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daily articles for founders

Here are 10 quality posts from the Founder's Library:

More about pricing books  

Sacha Greif comments on a series of guest posts, starting with his own earlier effort:

All three are great reads and well recommended for thoughts and experiments about pricing. Different books, different desired outcomes, different approaches, all analysed in some level of detail. Worth poking through over a break for ideas about how to test and refine pricing.

The articles focus on pricing ebooks (and additional materials), but the ideas and methods apply to other products too.

Four kinds of entrepreneurial contexts  

Context is everything when it comes to startup advice. It's not enough for the giver of advice to provide context, however. The receiver must also understand his or her own context.

Hidden in this article (superficially, a criticism of the Startup America initiative announced by the US government recently), is a list of four primary "entrepreneurial contexts":

  1. Small businesses: businesses which do not aim to scale to huge sizes, do not get venture funding, and whose success criteria is to "feed the family and make a profit".
  2. Scalable startups: businesses which shoot for the moon, have a chance of getting huge, tend to be disruptive, hire the best and brightest, and often attract venture investment. Their purpose is to search for a repeatable and scalable business model and then pump money into it to scale it up.
  3. Large companies: businesses have existing competitive advantages, are already making a lot of money, but are looking to innovate either because their cash cow is eroding, or they are being disrupted by competitors (startups or other large companies) or even are looking to be the disruptors themselves).
  4. Social enterprises: businesses, non-profits, or hybrids whose purpose to make the world a better place (rather than to take market share or create wealth for the founders).

Each of those is a unique entrepreneurial context, and advice that works in one may not work in another, or not without significant adaptations (which the best startup mentors understand and provide). Make sure you know which context you're operating in and understand whether advice being offered to you fits in with that context.

For example, E-Myth is a great book for the small business contexts, but its suggestion to design your business to be operated by the "least skilled operatives possible" will sink your scalable startup like a stone.

Startup gung-ho

Businesses, investors and consumers alike are gregarious. They want to go where everyone else is going. They want to buy success, from successful companies.

This leads to a perversion that affects the startup world as well as the rest of the business world: the need to appear more successful than you are, in order to get business, investment, customers.

This is not entirely artificial. Building a successful business is also about being able to project the right image to appeal to customer, and an appearance of success is part of that. Fake it till you make it, as they say. People don't want to buy from or invest in a dying company, so you've got to look like you're doing great, even if you're an invoice away from technical bankruptcy.

But there's a reverse side to that, which I believe is harmful to some startups: this projection of fake success extends to meetings with other startups and potential mentors at networking events, and because of that, founders who could really use a good dose of advice from a more experienced entrepreneur end up flying blind and making all the same mistakes again.

Startup networking events

When I turned up to my first startup networking event, I didn't know what to expect, so naturally, I turned on the "we're doing great" façade (which, I quickly observed, everyone else did too). Isn't it amazing how, in a high-risk industry where most companies are expected to fizzle out in the next few months or years, everyone is doing great, growing fast, acquiring more users, etc? How often do you meet a new founder and hear "Yeah, well, I've been at this for 9 months and our revenues are still way too small, so I think I'll be throwing in the towel and trying something else soon, because this isn't working."

Another aspect of this problem is that once you start putting up the appearance of success, it becomes very tempting to do so consistently, with everyone. Anyone could refer you to some business, after all, so you have to be on your toes all the time. Otherwise, you might miss out on some great opportunity that would have come your way if only people thought you were doing well. At least, that's how it often feels.

To make matters worse, if you introduce yourself by presenting what's wrong with your business, people will peg you as a negative type, and that's not the kind of founder people think of as being headed for success. No, you have to be an outgoing, friendly, open extrovert with a strong dose of self-confidence and a very slight touch of arrogance.

I'm very lucky that I can genuinely say that at this point, the two businesses that I am involved in are doing very well. But this wasn't always the case.

Missed opportunities

In the times when my companies were not successful, did I get any amazing opportunities by claiming to be successful to my startup peers? I don't think so. Founders have a pretty finely tuned bullshit detector. I doubt anyone was all that fooled. What about investors? With them, faking success is even less useful. VCs will not invest without doing a fair amount of due diligence. Claims that you're doing great when you're going bust will never lead to investment, unless you're a consummate con man.

