I've been in the startup business for a while and it still amazes me how many
founders (including me at various points in my life) have completely irrational
views on how life at a startup is going to be.
As it turns out, lots of success requires a sprinkling of luck to work, but
counting on this luck to come up at the magical times is foolish. So, stay up
late at night working on the business and improving the product for customers --
not what deciding what you're going to wear to the startup ball when the magical
startup fairy comes tapping at your window. In other words, quit running
advanced spreadsheet models on how your revenues are going to grow if you can
get only 1 out of 4 users to tell their friends. (See #1 below).
Founders: Stop Hoping for Magic and Start Working
1. Somebody's product is going to "go viral" this year. Someone is also
going to win the lottery. Just not you. Don't count on virality, but
add some simple elements to your product that make them easy to spread.
This will increase the probability that your product will go viral to
something slightly above zero (instead of zero).
2. Venture capitalists are not swash-buckling risk-takers that are going to
fall in love with your startup at first sight -- and write you a check.
Unnecessarily daring people do not become VCs -- the industry filters most of
those out. Work at not needing the money. If you could use
the money, get multiple VCs interested.
3. Smart people are not going to be lining up to work for your startup,
without salary, just for the sheer thrill of "the startup life" and an ability
to be associated with the brilliance that is your idea. Be reasonable
about it. Expecting team members to take some risk for some time is fine. But,
that's not a great strategy to recruit a great team.
4. Big company executives are not going to be inviting you into their
wood-panelled offices with old leather chairs offering you increasingly
lucrative partnership deals just because of "synergies" they might have with
you. Big companies have teams dedicated to keep an eye on startups like
yours. Just because they spend time with you doesn't mean you're getting a deal
anytime soon. Just because you get a deal, doesn't mean it's a good
one.
5. Google, Microsoft and others are not going to be falling all over
themselves trying to acquire your company. Acquisitions are great when
you can get them. But, they're usually complicated and take time. Get great
counsel.
Now, here's the good news. If I happen to be wrong about any of the above
ones and you do indeed get lucky on one of these things, the chances that you're
going to get lucky on others goes up. So, keep crankin'. The magical startup
fair may never show up, but you're better off not waiting for her anyways.
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I've been invited to speak at the upcoming Business of Software conference in
Boston (my home town!) on September 8, 2008.
As such, I've been thinking a bit about the business of software. I do this
regularly because my day job (and most of my night job) is running a software
business in the area of internet
marketing.
more info: Business of Software Conference
There are a ton of great speakers scheduled for the conference -- and then
there's me. Other folks that will be there include Joel Spolsky (who is
sponsoring the conference), Seth Godin, Eric Sink, Steve Johnson, Richard
Stallman, Paul Kenny, Jessica Livingston and Jason Fried. It promises to be a
great conference and I'll do what I can to not bring down the average quality
too much.
If you're planning on making it to Boston for the conference, please reach
out.
Meanwhile, here are somewhat pithy thoughts on the business of software.
Pithy Insights on The Business Of Software
1. Software businesses are not a low-cost play. You're probably better off
producing great software somewhat expensively than producing average software
somewhat cheaply.
2. Great software is produced by great people. Mediocre people don't ever
accidentally produce great software that makes millions of dollars.
3. Programmers have not been, and never will be, commodities. If you think
this way, I'd quit now.
4. Pricing software is hard. More people charge too little than charge too
much.
5. If you're charging really small price-points, consider going to
a freemium model (some version for free, the upgrade is paid for). The free
version is a great way to get some distribution and customers.
6. Just because people should buy your software doesn't mean they
will.
7. One of the trickiest parts about a software business is figuring out the
right level of services to sell. If the answer seems blindingly clear, you're
not thinking about it hard enough.
8. It's getting harder and harder to make money on pure software innovation
(i.e. lines of code and the product itself). Increasingly, business
innovation is what companies are using to drive differentiation and better
margins.
