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

Cash vs Equity compensations  

Following an earlier discussion on HN about whether founders ought to make many times the return that their early employees get from a startup, here's a level-headed post by Jason Cohen proposing a straightforward approach for calculating how much shares an employee should be getting:

When someone works for less salary than they deserve (meaning: what they could make elsewhere), I think of that as a cash investment they're making in your company.

Jason then proposes treating this investment like any other investment. After all, if the new hire had demanded their market salary, you would have had to raise that cash from an investor. So, use whatever metrics you've got in place to calculate the values of angel or VC investments, to value this employee's investment.

Of course, one small hole in this is that startups are not just "a market job". They're significantly more interesting, you learn more, you get more introductions to interesting people, etc. Startup jobs are inherently more valuable than "market jobs" working at a mindless corporation. So, one could certainly argue that you shouldn't compare the employee's new salary to their market value, but to a slightly discounted value.

That said, this model is a great starting point and can help drive discussions towards something objective and rational, rather than towards an emotional discussion of "how much percentage should I get?"

Jacques Mattheij on: Networking without going places

Jacques Mattheij, who blogs regularly on http://jacquesmattheij.com/, is a long-time entrepreneur who's been through hell and back, and his most recent project is ww.com, a real-time web broadcasting platform. He is well-know to the Hacker News community, although he recently quit it, having achieved a staggering 50'000 karma points within a couple of years.

In this article, Jacques shares a technique for making the most from networking, without turning up.

The Problem

The problem with getting 'gigs', when you're a consultant, is that you are more or less expected to go out and 'network'. Typically, this means that you get to hang out with a bunch of people in the field of your choice and rub elbows being social every once in a while, typically while standing up in a large room full of people that are telling each other how fabulous they themselves are, while consuming small bits of food and drinks.

I've been to a few networking events and, honestly, I feel like a fish on dry land when I'm there. I don't know who to talk to, I don't like the atmosphere, and I don't do alcohol, so typically I'm bored out of my skull and somewhat annoyed - not the best first impression to make on the others.

It's possible that I've been going to the 'wrong' events, and that there are better places to go to. Those events that make me feel from the announcements as though I should probably be there are either too far away from here to be practical, or would take me away from what I really should be doing for too long. Since this is the scene here, I don't have much choice in the matter... or so I thought.

Networking through other people

A few years ago, after yet another wasted afternoon and evening, I figured I had to change tactics or I'd continue to waste my time in a way that was both counterproductive and downright frustrating.

The decision to do something about it was easy enough, but finding a good solution didn't exactly come to me overnight. It took a while to talk it over with other people and finally, after a few trial balloons, I hit on this trick:

Instead of going to 'networking events' I found out who was going there too, and tried to find a few people who were going to the places that I used to go to, and a couple that I had never heard of as well. This then gave me grounds to approach them with the story of my frustration with the networking events in general, but at the same time my occasional success at scoring a job through a contact made there.

The structural solution to the problem was very simple: those that do go to these events obviously like it, so why not make it worth their while? For every customer that you find me through whatever means (networking events or simple referrals) I pay a percentage of my gross income on that customer in the first year, typically 10%.

For a big job, that can add up to a nice sum for the person that brought me the contact, and it incentivises them to keep doing it. I'm absolutely religious about making sure this money is paid out and accounted for, to the point that I'll remind them to send me an invoice for a job that was referred, and I'll keep them informed if the same customer later wants me to do a repeat job.

Who would you do this with?

As a rule, the people that I have this arrangement with are not looking at my referral fee as their means to go shopping on Saturday morning, but as a token of appreciation for spending the time and effort to be on the lookout, and occasionally handing out my card. This gives them a lot of reasons not to hand out my card unless they feel the match is an excellent one. I much prefer that over having a lesser experienced person approach a crowd of people with, as their main goal, to carpet bomb (AOL style) the attendees with my card. That would very much work against me.

It Works!

Nowadays, almost all of my contract jobs (and there are not that many of them anyway, but they do still flow my way) are coming in through this referral mechanism, and I haven't been to a 'networking event' in 4 years.

Of course, the 'be seen' and 'keeping your name in play' aspects of the networking events disappears, but I never cared much for it anyway. I'd rather talk nuts and bolts in a quiet room or get some work done for a paying customer.