What opportunities did I really miss, then?

How about opportunities for advice? Entrepreneurs are a helpful lot, but if you don't present your problems clearly, your peers won't be able to help you. Even non-entrepreneurs seem more likely to offer advice and connections if they think you're struggling and they could make a difference. Perhaps the only set of people to whom you might want to project the "appearance of success" are clients, during a pitch. Even that is unclear, though. It really depends on your industry. In some industries, a fledgling startup is more likely to get a foot in the door than a mature, successful company, and expectations will be lower, and therefore easier to beat.

In summary

  1. Appearing more successful than you really are will destroy more opportunities than it will create.
  2. Instead, be honest with fellow entrepreneurs. Don't be negative about it, but don't claim to be doing great when you're not.
  3. VCs will not invest based on an appearance of success, so bullshitting them won't work either.
  4. Appearances of success may work with some types of customers in some industries, but think about it for a few minutes instead of simply defaulting to the startup gung-ho attitude.

Three traffic triage questions  

Ilya Lichtenstein on traffic triage, the activity of efficiently filtering which online marketing channels are worth investing in, and which aren't:

The trick to allocating your marketing effectively is implementing some kind of traffic source triage system. When encountering a new traffic source, you want to be able to quickly and consistently categorize it into a low, medium, or high priority group, before spending any time or money testing it.

Ilya then proposes three key questions to ask about any kind of traffic, and goes into detail about how to answer them:

  • Is there enough volume?
  • Is the traffic cheap enough?
  • Does the traffic convert well enough?

Importantly, Ilya describes ways to answer these questions without having to invest money into the traffic source.

Advice for a young entrepreneur  

Tony Stubblebine starts with the following (well presented) advice:

  1. Surround yourself with interesting people;
  2. Focus on the right things (which means, ironically, figuring out what the right things are);
  3. Be useful.

He ends on a little zinger:

There’s basically two ways to be financially successful as a company. One, you could rely on time-tested business fundamentals. I call this the Warren Buffet model.

Two, you could rely on the greater fool theory, which is that with enough hype, smoke, and mirrors you can find a buyer who is an even greater fool than your investors.

(...)

So much of the startup world is arrayed around the greater fool theory that I felt like my best chance was to build a company that was independent of that system. I think of bootstrapping as a very slow form of raising money. But now that we’ve done it, I have a reliable stream of income and never have to raise money again. It’s really just at this moment in time that we can switch from doing whatever it takes to survive to actually testing our ability to make a major impact.

To be fair, there are situations where you do need the extra money to grow extra fast, or else you lose. Groupon is a good example - had they not executed so brilliantly and quickly, they would have been eaten alive by the dozens of clones which emerged everywhere.

I'm a big fan of getting profitable early, but it is neither the only way, nor the universal best way.

Three types of acquisitions  

Chris Dixon:

As large companies mature they move from doing just talent acquisitions to doing talent and tech acquisitions to eventually doing all three types of acquisitions. Usually it takes a startup beating the large company in an important area for the large company to realize the necessity of business acquisitions. For example, Google seemed to dramatically change its attitude when YouTube crushed Google Video. Eventually every large company has a moment like this.

Read more about these types of acquisition on Chris's blog.

Update: Another type of acquisition, via Seth Godin.

How to choose a cofounder  

Excellent article by Elad Gil, outlining many points that are worth thinking about before deciding to work with someone. As I've mentioned in an earlier article, starting up with someone else can be fraught with peril, particularly if they're a friend. Together with my article, this checklist of questions could save you a lot of pain.

Here are the high-level points, but please read the full article to get the substance:

Key criteria for selecting a cofounder:

  1. Ability to communicate with each other. Can you have an honest and frank conversation with your cofounder?
  2. Alignment on key questions. What are their objectives? Why a startup? What do they care about in company culture? Who do they want to hire? How do they view investors? How ethical are they? What is your role versus theirs?

