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

Look for opportunities rather than ideas

Yesterday, someone emailed me, asking about how to find good ideas to start a startup.

Every founder who's been in the game a few years has clouds of potential ideas floating around that they can't find the time to work on. They might not all be good, but there are always too many of them. At the same time, though some people have this cloud of ideas following them even before they run their first business, many start off with few ideas. Before I started my first business (and for a year or two afterwards), I was one of those people... I didn't have that many ideas. But now? I spot (and ignore) new business opportunities on a weekly basis.

Why is that? I think it's because of a shift in perspective. Few businesses are actually started based on an "idea". Instead, entrepreneurs start businesses because they spot opportunities. That is the shift in perspective that occurs after a few years running your own business: because your job is, basically, to identify and pursue opportunities, you become very good at noticing and evaluating opportunities for business.

Can this shift in perspective happen before running a business? Perhaps, but I don't know of any tried-and-tested methods to induce it. Perspective shifts don't usually happen merely by reading an article or hearing a good story. Articles and stories are just one part of a long series of experiences that lead to someone to change their view of the world.

That said, I think there are a number of things you can do to drive towards that shift in perspective. It might still take years, but getting there in years is still better than not getting there at all. Here are some suggested activities:

  • Go out of your way to meet entrepreneurs and talk about opportunities (rather than ideas) with them. You can meet them for lunch, at startup meetups, etc.
  • Realise that almost everything you can lay your eyes on was built and delivered by a business - even the trees in your local park are probably being tended by a business. Most of these businesses make money. Some make a ton of money. Make it a constant habit to pick out some of those things and figure out how they make money. In the same way that a programmer will try to figure out "how they did it" when exposed to a cool new piece of software, an entrepreneur will have a habit of trying to figure out the business model, constraints, effort and so on, whenever exposed to a cool new business. Keep asking yourself "how would I build this business from scratch?"
  • Learn to sell. Once you know how to sell, the space of opportunities that you can spot grows tremendously.
  • In fact, learn as much as you can from the startup skill set. Each of those skills grows your reach in the opportunity-space.
  • Finally, read the right kinds of blogs/sites. Swombat.com is a good example, but there are many others that provide insight from the point of view of experienced entrepreneurs. Many of those are found in the Founder's Library. With the right kind of daily reading, you can probably brainwash yourself into a different state of mind (whether that's a good thing or not is up for debate).

Ultimately, if you want to achieve this more quickly, jumping in at the deep end and starting a business will always be the quickest way to achieve this perspective shift. Running (and failing at) a business shakes you to your roots, and this kind of painful experience is the stuff perspective shifts are made of. As they say, it "builds character"...


Don't underestimate simple ideas  

William Wilkinson, a designer at MetaLab, makes the point that you shouldn't discard simple ideas just because they're simple or appear stupid. He acted on a simple idea for a Russian Roulette simulator for the iPhone, and made $16k in one month from it.

This is not all that dissimilar to threewords.me. As Gabriel Weinberg reasoned, building a small thing that takes off is a good way to get started as an entrepreneur. And, being an entrepreneur is all about finding opportunities where others don't see them, and exploiting them.

Investment as a cushion or a springboard

I believe new entrepreneurs should not take investment. Here's why.

There are two primary types of investment that I've observed being taken: investment as a cushion, to protect the company from having to focus on short-term revenue generation right away, and investment as a springboard, to help the company grow faster or enable a cash-intensive business model. These can be loosely matched with the Seed and Series A stages of funding, though some Series A are cushion funding, and some Seed funding is used as a springboard.

One might expect me to launch into a tirade about how one is better than the other, but that's not really the case. Both uses are valid. However, cushion funding is dangerous for inexperienced founders.

A cushion from reality

Starting a business with zero revenues and zero funds, you have to do what's called "bootstrapping". As UK entrepreneur Iqbal Gandham (who contributed this swombat.com article) argued on TechCrunch, bootstrapping from zero funds is impossible:

The harsh reality for startups is that you need someone somewhere to pick up a tab for around £50k, which of course could be split over two people, i.e £25k a piece, but still that is just £300 or so pounds less than the average salary in the UK.

However, many people commonly raise this initial £50k (though it's often much less) from their own savings (saving £50k is hard, but hardly impossible, when you're an IT contractor earning £50-100k/year). Bootstrapping, then, is creating a business without taking external investment. When it's your own savings dripping through the hourglass, when every expense matters, you end up, hopefully, being very focused on reaching revenues as soon as possible. Lack of funds creates an extreme awareness of the need for more funds.

