Homebrew: The challenges and opportunities in starting up

We think of Homebrew as our startup (it just happens to be one that writes checks instead of code). And we’ve definitely had to deal with the typical startup challenges while getting Homebrew off the ground, including fundraising. While cloud services, open source software and engineering outsourcing/offshoring have driven down the costs of starting a technology company, I’ve been dismayed at how little impact technology has had on aspects of company-building that have nothing to do with the the traditional technology stack, such as obtaining credit, finding office space and buying insurance. There is still tremendous opportunity to improve the costs and efficiency of creating businesses, especially small businesses that are part of the Bottom Up Economy. We’ve learned this first hand over the past few months.

I thought it would be interesting to outline all of the things that we had to do and the dollars we had to spend to get Homebrew to a point where we could focus on our “product”, investing in entrepreneurs who are enabling the Bottom Up Economy. I found that with each of the items, there is room for startups to provide a better, faster, cheaper solutions. If you’re working to address any of these opportunities, we’d love to hear from you. Here is a long but not completely exhaustive list:

– Fund formation. Legal work, including for our fundraising (akin to company formation and fundraising for startups), took us 100 days, required countless state and federal forms and cost us about $125k in legal fees (yikes!). And because we’re a VC, we had to purchase a special type of insurance called Venture Capital Asset Protection, which protects us in case we get sued while performing our duties as board directors of the companies we invest in. We obtained our policy through a broker and pay about $15k annually to cover us. Finally, we conducted a trademark search and registered our name, which required using a separate trademark lawyer and incurred about $3k in fees. While fund formation is clearly a high class problem, small businesses usually need to complete similar steps when starting up. They need to incorporate, register the business, seek trademark protection and get liability insurance. While we had the benefits of time and resources, most startups don’t. Yet, beyond a now dated LegalZoom, little seems to have been done to decrease the cost and complexity for new businesses.

– Office space. It took us two real estate agents and about 7 months to find and move into our offices (3200 sqft at a bit over $10k per month). The good news is that in most commercial real estate markets, San Francisco included, tenants don’t pay broker fees (lots of startups don’t seem to know this….hire an agent!). However, landlords can make you jump through hoops, including providing financial statements, certificates of incorporation, etc., to sign a lease. As a startup much of this is hard, if not impossible, to provide. But it doesn’t end there, once you find office space you need to find a real estate lawyer to review your lease agreement (cost us about $2000) and get lease insurance ($2700 through an insurance broker). In both cases, we relied on our real estate agent to recommend a service provider as there wasn’t any good way of “shopping” for one. Is there anyone out there working on a Zillow or Trulia for commercial real estate?

– Office outfitting. Furniture, internet service, janitorial service, utilities, electricians, movers, painters, food and drink. These things add up, even if you’re just opting for IKEA and Costco. And they take time because there are no good sources for identifying providers, for comparing pricing and quality or for scheduling.  Even with the help of friends, all of this took countless hours, appointments and emails.  The most frustrating was furniture, which took 4-8 weeks (and counting!) for delivery with no regular visibility into a delivery status. And we know we’re not alone in struggling through these items because we hear about them regularly from founders and small business owners we meet.

– Hiring. For small businesses, hiring is still done through personal networks, walk-ins or Craigslist. Given that we were looking for more than just an employee, a true founding member of the Homebrew family, we relied exclusively on our personal networks. The process didn’t cost money but it took 5 months of interviews, reference checks and social outings to vet candidates. We were fortunate that all of that time and energy resulted in finding a great Director of Operations. Unfortunately, for small businesses, they rarely have the luxury of that much time to find a qualified employee.

– Health insurance. Our Director of Operations is an employee so the State of California requires us to carry workers’ compensation insurance. Again, we worked through a broker and obtained a policy that costs us $240 annually for one employee. We also needed health insurance for our team. This was possibly the most painful experience that we had even though we worked through a broker. The list of reasons why is too long to delineate but it includes: 1) not being able to obtain insurance without 6 weeks of payroll 2) needing to provide proof of insurance for one employee who opted out of coverage (?!?) 3) completing over 16 different forms for only two covered employees 4) having to provide partnership agreements, ownership structure and our Certificate of Formation for who knows what reasons 5) requiring a paper check for payment of the first month’s premium to initiate coverage and 6) taking over 3 months from start to finish (our insurance finally kicked in on 8/1). And all of this is for a process that is completely opaque and results in what we hope is good insurance given the $2500 per month to cover two employees and their families. The vast majority of small businesses rely on insurance brokers for finding and maintaining health care coverage and no doubt face the same questions and frustrations we did.

– Banking. As a startup in Silicon Valley there are plenty of banks that will service you, so finding a bank is not a problem. However, the process of actually opening an account takes countless paper forms and hours of back and forth with the bank. And if you want a business credit card, good luck. Homebrew is a $35 million fund with large institutional investors and we still couldn’t qualify for a credit card with reasonable limits and fees from a number of banks. After six weeks, we were finally approved for a card from Amex on the back of my personal credit card history. Imagine the pain if you’re a small business on Main Street!

– Payroll. Maybe the easiest thing we did because of our outsourced CFO and ZenPayroll (wish we could have invested but Homebrew didn’t exist then!). Most small businesses still rely on ADP or Paychex but it’s great to see a better solution available.

– Web Presence. Finding and negotiating for a web domain, designing a logo, building a website that works well on mobile, choosing a web host and setting up various online identities (blog, Twitter, Facebook, LinkedIn, AngelList) takes time and can cost significant amounts of money. We have the benefit of having worked in technology for years (and it still wasn’t painless), but for a small business that wants to have a meaningful online and social media presence, the resources available to help understand its needs, find options and learn how to use them, are still incredibly disparate and unclear. The number of options available are limitless but the information needed to make intelligent decisions is rarely available.

– Infrastructure. We’re a completely cloud-based company so we use Google Apps for email, Google Docs for document creation, DropBox as our file system and Base for CRM. Selecting a CRM system was the most difficult of these choices because there are so many options in the market and no good way to compare them. We also chose to buy a printer/scanner/copier because as much as we want to be a paperless office, it’s hard to avoid paper completely in our business. Fortunately, we didn’t need a POS system, merchant account, accounting system (our outsourced CFO uses Xero), etc. like many small businesses do because I think I would have pulled the little that remains of my hair out trying to figure all of that out.

As a fund, we had the luxury of raising our money upfront and having ample time to work through these issues as there was no clock ticking. But for small businesses, the costs and the time taken away from selling and serving customers can mean the difference between success and shutting the doors. There is so much friction involved in the process of establishing a new business and relatively little has been done to make it easier. We hope that Homebrew can play a part in changing that. Over the past few months, we’ve put in place a lot of the foundation to support entrepreneurs participating in the Bottom Up Economy. We’re going to share as much as we can along the way – both the good and the bad – to be transparent about our work and to encourage more innovation in support of the Bottom Up Economy.

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