daily articles for founders

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

Strategic investments in early startups  

As many startups are created by people with ties to related industries, it can be very tempting to look for "strategic investment" from the businesses that you have the strongest links with. This article makes a good case for why that's a bad idea.

The right way to accept strategic investment is from a position of power and independence, and this is best exemplified by the recent investment by WPP in Buddy Media. Buddy had just raised $15 million Series C at a high valuation in the wake of building a massively successful, fast-growing business.

Growth vs Capital Efficiency  

Boris Wertz:

I often see two entrepreneurs executing on similar opportunities, but with two very different capital efficiencies. First, there’s the aggressive one who spends money very quickly, building a large team, buying early growth through aggressive marketing and sales, and hoping for a large upround in the next financing round. Then, there’s the bootstrapping entrepreneur who hires carefully (sometimes too little, too late), trying to get as much runway with the current money as possible and build a “real” business.

In other words, bootstrapped vs funded.

Boris makes some good points, though I feel he still glorifies the funded path a bit more than necessary (perhaps because he's himself an investor, and is therefore interested in there being more funded businesses). One essential point:

3 . Evaluate your market: is it winner-takes-it-all?

If you’re targeting a winner-takes-it-all (or almost all) market, then focusing on saving money makes no sense. You’d be sacrificing market leadership. Think about it. Nobody remembers Ryze, or Spoke as early LinkedIn competitors. But if you’re operating in e-commerce or other non winner-takes-it-all markets, then you don’t have to be overly aggressive in the early stages. In this case, you can take your time to fine-tune your model before aggressively scaling up.

I'd turn this point around and say, unless your market/idea has a property, like winner-takes-all or an intrinsic huge-upfront-investment (e.g. Tesla or SpaceX - and by "huge" I don't mean "it'll take 12 months to build v1"), it makes little sense to take funding, with all its associated problems.

Term sheet negotiations  

One founder wanted to negotiate out of having to pay $10K in lawyer fees. Said just because it was always done that way doesn’t mean we had to do it that way this time. Turns out that person wanted to rewrite the book of convention on every decision he made. I can’t tell you that’s why his company failed but it sure didn’t help. Another person didn’t want preferred shareholders to have any preferred rights. He never should have taken investor money and probably won’t again. My favorite was the guy who wanted a relocation bonus….to move his boat to the bay area.

The investor who spends hours browbeating you to avoid a tiny reduction in the option pool will also be tying up board meetings for an hour to talk about an assumption on line 18 of the revenue model submitted for discussion. (...) Does he wait until the day of close and then call you and tell you that he found out you have a competitor and is going to lower the valuation by 30% now that you are in a lockup? This person is always going to be trying to find and exploit any leverage they have over common.

In other words, if they're frustrating to deal with during the negotiations phase, they'll probably get even worse after it's over (and they no longer have any reason to try and seduce you). So don't ignore those early signs.

Attention infrastructure vs fundamental businesses  

Great post by Garry Tan, cofounder of Posterous and now designer-in-residence at YCombinator, about the difference between infrastructure businesses and fundamental businesses.

Attention infrastructure businesses like Facebook, Google, Twitter et al:

  • require significant capital infusion;
  • are high-risk, high-reward;
  • tend to be created by technologists.

Fundamental businesses:

  • earn money immediately;
  • are less risky upfront;
  • can still go huge.

This turns out to be a valuable framework for identifying viable Internet startup ideas. Are you building something that could become infrastructure? Or are you building a fundamental value-generating business that uses the infrastructure? Both are amazing business models, but have radically different risk profiles. But as Apple has reminded us today -- it's good to be king.

Worth closing with a perhaps obvious point: frameworks are just (sometimes very useful) ways to analyse things. Reality is often more complex.

Making all the decisions yourself  

Stephen Wolfram:

I insist on really understanding everything. And, you know, every time I don't, something ends up being wrong.

I think that's a general feature of at least my style of running a company. At the beginning the CEO does everything. But gradually as you understand things, you can hire other people to do them.

I know people who favour both this style of company management (known in the E-myth parlance as "delegate, don't abdicate"), and the other.

