swombat.com

daily articles for founders

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

What does the business guy do pre-launch?  

I don't quite understand why this idea keeps cropping up lately, even from reputable sources. For example, this one is from Seth Sternberg, the CEO and cofounder of Meebo - so he's hardly a nobody or a slouch. And yet, what to make of this:

For most consumer internet products, there’s not a whole lot the business person can really do pre-launch. All of the company’s value will come when the team builds and launches a product, so that should be the primary focus. There aren’t any partnerships to be struck yet, as the product has yet to build any credibility in the market. There aren’t any folks to interview, as you can’t afford to hire a full team, and you’re wasting your time looking for pre-launch financing—a controversial statement these days, I know, but that’s a topic for another post.

The funny thing is, he answers that in the same article, as things to do "2-3 weeks before launch" - all those things can be done long before launch:

  • Get incorporated (how does that need to wait until launch?).
  • Figure out the launch strategy (I sure hope that's being done earlier than a month before launch!).
  • Find good mentors.

Here are a few other things to do if you're the business guy on a pre-launch startup:

And that's just looking through the articles in the Founder's Library.

The truth is, if you followed some kind of discipline like Hypothesis Driven Development to map out the unknowns ahead of you, you should have plenty to do before even starting to code, let alone while the coding is going on.

The head of X  

Brad Feld:

When I think about roles, regardless of where the person sits in the organization, I like to think of them as “head of something.” That lets me focus on the “something” that the person is responsible for. This scales up and down the organization since the receptionist in a company is the “head of meeting people when they walk in the door and making sure the are comfortable and find their way to the meeting they are there for.” More importantly, it forces senior execs, such as a COO, CSO, CPO, CRO, CIO, CTO, CDO, CAO, or CFO to define clearly what they are the “head” of.

Even in a tiny startup this makes sense. Everyone may get involved in everything, but what is it that each person is ultimately responsible for? Resolving that ahead of time helps solve two issues:

  1. Problems being ignored because everyone thinks they're somebody else's problem.
  2. People stepping on each other's toes and creating bad feelings.

Some people need hand-holding all the way to take responsibility for something. You ideally don't want those in a startup. Other people, at the opposite ends of the scale, react badly (for example, by not caring anymore) when you constantly step into their area of responsibility and override their choices. Being clear about who does what can help make sure you don't do that, and so let them do a great job.

Clearly defining areas of responsibility should be done, however informally, at every stage of a company's growth. One caveat: if you're spending lots of time discussing who's responsible for what, rather than actually getting things done, you're doing it wrong.

Tech founder's guide for picking a non-tech founder  

Jessica Alter:

There are many articles and blogs claiming to have THE list of things to do to find the perfect technical cofounder - as if it’s that easy to find a cofounder in general. From my purview at FounderDating, however, one of the most important and least-discussed (in the press, at least) questions is from technical entrepreneurs. For the last year the longest- running trending topic on FD:Discuss (the Q/A section of the site) is: how do technical cofounders evaluate non-technical cofounders?

Jessica outlines 4 key criteria:

  1. Good at figuring stuff out
  2. Good at getting stuff done
  3. Highly determined
  4. Good at communication

Ultimately, the kicker is in Jessica's suggestion as to what to do to recognise those characteristics in a potential cofounder:

Start a side-project. These quotients are exponentially easier to calculate when you’re working on something real together. It doesn’t matter if it’s the idea you actually end up working on, you’ll see far more revealed doing this than you will over 10 coffees or hypothetical white board sessions. Yes, that also means you can’t find the right partner in just a few weeks. So be constantly putting yourself out there.

A few months seems about right. Remember: finding a cofounder is like finding a wife. You don't go out looking for a cofounder, you go out to meet new people and work on neat projects with them, and if you meet one that you feel like starting a company with, great.

Investor tricks to mess with valuations  

Here are a couple of articles (1, 2) detailing some techniques used by investors to tweak a valuation in their favour. The site is a little dubious - basically a collection of articles designed to sell you an eBook about private equity, but the articles are interesting on their own merit.

The tricks being exposed seem devious and misleading, and they are hopefully more representative of private equity than of technology venture capitalists. Personally, I'm not much into the VC money game, but if I was to consider taking on investors and I noticed something like that going on, that'd be the end of the discussion with that particular investor. This is probably a good reason to build a business that doesn't strictly need outside investment: so you can tell any investor who tries to pull a fast one to fuck off.

In any case, if you do intend to raise money from professional investors, make sure you get a good lawyer who can spot these things and warn you that you're about to get shafted.

