swombat.com

daily articles for founders

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

Frog Driven Development  

I'm generally skeptical of outsourcing development in technology startups, although I have seen it work in rare occasions. Outsourcing your core competency is risky, and if you're a tech startup, your core competency (and what you will be competing on) is tech. If that's outsourced, you have little or no control over it.

This article presents an outsourcing horror story, but makes a larger point that applies also to projects without any outsourcing. "We're nearly there" is a cruel misconception. Admitting mistakes and fixing them for the long term is almost always better than assuming that the next corner will be the right one and all the problems will be left behind.

Problems only accumulate unless you take the time to actively fix them.

Of all the lessons learned in this process the most important one is never to stop asking yourself if you are being a frog. Keeping going on the false promise of "we're nearly there" is lethal. It leads to the equivalent of a startup killing death spiral that can suck up all your most valuable resources: morale, money, focus and worst of all, time.

The 90/10 rule  

Vince Baskerville makes some good points and some not-so-good points:

When deciding on adding new features, take a moment to really think about what it will cost. Every feature has an associated price. One of the many things people hear me say is "What is the negative value?" Meaning, just because it seems to give a temporary gain, is it genuinely worth whatever loss over time?

This is certainly spot on. However...

(...) this is the basic concept behind the 90/10 rule. If you aren't familiar, it is basically a concept that states on average, your user will spend 90% of their time using only 10% of your product. Only 10%. Think about some of your non-tech friends. How many of them continue to use a product like Microsoft Word, yet barely know how to actually do anything outside of the 10-15% range of what it could actually do? Now peer back at your tech. friends, what about products like Adobe Photoshop, or any plethora of computer software? Many software companies keep coming up with feature after feature for every new release, yet almost no-one actually uses them all (and I would put money on how this is a small minority), and frankly it just makes the programs unnecessarily more complex.

This is, unfortunately, a thorough misunderstanding of usage patterns.

Take Excel as an example, bloated software par excellence. Yes, each user uses maybe 5% of Excel. Power users perhaps use 10% of its capabilities. So, should Microsoft chop off 90% of Excel?

Absolutely not.

The fallacy of this 90/10 rule is that even though 90% of your users only use 10% of your product, they each use a different 10%. Every single feature in Excel is being used by someone. Most of them were paid for, directly or indirectly, by someone who really needed it. Cut a single feature of Excel, and a hundred people across investment bank front office departments will scream out in horror and refuse to upgrade.

Photoshop is another great example. Photoshop is a program with incredible depth. You can spend years learning to use Photoshop and still only use a small fraction of its features. But Photoshop is used for so many different things, that every one of these features is in fact being used. Cut a single one out, and Photoshop will lose sales - possibly a lot of sales. That's why they don't cut features.

On the good side, this cuts both ways. Any specific, niche group of users will only use 10% of the potential feature set. So you can focus on just those users, and build that feature set better than any other player on the market, and therefore capture that niche.

As software development gets continually cheaper, new niches become commercially viable all the time - and you don't need to build all of Photoshop to get them.

Luck, talent, positioning  

Michael Wolfe wrote this inspiring article answering the debate of luck versus talent in startups.

Successful people usually point to talent...they tell stories of unbelievable execution, insight, and clever pivots from great entrepreneurs who they feel would have succeeded under any circumstances. Many of those founders go on to multiple successes.

Team Luck points to people they know who are wealthy and successful but just can't seem to get anything done. They must have stumbled onto the right idea at the right time, caught a wave, got someone to overpay for their company, and laughed all of the way to the bank. People say, "geez, if he could have done that, I could have."

In a debate like this you can either pick a side or split the difference with an "it depends." Instead of doing that, I'll propose a third option: I'll call it "positioning."

An actionable take-away from this is to figure out what actions put you in the way of luck, in places where your talents can be both enhanced and put to use, and do it more often. What can you do in the coming year to multiply your chances of success?

Building a great design and throwing it away  

Very interesting review of a design process, by Jeannie Nguyen of Lexity, about the process they followed to arrive at their current design.

We took a couple of months to design and build our new site, and threw it all away at the last minute - building what you can see now at lexity.com.

(...)