However, if you have a nice £100-200k cushion provided by someone else, you don't feel the bite quite so much. Sure, you still have a runway, and it is diminishing, and it is something you need to "think about", but it is far more theoretical than seeing the biggest number in your bank account steadily approaching zero.

One of the biggest things that new entrepreneurs (at least in most of the world outside of Silicon Valley) need to learn is not how to build a product or deliver technical work, but how to run a business profitably. It's all these ancillary tasks, from sales to accounting, finance, legal, marketing, and general business management, that take three years to learn (give or take). That learning is one of the most important forms of progress for the new entrepreneur.

In that context, any cushion which slows down the learning, which delays it, makes it more distant and theoretical, is potentially harmful. Most successful entrepreneurs are the kind of people who thrive in sink-or-swim situations, and investment-as-a-cushion can turn this into a delayed sink-or-swim, and even set things up for a sink: having funds makes you more likely to take on fixed expenses start relying on your ability to spend, which you shouldn't - not until you have a functioning business and/or know what you're doing.

So, my advice to new entrepreneurs is: don't take funding, and if you do, take a minimal amount and spend as little of it as humanly possible.

A cushion from short-term focus

The proposition is considerably different for experienced entrepreneurs. Managing your cash flow, your runway, your fixed expenses, etc, is a very hard lesson to forget. Once you learn how to sell a product that doesn't exist based on a reputation that's only in your head, that's a skill acquired for life.

Many experienced entrepreneurs who could fund themselves take seed funding anyway. However, they don't take it "because they couldn't afford to do a startup otherwise", they take the seed funding because it enables them to put aside the short-term revenue focus for a little while and aim for something bigger and riskier. Once you've learned how much the short-term focus matters to your survival, it's very hard to ignore it. The cushion of external investment enables an experienced entrepreneur to temporarily ignore that pressure.

In this situation, I think it makes a lot of sense to take external investment as a cushion.

A springboard to greatness

Finally, the third case almost exclusively applies to experienced entrepreneurs, since, at least in the sane world outside of the Valley, VCs will pretty much never invest in a business that doesn't have either a proven founder or proven revenues (both of which add up to an experienced entrepreneur).

In this case, funding is required to enable the business to grow much faster than by organic growth alone. This is particularly important in winner-takes-all and first-mover-advantage types of markets. Paypal and eBay are great examples of the first: most people will have only one online payment account, and they'll pick whoever has the most popular platform. This winner-takes-all advantage paradigm is so strong that even with all their misbehaviours, both of those players are still firmly lodged at the top of their respective markets. Worth taking investment to get there first? You bet.

For the second case, looking in the enterprise market, many pieces of software like SAP have huge installation costs. A large SAP installation might cost $200m: $20m in software licences, and $180m in consulting fees to set it up. In a market like this, being the first to make the sale is pretty important, because customers are very rarely going to change platform if it costs that much.

In these contexts, taking growth investment makes sense, because otherwise a competitor who does take that investment will beat you to the post. This type of investment is not at all a cushion - in fact, it makes the fall much harder if you miss, turning a moderate success into a complete failure - it is a springboard, an amplifier of your efforts.

If you know what you're doing and are willing to take the risk, springboard investment does of course make sense.

Conclusion

So, in summary, taking investment can be seen as either a cushion from reality (often the case with new entrepreneurs), a cushion from short-term focus, or a springboard to greatness.

Only the latter two are good uses for investment. If you don't yet know what you're doing, if you feel you need the cushion just to survive, then you probably should not take it.

To conclude, it's worth noting that these arguments apply mostly to the 99% of the world outside of Silicon Valley, where spending tens of millions to build a company with zero revenues for years is not an option.


Bait and switch acquisition offers  

Ouch. Here's an anonymous story from a founder who got screwed during an acquisition. Killer quote:

He tells me, "I'm sorry, but the CEO changed his mind. We're not moving forward with you guys." What? I was furious and trying not to panic. "Why not?" He gave me several reasons, including uncertainty about how our product would integrate into their suite of offerings (shouldn't that decision have been made back in October?) and disagreement on the roadmap we presented (remember that chaotic three hours on the second day of due diligence? Also, he's the CEO, if he wants it, he gets it, right?). The one that stuck with me the most was "Our engineers looked at what you showed us during due diligence and told our CEO ‘It doesn't look so hard, we can build it ourselves.'" Information that we had shared under NDA.