9. It's a great time for software startups. Capital costs are very low
(infrastructure, systems software are getting cheaper every day). And,
distribution is actually possible with some creative marketing on the internet.
Tiny companies have a shot at reaching big markets.
10. There are still people that believe massive spec documents and months of
planning will produce working software that users are going to be delighted
with. I feel sorry for these people. Think agile, folks!
11. Make sure you're deciding correctly between a horizontal offering and a
vertical offering. Horizontal offerings are tempting because of their potential
scale -- but they're much harder to execute.
12. Programmers often like to build platforms, not applications. But,
building a business around a platform takes lots of good strategic thinking (and
often a fair amount of capital and/or luck).
That's all I have for now. More on this particular topic in a later
article. I'm on vacation today, so didn't have enough time to really dig
in.
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It's been a mildly interesting weekend.
One of the interesting things that happened was a TechCrunch article that
described Andrew Baron selling his Twitter account
It was the weekend, and I was looking for some quick amusement value, so I
jumped into the auction on eBay. Things got really interesting from there.
There's been a lot of discussion on the TC article and on Twitter itself
about how crazy/wrong/idiotic this whole thing is. Amidst all the noise, a few
good points have been made.
Since I'm currently the high bidder, I figured I'd share my two cents as to
why I'm bidding on a Twitter account at all (I'm not even that big of a
Twitter user yet).
If you're an OnStartups reader and like Twitter, you can follow @OnStartups.
Thoughts On Bidding For A Twitter Account
1. I think of this as being a "digital asset" -- akin to a blog. Like a
blog, a Twitter account has a "readership/following". Just like a blog can be a
person/business/hobby/whatever, so can a Twitter account. Based on this, I
don't see anything inherently wrong with someone selling (or buying) a
Twitter account.
2. Twitter allows you to change the name of an account after it's been
created. So, I could change the account to www.twitter.com/technogeeks if I
wanted (which right now, is still available). [Note: That's not the name I'm
planning to use, so if you want it, go for it].
3. The account being sold had 1,400+ followers at the time it was listed and
now has 1,600+ followers (presumably because of all the buzz around the sale).
That's interesting. Much of the chatter on the account right now is about the
sale. If people were planning on leaving in droves, I'd expect it to start
happening already.
4. Twitter followers can easily "un-follow" an account. So, although some
have made the argument that this is somehow "wrong", the ease (and safety) of
opting-out unfollowing makes me feel fine with it. Contrast this to if a
company sold your name as part of a big mailing list. At least with Twitter,
you don't need anyone else to get you off someone's follower list. You want
off, you're off. It's that easy.
4. I've been finding more and more interesting people on Twitter lately.
So, although I've been skeptical of it, there may end up being a there
there.
So, the question is, what am I going to do with the account if I do
actually win the auction? I can't tell you yet -- but I do have some ideas
(none of which are nefarious and require an evil laugh). Stay tuned...
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Yesterday, I had the opportunity to speak to the New Enterprises class
(15.390A) at MIT and talk about startup funding. On my first PowerPoint slide,
my second bullet-point was (literally): "I Hate PowerPoint".
Don't get me wrong. I think PowerPoint, the software tool, is just fine. In
fact, I have a fair amount of respect for the programmers that built it. It's a
powerful application. What I hate about PowerPoint (and I guess, presentation
apps more generally) is what it does to me during my preparation as a speaker.
For some reason, as soon as I start creating slides for a presentation, my
passion slowly dies. Despite all my readings on PowerPoint best practices from the likes of Steve Jobs and Guy Kawasaki, and my
best efforts to keep things simple and powerful, I invariably get reduced to
this neurotic shell of my usually practical and passionate self and resort to
that horror of all horrors -- the bullet point. Then, it's all down-hill from
there.
For the MIT event, I had actually decided not to create a PowerPoint deck.