If everybody adapted this scheme, it would stop working. So, here's to hoping that lots of people continue to go to networking events where they'll run in to one of my 'representatives'! The people that do this for me are people that I've known for a long time, that know my strong (and weak!) points and that have no problem attaching their reputation to mine.

The best part of it is that those that help me in this way probably do a much better job of presenting me to a prospect than I ever would do myself!

It's not commission sales

It would be fairly easy to interpret this as a commission sales model, but while the ingredients are there that's not really the case. For starters there is no sale or anything like that being done by the person that represents me. It is probably closer to having a few people, knowledgeable in the field, that keep their ear to the ground for the specific conditions that match my talents and personality. If the job is a bad match, they stand as much to lose as I do, if they refer me. So far the 'score' rate has been 100%. In other words, every time someone referred me, it led to a job, sometimes as fast as the next day in some foreign country. The second difference is that they are not at all involved in negotations, can't make any binding offers and don't have a say in the 'product'. It's strictly a stack of business cards in the pocket of a third party.

This model might be adaptable to product sales, but I have not tried that, and I can see some reasons why it might not work well. For instance, you'd have to have a larger number of people doing this, which would lead to territory conflicts, and there would have to be all kinds of formal agreements in terms of volume discounts and so on. Since the agreements I have are completely informal, no contracts, entirely based on trust of all parties involved, a person that depends on their 'sales' for a living would not be able to function well in this environment. That's precisely why I kept the number of 'representatives' very low and the quality really high.

If you want to adapt this model to start-ups, and you make a go of it, then I would very much like to hear how you did it and what the effect was. As presented here, it works best for consultancy in very narrow niches.

Step by step

  1. Decide, for yourself, if you would rather go to networking events, or spend the time doing what you're good at
  2. Make a profile of the kind of person that would be able to represent you best
  3. Identify one or a few people like that, and approach them with the proposition
  4. Make sure they know your reputation, your strengths, and your weaknesses inside out
  5. Wait for the first job to be handed to you and do your absolute best to make the person that referred you look good, even if the match is a poor one; in that case, talk things over afterwards and correct course if required
  6. if you have multiple people doing this for you, try to make sure they're from sufficiently different circles that they won't be attending the same events

This article is part of a series.


How to use Business Development in a startup  

Via this post, here's a great set of slides by Charles Hudson, about when to hire someone for Business Development, and how to use them properly.

Here's a summary/extract of some of the key slides:

The purpose of business development is:

  • Licence someone else's technology or content for use in your product or service
  • Distribute your product or service through someone else's network

Revenue growth, sales, "business guy" are not BD roles.

First, make sure you actually need BD. Maybe you want a business hire who is not a BD person, to work on relationships with key partners, do market research, or help you sell your company. BD is costly to staff, more so than even a talented engineer or designer, so make sure you really need it.

BD creates extra work for the product team. If you're not willing to do the extra work, don't hire a BD person. Be aware that internal projects will often get deferred to process deals signed by BD.

Make sure the relationship between BD and product is healthy: don't allow overly padded estimates of delivery time, but also don't allow BD to over-estimate their likelihood of closing deals. In addition, make sure that your BD people don't treat pre-deal engineering work as "free" - spec work and mockups cost, and bringing in your top engineers to a meeting is very expensive. But make sure your engineers respect the BD function too.

The presentation also includes information on how to evaluate Business Development deals, and how to make sure you're not caught out by typical BD problems. It's worth a read.

Hidden cofounders  

Suranga Chandratillake on partners, friends, etc, as hidden cofounders:

I've found that "hidden co-founders" - husbands, wives, girlfriends, boyfriends and even parents - are often a crucial factor in the success of a startup. Why? Because being a founder and entrepreneur is not like a regular job. Startups are under-funded, under-connected and under-resourced compared to their competition. The way you beat these odds often requires super-human effort and commitment. This places you under strain, and the primary nature of this strain is physical. You have to travel, with no notice and at inconvenient times, often around the world. You have to focus entirely on the company and its mission, often pulling all-nighters and usually working through weekends.

...

All of this strain takes its toll. You will extract time and energy from some other part of your life and that probably means your family. Having someone else who can change their schedule at the drop of a hat, keep the trains running at home and go that step further to provide unconditional support, understanding and advice (after all, who better than your life partner or spouse?) is key in allowing you to perform at your best.

