daily articles for founders

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

Disrupt or compete  

Pontus Siren at Innosight illustrates the difference between direct competition and Disruption by looking at one of the most competitive industries - shipping.

The basis of competition in the industry continues to be the efficiency of moving a metal box from harbor to harbor.

In the last 50 years, ships have grown from 500 containers to 24,000, to the point where harbours are unable to cope. Even the sheer volume of ships is straining the world's main canals.

The industry is highly competitive:

Naval engineers are planning and building ever bigger ships. As the ships grow, their engines have become vastly more efficient and sophisticated, the fuel mix has changed, and complex IT infrastructure has been put in place to coordinate the movement of the containers and ships.

But fundamentally the underlying cost structure of the business has not changed from 1950.

Pontus makes a case that in choosing direct competition or Disruption, you need to consider the efficiency of the industry itself:

It’s all part of the relentless drive to reduce the cost of ocean-going freight that has made transportation very cheap indeed. In a private conversation, a shipping executive noted that the cost to ship a pair of sneakers from Vietnam to Europe is two cents. Another executive noted that the container shipping business is a near perfect market with highly standardized products (the ships, the containers, the routes). “It’s an impossible business,” he concluded. Rather ominously, another executive observed that it’s also an impossible business to exit.

With the incumbent players getting ever bigger, the efficiency of their industry drives profits down and ties them to their existing business models. They're handcuffed to a sinking ship!

Which makes a the distinction between competing and Disrupting very clear. When considering how to Disrupt such a competitive industry, you need to look outside it:

There are at least two technologies on the horizon. One is the advances in robotics that could reduce the global wage arbitrage and move some manufacturing closer to the end consumer—from Asia to America, for instance. Likewise,3D printing could have a similar impact if it becomes vastly more sophisticated and accessible. If manufacturing moves closer to the end user, the need to ship goods halfway around the world would be reduced.

The term "disrupt" gets used a lot in the startup world, often incorrectly when you consider the definition coined by Clayton Christensen.

A Disruptive Innovation is an innovation that helps a new market become customers, or separates and focuses specifically on a low-end market which the existing industry doesn't value. It's contrasted with sustaining innovation, which only helps the existing industry improve how they serve their current customers.

If you're truly Disruptive, you'll Disrupt an entire industry, not just the players within it.

Hardware startups and quality  

Marc Barros offers some solid tips for starting a hardware startup, which show that although there are similarities between the approaches for hardware and software:

Shipping a quality device is by far the hardest part of building a hardware company. I’m not even talking about the extra work it takes to deliver an amazing customer experience. I’m just referring to a product that doesn’t break, feels great when you use it, and delivers on the promise. Not just once either, but multiple times over, across thousands of units.

... the punishment for screwing it up in hardware is much more brutal:

Assuming you retail your product at $100 and it costs you $50 to deliver the finished product to your customer, you have $50 in profit.

Each time you deal with a defective unit it costs about $15 in shipping (to and from the customer), requires you to replace the defective product with a new unit from your warehouse that you can no longer sell, and spend about $5 to ship it back to the factory in buik. Even though your factory says they will reimburse the costs, it will take 60-90 days from the time you send the product back to agreeing on the root cause and in turn the financial reimbursement. In the meantime you are wasting your limited inventory and cash reserves replacing defective units.

Marc offers some solid tips for hardware startups, to avoid shipping a crappy product that gets returned a lot. Read more.

Basics of selling your company  

Fred Wilson, as part of his "MBA Mondays" series, provides this great article explaining some basic terms involved in sales of companies.

He covers: price, consideration, reps, warranties, escrow, integration plan, stay packages, government approvals, breakup fees, and timing.

If you don't know what some of those terms mean, this is worth a read.

Starting up in a recession

With double-dip recession looming in the UK (and downright depression or even complete financial implosion hovering about the rest of Europe), it's worth reviewing that old chestnut of "starting up in a recession", particularly when focusing on B2B startups.

Wisdom passed down from our Wise Elders suggests that:

So maybe a recession is a good time to start a startup. It's hard to say whether advantages like lack of competition outweigh disadvantages like reluctant investors. But it doesn't matter much either way. It's the people that matter. And for a given set of people working on a given technology, the time to act is always now.