After all, there's no rule anywhere that says you have to have slides to present
at MIT. Things were just hunky-dory (the first time I've ever used that phrase
in writing) until a few hours before my scheduled talk. Then, Brian Halligan
(my co-founder at HubSpot) casually says: "So, let's check out your slides for
the MIT talk". Curses! I tell him, "I don't have slides. I'm just going to
talk." To his credit, he didn't give me a hard time about it (we've had
conversations about my hatred for PowerPoint before). Then he went to lunch and
I was left questioning my decision. After a little while, I thought, "ok, maybe
a few slides can't hurt...will keep me organized...". I start PowerPoint.
Curses!
To be fair, once I'm actually speaking, PowerPoint is not that bad and I've
gotten pretty good at having it not get in the way. I spent the 10 years of my
early entrepreneurial career doing a fair amount of public speaking and spent
most that time avoiding PowerPoint entirely. Oh, those halcyon days...
So, back to the MIT talk. The talk itself went great and I just had gotten
over my anger at PowerPoint today when I came across an article by Jeff Nolan
titled "PowerPoint And The Spoken Word". I agreed whole-heartedly
with the premise of the article, and loved this particular sound-bite: "The art
of business communication is not forever lost, but it has quite often never been
acquired largely because we have confused the medium with the message."
So, why do I hate PowerPoint? Because even though I know better,
it's just too easy to get lazy, resort to bullet-points and create slides for
the worst possible reason to create slides: Because you think you have to.
That, and I'm really doubtful that anyone in my audience (or yours) has thought
this in the first 5 seconds of a presentation: "He's got a PowerPoint deck.
Yah! Woo hoo!".
If I hate the talent and resources of Steve Jobs, I'd be able to create
slides just fine. But I don't (have the talent) and don't (have the resources)
so I don't like to create slides.
Hate PowerPoint because you love your audience.
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I've been (personally) using Twitter more frequently lately because more
people I know are using it.
Not sure how many people really care where I'm having dinner. But, I figure there are many more people interested in startups. So, I've kicked off a Twitter account for OnStartups.
If you are interested in getting pithy insights, quick tips and short
quips On Startups on Twitter, follow OnStartups on Twitter:
http://twitter.com/onstartups
I'll try to keep the signal-to-noise ratio high (and post only things that
are at least semi-useful and/or related to startups).
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Venture capitalists have a hard job. The good ones have to pick a small
number of investments from a large pool of opportunities, often with minimal
"data".
If I were a VC, I'd look at a lot of the things that VCs look at today and
ask some of the same questions. What's the market opportunity? Who's on the
team? What do you think your sustainable competitive advantage is, or
will be?
In addition to some of these common questions, I'd also ask some uncommon
ones. I think it's these uncommon questions that often reveal the heart and
soul of a startup. If I were investing my own money (which I do on occasion),
the answers to these uncommon questions would be as important to me as some of
the common ones.
Uncommon Questions For A Startup
1. What is the longest debate the team has had in the last 30 days?
How long did it last? What did you decide? How did you decide it?
Motivation: Any great startup team is going to have a set of issues/questions
at any given time to which the answer is not obvious. How a team goes about
identifying the tradeoffs and getting to an answer (even if it's not the right
one) is revealing.
2. If your equity/salary was based completely on the accuracy of
your projections, what would your forecast be?
Motivation: Drawing the classic "hockey stick curve" (for users, traffic,
revenue, profits, whatever) is just too easy and doesn't tell me anything. I'd
like to know what the startup really thinks it's going to do. Yes, all
forecasts are guesses, but some guesses are more practical than others.
3. What's the biggest surprise you've had in the business
recently?
Motivation: There should always be surprises. Startups should be
experimenting and trying new things constantly. Especially in the early days
when lessons are the cheapest. No startup has it "all figured out" (and those
that do, aren't experimenting enough).
4. If you knew with 100% certainty that you weren't going to be able
to raise (more) funding, what would you do?
