daily articles for founders

Investment increases your risk

It's no secret that I'm a fan of bootstrapping. I like to retain 100% founder control of a business that I'm in. There are some circumstances where I'd consider raising capital (as a springboard, not a cushion), for the right kind of business, but I think they apply only to a very small subset of businesses that are interesting (aka fun to run) or likely, and to a vanishingly small subset of businesses by first-time founders.

That said, I do regard both methods - bootstrapped and funded - as valid ways to build a business. It all depends on your objectives and your circumstances. You couldn't start Google without funding, nor could you grow it to be the success it was. Facebook needed to own the social networking space before it could generate money, so it needed funding too. Even Apple, the cash cow par excellence, needed funding to help jumpstart its manufacturing operations (though nowadays, they'd probably have used Kickstarter). Some businesses are just capital-intensive. Some have a winner-takes-all kind of market where you must be funded to win. Some just don't have an obvious business model upfront.

Every once a while, though, I speak to someone about funding, in the context of a business that should be cash-generating fairly early, or is already generating decent amounts of cash, and they mention that they're looking for funding to decrease their risk. That's a terrible misconception. Funding does not decrease your personal or your business risk - it increases both.

Risk profile

Taking funding makes your distribution of possible results more binary. By default, a business can be anything from a complete failure (0% or even negative ROI) to a roaring success, with all the options in between available. If you raise funding, however, it cuts out a number of the middle options. VCs will definitely want an exit, and if the exit is too low, this can turn a fairly decent success into a relative failure for the entrepreneur.

For example, building a business worth £20m is a pretty amazing achievement, but if you've raised £10m from a VC to get there, with 2x preferential rights you would be wiped out and result in very little money for you as a founder. In that scenario, not taking the funding and building a, say, £5m business instead, would have been a far better financial outcome for the founder.

Angels can be a bit more forgiving, but they're typically looking to exit too, and taking that first bit of funding will gently push you down the road towards taking more and more. Angel funding does not necessarily make the outcome entirely binary (angels are more forgiving if you decide to just run your business and pay dividends), but it can still make a great first business success seem like a failure.

Remember, the VCs, despite all the rosy-coloured articles out there, are not in business to help you. They're in business to make money for themselves and their limited partners. Some do so in more ethical and helpful ways than others, and that's to be commended, but the fundamental business model of the VC is to get a good return on a few superstar investment and limit the damage as much as possible on all the other "failures".

No pain no gain

If funding makes things so much more risky, why bother at all?

Funding is worth taking when you want to trade additional risk for potentially larger gains. Talking of the "startup lottery" is not so far off the mark. Investment is a bit like gambling. When you raise funds, you take on a larger risk, both personally and on behalf of the company, in exchange for a potentially larger return.

If there was any way to increase return without increasing risk, everyone would have done it already (and in fact there are many ways, like getting mentors, learning about the topic, etc).

With this perspective, it becomes obvious when funding is a good idea: you should only take additional risk when you can afford it.

Most first-time founders are broke. Not only that, but being first-time founders, they are already carrying enormous amounts of risk, because they don't know how to run any kind of business, let alone a mega-successful high-growth tech startup. This is as compared with, for example, someone who has run and profitably exited a couple of more traditional businesses in the past, and is now looking for a new challenge. That experienced entrepreneur may be willing to trade some additional risk for a chance of a much larger impact than her previous ventures.

Given these circumstances, I would argue that new founders should be looking to decrease their risk, not increase it. As a first-time founder, it is better to have a risk curve that gives you a 30%-ish chance of making a fair bit more money than you were making in your previous job, with a fairly smooth distribution of lower outcomes and little chance of zero return (not that unlikely in my opinion), than a risk curve that gives you a large chance of zero return and a slightly higher chance of a very large outcome.

And therefore, first-time founders should almost never take funding.

Tech founder's guide for picking a non-tech founder  

Jessica Alter:

There are many articles and blogs claiming to have THE list of things to do to find the perfect technical cofounder - as if it's that easy to find a cofounder in general. From my purview at FounderDating, however, one of the most important and least-discussed (in the press, at least) questions is from technical entrepreneurs. For the last year the longest- running trending topic on FD:Discuss (the Q/A section of the site) is: how do technical cofounders evaluate non-technical cofounders?