Elad also points out that you should be clear about who's in charge, or else your disagreements will freeze the company, that you should avoid starting up with someone with strongly overlapping skills, and that it's a big bonus to have known them for a few years and even worked together before.

Time-saving web design generators  

This will be useful to someone - particularly when trying to put together a decent design to test an idea quickly. Generators are listed for:

  • loaders
  • colour schemes
  • favicons
  • striped and dot patterns
  • miscellaneous backgrounds patterns
  • tabs, badges, buttons and ribbons
  • CSS3 effects.

Enjoy.

Use your competitors' marketing budget for your campaigns  

This article by Ilya Lichtenstein proposes a method for competing against bigger, better-funded companies:

  • You can learn from their experimentations what works best in terms of marketing message, demographics, etc, which saves you from having to run your own expensive A/B tests.
  • You can find the keywords which they're not managing well and target those.

It's worth pointing out that this is an evolving pattern. Five years ago, most companies had no clue about SEO/SEM. These days, they will hire competent firms to do this for them, and so the result will be a lot of money spent on optimising ads, often with some skill.

As a smaller competitor, you need all the help you can get. Learning from your larger competitors is a no-brainer.

Money and wealth

Money and wealth

First, a disclaimer: I am not an economist. However, most people misunderstand money and its purposes and uses so badly that I feel compelled to write out my understanding of it. Perhaps because I am not an economist, this might help some.

My context: I am running a successful, profitable company that I started with my wife. I spent a number of years broke, but I have never been poor. I've always had the safety net of a middle class family and a top education (provided and paid for by my parents) to fall back on. I've lived in not-so-great accommodations, but it always seemed temporary in my life. Now for the first time I have enough money that I don't need to worry about it. I can afford the things I want (though I typically don't buy them, because once I can afford them, they no longer seem so desirable, just wasteful). Perhaps this is temporary, but at this point in my life I have enough money.

Thirdly, I am in this article discussing material wealth. There are many other potential variations for the meaning of wealth in other contexts. I'm not talking about these. Just the good old fashioned material wealth that society keeps telling us to chase.

With all that in mind, let us begin…

Money is a medium of exchange

The first and perhaps most important mistake people make is to confuse money for wealth. This is not too surprising when the dictionary itself proposes this misleading definition of "wealth":

1 . a great quantity or store of money, valuable possessions, property, or other riches: the wealth of a city.

It's worth including the "Economic" definition on that page though, it does change things somewhat:

3 . Economics:

a. all things that have a monetary or exchange value.

b. anything that has utility and is capable of being appropriated or exchanged.

You'll notice the Economists don't define wealth directly as money, but as the ownership of things that are worth exchanging for other things of value or for money.

The more I earn, the more I realise that wealth is not money, but the ability to generate money (and other things of value). This is akin to the difference between saying "I am a dancer" (i.e. I have the ability to dance) and "I was a dancer" (i.e. I once had it but I no longer have it). Being wealthy is equivalent to the first statement, while having money is equivalent to the second.

Having money does not make you wealthy, but having the ability to make money, through net income generating assets such as businesses, investments, or even just your own skills, that makes you wealthy. This is perhaps why those with a solid education are never really poor, but merely broke: they have the potential to make money, even if they don't have money right now.

But surely, having a lot of money, say a billion dollars, is the same as being wealthy? In theory, perhaps. In practice, it seems people who know how to maintain wealth would never keep a large sum in cash around, but quickly turn it into net income generating assets, and those who do not (e.g. lottery winners) often quickly find that the seemingly infinite pile of cash has evaporated into nothing.

Having a lot of money is at best a very temporary form of wealth.

Wealth is measured in net income generating assets, in things that allow you to generate money: skills, stock investments (if they generate profits), profitable businesses you own, cash-flow positive lands and properties, etc.

