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daily articles for founders

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

Dilution infographic  

I'm not generally a big fan of infographics. I basically consider them the "lolcats of dataporn", if that makes sense - cutesy pictures that appeal to people who are obsessed with the act of acquiring more information, but never really figure out ways to use it in any way because they're too busy acquiring the next piece of dataporn.

However, sometimes, an infographic can be a great way to explain an idea visually. That's the case for this one, by Jess, reposted by Mark Suster, which conveys, both visually and with numbers, how share dilutions work in practice.

Enjoy, but don't let me catch you watching porn again!

What font should I use?  

Design is an essential part of most successful startups. Having some, even relatively basic, design skills is useful in many areas of business.

Dixit Smashing Magazine:

Over the last six months or so we've been trying very hard to improve the overall quality of the articles published on Smashing Magazine. One of the improvements we introduced is the so-called 'Smashing Magazine Experts Panel' where our articles are reviewed by experts (who are invited and paid for their reviews) before these articles get published online. There are also other things we do to ensure the good quality of the articles. We want to be a professional, reliable online publication for designers and web-developers.

It shows in this article. Excellent overview of key principles for picking fonts. Here's a summary, but do read the article.

  • Use appropriate fonts. Don't go for individuality above all else.
  • Know the font families: Geometric, Humanist, Old style, Transitional, Modern, Slab Serif.
  • Use decisive contrast, fonts that look significantly different. Either keep it exactly the same, or change it a lot.
  • Don't over-use particularly stylised fonts.
  • Break any of these rules sooner than design something truly barbarous
Let the acquirer name a price  

A good piece of advice from an unlikely source (the Globe and Mail) by John Warrillow:

One of the most basic rules of negotiation is to never be the first to name a starting price. If you do, you could leave money on the table, or turn off a prospect before you even start the dance.

Fortunately, there is a formal document you can request from would-be suitors that forces them to put their number - or at least a range - on the table first.

So, what to do if someone is trying to figure out how much you value your company?

There is no need to be the first to name a price. If you find yourself being asked for your number over a quiet lunch, don't feel obligated to react.

Just let your suitor know you'd be happy to review an IOI or LOI. A serious professional buyer will know what you're looking for, and will be happy to oblige.

What kind of startup should you copy?  

Stefano Bernardi offers some advice to those who want to follow the way of the Samwers Brothers and build businesses by copying successful US startups in their country:

Please do not clone Pinterest. Do not clone Instagram. It will not work. Not matter what Pinspire and co. want you to believe. Cloning social startups is extremely hard as you face the same growth problems of the American startup, in a market with fewer early adopters and many more monetization challenges.

Instead, clone startups that have one of these characteristics:

  • Highly regulated markets (e.g. payments);
  • Deeply local startups (e.g. ways to connect you to local businesses);
  • E-commerce niches that are still empty in your country;
  • B2B startups.

Interesting article. Read more here.

Dangerous data for startups  

An interview with Patrick Vlaskovits, posted on the chart.io blog, outlining some good points about dangerous data:

Many people, especially those handicapped with a graduate level education, like myself, think that data is only interesting and can only be acted upon if it is "statistically significant". In the context of early stage Customer Development, I believe this is well-intentioned, but ultimately, misguided.

and

Evidence comes in a diversity of forms. It can be anecdotal, it can be in aggregate or it can be a trend line. If you take an open-minded approach to the types of evidence you'll accept, and adjust for their biases/problems/problems accordingly, you'll likely fare better in the chaos of startup-land than just simply jettisoning what you feel is low-quality data.

and

In my opinion, trying to make CustDev formulaic, well-that's a road to perdition. Some of the techniques that may work now, might not work as well in two, five, ten years, so there is no point writing a hyper-specific rule book because no book can know exactly the context you are operating in and when you are operating there.

There are a lot of other good points made, generally pointing to the fact that not all business decisions can be reduced to a statistical A/B test, and how techniques and methods for customer development need to remain contextually sensitive to be useful. It's worth reading the full article.

How to work as a CEO/COO team  

Sometimes, the best solutions are the simplest.

Joel Gascoigne:

I asked Leo to become COO in November last year. (...) The problem we found, was that it was almost impossible to clearly separate these two processes. If Leo was working with someone to try and set goals and keep to them, he inevitably had to make decisions which affected our direction.

It felt like with the new structure we were suddenly both involved in every decision. The goal of the new role for Leo was to speed things up, but with both of us discussing every decision, things were sometimes grinding to a halt, especially in cases where we didn't immediately agree.