Jessica outlines 4 key criteria:

  1. Good at figuring stuff out
  2. Good at getting stuff done
  3. Highly determined
  4. Good at communication

Ultimately, the kicker is in Jessica's suggestion as to what to do to recognise those characteristics in a potential cofounder:

Start a side-project. These quotients are exponentially easier to calculate when you're working on something real together. It doesn't matter if it's the idea you actually end up working on, you'll see far more revealed doing this than you will over 10 coffees or hypothetical white board sessions. Yes, that also means you can't find the right partner in just a few weeks. So be constantly putting yourself out there.

A few months seems about right. Remember: finding a cofounder is like finding a wife. You don't go out looking for a cofounder, you go out to meet new people and work on neat projects with them, and if you meet one that you feel like starting a company with, great.

Three modern organisational structures  

I found this gem by Aaron Dignan linked via this previous article. While the general theme is around "what to do with a 10,000 person stagnant organisation" (and it offers some concrete advice towards that), the really interesting part is the overview of three modern ways to structure a business, namely:

  • Holacracy (Medium, Zappos): "authority should be distributed, everyone should be able to sense and process (solve) the tensions (ideas/problems) they perceive, roles and employees are not one-to-one, and that the organization can and should evolve toward its "requisite structure" (the ultimate structure for its current environment)"
  • Agile squads (Spotify): "Instead of an engineering department, a design department, and a marketing department that each collaborate on products with dubious ownership, they organize vertically around products (or more specifically pieces of products) and traditional disciplines are loosely held horizontally."
  • Self-organising (Valve, Github): "Unlike the examples above, they accomplish this by essentially having no structure. Employees are encouraged to work on whatever they want-to find the projects that engage them and do the best work of their lives."

GrantTree is somewhere in between Holacracy and Self-organising - but I'd never heard those terms before today, so perhaps that's the case for many people who will read this article.

Agile Squads is the only one that doesn't seem all that new - cross-functional teams are hardly ground-breaking - but perhaps the meat of the newness is somewhere else than in the cross-functional element.

Key quote:

The defining characteristics of these models are fairly straightforward. They aim to distribute authority and autonomy to individuals and teams. They let the changing nature of the work (expansion/contraction/shifting) impact the structure of roles and teams in a fluid way.

I firmly believe that if you're starting a business in today's ever-changing environment and not making any effort to make the business more adaptable to rapid change ("anti-fragile", as the article calls it), you're setting up your business for failure a few years down the line. Getting big won't protect you, either. See Blackberry as a warning.

Don't reinvent management  

Interesting article by William Mougayar, looking at some obvious mistakes that people can make when scaling up a startup's team, namely by trying to reinvent the wheel of management:

What troubles me sometimes is seeing startups that re-invent tried and true management principles, or misinterpret them, or even ignore them, for a lack of interest in researching or learning the prior knowledge that already would have served to solve the issues they face.

This is a very good point. Many startups started by developers try to throw the whole of what they call "management" out the window. But the reality is that a startup is a human organisation, even at a small size, and it needs management like any other kind of human organisation. Don't accept any management tools as gospel, but be knowledgeable about what's out there, and pick and choose bits that suit your startup and context.

William makes a number of worthwhile points and links to a number of further insightful articles. Here's one that stands out for me, though:

Each startup CEO who has scaled their company ends up developing their own style or management framework.

As MD of a growing company, I am hoovering up information from every possible source - but it is abundantly clear that the GrantTree way, while taking its cues from many sources, will be fairly unique.

I'm beginning to think that this is a characteristic of interesting businesses: they're unique, different, in the specific combination of features they present, whereas most businesses are similarly uninspiring and unpleasant places to work, mostly in similar ways, all doing more or less the same things.

This is an interesting reversal of the Anna Karenina principle.

Why transparent salaries make sense  

Following up on my recent post about developing a good culture, I noticed Joel Gascoigne posted a brave article exposing the open salary structure at Buffer.

I felt Joel's article missed out a bit on the "why" side, so I wrote a response article to that on the GrantTree Blog: Why transparent salaries make sense

This was posted to HN, and did reasonably well, until the controversy detector flagged up that there were too many comments (apparently this is a very interesting topic for discussions) and then it sank without a trace, so you might have missed it then.

Developing a good culture takes constant vigilance

GrantTree now has twelve, soon thirteen employees. The culture is (currently) great, I believe. People are generally happy to be there, and they're beginning to function as a group rather than a collection of individuals.