Ah, lack of competition. What a boon. With no competition, or even shrinking competition, surely this pulls the bar for success lower, and means that you're more likely to make money, achieve success, reach the sky and pull the moon down to earth! Another idea that I often repeated to myself, as Woobius struggled through its first couple of years, was that the construction industry's implosion meant they would be more willing to consider innovative, different solutions, like ours. They were under pressure, so surely they'd be more willing to try new things.

Wishful thinking? You bet.

I'm on my third business now. The first one was definitely not recession-proof, though it never got a chance to prove it. The second one was not recession-proof either, or at least, its first two products weren't. Woobius is still alive (and in fact doing great), having pivoted to a recession-proof product, but more on that later. My third business is definitely recession-proof, thriving in an environment where not a day goes by without talk of recessions and financial cataclisms.

My conclusions, based on my experience, is as follows:

  1. A rising tide floats all boats. Given the choice of starting a business in a booming market or in a shrinking market, always pick the former.
  2. Some products are more recession-proof than others. If you're starting up in a recession, be sure to sell something utterly tangible. Like money. Or sales. If your customers can't directly see how it impacts the bottom line, they won't buy.
  3. There are booming markets even in a recession. For example, the "mobile / tablet" space has been booming throughout this last recession. If you can deliver tangible value in a booming market, great.
  4. There are small and/or shrinking markets even in a boom (for example, audio publishing in 2006, when I started my first startup around audio publishing). Pick one of these, and you'll get to feel as if you were in a recession, even while the rest of the world is bubbling away. If you're targeting one of these, well, why? Life's too short.

So, before you start your B2B business in a recession, ask yourself if that business model is suited for a recession. Can you directly measure the value it provides, in pounds, dollars, or euros (until they split that up into 20 currencies again, at least)? If not, maybe it's worth finding another business idea.

How to: register a company in the UK

Every Saturday, I'll try to post an article that covers some practical aspect of starting a business which is essential, and necessarily all that complicated, but which many people shy away from simply because they don't know the steps involved. This is not a "how to run a successful business" - the whole of swombat.com is not enough to explain that wholly. The idea is to take away a lot of the uncertainty from specific aspects of starting and running a business that might be putting people off not because they're difficult, but simply because they don't know.

As I argued last year, step 1 in starting a business is, quite simply, to register your business. However, there are also a number of responsibilities that you need to be aware of if you want to do this safely, and not end up being deemed irresponsible and fined by Companies House, HMRC, and other friendly government bodies.

1. Registering the business

Contrary to some people's opinions, registering a business in the UK is straightforward and cheap. There are many sites that automate the process of interacting with Companies House. I've used two of them, the last one being Companies Made Simple, specifically this subpage.

2. A Limited Company

If you're trying to create a business, rather than just create a legal outlet for your freelancing, you will need a Limited Company. The only reason to create any other type of trading entity (Sole Trader, Partnership, Limited Liability Partnership, PLC) is because your accountant advises you to. But even if they do, typically it is possible to transition your business affairs to whatever more complicated setup they propose - and often that setup will involve at least one Limited Company anyway, so there's no good reason not to registed a Limited Company, or Ltd for short.

But before you can do that, you need to figure out which package you want. The crucial factor is that in order to open a bank account, you will need a printed Certificate of Incorporation. God only knows why that is, but it seems to be the standard amongst most banks. This means you need the Bronze Plus package at a highly affordable £29.99.

Update: It seems that banks no longer require a printed certificate.

Why not get one of the other packages? Because the only thing of value there is, maybe, the registered address - but that is mostly useless unless you also get the mail forwarding, so just go with Bronze Plus.

Finally, I haven't tried it myself, but you can also register directly with Companies House here. That costs £18, so it's even cheaper, and is probably just as straightforward. If someone can try it out and let me know, I'll update this post.

Update: it seems that CompaniesHouse is indeed more straightforward, but if you use the bank account offers from a place like CompaniesMadeSimple, it works out in your favour financially.

