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

Startup Therapy: Ten questions  

Not a new article, but one that bears reposting as we approach the new year, a traditional time of reflection.

See if you can find the time, over the next couple of weeks, to answer the following questions about your business:

  1. In one sentence, what does your product do and who buys it?
  2. In one sentence, why does someone buy your product?
  3. What one thing is most responsible for preventing sales?
  4. What one thing could you do to get more feedback from customers, potential customers, or sales you've lost?
  5. If you had zero revenue from now on, on what date would you run out of money?
  6. If someone handed you $100,000 today, how would you spend it to maximize future profits?
  7. If you were forced to hire someone today, how would you define her job such that she would contribute enough revenue to cover her expenses?
  8. Which of your business operations do you hate?
  9. What initiatives could be done half-assed without significant impact?
  10. If you could get one solid hour of advice from a guru you respect, what would you discuss and what would be the goal of the meeting?
How to hire a programmer  

Jeff Atwood outlines a solid process for hiring programmers:

  1. First pass a few simple "Hello World" online tests.
  2. Ask to see their portfolio.
  3. Hire for cultural fit.
  4. Do a detailed, structured phone screen.
  5. Give them an audition project.
  6. Interview in person.

Jeff rightly emphasis the "cultural fit" test. We may all bemoan HR departments and their psychometric nonsense, but poor cultural fit does, in practice, seem to always lead to trouble down the line.

Self-employed vs business owners  

Derek Sivers makes a great point, illustrated by an engaging story:

There's a big difference between being self-employed and being a business owner.

Being self-employed feels like freedom until you realize that if you take time off, your business crumbles.

To be a true business owner, make sure you could leave for a year, and when you came back, your business would be doing better than when you left.

This is absolutely correct, and, as Derek mentions is straight out of Michael Gerber's E-myth book. Gerber makes a number of other points. I strongly recommend reading the book.

Productised services: #2: Services companies

In the previous article, we explored the pros and cons of product companies. In this one, before looking at productised services themselves, let's see what services companies have to offer.

Services companies

Services companies are much better and much worse than product companies, depending on how you look at them.

The classic example of a service company is a consulting, web development or design agency (like, oh, 37signals - but before they built Basecamp). Essentially, a services company trades skilled time for money in a mostly linear way.

There are great benefits to services. First, you can often ask for a significant chunk of the money upfront. That's great for cash flow, and not to be underestimated. It means that services companies very rarely require investment to take off.

Secondly, you know pretty much right away whether anyone wants to buy your time, so you're not sitting for years waiting to find out if you have a business. It can take a few months, or even years for sales to ramp up to a level where the business can be called "alive", but sometime in the first few months you should start to see significant amounts of cash coming in. If you don't, you're probably selling the wrong service, or selling it very, very badly.

Another good thing about services is that people instinctively understand that skilled time is worth money, so whereas convincing even a 10-people company to spend $200/m on a web product might be a tough sell, they will not hesitate to spend a few thousand dollars on the right service. And before you say "but the $200/m comes in every month forever", first of all, that's ignoring inevitable churn, and secondly, most businesses would (and should) rather have $3000 upfront than $200/m for 18 months, even if the latter is slightly more.

Finally, one last benefit of services is that services markets are often very fragmented, so it's much easier to build a moderately successful company in that kind of market. There are very few winner-takes-all services markets. Most of them look a lot like accountancy and consulting: a handful of huge mega-firms, a bunch of very large firms, quite a few large firms, and lots and lots of small firms. It's much easier to get a foot in the door and build a sustainable business in this type of market.

On the downside, services are very hard to scale. Since you're selling skilled time, and you only have so much of that yourself, you need to hire other skilled people in order to scale. The maths for that just doesn't work in your favour until you get really big (see this article by Jason Cohen for details), and getting really big is really hard, because you need a lot of smart people, and smart people are rare and expensive and hard to recruit.

Another problem is that services have much lower gross margins, because part of your variable cost (i.e. the cost that is attached to delivering the service) is skilled people's salaries. As long as you're the only person working in your company, the margins look great because it's all profit for you, but as soon as you have to pay someone else, suddenly you find those margins dwindling rapidly. By comparison, with a product, your gross margin can and should be extremely high - 80, 90, or even 95% in some cases.

Finally, services kind of suck because they take constant effort. Most services are not recurring, so you have to keep selling. People leave your company, so you have to keep recruiting. New people don't know what they're doing, so you have to keep teaching and training. If you stop doing any of those things, your company can develop deadly problems very quickly, like a diminishing sales pipeline, running out of people at a given skill level, or even running out of cash. Those things are hard to delegate until you get bigger. And getting bigger is really hard.

Tomorrow, at last, the third alternative: productised services.


What to look for when picking a VC  

Mark Suster:

So finally, how do you know if your VC will stick by you in good times or bad? How do you know if they'll intervene in a positive way in conflict? How can you tell if they really are good at intros and follow through on what they say they're going to do.

The best way - of course - is to reference check. Here's how you reference check a VC (link to post with longer version)

  • look at their portfolio list
  • subtract out the super, crazy successful companies. a) they have no time for you & b) everybody who has a super successful out-of-the-gate company loves their VC because there was no conflict.
  • call the companies that are doing well but not yet household names. Ask about the criteria above.
  • more importantly, call the companies that struggled. You'll learn most about VCs when you find out how they handled themselves in tough situations. Make sure to call 3-4 members of the management team to avoid one person's bias

The list of criteria to pay attention to is great, very useful. If your business does require you to take investment from VCs, this is a very helpful article

Test your startup ideas for $20  

In the theme of validating and invalidating your business ideas, here's another approach.