One of the many things I learnt along the way - one of the few things which I'm certain enough of to be willing to write an article about it - is that building a good culture takes constant effort. It doesn't just happen. It takes consistent, deliberate effort, every day.

A good culture?

Perhaps it's worth defining what the hell a good culture is, before we go deeper. Every company will have its own definition of "good culture" that will be different, but we can make a useful first stab.

Here's a simple definition of a "good culture": a company with a "good culture" is not a shitty place to work.

By contrast, most companies are terrible places to work, for a lot of reasons. They have incompetent managers, rules and processes that don't make sense, arbitrary restrictions such as strict working times ("if you come in at 9:01 you're late and you will get a bollocking") or limits to what you're allowed to be working on ("You're an analyst programmer, you're not allowed to go and work on sales stuff"). A simple barometer: if working for a certain company would make you miserable, then at least from your point of view they have a bad culture. Perhaps one of the reasons entrepreneurs hate working for most other companies is because they have a very strong sense of culture.

Many people can put up with bad culture. They accept it as a given parameter of this thing called "work" which sucks anyway. But many entrepreneurs are likely to quit even their own successful businesses (or scale them down dramatically) when the culture goes bad.

Bad culture is the default

Unfortunately, despite this very strong sense of culture, the default company culture you end up with is still a bad one. As a couple of examples, I'll offer up the culture that Tony Hsieh, a master of culture-growing, ended up building in his first business, LinkExchange. From the sound of it, it was a bad place to work - and he no longer wanted to go to work in the morning. So he sold the company. This is not a rare story. Another way this occasionally unfolds is that the entrepreneur will wake up one day, realise the company they've created is not a place where they want to work, and start scaling it back down to just themselves in response. As a second example, GrantTree was on a path towards a bad culture this summer, and this was averted because one of our employees gave me a kick up the ass by pointing it out very bluntly. If not for her, we'd probably be even further down the path of building the kind of company that I don't want to work at.

The reason for that, I believe, is that by default, if you don't make an active choice to do something different, you will naturally end up doing what everyone else does. And as I mentioned earlier, most companies have a bad culture. If you don't make frequent, deliberate, often courageous efforts to push for the kind of culture you care about, you will build a company that's just like every other company out there.

That's what I mean by good culture requiring constant vigilance. It's not a case of "letting things slip once" - you can always take corrective action, as GrantTree did. But if you let things slip too far into the wrong direction, then you may find that the cultural inertia of your company makes it impossible or just too much effort to change. At a size of 12, of course, change is still possible, but what if we'd realised this only after we reached 100 staff and 2, 3 years of doing things the bad way?

How to avoid this trap

The most important thing, I feel, is to be aware of what kind of culture you want to build. This self-awareness is harder than it sounds. It takes a lot of introspection and courage. You need to be willing to accept that your vision for what kind of company is good to work in will generally be considered a bit crazy by most people ("What do you mean all salary information is transparent? You can't run a company like that!") or downright batshit insane ("Wait, what? You let employees decide on their own salaries???"). More experienced culture-builders will smile and nod and say "that sounds interesting", but those are few and far between. Most people will think you're crazy to want to run a company like that, differently from most other companies out there.

Luckily, as entrepreneurs, we're well used to enduring multitudes of concerned friends, family and other well-wishers telling us that we're insane, so perhaps the criticism is not so hard to take. However, before you can be criticised for your crazy ideas, you need to figure out what those ideas are.

There are all sorts of ways to do that, but the key is constant questioning of yourself. Keep asking: do I feel this is truly the right thing, or is this just a default way of running a company? What are the natural consequences of this decision a few months or years down the line? What kind of company makes this decision? Would I want to work there? That last question is particularly essential.

Through this constant questioning, you will over time develop an awareness of what values guide your decisions, and this will then strengthen your ability to make the right choices and make them more quickly. But you can't let up this constant vigilance at any point - otherwise the defaults will once again take over.

Once you are aware of what it is you want to build, the next step is to hire the right people and guide the people you've already hired towards this vision. As a founder of the business, you have enormous influence over the people who work there - much more than you think. Don't let it go to your head - it doesn't make you some kind of company divinity. But it does give you a very deep store of credibility to make things happen, to cut through personal likes and dislikes, through politics, through apparently insurmountable problems, and make change happen. Use that. Use it every day, in countless little ways. Lead from the front: lead by example; be the culture you want to see. Explain your vision, over and over again, in one-to-one meetings, in emails, in group meetings, etc.