Money is not a net income generating asset. Money is not wealth. Money is a medium of exchange. By reading about rich people, you'll notice they generally try to avoid having a load of cash lying around, because money is not a place to store wealth. It is and has always been, historically, a very, very poor store of wealth. Currency, since its invention, has been a fantastic tool to facilitate exchanges of things of wealth. That is what it is, nothing more, nothing less. Our economy could not function without money, but its value is not in the money. The relationship between value and money is like that between a community and a message board, or a bicycle and its tires. The first can exist without the other, but the second without the first is mostly useless.

Some people will perk up at this and say "aha, this is because of the evils of inflation, and a return to the gold standard or a switch to Bitcoin would solve that".

To which the only valid answer is: bullshit.

Those who think money used to be stable need to read the book Money: whence it came, where it went (if you can't find a copy, send me an email). It is very instructive to look at the history of money and realise just how unreliable it is as a store of wealth. Historically, every few decades, money used to lose all its value in some kind of disastrous bubble that affected currency itself. Any wealth that was stored in money simply evaporated into nothing at all. Even gold suffered enormous ups and downs - for example, the importation of large amounts of pillaged south-american gold into Portugal destroyed its economy through hyper-inflation; the difficulty of moving gold between central banks during the gold standard era caused massive deflation in some parts and massive inflation in others.

The deep irony is that all those people calling for an end to inflation (and usually a return to a gold-like standard) because of the evil erosion of money, have lived their entire lives in a period of unprecedented monetary stability. Money is so stable nowadays that it sort of looks like a store of wealth, enough so that people get incensed that the state would dare allow inflation to affect it. The reality is that the current system has resulted (in some parts of the world, by far not all) in fairly steady and predictable inflation for almost a century.

Given the perils of deflation, a small, steady, controlled inflation is really the ideal situation for a medium of exchange. Not only that, but a moderate rate of inflation is generally considered a very good property for a medium of exchange for wealth, since it encourages people not to treat money as wealth, and to instead look to store their wealth in things that actually have value (ideally investments that enable the economy to work better, putting the accumulated wealth to use as capital).

But enough about misguided gold-standard bitcoin purists. How does this affect you, dear reader?

To get wealthy, build net income generating assets, don't accumulate money

Robert Kiyosaki, author of Rich Dad, Poor Dad (worth reading along with its sequels), proposes that rich people get rich by building their net income generating assets column (i.e. things that generate positive cash flow each month, not "buy and pray" investments like most stocks or houses), and that middle class people fail to get rich because instead of buying or building net income generating assets, they buy loss-making assets (e.g. by buying a bigger house with larger mortgage payments, or a new car with monthly payments) that drag them down.

I won't try and summarise Robert's entire philosophy in a blog post, but a common misconception (and my misconception, earlier) about "getting rich" is that it involves accumulating money.

As I hope I've made the case, having piles of money may occasionally happen on the way to getting rich, but it's not the goal, nor a desirable thing.

To get rich, what you want is net income generating assets, including the skills to generate those net income generating assets. Learning how to turn business opportunities into functioning businesses is an invaluable net income generating asset: I believe you can exploit that net income generating asset in almost any economic context, even war. But, as a more generic category, the fundamental pillars of wealth seem to me to be health (including youth, energy, endurance), education (including work ethic, general knowledge, wisdom, self-knowledge), intelligence and relationships (connections to useful people, trust, reputation, power). If you have those (at least the first three), and you truly desire wealth, it is yours for the taking, in this world at least (so long as you don't let your own beliefs hold you back).

The key takeaway should be that instead on focusing on how to accumulate money, you should instead focus on how to turn money (or other things) into things that create more money. A wealthy person doesn't set a goal of saving up a million dollars, and if they find themselves with a million dollars in cash, they quickly set to work finding a better format to store that wealth into.

Instead, figure out how much income you want and create things that will generate that income for you.

Savings

In that context, saving large amounts of money seems very ill-advised. Of course, at age 33, my perspective on this is limited, and perhaps I'm getting it all wrong, but it seems to me that the idea that the best preparation for retirement is to save up a load of money is a horribly noxious lie that has likely led to the bitter disappointment of hundreds of millions if not billions of people.