If you're getting serious about selling your company, read this first. It will save you from these kinds of mistakes - mistakes which are not only costly, but also infuriating.

Getting feedback on your prototype  

The guys at PaperBuff share this insight and set of tools to achieve it:

One of my favorite pieces of Paul Graham startup wisdom is that the entire point of your early product is to get your users to tell you what you actually should build.

To achieve this, feedback has to be:

  1. Fast: your feedback loop needs to be tight, and the tools need to support that.
  2. Actionable: Measuring page views and the like might give you a nice feeling, but actionable feedback is what you need.
  3. Scalable enough: it doesn't need to scale to thousands of users; if it gives you the right feedback right now with the right amount of effort, that's good enough for now.
  4. Candid: back up what people say with their actions; for example, if people tell you they love your site, but they never come back, the feedback is suspicious.

For these purposes, they propose a few tools which can be useful at that crucial stage:

  • Olark for chatting to your users in real time
  • Mixpanel for real-time event tracking
  • Chartbeat for real-time analytics
  • Clicky for traditional web analytics

Early on in a startup's life, user activity streams can also be essential.

Get better at UI design  

UI design is essential to any startup, but it's often something that's a secondary skill for startup founders, who have either a business focus or a technology focus, and who tend to treat UX as just another task on the list (if it's even there at all).

Of course, UX makes and breaks startups, whether consumer-based or B2B, and should be a central discipline. This list of books is a good starting point to improve your skills in that area.

Startup skills vs startup ideas

There's an interesting but damaging perversion in the startup world, around ideas vs execution. Even among those who believe that "ideas are worthless, execution is everything", there is a practical, observable tendency to rate theory over practice.

If you were advising someone about how to build a top quality web application, and they didn't know how to program, you'd tell them that first they need to learn to program, probably spend a year or more practicing the craft, before they have a chance to build even a mediocre quality application. Programming is a highly complex activity that takes skill (built through experience) to do well. You wouldn't simply explain to someone the technical and architectural pitfalls of the application they want to build, give them a process for how to program, and set them off.

The same is true for most technical fields. There is a skill base that takes many months or years to build, and that skill base determines the success of any non-trivial endeavour, rather than the process they follow or the idea they have. Certainly, having a great process and a great idea is a valuable plus, but without the skill base, process, ideas and theories are mostly worthless.

But somehow, despite their renowned complexity, startups seem to be exempt from this rule. A large portion of the advice given to startups focuses on ideas (you should do this, you should do that) rather than practical skill-building (you should practice that until you're good at it).

Lean startup and the scientific method

One flagrant example of that is the Lean Startup methodology. Lean Startup is a process, a plan for how to go about executing your idea. I love it, because it presents a clear approach for applying skills which I've built over the last few years. It's a great distillation of a very rational process for going about building a startup, and I commend Eric Ries for presenting it in such a clear and cohesive manner. However, by itself it is no more useful than the Scientific Method.

Wait a minute, Daniel, the Scientific Method got us all of modern science! Surely that's pretty damn useful! I don't disagree. The Scientific Method, and the Lean Startup Method, are both very useful... when applied correctly, and with the right skill set to back them up.

If you handed down the Scientific Method to someone who is not a trained scientist, in theory they should be use it to derive new laws of nature. In practice, though, what would most likely happen is that they would mis-apply this method and come up with all sorts of crackpot theories about perpetual motion machines and life-altering magnetic bracelets. There's a good reason why we force wannabe scientists through 5-10 years of training before allowing them to do anything of consequence: it takes that long to build the skills to know how to do it properly.

In some rare cases, an exceptionally brilliant genius might manage to do "real science" without formal training, but the common case for an untrained scientist trying to apply the scientific method is failure. This is not a failure of the method, it's a failure of the person, a failure of skills.

The same is true for startups. No matter how good your method is, if you don't have the core skills needed to build and run a successful business, the great likelihood is that you will fail - not because you have the wrong method, but simply because you have no idea what you're doing and applying the Lean Startup method (or any other approach to company-building) is hard and takes skills.