I wondered if it'd be crazy to scratch up all the work we've been doing for the past month, and to start over again. To just throw away the time it took to make all the drawings and for Kent (aka our Web Guy) to build all of this. I pitched the idea anyways.

It brought us back to the idea that our company is built on 3 columns: affordability, effectiveness, and simplicity. It made us rethink our site design. Did we really need all the festive colors? Did we really need our pigs to fly and animate? Did we really need Sophie to drive through the city? Then we realized our website design should reflect the third column our company was built on: simplicity.

It's important to have the courage to make brave decisions in design. It would be interesting to see the results of an A/B test of those two designs, though.

Advice for dealing with journalists  

Great article by SEOMoz's Rand Fishkin that both provides examples of risks of dealing with journalists, and key principles for how to avoid getting yourself in trouble. I'll skip over the stories (read them in the article), but here are the key principles:

  • Know what you want out of the press (no press, or any press)
  • Have a clear and compelling story so that the journalist doesn't make up a less-than-ideal one for you
  • Ask about the journalist's motivations so you don't inadvertently support a story that will naturally paint you in a negative way
  • Study your interviewer beforehand
  • Be very careful with your phrasing to make it harder to misquote you
  • Prefer email interviews to verbal ones, as you can be more careful with phrasing more easily
  • Everything is "on the record"
  • Beware later questions and off-the-cuff "follow-up" questions
  • Don't be afraid to call out journalists publicly
Why blog?  

Gabriel Weinberg on why and whether he should blogs:

It's not an easy decision, and one that is constantly in your face, simply because blogging takes a lot of time. A good post may take 3-5 hours when all is said and done. That time (for me) is often directly taken away from other professional activity, so the opportunity cost is quite high. In other words, I must have a good reason for doing so or else I really shouldn't be doing it.

Gabriel lists 4 key reasons:

  • Writing leads to understanding: writing things down forces you to think through them more logically.
  • Writing blogs helps you get over your fears of putting your opinion out there: in this, it's very much like public speaking.
  • You can reach the right people: building a following will help you reach an audience with other things you have to say.
  • You can stand out: having a popular blog is a great way to stand out in your field.

I agree with all these reasons and they are great reasons to blog. Personally, I have a few other reasons:

  • I just enjoy it. I love writing, expressing thoughts in the written medium. Throughout my life, I've always spent a good amount of time each day writing things. Whether it has been fiction writing, posting on message boards, commenting on HN, chatting on IRC or even blogging, writing my thoughts out is something that I can't help doing each and every day.
  • Blogging is an opportunity generator. A lot of really excellent opportunities have come my way because of blog posts I'd written. This ranges from coverage from sites like LifeHacker, Slashdot or TechCrunch, to essential business deals that made a big difference to one of my business ventures.
  • It serves a purpose. I like to share useful lessons with others. I'm a big believer that when good ideas spread, we (humans) all benefit. It makes sense to take part in the spreading of good ideas.
  • It's as essential as having business cards: although this is changing these days, with Twitter taking the place of a blog, I still feel like an entrepreneur without any kind of personal or startup blog is a bit strange and incomplete.

I'm sure there are many other reasons to blog. Fundamentally, I think the best reason is because it's just fun.

How to: track your expenses (UK)

Last week we covered how to deal with your corporation tax. One of the things I mentioned is that as part of your system to deal with CT, you need to track expenses correctly.

There are a million different systems to track expenses, ranging from "stuff all the receipts in an envelope and get a bookkeeper to track them" to using accounting software and tracking everything yourself. It doesn't really matter which system you use so long as you're comfortable with it and you know that it works and how it works.

At the end of the day, as the business's founder, you are personally, legally responsible for your company's record-keeping. If you screw it up, you can't turn around and blame someone else. You're the Director, it's your fault, and "not knowing" is not considered an excuse. If the bookkeeper screws up, it's still your fault.

Keeping track of expenses is really not hard at all, so if you do screw it up in a big way, it is really through your own sloppiness. Read this article, and this hopefully won't happen.

Many books about accounting (and many accountants) end up recommending a horrendous, antiquated system like SAGE or QuickBooks. This is often because they're written by accountants who are familiar with those systems and would rather everyone used them so they don't have to learn new systems. That's fine for the accountants, but from personal experience, most of those legacy accounting systems make me prefer to stick a sharp pencil in my eye rather than launch the horrible software.