To make this relationship work in the long term, however, I believe founders need to be fully aware of the (often quiet) sacrifices these hidden co-founders are making and work to balance the effects of these contributions.

Suranga then proposes five principles to help this type of relationship work, based on respect, openness and balance.

This seems like very good advice, and is to be contrasted with the exceptionally terrible advice coming from a respected figure like Ron Conway, who stated:

Dating someone or married: warn them that they're not first in line, that you have this vocation, that your duty is to your company. It has to be that fanatical.

Please don't do that. That is execrable advice, guaranteed to torpedo a relationship that you deeply depend on. On the contrary, respectfully start by making it clear to your significant other that they're always first in line, even though in practice it may not seem so at times.

You don't get extraordinary commitment from people without offering them extraordinary commitment on your side. If you tell someone they're second place, don't be surprised to find yourself also at second place (and therefore not worth all the hassle).

Elad Gil's engineer hiring process  

For an early startup, I believe you have to be much more efficient than this ten-step process - and I'll cover my process for recognising technical talent in a later article - but as the company scales, you need to put in place hiring processes which work even with dozens or hundreds of employees. That's when "heavy" recruitment processes come in.

Here's Elad Gil's hiring process:

  1. Resumé screen
  2. Phone screen 1 - culture fit and "reasonable to set up a technical call"
  3. Phone screen 2 - engineering interview
  4. In person interviews
  5. Discuss the candidate
  6. Half to full day of work with the team
  7. "Beer test"
  8. Reference checks
  9. Offer
  10. Close

Have a read through the article for much more detail.

What should you bring a "business guy" on for?  

Rob Walling:

For example, here are four areas I've heard mentioned by developers when discussing finding a partner with business experience:

  • Business filings and structure
  • Taxes
  • Banking
  • Payment gateway / merchant account

Aside from "to kick me in the head twice a day" these may be the worst reasons ever for finding a business partner.

Each of the above "business-y" things can be handled either with a few hours of research, or by hiring an experiences professional (lawyer, accountant, etc…). Giving up equity to someone to handle what amounts to administrative duties is a huge mistake.

Couldn't agree more. Not only that, but unless you're capable of understanding and handling things like business filings and structure, taxes and banking, it's not really your business. You're not in control.

Rob goes on to suggest that the only good reason to bring on a "business guy" is if they have successful marketing experience.

I think that's limiting things a bit. There are many other non-technical competencies which might be critical to your startup (business development, customer relations, design, logistics, etc.). The key is, you should only bring on more founders if they bring something so critical to the table that the startup is worth a lot more with them than without them. If you're a single founder, one way to think about it is, whoever you take on as an equal cofounder should more than double the value of the business (and obviously so, not in a hypothetical sense).

Sales comes out of who you genuinely are

Have you seen Glengarry Glen Ross?

It's a pretty awesome movie based on a play by David Mamet. There's a scene in there that has been posted ad nauseam, the Always Be Closing speech where Alec Baldwin puts some serious pressure on the small sales team at some kind of real estate company that's never fully described.

A less well-known feature of that film is the sales pitch and approach followed by that company's star salesperson, Ricky Roma, played by Al Pacino. Ricky is shown spouting ten shades of bullshit in a bar with his "mark", convincing him to buy a product that's clearly not good for him (and very expensive), and then actually lying to his face to try and maintain the sale when his customer realises (after being told by his wife that she'll divorce and ruin him if he doesn't cancel the sale) that he made a really, really bad deal that's about to literally destroy his life and put him in the gutter.

What does Ricky Roma do in this situation? He lies and pretends the contract can be cancelled later, so that he can lock in this "customer" into this sale that will destroy him.

Ricky Roma is a complete asshole and a stain on the reputation of salespeople. David Mamet must not have known a lot of salespeople, to have this view of what a good salesperson is, because that is definitely not how great salespeople work.

Which brings me to real salespeople, the ones who actually make sales in the real world, rather than in fantasy plays. The kind that you need to become yourself, to an extent, in order to be a successful founder.

Win-win-win

Successful salespeople don't pressure or bullshit the prospect into a sale. They are persistent, but they are always focused on achieving a deal where it will benefit all parties.

This means that a great salesperson will never be selling something that they don't believe actually helps the customer. And that has to be the starting point of every conversation with a potential customer. How can I help you? Is there something that I sell or someone that I know that can make your life better?