Here, then, are the devious tricks:

  1. Vendor financing, aka giving you the money in tranches; for example, $7m now, $7m in 5 years means that the actual value of the deal is only $9.8m based on a 20% discount rate);
  2. Contingent earn-outs, aka the same, but even worse, because the second tranche is uncertain;
  3. *Company-paid earn-outs, aka the same, but the wording says that "the company" will pay the extra money, which means the current shareholders (i.e. you) will need to pony up some of the cash yourself;
  4. Equity clawbacks and ratchets, aka if you don't meet your own targets (because of any reason), we'll take more of your shares;
  5. Mis-valued employee stock options, aka "Let's shift the options pool into the pre-money valuation (effectively decreasing the value of your shares), and make it even larger by actually calculating it based on post-money valuation";
  6. Preferred stock with outrageous terms, aka you'll need to grow your business to several times its post-money valuation before you even see a penny of return;
  7. Huge management fees, aka let me get some of my money back from you for stuff I should be doing anyway, even though I'm supposedly investing in you.

I'd be very surprised if any high-profile, reputable VC (or any VC wanting to preserve their reputation) stooped to those types of obviously misleading tricks. Do that once, have an article written about it, and you're burned in the startup community.

Don't build a product without validation  

Trevor Owens:

There’s a pervasive, logical fallacy out there in startup land. Propagated by a Steve Jobs quote and entrepreneurs in denial, it is the fallacy that customers don’t know what they want until you show it to them. Of course, the mass market doesn’t know what it wants until you show them, but early adopters do. Logically, they must know.

A good point worth making more than once: if you are convinced that your idea is evidently brilliant, but you can't get any customer validation for it, you are wrong.

Going into denial, failing to accept that you're wrong, won't make you right: it'll just make you poorer. Having a vision is essential. Having tunnel vision is deadly.

It is important to get some market validation for your ideas, especially if you think they don't need validation, because they're obviously valid: that's the time when you're most in danger of getting it all wrong and flattening yourself on the ground like an egg fallen off a high shelf.

Email-first startups  

Ryan Hoover:

Email-first enables startups to:

  • Validate ideas quickly [...]
  • Fake it ‘til you make it [...]
  • Force focus [...]
  • Create habits [...]
  • Be ubiquitous [...]
  • Transfer to other mediums [...]

Very good points. Ryan goes on to point out several examples of email-first startups.

For what it's worth, GrantTree is currently paying £2k a month for a startup that still has no web page. They do have a daily email that is well worth the money, though. Do I care that they don't have a website? Nope. Would I pay any more if they did? Nope.

Advice for ambitious 19-year olds  

Great read from Sam Altman, well rounded and sensible advice, providing enough context to help someone make a good decision:

No matter what you choose, build stuff and be around smart people. “Stuff” can be a lot of different things—open source projects outside of class, a startup, a new sales process at a company you work at—but, obviously, sitting around talking with your friends about how you guys really should build a website together does not count.

Can't disagree with that or, indeed, anything else in this article. If you're an ambitious 15-19 year old, have a read.

Impatience

One of the qualities and vices of the entrepreneur is impatience. It is a quality, because too much patience means that nothing will ever happen. A buddha-like, infinitely patient entrepreneur will simply wait for someone else to scratch that itch, rather than roll up his sleeves and get it done himself. Infinite, god-like patience is not compatible with being an entrepreneur.

At the same time, too much impatience is a problem. Things take time. A lot of time. Ridiculous, unacceptable amounts of time. We can use impatience to make them happen a bit faster, but there are limits. Too much impatience breeds discontent, unhappiness, demotivation, all because of unrealistic expectations.

This is true in all areas of life. People who take up a new diet or exercise regimen often expect results within days. The reality is, though you might feel better right away when you start exercising, tangible, lasting results typically take 6 weeks or more to appear for good. New habits take 30 days or more just to become habits, let alone to make a lasting difference to your life. Some benefits might be visible right away, but most take much longer. Reading a new self-help book or article won't instantly make you better - it takes time and perseverance, sustained effort over a period of time that, for the impatient man, is excruciating.

Learning to be a successful entrepreneur takes years. Building a profitable business takes similar amounts of time. There are shortcuts that can speed this up. If you have a great, hands-on mentor, perhaps things can go a bit faster. If you have a great salesperson on a roll, maybe the business can be profitable from year one. If you're very experienced, have a top team ready, and you know exactly what you're doing, maybe it can happen even faster.