The solution? Split the CEO responsibilities across the two roles, with each doing what they do best!

This may seem really simple in hindsight, but it's the kind of solution that's just not all that obvious when you're first going through it. The article is well worth a read.

Getting into a startup right after university  

Some great tips by Jean Hsu. Startups won't hire fresh graduates on the basis that "they can do the job already". They will hire on the basis of potential. It is understood that it will take time and training to grow a new graduate into a fully productive hire (and that, largely, is why graduates make less money than experienced hires).

Here are Jean's tips:

  1. Try to get personal recommendations, by letting your friends know you're looking for a startup job, and going to relevant meetups and events.
  2. Tailor your resumé to the job you're applying for.
  3. List extra-curricular projects. In my opinion, those are often much more interesting and convincing than anything you may have done in class.
  4. Have an online presence so you stand out.
  5. Prepare for the interview by reading up on the startup and familiarising yourself with the product.
  6. Be relaxed, friendly, comfortable (be yourself!) during the interview - they're not just testing you on your technical ability, they also want to check they can work with you day in day out.

Don't forget to evaluate whether you want to work at that startup. For a new graduate, the calculation is slightly different, in that almost any job will teach you a lot, but don't let yourself stagnate during your first few years out of university - they are possibly the most important of your career, in terms of their potential to set your direction for the next 10, 20 years.

The main advantage of a startup job for a college graduate is that you will be able to grow into a position of responsibility much, much faster than at a larger company - but you do need to go about it deliberately to make the most of it.

Another piece of advice: if the "startup" turns out to be nothing like what it advertised itself as (some people are unscrupulous about calling their small businesses startups), leave quickly! The personal growth opportunities in a small business which isn't growing are usually extremely limited.

More on splitting equity 50/50 or not  

Several articles came out since Joel Spolsky's OnStartups answer about splitting shares, some very cogently arguing against a 50/50 split, and proposing alternative methods. I've waited until a few accumulated before posting a summary.

The first, by Dan Shapiro, argues:

50/50 isn't a business decision, it's a compromise

It goes on to propose a relatively complex system to get this hard decision done up-front and avoid later arguments.

Mark Suster agrees (in fact, Dan's article quotes the talk that Mark's article is based on):

50/50 partnerships can be hugely unstable - even if you've been friends since high school.

(...)

Most senior employees who join are given 2% if they join early. Maybe they get up to 10% if they joined REALLY early and were senior. Who gets 30%? Nobody. That's who. So trust me when I tell you that you can hire incredibly talented people for 30% of your company. Or 20%. Let's be honest - even 10%.

It's worth noting that both Mark and Dan had a 50/50 split in their first startup (they both say so in their articles). This means they know first-hand the problems it can cause.

On the other side of the debate we have both Joel Spolsky and Fred Wilson. Fred argues:

And I second with emphasis the focus on fairness. Founding teams that allocate the founders equity fairly stay together a lot more than founding teams where one founder has a much better deal than the others. The same is true of venture capital firms. The most stable venture partnerships are those where the partners share in the carry equally or near equally. At the end of the day, this is as much about respect as it is about money. And when people feel disrespected, they are going to leave at some point.

So, what to make of these two apparent contradictions, both of them argued very convincingly, by people with vast amounts of experience in the domain?

Well, usually when you get this kind of situation, where both sides are convincing, both sides are credible, both sides make sense, that points to a very interesting "hidden variable", a disagreement that's not obvious, and usually hidden in the meaning of commonly accepted words.

In this case, I believe the hidden variable is inside the meaning of the word "friend".

Fairness and self-interest

There are many different types of possible relationships between people. To take just two, some people form relationships around fairness, and others form them around self-interest (and most use both with different people).

There's nothing wrong with either of those. Both occur frequently. Typically, older relationships tend to be based around fairness, but not always. And it's not that rare for one person to think that the relationship is based around fairness, while the other person is focused on self-interest. This is not a bad reflection on either friend, just a reality.

If you structure a company's shares based on fairness, but your relationship is based on self-interest, you're headed for the trouble Mark and Dan mention, as soon as you hit a hard decision. If you structure a company's shares based on self-interest, when your relationship with your cofounder is based around fairness, then the minute you use the power which you gave yourself to overrule the other person's decision, you've probably lost a cofounder and gained a competent but demotivated employee. And you'll have to deal with the demotivational aspects of the lack of fairness of the split forever.

My view, then, is that you should base your equity split on the type of relationship you have with your cofounder. There is no "one size fits all" solution. Make sure you fully understand what the dynamics of the relationship are before you decide on a split, that you know where each party is coming from, what they want, what they look for in this friendship. Then make sure that split extends and strengthens your relationship rather than undermine it.