Every half-decent article about startup hiring suggests that culture fit is one of the most important hiring criteria - yet most startups ignore that at first, perhaps because they're not really aware of their culture. If you hire based on competence alone, each person will bring some random addition to the culture that doesn't pull in a specific direction. As a result, you will by default end up with an average culture, in the middle - a bad culture, in other words. If you keep hiring people who have the right culture, on the other hand, each hire will strengthen the culture you're trying to build and make an average, boring culture less likely.

Critically examine even little decisions. You can often undermine your own culture-building attempts by giving the wrong example. If you believe in transparency as a key value, for example, then don't hide in a corner and do stuff in secret. Each time you do that, you will undermine your own message and look like a hypocrite. Hypocrisy is a major feature of the average "bad culture".

As a final tip, don't try and force culture. You can show the example, but creating artificial culture artefacts (like "we have a fun afternoon every friday with beer and snacks at your desk" or "we play ping pong") just results in the superficial appearance of culture without the substance of it. You can't make your company fun by saying "we're a fun company". You need to create an environment that is conducive to people having fun, and then allow it to happen, and encourage it gently when you see it. If you want to encourage a culture where people can have a beer on friday afternoon, just keep a fridge stocked with beer, and crack one open yourself at your desk on that fateful day. Eventually people may follow. Or not - and that's ok too. I think one of the reasons that every company with great culture has its own unique expression of culture, its own unique set of "cultural artefacts", is because the ones worth anything grow organically, and that growth tends to be random.

And they all lived happily ever after...

I'm not far enough down this process to know what happens once you have built a solid, good culture. Discussions with people who are further along seem to indicate that even after investing many years into this, when the founders leave the culture tends to get worse, or at least to drift further and further away from what they initially envisioned.

Then again there appear to be counter-examples, like Semco. Perhaps there are certain features of culture which makes it more resilient to the departure of the founder (like a democratic approach). For obvious reasons, I can't comment on this yet. Check back in ten years or so for an update...

In summary

  • By default, your culture will be just like everyone else's: crap.
  • To avert that, you need to constantly question all your decisions and their impact on culture - always, forever.
  • Be prepared for people telling you you're crazy for the insane ideas you're trying to implement in your company.
  • Make an effort to become self-aware about what kind of culture you want to build.
  • Make culture fit your number one hiring criterion.
  • Don't try and force culture. Enforced fun is not.

Embrace the desire to make money

"If you want to make money, go into banking, not into startups."

"Only go into startups if you're really passionate about them, because you probably won't make any more money than from a good job, and probably a lot less."

"Startups are very risky, you'll probably fail to make any money."

"A startup's purpose should be to change the world for the better in a meaningful way."

Raise your hand if you've ever heard this. Raise your other hand if you've ever said this to others.

I have both hands up. If you searched through my voluminous HN posting history, you'd probably find at least the first statement in there word for word. What can I say, youth errs.

An alternative view

Having a good job in a high-wage industry can potentially result in having a relatively high wage. For example, being in finance (or indeed in software engineering in the Valley) can result in pretty high wages.

However, those wages are taxed very heavily. Of what remains, a lot goes into maintaining a certain lifestyle that goes with the job. Whether that's spending half your disposable income on rent in the Valley or having to go out to expensive bars all the time in the City, somehow, many if not most people working in these high-wage jobs don't accumulate all that much money.

Moreover, whilst those kinds of jobs used to be relatively steady, it can hardly be said that they are risk-free, especially in today's world. If you're working in a job, that means you're at the mercy of factors that you cannot see and which may drive you out of that job with little notice. And once the job is over, so's the money.

Finally, the kinds of jobs that pay well also have a tendency to require complete focus. They consume your attention, your life. You can't be an M&A banker earning hundreds of thousands of pounds a year without working incredibly long weeks that sap your life in exchange for all this money. When you work that kind of job, you have to be all-in.

I contend that a job, any job, is a very poor way to "get rich". It can be a good way to learn, but to get rich? Nope.

What about startups?