3. What's in a name?

Before you can buy the package, you need to choose a company name. This can be anything you like, but shouldn't be rude, or you might be forced to change it. You should name your company something generic enough that it will cover what you plan to do with it, but specific enough that it conveys what you plan to do with it. So, unless you're creating a joke company or operating in a dynamic, youthful market like Ruby on Rails consultancies, avoid exotic names like "Rapid Lobstersnake Ltd".

What's a good name? It's related to your intended trade, it's pronounceable, it doesn't bring to mind something stupid or negative, even when pronounced rapidly (a very early idea of a name for GrantTree was WeClaim... which, on the phone, comes across as WeakLame; no good); it should convey the right impression when spoken on the phone, so that you actually get through to people you want to speak to. If you're struggling to find a great name, don't worry about it. Not only you can change the name later (it's only a minor hassle), but you can also trade under a different name than your company name. So, for example, Irrelevant Ltd could have a website relevant.co.uk and sell a product called iAmRelevant.

One final note about names: they can't duplicate someone else's company name, and there are some words (like UK) which don't count as a difference, so that, for example, Example Ltd and Example UK Ltd are the same company name, as is Example UK Limited.

4. Shares, shareholders, directors

As part of the company registration process, you might be tempted to come up with a lofty valuation for your shares. Don't. You'll only cause yourself hassle. Create 100 shares of £1 each and assign 1 share to each equal cofounder. You can change those numbers to reflect however you decided to set up the company. If you want to implement vesting, close this web page and get in touch with a solicitor.

Directors - anyone who should be able to speak for the company legally should be a director. You need at least one Director, and since a few years back you no longer need a Company Secretary (that was previously required). Contrary to what you may think, being a Director of a company is not all that glamorous. It just means you can be fined or put in jail for fraud if you really screw up badly. So, before you name half your family Directors to make them feel good, consider that they could end up in jail because of it. Scary? It should be. Whoever is a Director is responsible for making sure the company doesn't screw up its legal obligations to the government. It's worth adding that making someone a legal Director of the company and printing "Director" on their business card are two completely different and independent matters.

5. Registered address?

Contrary to what some people will tell you, you can have your business registered at your home address. You can do so even if your tenancy agreement doesn't allow it (obviously, don't actually go out of your way to tell your landlord about it). I don't know anyone who has gotten in trouble because of this (though I'm sure you can find some rare examples if you try).

In theory, you're supposed to display the company name somewhere in the entrance of the building, or outside your flat. In practice, nobody cares and they're unlikely to ever check that unless you've screwed up something else really badly (like not fulfilling the obligations described in the next section). So, basically, you can use your home address. That's the easiest thing to do, and recommended unless you have a reason to do otherwise.

What's a good reason to do otherwise? Well, if you're planning to deal with other businesses, being registered at "123 Nowhere Grove, Holington, SE31 TLD" doesn't quite carry the same prestige as being registered at "123 St James Street, London W3 456" or the like. The latter will be more convincing, so if you need it for your public image, you may wish to set up a registered office at a different address - but this can be done separately.

There should not be any other difficult questions in the registration process. Just complete it, and the company should be created within a few working days. You'll get the Certificate of Incorporation soon after. Don't frame it yet - you'll need it to open a bank account.

6. Well done, you now have legal obligations

The main effect of going through these steps is to end up legally liable for an entity other than yourself. You know how buying a car means that suddenly you need to sort out insurance, MOTs, tax discs and all that? The same is true for a business (but it's a hell of a lot cheaper than a car!).

The main obligations that you've taken on are to file what's called an Annual Return, to file your accounts, and to file a Corporation Tax Return (affectionately known as CT600).

If your company isn't trading, you may get away with not filing some of those, but you should probably keep it active anyway since it doesn't cost much and looks better if, 3 years down the line, you decide that having a 3-year old company is useful to your credibility.

The Annual Return is basically a form where you confirm to Companies House that the directors/shareholders/registered address/etc details of your company are still correct. It's a quick formality, takes a few minutes a year, and costs, if I recall correctly, about £14 to file.