In the distant past, people "saved up" for their retirement by creating net income generating assets - out of their loins. Grown children can create wealth to sustain you when you can no longer do so yourself. A similar approach seems sensible today: instead of saving piles of cash that can depreciate rapidly or even be lost when the stock market turns sour and the bank or government turns around and slashes your retirement fund, create net income generating assets that will generate the wealth you will need to live on.

Saving for your retirement instead of creating net income generating assets seems like piling up potatoes in your cellar instead of keeping the potato farm running. The potatoes will go bad over time, you'll almost certainly miscalculate the amount of potatoes required, and if you run out, you're really properly screwed, because you don't have a farm to grow new potatoes anymore.

Pensions changed this somewhat - they were equivalent of handing the potato farm over to the state in exchange for a steady supply of potatoes until your death. In theory, this was a great idea. Unfortunately, history is showing that the state is a stingy, cruel, unfair and generally grossly incompetent manager of potato farms. Any people my age who, today, trust that the government will provide for them in their old age through pension schemes, are, in my opinion, delusional. Perhaps something else might change this situation, but who knows when such revolutionary ideas will actually take hold. In the meantime, Caveat Emptor.

The best kind of net income generating asset would be one that can adapt to changing circumstances, that has the lasting power to survive through dramatic world events (which no one can guarantee the future to be free of). The net income generating assets need not be imperishable: they merely need to have a very good chance of surviving you. Strangely enough, from this perspective, well educated, healthy, intelligent and loving children are probably still the best retirement net income generating asset you can possibly create, as they have been for thousands of years.

The purpose of wealth

Some people reading the above may think to make wealth their fundamental goal in life. I believe that's very misguided. As Paras Chopra said recently, the real use of money (or rather, wealth) is to buy freedom.

As Bob Dylan put it:

A man is a success if he gets up in the morning and goes to bed at night and in between does what he wants to do.

Wealth can help with that, depending on what you want to do. Lack of wealth can definitely hurt that goal. I took some acting courses, and one acting teacher once declared that a "successful actor" earned about £5,000 a year from acting. The rest of their living costs came from odd jobs like being a waiter or working in a supermarket. I politely kept silent, but my thought was, this is not a successful actor, it is a successful minimum-wage worker with an acting hobby.

Wealth, to me, serves as a platform to enable you to do what you want without so many distractions. Fooling oneself into pursuing wealth as a fundamental objective is as limiting as failing to consider wealth at all.

Importantly, in this context, wealth is highly relative to the person. You are wealthy not if you exceed some social threshold, like being a millionaire or a billionaire, but simply if you have enough wealth to meet all your needs. This points to an obvious way to increase your wealth: reduce your needs. Some take this to the extreme. Some take this to even further extremes. The fact is, if you believe you need a castle and a ferrari to be happy, your bar for wealth will be much higher than if you are happy wherever you are and don't particularly care for owning cars.

Unfortunately, if you work surrounded by people who make lots of money, chances are they spend lots of money too, and by spending so much time with them you will learn to need to spend a lot to be satisfied too. This is why high-paying jobs seem, in practice, to fairly rarely result in creation of actual wealth. Instead, we end up reading stories in the New York Times of couples who earn $500k a year and feel poor. Those stories are usually made fun of as disconnected from reality - but there is no contradiction between earning money and being poor. Money is not wealth. Poverty in your mind cannot be cured with pay raises.

A final summary about money

If you want to avoid falling into some of the most devious traps that wrong-thinking about money can lead you into, keep the following principles in mind:

  • Money is a medium of exchange for wealth, it is not a store of wealth.
  • Money is transient and unreliable, and expecting it to display permanence will only lead to disappointment.
  • Wealth is not an accumulation of money, but the ability to generate it when you need it.
  • The fundamental building blocks of wealth are health, education and intelligence. Money is a side-effect of combining these building blocks with a wilful effort to create wealth.
  • Any aggregation of lots of money is a risk. Turn it into net income generating assets as soon as possible to reduce that risk.
  • Any aggregation of assets also is a risk! It can have maintenance costs, if they're not net income generating assets. Sometimes those costs outweigh the value of the assets in which case the assets are a net negative. Be careful what assets you invest in.

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