Startups in the Valley sense are also a pretty poor way to get rich, because they are like jobs with a high potential payoff on exit. If you sell your business for hundreds of millions, you will be rich. If you don't, however, you will just have collected a (probably not so great) salary for a few years, while pouring your entire life into the game. This is not that dissimilar to the banking world.

The quotes I started the article with are actually not so far off the truth, if you limit the word "startup" to the funded kind.

However, if you include all aggressively growing businesses in the word "startup", as per my definition from some time ago, then the picture changes. A rapidly growing business can definitely make you rich. In fact, one might say it's the best and most popular way to build a fortune.

However, no business will make you rich unless you actively want to make money. If you go into business with the mindset that you're in it to change the world and don't want any money, then guess what: you probably won't make much money. You probably won't change the world either, but that's another matter.

There are always exceptions, of course. However, it's never healthy to count on being one of the exceptions. A good plan, after all, doesn't just present one path to success - it sets things up so that all, or at least most, paths lead to success.

Embrace it

I meet far too many entrepreneurs who seem almost embarrassed to admit they want to make money. This is a very nasty side-effect of the Valley mentality of "it's about changing the world", a mentality that's contaminated the rest of the world (with both good and bad side-effects).

Wake up! If you're broke, it's perfectly ok, admirable even, to want to make more money. Society has little respect for the broke idealist waiting for his or her big break. If you're a student living with your parents (or about to once you leave university), or if you're beholden to a soul-sucking job because it pays your rent, or if you find yourself never able to afford the things you want, even though they are reasonable things like an up-to-date computer and a decent house to live in - then you absolutely should want to make money.

Money is not evil. It's a token of success in today's world. Wanting to make some money so you get the good things that go with it (like comfort and security) is a perfectly valid and admirable desire for anyone who's broke.

Of course, if all you ever want in life is money, then that's a different issue, but my guess is if you're still reading this article, that's not your problem.

A successful entrepreneur actively finds and uncovers opportunities for financial gain in the world around them. In order to find those, you need to be in the right mindset, and that mindset includes wanting to find these opportunities. If you've brainwashed yourself, or let others brainwash you, into not wanting money, you will not be a successful entrepreneur.

There will come a point in life where you have enough money, hopefully. At that point, you probably should start ventures that aren't about making money (though money-making businesses are a very robust way to change the world). However, that time is not when you're living off pot noodles and unable to afford a car.

In conclusion

Don't listen to people who tell you you shouldn't want to make money, that you should be "in the game" to change the world instead.

Until you've made enough money to at least be comfortable, you should be in the game to make money, explicitly, without any shame or hesitation about it.

Friends, Family and Fools: the worst investors

"If you're struggling to raise investment from angel investors, the next fallback is FFF funding - Friends, Family and Fools. You can always raise a few tens of thousands of pounds from this source no matter how early you are."

The above is a fairly standard bit of startup wisdom, dished out to all and sundry. It seems pretty sensible on the surface. If your idea is any good, if you're a smart person who can convince others that you'll do well, it ought to be possible to convince someone, anyone, to invest a few tens of thousands of pounds to help get you started.

And since your idea is really good and you are a brilliant new entrepreneur, this may be the best investment decision that those people make in their life. It could be their chance to become rich, piggy-backing on your hard work - but you don't mind that, after all, they're friends and family. And fools, but we'll leave those to later.

Yonder dark clouds

Unfortunately, it's a huge understatement to say that when it comes to startups, things don't always go as planned. In fact, as a first-time entrepreneur, there's a very high chance that your business will go tits-up. Entrepreneurship is a career, you see, and you're just taking your first steps up that ladder. You have no idea what you're doing, even if you wake up every day filled with the confidence to take on the world.

There are ways to decrease that risk, of course. Seeking revenues right away… Keeping costs low… Getting advice from experienced mentors… All those things will help reduce the risk of your first business, but still, chances are against you.

That's alright, in a way, because as long as you don't do anything really stupid and, for example, triple-mortgage your family house to fund your first business, you'll survive the demise of your first venture, and be in a position to take another, better swing at the magical piñata of startup success.

This is where FFF funding screws you over, though.

When can I have that money back?

You see, if you take investment from professional investors, or even other entrepreneurs, they know that it's risky. They know that there's a fair chance you'll screw up and lose the money. Of course, they want to convince themselves that you're different, but professional investors only invest money they can afford to lose, so if they do lose it, they won't cry a river over it. They'll draw a line and move on to the next thing - perhaps even invest in your next venture, who knows. Investors are, largely, rational beings who understand risk.