Most of those shortcuts, though, are not really within our immediate control. This means building a successful business will take a lot more time than entrepreneurs have patience for. So get ready for a frustratingly slow pace of progress, and make sure that psychologically as well as financially, you're in it for the long term.

The longer term view

There are a number of consequences, in terms of your mindset and decision making, to taking a long term view rather than being focused on a short term outcome.

The first is that you are more willing to invest in learning things that can help you go faster over the long run. One of the symptoms of a short-term mindset is the feeling that you just don't have the time to learn new things, because you need to just get things done. While there is certainly a point where you should stop using "I don't know enough" as an excuse for getting things done, there should never be a point where you tell yourself "I don't need to learn anything anymore, I know enough already, I should just do things". That's swinging into the opposite and equally harmful extreme.

Another effect is that you start to make choices that offer the short term benefits you want, but that don't screw you in the long term. For example, you will pick technologies that are there for the long term, and you will avoid accumulating large amounts of technical debt. On a business side, you would make sure deals you make don't impose unreasonable long-term costs in exchange for short-term benefits (by for example tying long-term obligations to short-term results).

Another effect of being an entrepreneur for the long term is to take time to grow as an individual, both in terms of what you know (covered earlier under 'learning'), and in terms of who you are and who you know. Investing time to get to meet interesting people, or taking the time to teach others what you have learnt, may seem like a waste of time from a purely short-termist point of view. But those are all valuable things if you plan to be around for the long run.

There are always exceptions to every rule, always counter-examples that show that you don't have to do it this way. You will certainly find examples of people who got into startups, spent a handful of years building a company with a lot of focus on the short term, then exited and never thought of the topic again. But those are exceptions (and were, in many cases, exceptionally lucky). If you want to maximise your chances of becoming a successful entrepreneur, you need to realise that it will take years, perhaps even a decade, and make your decisions accordingly.


37Signals' alternative option  

Not all companies that you'd think of as tech startups needs to distribute shares or options to their employees:

The complexity was both psychological (company dynamics) and economic (options/equity doesn’t really mesh well with an LLC corporate structure). And since we have no intention of selling 37signals or going public – the two scenarios where options/equity really make sense – the complexity became too hard to justify.

It's easy to come up with elaborate alternate schemes to avoid giving equity to employees, so it's good to see that 37Signals came up with a relatively straightforward scheme:

Here’s what we came up with in the event of a sale or IPO:

  • At least 5% of the ultimate sale price (or, in the case of an IPO, the fair market value of the capital stock) would be set aside for an employee bonus pool.
  • Each current employee will be credited with one unit for every full year they’ve worked at 37signals, starting after the first full year. The maximum amount of units one person could earn would be five units. > - So if you worked at 37signals for two years you’d get two units. Three-and-a-half years, three units. Four years, four units. Five years, five units. Seven years, five units. Etc.
  • We would divide the total employee bonus pool dollar amount by the total number of units held by all employees. This would determine the unit value.
  • Each person would receive the unit value multiplied by their units.

The only point I'll add is that if you decide that your business is not one which grants equity to employees (which is absolutely fine), you should be consistent. I know of at least one fairly high-profile business which takes the "we don't give employees shares/options" but then do give them out in secret to some key employees. That's just wrong.

Three kinds of games

This is just an arbitrary categorisation, but I find it useful. Obviously there are other ways to categorise games, and startups.

I love games. I have played games since I was a child. Computer games, board games, team sports (a bit less than the others), card games, dice games - any kind of game I could get my hands on. I am not Iain M Banks' mythical Player of Games, by far, but I do love the challenge that games pose.

And life itself is a game, as is business. These days I play less of the overly complex strategy game type (such as Civilization, of which I played every version except V), because I have come to the conclusion that those games feel too much like work, and I already have a game that feels like work, with the difference that when I earn gold coins in this game (my business) I actually get to trade them for Macs and summer hats in the appropriate shops.

Different games stretch you in different ways. With some thinking back over the long list of games I have played, these are the three ways they stretch you, and how they map to the entrepreneur's journey.

1. Games of mechanics

The first and most popular kind of game is the game of mechanics. This is a game where you win by application of your intelligence and insight. Most single-player computer games fall solely in this category, because that's all a computer can offer.

Games like the early, single-player Civilization games, or Dune 2, the original C&C, The Loom, Pinball, King's Quest, Trine or Super Mario, Donkey Kong and Battle Isle, most of the Black Isle Studios RPGs, Solitaire (physical or on the computer) or Backgammon are solely in this corner of the ring. Due to their very nature, they can only offer mechanics and so that's all they offer.