For the last few months, I immersed myself deeply in the sales process for GrantTree, but over the last few years, I've observed quite a few competent salespeople at work, and been part of many sales, both successful and not, and the conversation, particularly when selling high-value, high-price items, always starts with how to best help the person sitting in front of you (or on the other side of the phone call).

How you can help someone always starts with who you are. I'm a serial entrepreneur, with a blog full of advice for startups, with connections and experience that come from 5, 6 years of doing this, and with a business that sells a product that can help tech startups. So my conversations always start with understanding where the person on the other side is at the moment, and how I can help them. The best situations for me to help most tangibly is if there is a match between the services GrantTree offers and the state their business is in, but if those services won't help them, I would never push them into deals that won't provide a clearly positive outcome for them.

For example, some clients are too small for GrantTree to be able to add much value. It's the nature of government incentives, which are based on how much you spend, that the more you spend, the more you can get back. And the more you can get back, the bigger the difference it makes to use a specialist. I regularly speak to founders whose businesses are too small or early to make the most out of GrantTree's services. In those cases, I try to help them anyway - even without getting anything out of it for GrantTree.

This is how I start. My cofounder, Paulina, approaches clients differently. Her strength includes a very wide network of people who might be great connections for the person she's talking to, so naturally she leverages that, rather than tech startup experience, to help the potential client. But again - the focus is on helping the other person, never on trying to squeeze a deal out of circumstances where we can't make a positive impact on their business.

How will you approach your potential customers? That entirely depends on who you are, what you bring to the table. But it always has to be first focused on helping the other person. Otherwise, you are not a salesperson, you are a scammer looking for a quick buck, like Ricky Roma.

Getting over the money hurdle

With that in mind, as a geek, I used to find it hard to get past the fact that ultimately, I was doing this to make some money. This is probably the greatest hurdle for anyone (even people who eventually become master salespeople): realising that it's ok to make money from a deal.

It sounds trite, cute almost, but it's a real problem. Most people who have not spent a considerable amount of time selling will feel that the whole process is made unwholesome because they are, ultimately, doing it out of self-interest too. Yes, I'm trying to help the other person, but I'm also trying to make some money, so I must be selfish, right?

This comes back to believing in your product. If you don't believe that your product genuinely adds to your customers' lives, genuinely makes things better, genuinely helps, then don't sell it until you do, because then you are selling a scam and you should indeed be ashamed of doing so.

However, if you do believe in your product, then focus on that and the issue will go away. Here are some examples:

Patrick McKenzie wrote about how he started charging a lot more for his services after a conversation with Thomas Ptacek, who pointed out the vast amounts of value he was creating for the client business. Charging more enabled him to focus on providing top quality advice to people who could really make use of it. He's since helped many other companies to multiply their revenues. He wouldn't be able to do that unless he charged a lot for it (he wouldn't have the time to do it properly, with the right amount of focus). Patrick believes in his product (and should). If Patrick tries to sell to a business that would be a good fit, I'm sure he has no doubt in his mind that if the sale goes through, both himself and the client will benefit greatly. Is that a product you can believe in? Absolutely.

George, one of our recent hires at GrantTree used to work for Point-Two, who sell air jackets for horse riders that inflate upon impact. These jackets can save your life. He showed me a video recently of a woman whose horse hesitated before a jump. She went over the obstacle. The horse came tumbling after, on top of her. The 600-kg beast landed squarely on top of her. The air jacket meant that she walked away with a few bruised ribs. That jacket saved her life. Is that a product you can believe in? Absolutely.

GrantTree sells help with getting government funding. For the right clients, we increase the amount of funding obtained substantially, through our knowledge of the rules, as well as reducing the amount of time spent preparing the filings and the risk of doing so. Many of our clients would not file, or would file much smaller claims, if it wasn't for us. We regularly take on clients who have lost all belief in UK government funding, and are very surprised when the funding does go through. Or we take on clients who are already making use of the funding schemes and we substantially increase the amount that they get. Is that a product you can believe in? Absolutely.

Given that these are all products that add very tangible amounts of value to the clients, is it reasonable to make money for them? Absolutely. Making money from his consulting services means that Patrick has been able to go around the world helping well targeted businesses with his knowledge. Making money from the jackets means that Point-two have been able to save lives. Making money from government funding services means that GrantTree has been able to grow and help even more businesses. None of those things would have happened if those businesses did not make money.