Friends and Family? Not so much. Friends and Family will often get very upset when they find out you lost their money. You might find yourself highly embarrassed as the story of how you pissed away £20k of Uncle George's retirement funds makes the rounds over, and over, and over again for the next two decades. Not only that, but since they're your friends and your family, you may well feel somewhat obligated to repay the money somehow, sometime, once you've made some more money. It's like a lifelong debt that you can never truly shrug off, unless you're the sort of ungrateful git who probably wouldn't be invited to family reunions anyway.

Friends and Family investments are like the reverse of a convertible note. If everything goes well, they remain an expensive, low-valuation share investment. If things go badly, they turn into a loan securitised by that most valuable of assets: your personal relationships.

One would do well to stay away from such dangerously sharp-edged financial instruments.


Who's the greater fool? The fool who invests or the fool who takes the fool's money?

"Fool" investment basically means taking investment from people who are not friends or family, and who are also not professional investors or entrepreneurs of any sort. In short, they know nothing about startups, but they buy your sweet talk and decide to invest their hard-earned cash anyway.

The problem with this sort of investment is similar but different to the Friends and Family sort. Fools will not impose an eternal personal debt on you. However, experience shows that when the business turns south, they too will suddenly consider that the money invested should now be withdrawn from the business as soon as possible, and remain deaf and dumb to your declaration that the money has been spent and cannot be recovered.

Unfortunately, this sort of behaviour seems to be the rule rather than the exception. In the midst of a startup failure, which is a depressing enough event to begin with, Fools will drag you down and drag it all out endlessly, until you finally break all communications with them, under unpleasant circumstances.

Whilst a Friends & Family investment is likely to turn into a lifelong debt, a Fool investment will probably turn into a lifelong enemy, someone who will curse you under their breath every time they think of you and all the money you lost them.

Who should you take investment from, then?

There are only two categories of people that I'd consider taking investment from - and this is true at any stage of any business.

The first is professional investors, in which I include people who make regular angel investments, as well as wealthy people who have invested in things that lost them a big chunk of cash before, and who therefore will be fairly rational about the whole process.

The second category is other entrepreneurs, particularly those who have both failed and succeeded, as they know what it takes, they know it's very hard, and they know that if the business is going down the drain, the best thing to do is to let it.

Another key point about investments is you should only ever take money from someone who can afford to lose it. If my advice above falls on deaf ears, at least never take money from someone who simply can't afford the failure. Be very careful about that: you don't want someone's personal ruin on your conscience.

It's worth noting that with the recent advent of SEIS in the UK, investment by both professional investors and successful entrepreneurs is now much less risky than it used to be.

As I hope I've made the case above, taking investment from other types of investors, in particular FFF investors, will only result in trouble and pain further down the line, if the business doesn't succeed as easily as you might have expected.

If you can't raise the investment you need from proper investors, and you find yourself thinking of resorting to FFFs, I suggest you instead consider the idea to be out of your reach. It's better to work on another idea than to end up with the sort of nightmarish scenario that is all too common near the end of an FFF-funded startup.

Understanding your competitors  

In GrantTree, I've lost count of the number of times when, upon being asked about competitors, the client declares that "we don't have any competitors, what we do is unique".

Unfortunately, this mindset is wrong. Here's Des Traynor's take on it:

McDonalds and Weight Watchers are selling wildly different products, but they're competing for the same customers. This is what we call indirect competition. Note that this is different to competing on outcomes. Video Conferencing & Business class flights compete on outcomes. In that case, they're both hired for the same job (business meetings).

Spot on. The rest of the article explains how to make use of this insight in practice, with a real-life example. Read it now.

Hardware startups and quality  

Marc Barros offers some solid tips for starting a hardware startup, which show that although there are similarities between the approaches for hardware and software:

Shipping a quality device is by far the hardest part of building a hardware company. I'm not even talking about the extra work it takes to deliver an amazing customer experience. I'm just referring to a product that doesn't break, feels great when you use it, and delivers on the promise. Not just once either, but multiple times over, across thousands of units.

... the punishment for screwing it up in hardware is much more brutal:

Assuming you retail your product at $100 and it costs you $50 to deliver the finished product to your customer, you have $50 in profit.

