This week I'm attending the SXSW Interactive conference, one of the top conferences for the web industry. Over the next few blog posts, I'll highlight some of the more interesting things I've seen here -- panel discussions about entrepreneurship, hot new products that might be of interest to entrepreneurs, award winners, and maybe even a couple of interviews.

Yesterday I attended a panel entitled "The Care and Feeding of Your Startup". Here are my notes (not transcript!) from the discussion:

Panelists:

Moderator: Eric Hellweg Editor & Managing Dir, Harvard Business Online

Stacey Zuniga Founder,   UnWired Nation Inc

Eric Hellweg Editor & Managing Dir,   Harvard Business Online

Blair Garrou Managing Dir,   DFJ Mercury

Bill Flitter CEO,   Pheedo Inc

Chere Heintzmann Marketing Director, Disney Company

C. Eric Smith Pres,   UnWired Nation Inc

Hellweg: How do you take an idea and develop it into a company?

Smith: There's no shortage of ideas. The main thing is this: is this something I can be 100% dedicated to and passionate about in my life? If you're not driving it at that level, the company will not succeed. It always starts with my own personal need that isn't available in the marketplace.

Flitter: We saw a need in the marketplace. There was a problem with email marketing - a decline in open rates of email marketing. We set out to provide a solution to that.

Heintzmann: Importance of distinguishing nice to have vs. need to have. Biggest things we look at: the team, momentum, market size, morphability, cost structure, competition. What is the pain that your product is trying to solve?

Zuniga: Seek out the critical folks. One person said, "We don't know if this is a business or just a feature." You have to listen to this kind of input, regardless of the source.

Garrou: In the web space, core features that spur adoption for multiple platforms have potential.

Heintzmann: Morphability is very important. Very often where you end up 6 months later isn't where you envisioned when you started.

Flitter: If you build a feature and focus on that feature, and then focus on where you can take that feature, with the lower cost of development now, you can take it to the market and see what happens. But have a plan as to where it could go.

Hellweg: How can these people who are looking at funding show that flexibility without coming off like they don't know what they're talking about.

Heintzmann: 9 times out of 10, the team can't go the distance. Many companies, with the money they're asking for, they're trying to do too much too soon. Have a product roadmap, but start with the core value.

Smith: Ars Technica board room - think of your business as a relay race. Think of each stage as something you have to prove to yourself and to investors.

Heintzmann: Unrealistic expectations make it difficult to align the team, investors, etc.

Hellweg: How do manage expectations within your company?

Flitter: We have two sets of numbers -- one for our VCs and another internal, so we make sure we're exceeding their expectations.

Heintzmann: If you can exceed investors' expectations, it's OK to fail. Build trust with your investors.

Hellweg: As you're putting together your team, what do you consider?

Smith: The key thing is to find the people that complete your skill set and who can motivate you and help you get through the tough times.

Zuniga: If this is your first startup, chances are that it won't be your last, nor your first successful one. You're looking for people with "karmic velcro". Do they understand how startup works and have the fortitude to stick around? Fail fast. You'll learn quickly what works with your team and what doesn't. And it will be different for every entrepreneur.

Smith: No way to know when first meeting someone.

Garrou: Three things we want to see: 1) someone in charge of product who's listening to the market, 2) someone in business development, 3) the team needs to have built team of advisors and mentors before funding.

Heintzmann: Are they passionate about the ideas? Do they like each other? Does the founder know where they start hitting a wall and need to hand off?

Hellweg: What are common mistakes entrepreneurs make when building their team?

Heintzmann: Building the senior team too quickly. Some things can be outsourced.

Garrou: Companies that can't manage outsource relationships are going to have a hard time scaling in a capital-efficient manner.

Hellweg: What about funding?

Garrou: It's highly inappropriate to go after venture money for a web product in the startup phase. The most important thing to do is listen to the market and listen to the users. Get to half a million or a million users first. Look at angels instead.

Smith: Key to successful VC is to take the money at the right time, from the right people, for the right reason. Use it to fund growth of something you've already proven can be successful. This time we had to grow quickly and we had to burn cash to do that in order to capture the attention of eBay. Some products are not venture fundable.

Garrou: And that's OK. There are plenty of companies with a $10-$30 million exit, and that's not enough for a VC, but it's terrific for a small web startup.

Flitter: When we started Pheedo, we considered the options. I wanted to grow a company. The best time to go for money is when you don't need it. It's cheaper now than any time in history to build a company.

Garrou: I love the StumbleUpon strategy. They built the company cheaply, built an audience and had a terrific exit.

Hellweg: How do you keep innovation once you start having all of this corporate overhead - monthly board meetings, etc.

Garrou: When you can afford the outsourced CFO, that's the right time. Until then, run lean and mean.

Heintzmann: It's really smart to make sure you're aligning yourself with the right VC. Some have never had to float payroll, never bootstrapped a business. Make sure it's someone who's been in your shoes. I don't want to deal with someone straight out of school, with a background in finance, who wants to look at your books every month.

Garrou: When you do take venture money, try to do monthly board meetings one in person, one remote. Do financials quarterly and cash statements monthly.

Hellweg: What did you do when you were at that point?

Smith: CEO handled the board side and investor relationships so partner and I could stay focused on product and the customers in the pipeline.

Audience question: What about the changing environment for investing, especially in the earlier stage?

Garrou: In past three years, more and more investment at $250 million and below. But M&A activities have dropped off, so money is tightening. Think of it as an 18-month process.

Audience: We have an agency, but we realized that we could create our own products at a lower cost and higher margin. How do we pick the products to develop?

Flitter: My first startup was a challenge of picking the right product. Look not at the number of items you sell, but how fast they sale. Don't do a lot of investment up front -- test the concept.

Audience: How do you choose that initial customer. Aim for a Fortune 500 client or a little lower?

Smith (who went after eBay as a client): We looked for a company that had several elements: massive pain (eBay, 50% of people were missing their final bid because they weren't at their computer), potential exit partner (could they acquire your company?), and ability to enter the market without official endorsement - we showed the value, measured everything, made the case.

Heintzmann: Consider the sales cycle. Do you have the money to hold out that long?

Flitter: If you look for "Fortune 500", you're looking at it the wrong way. Look at the characteristics of the buyer.

Audience: I launched an ezine last month, and I know that I'm wearing way too many hats. How can I focus on what I do best and still hold the vision?

Smith: You need to find people who will not only stick with you, but who can actually help you. Find the people who are willing to come on and help you take it to the next level because they believe in it too.

Audience: My cofounder and I are having the VC debate. At what point in terms of registered users do investors get wide-eyed?

Garrou: Some want to see over a million, others are interested at 20,000. I think the more important thing is growth and usage.

Audience: I have a company that helps people find clothing to buy. Has morphed several times since startup. How do potential investors feel about that?

Garrou: No, we like people who have gone through the abyss.

Heintzmann: Absolutely, we want to see someone who has gone through the learning process.

Audience: First-time founder. What happens once you get VC?

Garrou: It's not just about the monthly board meetings. Actually, you get a lot of hand-holding. You don't want them officing with you, but they should be opening up their Rolodex, calling potential customers and partners, building your advisory team.

Heintzmann: Should be able to guide you from your seed round to A round to B round.

Audience: We have an opportunity to join an incubator in Washington, D.C., or go to Silicon Valley. Does geography matter?

Heintzmann: I don't think it matters.

Garrou: First, based on the business, can you build a management team? And can the business build the relevancy it needs? Are they willing to put you on salary? (Audience member: "Yes.") Then take it.