What I'm going to recommend should work until you get to the stage of having a few (up to 10 or 20) people on (profitable) payroll - a small, profitable company. If you're VC-funded and you've hired 50 people, you probably won't be allowed to do this, but for most people bootstrapping their own business, or who have taken a small amount of seed capital, this system will work and will be relatively little effort.

My expense tracking system is based on a web-based product called FreeAgent (referral id included). It's slick, it's modern, it can track transactions and receipt scans together, and it's cheap (if £30/m breaks your bank, you have other issues). I don't normally recommend that people take on fixed, recurring expenses early on in their business's life, but this is one that is worth spending money on right away so your accounting is entirely sorted out from day one.

However, a tool is not a solution all by itself. "Buying FreeAgent" is no more a solution to your expense tracking than "Buying FogBugz" is a solution to your bugs. People, processes and tools, in that order, as I've said before.

So let's look at those three aspects of a possible expense-tracking system using FreeAgent.

1. People

What people do you need involved in solving this?

Well, when you're by yourself, it's just you. And yet, even then, you might find it helpful to get a virtual secretary to spend an hour a week doing the manual, boring part of the work (linking receipts to transactions), so that it happens even when you're distracted or simply can't be bothered. We (GrantTree) pay £30/hr (inc. VAT) to a freelance personal assistant to spend one hour a week doing this (I'm happy to recommend her if you email me). Even (or perhaps especially) if you're by yourself, you may wish to hire such a person to get rid of the drudgery. However, I recommend doing it yourself for at least a month or two so you fully understand what's involved.

However, even with a PA doing the reconciliation work, the rest of your team (that includes you) needs to be committed to the idea that expense tracking is not optional. If you don't scan your receipts in time, there's nothing your PA will be able to do for you.

So, the "people" side of this process includes anyone who's capable of paying for things out of the company account, or of charging expenses to the company. They need to understand that having messy accounts is not acceptable, and so they need to be diligent about scanning invoices and receipts correctly and on time so that they can be reconciled with banking transactions without too much fuss.

2. Process

This is the way GrantTree's expense-tracking process happens, which you can use as a model for your own expense-tracking.

First of all, all business expenses are, ideally, made on the company card. This ensures that they're not missed in the reconciliation. Of course, you should only give a company card to people who can be trusted not to misuse it - but even if they do charge inappropriate expenses in, you can always deduct those from later payments. FreeAgent supports tracking this type of mishap.

The second step is that any payment should result in a receipt scan in a pre-agreed "new receipts" directory. This is actually very easy to do without fuss, by using an iPhone app called MobileAgent, which costs a whopping £2.99. Go on, treat yourself. What MobileAgent allows you to do is to point to a DropBox folder and scan receipts directly into there, on the move. This means you don't need to keep paper receipts. Hurrah! So, every person with access to the company bank account should be scanning receipts into there as soon as possible after making the expense. MobileAgent will include the date in the file name, so that it's easy to reconcile later.

Thirdly, on a regular basis (e.g. once a week) you should import expenses from your online bank account interface into FreeAgent. So long as your bank support export in QIF format (which pretty much all of them do), you'll be able to do that.

This import needs to happen before the reconciliation (done by yourself, your virtual PA, or someone else), which is the fourth and final step. Once a week, your PA should go through all the unexplained transactions in FreeAgent, and match them with receipts in the common folder. Unless you've got a lot of transactions, this should not take more than one hour a week.

As part of this final step, any transactions that can't be explained, and any receipts that can't be matched, should be highlighted to the people with access to the business card. Since we're still only a week away from the oldest unexplained transaction, it should be easy to figure out what happened. What you don't want is a situation where an expense from 3 months ago is unexplainable. That sucks, and ends up causing you worry, especially when you need to file a VAT return.

Does this process need to be weekly? Not necessarily, but the more regular it is, the less problems you will have. I recommend weekly, but it's up to you.

If you just implement those 4 steps, your expenses will be tracked properly so that you are well prepared to file correct accounts. There are other things to think about too, like capitalisation, categorisation, and other such concepts, but those are things to know rather than things to do. The process above can remain the same for quite a long time into the life of your business.