Explain that your brother has a crazy business/product idea, and that he's about to get a 2nd mortgage on his house, raid his 401k and quit his job. His wife is a nervous wreck, afraid that they'll lose their house and retirement fund, and he's hit your parents up for seed money that they really can't afford to lose. Your parents and your sister-in-law have come to you for help to try to talk him out of his hair brained scheme.

Suggesting that it's your brother's idea is a good move, because people will often avoid giving negative feedback in person. With this approach, however, you'll really elicit all the negative feedback they can come up with.

Working smarter in a startup  

Elliot Loh:

There's this misconception that everyone needs to kill themselves at a startup. Certainly you're working by a countdown clock that is usually wound by funding. But you're not trying to do "whatever it takes" as much as you're trying to do "only what it takes".

Elliot provides a number of approaches to work smart instead of working hard:

  1. Devote time to meta-work; spend some time thinking about the bigger picture.
  2. Cut to the chase; keep the goal in mind so you can sidestep issues on the way.
  3. See if someone has already done what you want to do, and if so, use what they've learnt.
  4. Measure things so you can identify and shut down failed attempts.
Play/life balance  

Greg Bayer:

Working for a startup usually means putting in more hours than others.  Recently, I spent two days on less than 3 hours of sleep in order to push out our new Pulse.me release.  This doesn't seem strange to me and didn't make me unhappy.  In fact, it was one of the most exciting and fun things I've done in a while.

Chasing after dreams is an essential part of my life.  The feeling of fulfillment I get from doing so makes me a much happier / more content person, and this in turn positively affects my relationships.

I've argued before that hours are not a measure of productivity, but that's not Greg's claim in this post. He's saying, quite rightly, that working on your startup is not work, it's play - and so, unlike working stupid hours on a job, working stupid hours on a startup is a blessing, not a curse.

I'm reminded of an old saying:

Why work for someone else from nine to five for a daily wage, when you can work twenty-four hours a day for yourself for free?

So which view is right? Neither, really. If you feel like working, work. If you feel like resting, rest. If you feel like playing, play. Working for yourself, chasing your own dreams, is worth pursuing with far more energy than the typical job - but life is what happens while you're busy working on your startup.

I'll finish with an observation: I feel most happy, most rested, and most productive when I have had a solid 8 hours of sleep, starting and ending at the same time each day. This plus a good task list has more effect on my productivity than anything else - other than, perhaps, the pressure of an immediate deadline. But that type of intense work under pressure usually has a cost the following days.

Traffic sources have a half-life  

Many startups measure at least some of their success in eyeballs (mistakenly or not). A media event (like a successful post on Reddit or Hacker News) can be an exciting moment in a startup's life. This article by Rob Walling suggests that different forms of marketing have different half-lives. His conclusions:

  • Zero Half-life - Any kind of advertising
  • Short Half-life - StumbleUpon, Twitter, Hacker News, Digg, a direct mailing, most referral links
  • Long Half-life - SEO, email subscribers, RSS subscribers, Facebook fans (in some instances)

This is an excellent point, as well as:

... some companies appear to build their business around viral traffic sources (which have a short half-life), but they are, almost without us noticing, converting them into long half-life sources.

(...)

What you'll notice is these companies are using short half-life sources to drive traffic, but converting it into a source with a long half-life (an email list). This allows them to build a sustainable business over the long-term.

And therein lies the key: once you have tuned your ability to convert non-sticky traffic into something that will last, all traffic sources are good, no matter what their half-life.

Take a pay cut to work at a startup

Ellen Beldner, referring to an earlier article which suggests you should raise debt from your employees by paying them less than market rate, comments that the amount of shares per dollar invested (in the form of a pay cut) is lousy compared to other investors.

That's a good point, but it's ignoring a number of other factors:

Risk Analysis

If you're going to analyse risk in this way do it properly. Guess some probabilities of huge exit (say 1%, if you really believe in this startup), moderate exit (say 20%), and failure (say 79%), and calculate the risk-adjusted returns on your investment (i.e. multiply each probability by the return associated with it).

Then decide based on that and your risk appetite, and the risk-adjusted return, not based on "other investors are getting a better deal". Of course they're going to get a better deal: they're putting in millions of dollars (in the VC's case) or, alternatively, they bet everything into the startup when it was just an idea and the risk profile was much worse (in the founders' case).

Lifestyle factors

Also factor in the kind of lifestyle that the startup will offer. This heavily depends on the startup's culture, but don't ignore that factor. For some people, the alternative will be working for a large corporation, which will result in a very different lifestyle.

Career development

Working at a startup will not only allow you to learn things that you wouldn't learn while freelancing or working at a large corporation. It also allows you to meet people that you wouldn't otherwise bump into. It is not uncommon for the founders or investors of startups which previously employed you to invest in your startup, when you decide to start one.

Passion

Compared to a market rate job at a large corporation, the right startup can give you the opportunity to work on a cool product that you can really be passionate about. I would add that, unless you feel that the product is that awesome, you probably shouldn't work on it.

Your current situation

Your current financial situation is also a factor in the decision. Of course, if you have a mortgage and three kids, you probably won't be interested in below-market-rate jobs at a startup. You simply can't afford to make that "investment".

But not everyone is in that situation. If you're 24, single, still in the student mindset (i.e. willing to live in a shoebox on a shoestring budget), and want to get the best out of your job, rather than have it grind your soul out of you in exchange for a bit more money, working at a startup can be a great experience.

In conclusion

Numerous factors are relevant when choosing whether to work at a startup. The pay cut is just one of them.

On the other side, if you're running an early startup and you can't get people to work for you at below market rate, you should ask yourself whether there's something fundamentally wrong with your idea that makes it so unappealing.


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