have within the same or similar industries, or with the same or similar business models.

All of these models can work. It’s a matter of defining what you want to do and putting together a plan to get their business. Then, crank up Excel and a budget and that should tell you what type of investment you will need.