What's the other? It's the style where you surround yourself with amazing people who work really well together, and let them make their own decisions. As a founder, doing this requires you to be really good at recognising amazing people and helping them work together, though, which is easy to fail at. The other style is easier, and probably a better choice for new founders.

Fundamentally, you can trace back those two philosophies to Taylorism, where every important decision is centralised to the CEO and the rest of the company implements his wishes, and modern management, where important decisions are pushed down to those "closest to the coal-face". Both systems work, but the latter has been proven to be a better way, if not the only way, of building very large companies.

Google couldn't run if Larry Page and Sergei Bryn had to make all the important decisions themselves, for example.

In any case, this talk is well worth a read. Enjoy.

Habits of effective startup mentors  

I've argued before that mentors are essential to startup success, but who trains the mentors? Can you get a mentorship mentor? As it happens, you can, and much like most coaches are themselves being coached, mentors usually have their own mentors.

That said, it's interesting to try and write down what a good mentor should do. Here's a list, by LeanStartupMachine mentor Giff Constable, of ten best practices for being a startup mentor. The habits are:

  1. Always start by defining the fundamental idea behind a product or service
  2. Prioritize the startup’s biggest risks
  3. Get practical on the tactics to empirically mitigate risks
  4. Use your network to find them potential customers
  5. Challenge, play devil’s advocate, and poke holes in arguments
  6. Let the team come to its own conclusions
  7. Less mentorship may be better
  8. Don’t spoon feed, keep feedback crisp
  9. Collaborate with other mentors
  10. Be a mentor, not a CEO

Get the details here.

Never say "no", but rarely say "yes"  

Great article and advice from Jason Cohen, about what to do if presented with the option to work with a customer who you don't believe is a great fit. Others might suggest sending those customers away, but Jason believes that you should set the price tag on "yes" high enough that you will gain some strong, very tangible benefit from serving this customer.

So the principle is easy: Set the conditions of “yes” such that:

  1. If they say “yes,” you’re happy because the terms or money are so good, it more than compensates for the distraction, possibly even funding the thing you really want to do.
  2. If they say “no,” you’re happy because it wasn’t a great fit anyway, so it’s not worthwhile for a small return on your time and effort.

In other words, make sure you get enough of a financial benefit out of those customers to be able to serve them, and then some.

How to set up an advisory board for your startup  

We have an awesome advisory board at SmartHippo and I often get asked how we set it up and how we leverage the people on it. If you run a startup, particularly if you’re early stage, a good advisory board can be one of the best investments you can make.

The article presents some good tips for how to go about this. I disagree with directly approaching potential advisors and just asking them outright. It's better to engage with the potential advisor over a period of weeks or months, progressively getting them drawn further into the startup, before popping the question.

How to get and measure traction  

Here's an excellent guest post on TechCrunch EU by Alan Gleeson, making some useful points both about how to get traction, and how to present it to potential investors. the article is long but full of useful information and worth your time. A choice extract:

The most persuasive evidence you can provide that your business is worth investing in is ‘evidence of demand’. Clearly if this demand is translated into sales you have irrefutable evidence that the start-up has traction. The greater the sales the greater the proof.

In terms of the ‘traction hierarchy’, active users and letters of intent probably fall into the next tier below real sales, finally followed by viewer numbers (on your website). While growing visitor numbers to a website was once a good barometer of the potential of a business, it is no longer considered a valuable proxy. These visitors have to convert to sales and hence once again the focus returns to the one piece of evidence that trumps all others – real sales.

It also links to this excellent post by Gabriel Weinberg of Duck Duck Go, which lists a great many ways to acquire initial users.

Running a startup without hiring  

Gabriel Weinberg, respected entrepreneur and angel investor, proposes that until you have significant and growing revenues, you should refrain from hiring any permanent workers and, instead, use freelancers or do it yourself. This is in contrast to the typical funded startup approach, and is very good advice for those attempting to bootstrap their business.

[...] hiring takes money. It increases your burn rate significantly. Companies before product/market fit, i.e. traction, need to stay around long enough until they get it. That can take a lot of time, like years. There are countless cases where companies folded only to miss their moment and see other companies rise up where they might have done so.

This approach will probably not work for everyone, but if you are an experienced and multi-talented founder, I agree that it can be a better approach - allowing you to keep your burn rate low and to spend money on things other than staff costs.

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