Motivation: Sure, it's good for startup teams to think about how to break
beyond current limits to build phenomenal companies. But, great entrepreneurs
also work well within constraints that are unavoidable. The mother of all
constraints is a fundamental scarcity of resources -- like cash.
5. If you could pick only one non-financial metric to measure the
success of the business, what would it be?
Motivation: Revenues and profits are a great, fundamental way to measure a
business. But, looking at non-financial metrics can often be very revealing.
Shows what people care about.
6. If you could fix magically fix one, specific problem with the
business today what would it be? What would the likely impact
be?
Motivation: All startups have problems. It's interesting to know what
problems a startup has and how fixing it might create another, non-linear
improvement in the business.
7. What will you do to find and retain the best people possible for
the company? What do you
Motivation: More than anything else, the quality of the early team will
likely influence the outcome. I'd like to know what uncommon things are going
to be done to draw in the uncommon talent.
If you were a venture capitalist and investing in startups, what uncommon
questions would you ask? If you've raised capital before, what's the
best question you've been asked by a VC?
---
By the way, are you a startup fanatic? If so, request access to the free OnStartups LinkedIn Group . There are already over 5,500
members in the group.
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My co-founder, Brian Halligan and I are both big fans of Warren Buffet.
Brian wrote an article a while ago on the HubSpot blog "Quick Insights From Buffet and Gates". If you're a Buffet
fan, like me, I encourage you to check it out.
Recently, I had the opportunity to skim through the Berkshire Hathaway annual
report. There were some really amusing insights in there. It's refreshing to
see even a large, successful organization like Berkshire Hathaway maintaining
their personality and pragmatism in a document that for most companies is boring
and watered-down. My comments are in italics.
1. We are also happy to buy small portions of great businesses by way of
stock-market purchases. It's better to have a part interest in the Hope
Diamond than to own all of a rhinestone.
Venture Capitalists: Are you really sure you just absolutely MUST have
X% of that hot new startup? Instead of making the investment you want, why
compromise and do something else just because you can get 5-10% more?
2. You only learn who has been swimming naked when the tide goes out. [With
relationship to the recent housing bubble]
This made me think about pre-revenue startups. When the tide of funding goes out, and you have to start charging money, will your business model
be naked?
3. For the entire 42 years, our compounded annual gain in per-share
investments was 27.1%.
Ok, this isn't really amusing, but it is impressive.
4. A truly great business must have an enduring "moat" that protects
excellent returns on invested capital. The dynamics of capitalism guarantee
that competitors will repeatedly assault any business "castle" that is earning
high returns.
I like to think of this in terms of a wall rather than a moat. Build the
wall that protects your companies interest from those that would take your
profits away. My simple strategy for building a great wall: Step 1: Start
building wall. Step 2: Add at least one brick to the wall every day.
5. If a business requires a superstar to produce great results, the
business itself cannot be deemed great.
Though depressing for us startup entrepreneurs that think the entire
company revolves around us, it's true. A truly great business should likely be
able to run without the need for it's current founders or management team. Of
course, in the early days, this is rarely true.
6. The worst sort of business is one that grows rapidly, requires
significant capital to engender growth, and then earns little or no money.
Think airlines.
This is very interesting. A lot of the big infrastructure plays end up
here. You have to continually invest more and more money to get lower and lower
returns.
7. If his I.Q. was any lower, you would have to water him twice a day.
I felt guilty when I smiled at this, but had to admit it was
funny.
8. From Bobby Bare's country song: "I've never gone to bed with an ugly
woman, but I've sure woke up with a few."
9. Mitt Romney's wife Ann, when asked: "When we were young, did you ever in
your wildest dreams think I might be president?". Response: "Honey, you weren't
in my wildest dreams."
10. Charlie and I are not big fans of resumes. Instead, we focus on brains,
passion and integrity.
If you had to solve for any three attributes when hiring, these are about
as good as any. Intelligence, Passion and Integrity.