And don't forget to read this, especially the comments, for a view of what happens when it all goes wrong.

Government grants  

Renowned VC Fred Wilson dismisses government grants:

The application process is usually long, involved, and distracting. And sometimes the grants come with strings attached; you can't move, you have to use it for a specific purpose, you have to hire a certain number of people with it, etc, etc.

(...)

I'm not a fan of this form of financing. First, in principle I think that government ought to stay out of the business of picking winners and let the market do that. But more practically, I've never seen an entrepreneur change the outcome of their startup with government money. It is never enough to really move the needle and the strings that are attached usually make it uninteresting to me.

Given that, these days, I spend most of my time getting tech companies government money, I can't quite agree with Fred here. Perhaps things are different in the US (in fact, they almost certainly are), but here's the situation in the UK:

Tax Credits

The first mechanism that the UK government has to help tech companies is a tax break. It can be quite complicated to apply for, and so many companies that should be getting that tax break don't apply for it. If you're spending at least £50k a year on developing your own software products, you can get a chunk of that reimbursed by the government.

It's easy to dismiss the amount (you might get about £10k back on a £50k expense, for example), as Fred does, but actually, several companies in our portfolio would argue differently. One of them was in the middle of raising funding when the tax credit (over £40k in their case) came in, and it gave them that extra couple of months of runway that allowed them to negotiate themselves a good funding deal.

In their own words, they were "on the floor, laughing" when they saw the money come into their account at that critical time. So much for not moving the needle.

How much work did it take them to get this money? None at all. We handled all the filing for them. It cost them money, but that money was a "success fee" - in other words, it was money they wouldn't have had anyway if it wasn't for our help.

But enough about these unsexy tax matters. What about grants? Are they really that hard to file for?

UK Government Grants

Currently, GrantTree specialises in one of those grants, the Grants for R&D, which comes in the form of match funding with very few strings attached.

Are they hard to file? Yes, absolutely. The application form adds up to about 10 pages of very dense writing. It takes a lot of effort, great writing, persuasion, and technical skills, and of course experience in going through the process, to do this well, and it really does need your full attention for at least a few days to just get it done.

I certainly agree that in most cases, it's absolutely not worth it for tech founders, who already have their hands full with building their business, to dedicate a week or two of their mind-space to learning about the grant and preparing the application.

But here again, they can get help. And here again, the work is done mostly on a success fee, so that the cost is basically coming out of money which they wouldn't have had without the grant anyway. So it works out, once again, as free money.

Moving the needle

Can these things move the needle for entrepreneurs? Absolutely.

One entrepreneur I spoke to over a startup-themed dinner a few months ago claimed to have raised over £2m of government grants for his business, over the space of a few years. The Grants for R&D mentioned earlier can effectively extend your runway by 45% to 60% depending on the grant you apply for. Some UK-based companies can and do claim hundreds of thousands of pounds of tax credits every year. Even for a decently sized, mature company, that makes a difference. Money can clearly "move the needle". If it didn't, then why would people give up precious equity in exchange for it?

The same entrepreneur who had raised £2m of government funding made a great point that night. He said that the US, and in particular Silicon Valley, had a huge advantage in the density of VCs and hyperactive investment culture. In the UK, where VCs are scarcer and more risk-averse, the advantage that we have is that the government is willing to directly support small, innovative technology businesses.

If you want to learn more...

I don't want to turn this article into a pitch for my company's services, but if you're a UK company and you want to learn more, do get in touch. There's no guarantee that we can get you money (many startups are just too small and scrappy and don't qualify for either grants or tax credits), but we're always happy to discuss your options.

Dealing with a bad techcrunch review  

Update: Thanks to David Verhasselt for letting me know the link is dead. Luckily, I found a mirror here.

Josh Liu, London-based founder of MinuteBox, reacts to a bad TechCrunch review of his startup, and draws some key lessons:

  1. Great execution is key to getting your product understood;
  2. It is your responsibility to explain your product well, not the journalists';
  3. Not everyone will like your idea, and that's ok;
  4. Connect to the tech community to find the right team and/or cofounders.

This point is a familiar story:

When I was starting to work on MinuteBox, I knew no one in the tech community. I did not like social networking events. I was full of myself. I thought I had learnt a lot of things in business school. I just needed a developer and a designer to launch my business. Eventually, I found a developer and a designer through my friends. They are extremely nice people and were very helpful to me. However, they were not the right talent to execute the idea.

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