Each time you deal with a defective unit it costs about $15 in shipping (to and from the customer), requires you to replace the defective product with a new unit from your warehouse that you can no longer sell, and spend about $5 to ship it back to the factory in buik. Even though your factory says they will reimburse the costs, it will take 60-90 days from the time you send the product back to agreeing on the root cause and in turn the financial reimbursement. In the meantime you are wasting your limited inventory and cash reserves replacing defective units.

Marc offers some solid tips for hardware startups, to avoid shipping a crappy product that gets returned a lot. Read more.

Sales or die  

Echoing Mark's point from earlier, here's Spencer Fry:

Make sales or die. A little background on me for anyone who hasn't been reading my articles since 2009: I started selling on the Internet when I was eleven years old, in 1995. Since then I've co-founded three successful companies: TypeFrag, Carbonmade and Uncover. What do they all have in common and why are they all still around? It's revenue. Revenue comes from sales. If you don't have sales, you don't have revenue, and without revenue, you will die.

Nothing much to add. All the successful serial entrepreneurs I know are extremely focused on the concept of sales-first. This is the model that works outside the Valley.

... which makes learning to sell one of the most important things you can do with your time, if this is not part of your skill set.

Ring the freaking cash register  

Mark Suster, making a point I've made a few times, but explained from his point of view as a VC:

If you are a super young, well-connected, Stanford CS or EE, worked at Facebook early, have a bit o' dosh and have VCs chasing you … you are exempt. Or anybody who remotely resembles you.

Why? Because at least while the VC spigot is open and flowing for high-potential individuals that fit a pattern that some VCs seem to favor they can access cheap capital that isn't terribly dilutive and can use the to fund development and swing for the fences with limited focus on monetization.

Ok. That leaves 99.99% of you.

Mark also addresses the perverse incentives of the VC vs founders:

They are not rooting for you to fail - please don't misunderstand me on that. They would prefer you always move up-and-to-the-right. I'm just saying that great progress with no revenue and you needing more money isn't always at odds with a VC's interest. Sorry to give away the game.

Refreshing honesty. Play the VC game if you feel that's right for your business, but do so knowingly, and aware of the incentives at play there.

Startup funding in the UK  

Most of the search results when you google for startup funding uk are not very helpful at all to UK tech startups.

So, in the spirit of making things a little easier for my fellow startup founders, I've started putting together a resource on the GrantTree website:

Startup Funding UK

The idea is to provide a reasonably thorough overview of what's available, so that the new founder can locate the most interesting starting points for them more easily. Of course, since it's put together by me, it starts with a few articles debating whether the reader should be seeking funding at all!

If anyone has any suggestions as to what else I should add there or how I should change it, please do let me know.


It's rare to be able to point to something done by anyone associated with politics and declare that it might save the world.

However, this is it. The world that Bush, Obama, and all their accomplices in acronymic organisations around the world are preparing for us is a sordid affair, one that makes Orwell and Huxley look timid. Technology applied to the limitation of human rights is a fearsome thing.

The Pirate Party is finding its true calling here, and proposing a simple, achievable, 6-point plan for the EU, each of which will make a significant difference to the state of play and make it harder for a global surveillance state to emerge and terminate humanity's 300-year experiment with individual freedom.

Read on for yourself. I've asked here how we can support this movement.

Three kinds of games

This is just an arbitrary categorisation, but I find it useful. Obviously there are other ways to categorise games, and startups.

I love games. I have played games since I was a child. Computer games, board games, team sports (a bit less than the others), card games, dice games - any kind of game I could get my hands on. I am not Iain M Banks' mythical Player of Games, by far, but I do love the challenge that games pose.

And life itself is a game, as is business. These days I play less of the overly complex strategy game type (such as Civilization, of which I played every version except V), because I have come to the conclusion that those games feel too much like work, and I already have a game that feels like work, with the difference that when I earn gold coins in this game (my business) I actually get to trade them for Macs and summer hats in the appropriate shops.

Different games stretch you in different ways. With some thinking back over the long list of games I have played, these are the three ways they stretch you, and how they map to the entrepreneur's journey.

1. Games of mechanics

The first and most popular kind of game is the game of mechanics. This is a game where you win by application of your intelligence and insight. Most single-player computer games fall solely in this category, because that's all a computer can offer.