This is not to put their offering down. Games of mechanics are great fun. I still play them, though I tend to limit myself to the easy-to-pick-up-and-put-down iPad offerings, these days, due to lack of time.

What defines a game of mechanics is that it is won by analysing the situation "on the battlefield" and playing the right moves. Arguably, that's true of every game, but in a pure mechanical game, the battlefield is limited to the game.

Most startups start off as mechanical games. First, before anything else comes into it, you have to crack the mechanics of building something that makes money. This is a game where the battlefield is the product and the market, and I'm willing to go on a thick limb and say that if you're good at mechanical games, you will eventually figure out this game too. It might be the hardest mechanical game you've ever played, but it is just step 1 on the business journey.

2. Games of people

The second category of games, which some will argue is more interesting, but which is really just a matter of preference on the moment, is the game of people. In this game, the battlefield shifts from the board to the people around it.

To me, these have always been fascinating, because I used to be really bad at them, and therefore they were a constant challenge, something to learn and get better at. I don't like losing, but luckily for me that is coupled with a habit of, when I lose, trying again, and again, and again, until I win.

Most multiplayer games and board games touch on this dimension. Games like Warcraft 2-3, Settlers of Catan, Dominion or Dominant Species, look like they're people game (because, well, they involve people) but the game is not won by playing the people, so they're still fairly mechanical in the end.

Better examples of people games are No Limit Texas Hold'em Poker, some types of tabletop Role Playing Games (at least for the DM) and Diplomacy. In both cases, the game on the table in front of you is just an excuse for the game going on between your head and your opponents' heads. As the saying goes in Poker, don't play the cards, play the people.

Skill at the mechanics of the game is obviously necessary to play this. If you can't move your troops correctly (in Diplomacy), you will probably get eliminated no matter how well you play the people, simply because being weak paints a target on you that's hard to ignore. Same for Poker if you don't know the ranking and probabilities of various card combinations. But it is perfectly possible to get the mechanics of Diplomacy or Poker right and still lose over, and over, and over again, because they're people games.

In startups, people games become essential once you shift from building a product to building a company. Once you've got the basic machine that turns $1 of effort into $2 of revenues pinned down, the next step becomes to scale that up. No matter how technological your product might be, in the end, that will always end up involving other people. Maybe not hundreds of people, but at least dozens. And once you have people around, you have to play people games (avoiding office politics is a very tricky people game).

Much like playing mechanical games can teach you to play this second game, taking the time to play people games will improve your ability to play this part of the game, yet those games are much more rare than the mechanical type, so you have (in my experience, at least) to actively seek them out.

3. Games of self

The third type of game is the rarest and the commonest at the same time. This time, the battlefield is not on the board in front of you. It's not in the people around you. These are games where the battlefield is inside of you. It's you and your personal limitations. Arguably, all games have some element of this in them, at least at the very beginning, but I have yet to encounter an artificial game that is all or even mostly about the self. Perhaps the only such game we have at the moment is life itself.

What I mean by the battlefield being the self is that these games are about finding the limits inside of you and pushing against them. Games of the self open up new perspectives and unlock new skills that make you a better person.

I don't know of any artificial games that are purely of this kind, though many of the aforementioned games have some element of this, for at least a little while, but they abound in real life. I've argued before that successful people are successful, but the better way to phrase it might be that successful people make themselves successful, by winning at this game of self. They constantly find limitations within themselves and push against those.

The game of self becomes more visible as my business succeeds. Sure, success at the mechanics and the people aspects of the game of business is essential to even get there, and credit needs to be given to those games, but as the system that is GrantTree comes together, I find that many of the limitations of GrantTree's growth are not with either the people or the product, but with my own ability to observe and remove barriers.

The game of self is the meta-game. No one ever wins it fully, but every bit of progress you make on it increases your chance of success in all the other games. As such, it is always worth playing.

The only way I can think of to deliberately play this game is to play all games. Try many games, and pay attention to games that frustrate you, games which make you feel like a loser, games which force you to face uncomfortable truths. If you consistently lose at a game, it's a good sign that focusing on this game will make you progress in the game of self. If you're consistently winning, you're probably not learning as much.

Chess is perhaps the ultimate example of a game that rates highly on all three scales. No matter how much you play it and how good you are, you can always find someone who will beat you in novel and interesting ways and force you to think, and learn, and grow.

Life is a game of mechanics, people and self, and the multitude of artificial games humanity has concocted over the centuries can help teach you how to be better at all three dimensions.


more
Google Analytics Alternative