So don't feel bad about the fact that you'll get money out of the deal too. If you believe your product genuinely helps your customers, then making money from it is absolutely deserved and reasonable.

Focus on the win-win nature of every deal you make and, over time, the self-accusation of selfishness will fade away.

In conclusion

Mythological salesmen like Ricky Roma, who are really highly skilled scammers, have given the sales profession a bad name. If you want to be a successful founder, sales is one of the many skills you need to learn.

Get over your fear of making good money from selling good services by realising that every sale you make will benefit your customers (if your product is worth selling) far more than it will cost them, and start every sale from the point of view that you are trying to help the other person.

Good luck with it! Sales is damn hard, even without misconceived notions about whether it's ok to make money when selling something.


Paths to $5m  

Here's an article from 2010, by Gabriel Weinberg, doing some maths to calculate how to achieve a $5m exit depending on what sort of funding and cofounders you take. The conclusion:

At no investment and two co-founders, you'd need a $10M sale to get your $5M. At 80/20 that becomes $6.25M. And of course as a sole founder it's just $5M.

Those differences are pretty vast. $5M exit as a sole founder with no investment to $100M exit with several rounds of financing and two co-founders.

And yet the financial outcome is the same. But the probabilities are not. It's much easier to sell a small company for $15M than it is to IPO.

Of course, as Tim Ferriss puts it, why do you want $5m? If it's in order to sustain a certain lifestyle, then perhaps a muse or other lifestyle business may be even easier to achieve.

A good friend of mine has a talent for building these businesses - he can fairly reliably build a business that will make between £5k and £20k a month for a few hours a week of required effort. These are not always inspiring businesses, but in terms of allowing him to have the lifestyle he wants, and enabling him to do what he wants with his time, they are clearly successes.

If you just want a free lifestyle that enables you to spend your time on what you want, and if "what you want" isn't startups, you don't even need to build an exit-worthy startup to get your desired lifestyle.

Consulting company accounting  

Jason Cohen does a great job outlining a number of reasons why consulting can be a deadly trap for budding startups - namely, that it's hard to get the math right, and easy to end up not making the kind of profits you thought you would make (which then takes resources away from your product).

It's always hard. Most consulting companies don't make much profit, and it's one in a thousand that has the discipline to launch a successful product during off-hours. If you're going to make it happen, you yourself need to be serious, disciplined, and relentless.

Jason also outlines some concrete ways to combat those issues. If you're thinking of using consulting to fund your startup, this is a must-read.

Reckless risk-taking  

Philip Kaplan proposes that instead of worrying about low-probability risks, an entrepreneur should just power on ahead and sign whatever the client asks:

This lesson in total disregard for risk served me well. They say entrepreneurs are risk takers. I think of myself as too lazy and irresponsible to fully understand the risk.

It works for me.

I'm not sure what the lesson is here.

I think this falls squarely in the "very dangerous, easily misunderstood lesson" category.

If you met someone who crossed the road with his eyes closed his whole life, and said "no need to worry about crossing the road, just close your eyes and go right ahead - it's worked for me so far" you wouldn't take that advice seriously.

Now, the reality of entrepreneurship is that standing on the side of the road worrying about the cars costs more than just crossing, and if a car does hit you it won't necessarily cost you your life. So, it makes sense to just decide and go with it rather than worry about things too long.

However, that doesn't mean that you should take risks on casually and naively. The best entrepreneurs are risk-takers in the sense that they will take measured, calculated, mitigated risks for the chance of good rewards. They are not risk-seekers, they will not seek out unnecessary risks, nor will they naively accept every risk that comes their way.

In the examples he cites, Philip had an experienced entrepreneur looking over his shoulder, and also used his own gut feeling to help him make the decisions. What's not mentioned in this anecdotal article is all the deals he rejected before they even got to the contract stage, because he had a bad feeling about them.

As a smart founder, you need a bias towards making decisions, and you need to be willing to take calculated risks (ideally risks with a small, limited downside and a large, unlimited upside). But you should still think through what risks you are taking on, and do whatever you reasonably can to minimise those risks.

In other words, don't wait until you have a live GPS map of all the traffic before crossing, but do open your eyes and look both ways.

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