11. I've reluctantly discarded the notion of my continuing to manage the
portfolio after my death -- abandoning my hope to give new meaning to the term
"thinking outside the box."
12. Queen from Alice in Wonderland: "Why, sometimes I've believed as many
as six impossible things before breakfast."
Hope you enjoyed these. If you have other great Warren Buffet related quotes
or insights, please leave a comment We're always looking for more.
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My favorite stage of a startup is the early, early days. This is when things
are the most chaotic, resources are limited and the team is small enough to fit
a single car.
I've been thinking about the early days of the startups I've been involved in
and put together some quick (and practical) tips on these early days.
Tips For Startups: The Early, Early Days
1. You don't need office space: Plenty of startups do just
fine working out of a basement or spare bedroom.
2. Don't Bargain Shop For Small Things: Resist the
temptation to find the best deal on cheap things (like computers). It may be
personally satisfying to save $50 on a printer, but you're wasting valuable
time.
3. Think Of A Good Name: Spend at least a few hours
thinking about a name for your business. Read a couple of practical articles on
the topic. Talk to other people to test your names. Most entrepreneurs spend
too little time (as in almost none) on a company name. A good name won't make
your startup successful, and a bad one won't make it fail, but some simple
guidelines help. And, a name is hard to change later.
Reference 1 (Guy Kawasaki): The
Name Game
Reference 2 (Dharmesh Shah): The Startup Name Game
Note: Unsurprisingly, Guy's article is better, but I wrote mine first (did
not copy his "Name Game" title).
4. No Fancy Titles: Don't waste time coming up with fancy
titles for the founders. Simply use "founder" for your title and get back to
real work.
5. Forget Business Plans: Instead of laboring over your
business plan, labor over your business. If you do work intensely on your
business plan, assume that you are the only person that will ever read it. Even
your mom and you spouse won't read it. Potential investors will definitely not
read it.
6. Avoid Pontificators: Early team members all need to
do something. Don't recruit pontificators. Beware the pure "idea
people". You want "get things done" people. There will always be more
ideas in your startup than there are people to execute them.
7. Venture Funding Is Hard: Raising venture funding is
actually harder than bootstrapping -- especially if it's your first
startup. Try and figure out a way to get going without funding. Take the
hundreds of hours you'll save and go help customers solve problems.
8. Allocate Most Time To Customer Value: Act as if someone
is paying you $1,000/hour for every hour you spend making life measurably better
for your customers -- and $10/hour for everything else. In the long-run, the
ratio will be about right.
9. Part-Time Is Sub-Optimal (but OK): Many people will
tell you that you are unlikely to succeed with a startup if you're working on it
just nights and weekends. They're probably right. But, better nights and
weekends than waiting forever to get things kicked off.
10. Get Started! I have yet to meet someone that took the
leap, quit their job, started a company and regretted their decision (regardless
of outcome). Most people that have great jobs over-estimate the risk of leaving
them. Great people can almost always find another job if things go
really, really poorly with their startup.
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I recently came across an article by my friend Allison Shapira about Blue
Man Group as a business. The article is based on a reading Allison did as
part of her "Strategic Communications" course and looks at the business of Blue
Man Group.
Here's the part that struck a chord with me:
"How did Blue Man Group manage to maintain their vision, even with 38
performers around the country? They wrote a “Why To” manual. Not a “How To”
manual, which tells you how do things, but a “Why To” manual, which tells you
why to do things - it explains the vision..."
At my startup, we talk a lot about the "why to" part of the business (partly,
because we're all pretty analytical and like to have debates on just about
everything). We don't call them "Why To" discussions, but probably should.
Here are some examples:
Why To Charge Monthly Subscriptions (instead of yearly contracts):
Because it breeds the right company culture. With monthly
subscriptions, we have to earn our customer's business every month. There are
no "drive-by sales". Also, the data is worth more to us than the cash right
now. We want to learn as much as we can (and right now, the lessons are
cheaper). If we charged yearly, it'd defer a lot of this learning until the
customer had to decide whether to renew.