3. Tools

We've already covered this, but basically the tools to support this process are:

  • an online accounting tool (FreeAgent, Xero or KashFlow - any of them should do);
  • a mobile app that can scan receipts as they happen, either directly into your accounting system or into DropBox; all three of the solutions mentioned above have iPhone apps.

Final notes

Part of the process of reconciling expenses is to categorise them. That's a whole topic in itself, and I'll write about that next week. Capitalisation is also an important concept for larger equipment expenses.

The process we've outlined will put you in a good position to ensure that you always file your VAT returns correctly and without fuss. VAT is a whole topic in itself, so it will also be covered in a later article.

If you make expenses by cash or on a card that doesn't belong to the company, you can still enter those. Every person who can make such expenses should have an account in FreeAgent, and they can then create the expense manually in the system, or with MobileAgent. FreeAgent will automatically track who is owed how much for expenses, and how much of those expenses has been paid back to the user, which is a really nice time-saving feature. These types of expenses should be done just as promptly as normal expenses, by the way, for the same reasons.

The key take-away from this article should not be that you need to follow my system to the letter (or even at all). This is just an example of a system that works. Tailor it to your own business, adapt and evolve it as you gain your own experience and opinions on the topic. The key objectives of the system are that every invoice or receipt is explained promptly and correctly, and with a minimal amount of time wasted running around trying to remember what happened 3 months ago. Whatever works for you to achieve that is probably the right system for you.


The series so far:

1. How to register a company in the UK

2. How to: deal with your Corporation Tax (UK)

3. How to: track your expenses (UK)


Go for the win-win situations  

One friend that I respect very much said to me: "The way to get people to do what you want is to get them to want what you want. You need to come up with a deal that is good for them and good for you, and convince them that it's in their best interest to do that deal."

It sounds obvious, on the face of it, but often, the deal involves multiple parties, multiple moving parts that need to each come together in a smooth mechanism. It's not a skill that I've perfected yet, not by a long shot (though this friend of mine has many times proven his mastery at this particular game).

In practice, a win-win deal can be fiendishly hard to put together. And sometimes, it's just not possible. But when you can achieve it, it is the ultimate way to get people to do what you want. As the king said to the little prince:

"Exactly. One must require from each one the duty which each one can perform," the king went on. "Accepted authority rests first of all on reason. If you ordered your people to go and throw themselves into the sea, they would rise up in revolution. I have the right to require obedience because my orders are reasonable."

Favo.rs makes a similar point:

At the outset of each of these negotiations, the mutually shared goal was positive value creation for both parties, and a foundation for a sustainable partnership that would cause minimal to no pain for each side. However, once negotiations began, these potential partners would inevitably take one of two paths. Path one: true shared value creation, a.k.a. collaboration. Path two: a one-shot game, where maximum value capture for only one party during the first set of negotiations was the desired result.

Entrepreneurs can easily get bullied or pressured into accepting path two.

Adam of Favo.rs advises entrepreneurs to walk away from "one-shot" deals, because they foretell a poor relationship in the future:

(...) would I like to deal with this partner in this manner on a monthly, weekly or even daily basis for the foreseeable future? If the answer is no…then don't be afraid to simply walk away. Chances are you'll look back someday and be happy that you did.

Why VCs do what they do  

Dan Shapiro uncovers some of the reasons why VCs act as they do:

VC behavior sometimes looks insane, but generally it's just sound economics. It's crazy but true: if you know how a VC gets paid, you can pretty much read their mind.

Key points covered:

  • VCs don't want to take any risk
  • They want you to take more money
  • They raise big funds even though smaller ones perform better
  • They're not interested in quick, profitable exits
  • They'll block profitable sales
  • They invest gregariously

Worth a good read to understand the economic incentives of (most) VC firms.

How to evaluate founder exits  

Elad Gil with yet another excellent article, this one covering how to evaluate exits, as a founder, from a financial perspective:

(...) as an entrepreneur you should never go somewhere you think you will be miserable, even if it seems to pay more over multiple years. Entrepreneurial people tend to quit more often and more easily, so don't mislead yourself on how long you can stick out working for someone else.

All this is definitely in the "nice problem to have" category, and will not be a worry for most entrepreneurs, but if you're going through the process or planning to at some point, you should definitely have a read.

more