Core entrepreneurial skills

The good news is, skills can be learnt and practiced. You can go from zero skill, to moderate skill, to high levels of competence. If you have the right framework and support, you might even do so quite quickly. But like all skills, you will learn them more quickly if you're deliberate about it, rather than waiting for chance to teach you the skills in its world-renowned "school of hard knocks".

I'll cover these skills in more detail in another article, but my initial short-list of what the core entrepreneurial skills are is:

  • communication (written, visual, in-person)
  • programming
  • design
  • financial control
  • organisation
  • management
  • recruitment
  • negotiation
  • sales

Someone (or a cofounding team) who is competent in these 8 key areas will be much more likely to be able to successfully build a startup than someone who has major gaps in several of them. If you look at this list and see something that you have no skill in, you should consider either teaching yourself that skill, or pairing up with someone who is competent in that skill.

One final note: of course, skills vary depending on context. You might be great at giving corporate presentations, designing motorcycles or managing a department of 500 people in an international bank. That doesn't mean those skills will translate to the entrepreneurial context, and so you should be aware of that before ticking them off as "done". However, for each of these areas, there is a commonality between different contexts, which means that some of the skills will carry over, so a corporate salesperson will at least have a good head-start over someone who knows nothing about sales.


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.

The Startup resume  

If you're applying to work at a startup, particularly if you're applying for a junior or internship position, you'd do well to read Justin Kan's article about what to put on your CV:

Overall, startups are looking for employees who are exceptional in the one key thing that they will be doing, whether it is scaling the backend system or doing the visual design. In your resume you need to 1) demonstrate that you are exceptional at the thing you do, and 2) not be disqualified by seeming crazy or imbalanced. A simple rule: if something on your resume isn't achieving one of the aforementioned two things, leave it off.

Having reviewed numerous CVs in the past, I can't agree more. Another point I'd add is that, if you're applying for a junior position and do not have significant work experience (summer jobs in fields that are completely orthogonal, e.g. retail, do not count), then make sure you mention those hobby projects which can actually give your CV some value. All too often, I see CVs where, for example, the applicant will mention that they are highly proficient in PHP or Ruby but there'll be no mention of what they actually did to become proficient. "I built an stargazing GPS-enabled app in my spare time" should definitely appear on your CV, no matter how rudimentary the app may be or whether it is "serious".

Large companies may not care about such "icebergs" of experience, but startups definitely will.

Ramen profitability and long-term, sustainable profitability  

Jason Cohen explores the fact that many people mis-define profitability and claim to be profitable when in fact all they've achieved is that their business isn't oozing money just from basic operating expenses.

As Jason puts it:

If you are living off it, even if that's $3000/mo, then you've made it. You might not have a dynamo on your hands (yet!) but at least you're in a somewhat sustainable place. Maybe next month you'll make $3200 and you can "plow that extra $200 back into the company."

Or, to rephrase, if your business can pay for the staff that's needed so that it can exist on a month-to-month basis, then it is profitable... kind of. Let's call that level ramen profitability. It means you're not going to go bust next month.

However, that's hardly the time to pat yourself on the back and take a holiday, because if you do that, you don't have a business anymore. Not only that, but it's not clear that basic operational profitability is that amazing unless it covers the cost of growing the business.

If the business is not busy growing, it's busy dying. It might take a year, it might take 10, but unless someone's deliberately trying to grow the business and figure out how it can expand and do better tomorrow than it did yesterday, it's a dying business.

Early on, all the energy for growth come from the founders, and they're not paid for their efforts. Large companies have entire divisions, not to mention a large chunk of the senior management team, dedicated to this task of growing the business, and compensated for it. Ramen profitable startups are borrowing the resources for growth from founders that aren't paid nearly enough salary for that kind of work to be worth their while (but they're compensated by the fact that they own the business).

So that's the next step up: truly sustainable profitability, not just from a month-to-month perspective, but for the long term. Of course, something could still come out of left field and destroy your business overnight despite the fact that it is sustainable for the long term, but at least that will be the exception, not the rule.

One way I've heard it phrased (can't remember where), is that you know you have built "A Business" - as opposed to a business-like entity that's only there to make you some short-term money - is when the founders can take a year off and come back to find a business that's better off than when they left it.

Needless to say, most "profitable" small businesses are not sustainably profitable, and, as Jason points out, that's ok. Just don't fool yourself into thinking you've built a profitable business, until you have well paid and incentivised directors who can continue to grow it for you while you do something else.

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