Why To Not Sell To Anyone Willing To Pay: Because the
product is not going to be equally beneficial to everyone. Our happiness (and
our profits) is going to be based on how happy our customers are in the future.
If you know a customer is unlikely to be happy in the future, don't sell them. Make them sell
you and convince you otherwise.
Why To Resist Hiring For Resumes: Just about the entire
team at HubSpot wasn't hired for their resume. We solve for intelligence,
passion and integrity. Why? Because someone with 14 years of experience at a
Fortune 500 company managing a $100MM budget may not know much about our
customers and our market. We'd rather bring people on that are smart and will
jump in and figure things out.
How about you? What kinds of "Why To" concepts are floating around in your
startup? Does your team often ask the "why" question?
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One thing I've been pondering this weekend is figuring out why startups
fail. But, in order to figure that out, I had to first decide what constitutes
failure. The more I thought about it, the more I realized that a
definitive failure is when the startup simply stops trying. And, the
only reasons to stop trying are that you run out of cash, or you run out of
commitment -- or both.
Let me elaborate a bit. Lets say your startup had an unlimited amount of
cash (hypothetically). Whenever you needed money, you'd go to the money tree,
pick some more cash, and go back to your business. If this were the case, it's
likely the number of startup "failures" would be vanishingly small. Why?
Because you haven't failed yet, you simply haven't figured out the model that
works. As long as you still had commitment, you could keep going indefinitely.
Of course, there's no such thing as unlimited cash.
Similarly, lets say you had a day job, and your startup didn't really require
any cash. And, you were fanatically committed to your vision or idea. In
theory, you could run your startup for decades and still never really
"fail". You'd just keep going and rather than being a failure, you'd be a
startup that hadn't succeeded yet. As long as you were committed, you could
just keep going.
So, with that set of abstract concepts in place, let's dig in a little
deeper.
Constraints On Cash and The Paradox of Venture Funding
Given that you have a finite amount of cash, how long your startup can
survive is a function of how much cash you put in (revenues + funding) and how
much you take out (expenses). You'd think that a venture-funded startup would
be more likely to succeed, because it has longer to "figure it out" (i.e. more
time to get to success). But, I'm not sure that's true. What ends up happening
is that VC-funded startups tend to increase their expense-base such that their
time horizon is actually pretty short (about 1.5-2 years on a Series A
funding). On the flip-side, a bootstrapped startup might not have a large
influx of cash, but might actually have more time to figure things out.
As an example, my first startup was bootstrapped. No VC funding. We did
things the old-fashioned way. We charged people money, and spent less than we
made. We were profitable from our first year of existence (and remained that
way for 9+ straight years). We were profitable, because we had no
choice. How much we spent was always a function of how much we made. In
the long run, we didn't grow as fast as we might have otherwise, but overall we
succeeded.
Contrast this to a couple of venture-backed competitors of this bootstrapped
startup. They had each raised $25MM+ in venture funding. Of course, this was
in the midst of the bubble, but the lesson is still similar (it's an issue of
magnitude). These companies ran through their cash, and couldn't get funding to
keep going. They failed.
This is just one data point, and it would be silly to try and generate any
conclusions from it. But, it does generate an interesting idea:
Perhaps startups should simply be trying to give themselves enough time to
figure out what will work. And, the time available is not a function of the
amount of cash raised, but the amount of cash being consumed.
Profitable startups don't consume cash -- they generate it. Hence, they've got
more time.
For the record, my current startup, HubSpot, is venture-funded. This means I have some work to do
to figure out how to get to the point of having an infinite amount of time to
figure things out (otherwise known as becoming profitable). The good news is that profitability is something we actually talk about (which you would think would be a common conversation in startups, but it's not).
In a follow-up article, I'll discuss the tradeoffs between bootstrapping and venture funding a startup. Having seen it from both sides, I'm beginning to form an opinion (always a dangerous thing).
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