The Accounts need to be prepared twice: once abbreviated, and once full. You need abbreviated accounts, because otherwise Companies House will publish your full accounts (including turnover figures, etc). Abbreviated accounts give away a lot less about your company. Full accounts give away more, and are lengthier to prepare. If you have a decent accounting system in place, preparing your accounts should be straighforward, and contrary to common belief, you don't actually need an accountant to do it for you (though it can help if you want to do complicated stuff).

Finally, the CT600 can also be generated automatically by any decent online accounting system, such as FreeAgent (includes referral link). We'll cover getting the accounting set up in a later article (in the next few weeks).

All those things can be filed either via CompaniesMadeSimple, or via HMRC's and Companies House's own online systems. I recommend signing up for Companies House and HMRC directly. Be aware that it take a few weeks for them to send you the various authentication tokens, so register there as soon as you can. The pages to register are: HMRC, Companies House.

That's enough for today. Congratulations, presumably, on setting up your first company! It wasn't that hard, was it?

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)

How VC firms are managed  

Here's a great article by Jo Tango, that starts off as a description of the way in which VCs are paid (which is relatively common knowledge), and proceeds to explain some interesting facts about the way VC firms are managed (which is not so common knowledge):

The existence of the management company has a few implications. First, the Chief Partner cannot be fired without his/her consent. Every other partner at a VC firm can be, including the ones who have worked hard to earn pieces of the management company. So, a partner at a venture firm is usually an employee-at-will. They can be fired at any time.


Now, a VC firm’s culture varies from one to another. The Chief Partner may delegate authority so that all partners have a voice in an investment decision–or, he may allow input from others, but in reality, is the one making the decisions. Entrepreneurs need to know that when they pitch a firm. Who is the Chief Partner and do the other partners have power?

Read more here.

Gabriel Weinberg's startup advice flowchart  

Needs no further description. Check it out.

How to set up meetings with customers, investors, mentors, ...  

Vinicius Vacanti proposes a better way to set up meetings with potential customers, business partners, mentors, and so on.

Rather than putting the onus on the person you want to meet with "I'm pretty free for the next two weeks, let me know what time works for you", take off the cognitive load of deciding when to meet, and propose some concrete times.

In practice, I find this does work very well. Usually, proposing 3 times in the next 2 weeks does the job. One of the main reasons this helps is because it reduces the back and forth to set up a meeting (which saves everyone's time):

Why Ty Danco is investing in CardMunch  

An excellent dive into the mind of an angel investor, and how he perceives and analyses deals:

There are just 3 inviolate areas for any investment: 1) A large, addressable market; 2) a capital efficient business model which can create good margins; and 3) great people. The first two I don’t even have to consider carefully—you can normally disqualify a deal that doesn’t cut it in less than a 2 minutes. But most everything else takes some time. My rough weights are as follows:

10% Product: (with at least a beta product up and testable)

60% People: Who is the team? (Past experience, past SUCCESSFUL experience, technical chops, hunger, humility, coachability, advisory boards) Do I believe the CEO? Do I like them?

10% Distribution: Who’s leading sales? Can they sell at the Startup (as opposed to Big Industry Leader) level? How will they reach customers? Also pricing, sales cycle, staffing requirements, etc.

5% Operations: Is this scalable? Tested technology? Dependable outsourced vendors?

5% Social proof: Who else is investing, and do they bring anything besides money?

5% Price and Terms

5% Everything Else

Worth a careful read if you're thinking of raising money.

Detailed case study of validating a project idea  

Rob Fitzpatrick works through a detailed example of idea validation, using an idea which he's currently working on as the example.

You should go and read the whole thing, but here are a couple of pull quotes:

This simple cycle is the core of all startup strategy:

  1. What are the biggest assumptions and uncertainties baked into our idea?
  2. What’s the fastest, cheapest & easiest way to answer those questions?
  3. Do it.
  4. Measure it.
  5. What are the biggest assumptions and uncertainties still baked into our idea? And so on.


Note that I didn’t write a single line of code until I was up to assumptions 4 & 5, by which point I was confident in my problem, value proposition, and customer segment. The total time spent coding to date is still well under 20 hours — a single long weekend or a week of late nights after work.

More on this approach here.

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