Games like the early, single-player Civilization games, or Dune 2, the original C&C, The Loom, Pinball, King's Quest, Trine or Super Mario, Donkey Kong and Battle Isle, most of the Black Isle Studios RPGs, Solitaire (physical or on the computer) or Backgammon are solely in this corner of the ring. Due to their very nature, they can only offer mechanics and so that's all they offer.

This is not to put their offering down. Games of mechanics are great fun. I still play them, though I tend to limit myself to the easy-to-pick-up-and-put-down iPad offerings, these days, due to lack of time.

What defines a game of mechanics is that it is won by analysing the situation "on the battlefield" and playing the right moves. Arguably, that's true of every game, but in a pure mechanical game, the battlefield is limited to the game.

Most startups start off as mechanical games. First, before anything else comes into it, you have to crack the mechanics of building something that makes money. This is a game where the battlefield is the product and the market, and I'm willing to go on a thick limb and say that if you're good at mechanical games, you will eventually figure out this game too. It might be the hardest mechanical game you've ever played, but it is just step 1 on the business journey.

2. Games of people

The second category of games, which some will argue is more interesting, but which is really just a matter of preference on the moment, is the game of people. In this game, the battlefield shifts from the board to the people around it.

To me, these have always been fascinating, because I used to be really bad at them, and therefore they were a constant challenge, something to learn and get better at. I don't like losing, but luckily for me that is coupled with a habit of, when I lose, trying again, and again, and again, until I win.

Most multiplayer games and board games touch on this dimension. Games like Warcraft 2-3, Settlers of Catan, Dominion or Dominant Species, look like they're people game (because, well, they involve people) but the game is not won by playing the people, so they're still fairly mechanical in the end.

Better examples of people games are No Limit Texas Hold'em Poker, some types of tabletop Role Playing Games (at least for the DM) and Diplomacy. In both cases, the game on the table in front of you is just an excuse for the game going on between your head and your opponents' heads. As the saying goes in Poker, don't play the cards, play the people.

Skill at the mechanics of the game is obviously necessary to play this. If you can't move your troops correctly (in Diplomacy), you will probably get eliminated no matter how well you play the people, simply because being weak paints a target on you that's hard to ignore. Same for Poker if you don't know the ranking and probabilities of various card combinations. But it is perfectly possible to get the mechanics of Diplomacy or Poker right and still lose over, and over, and over again, because they're people games.

In startups, people games become essential once you shift from building a product to building a company. Once you've got the basic machine that turns $1 of effort into $2 of revenues pinned down, the next step becomes to scale that up. No matter how technological your product might be, in the end, that will always end up involving other people. Maybe not hundreds of people, but at least dozens. And once you have people around, you have to play people games (avoiding office politics is a very tricky people game).

Much like playing mechanical games can teach you to play this second game, taking the time to play people games will improve your ability to play this part of the game, yet those games are much more rare than the mechanical type, so you have (in my experience, at least) to actively seek them out.

3. Games of self

The third type of game is the rarest and the commonest at the same time. This time, the battlefield is not on the board in front of you. It's not in the people around you. These are games where the battlefield is inside of you. It's you and your personal limitations. Arguably, all games have some element of this in them, at least at the very beginning, but I have yet to encounter an artificial game that is all or even mostly about the self. Perhaps the only such game we have at the moment is life itself.

What I mean by the battlefield being the self is that these games are about finding the limits inside of you and pushing against them. Games of the self open up new perspectives and unlock new skills that make you a better person.

I don't know of any artificial games that are purely of this kind, though many of the aforementioned games have some element of this, for at least a little while, but they abound in real life. I've argued before that successful people are successful, but the better way to phrase it might be that successful people make themselves successful, by winning at this game of self. They constantly find limitations within themselves and push against those.

The game of self becomes more visible as my business succeeds. Sure, success at the mechanics and the people aspects of the game of business is essential to even get there, and credit needs to be given to those games, but as the system that is GrantTree comes together, I find that many of the limitations of GrantTree's growth are not with either the people or the product, but with my own ability to observe and remove barriers.

The game of self is the meta-game. No one ever wins it fully, but every bit of progress you make on it increases your chance of success in all the other games. As such, it is always worth playing.

The only way I can think of to deliberately play this game is to play all games. Try many games, and pay attention to games that frustrate you, games which make you feel like a loser, games which force you to face uncomfortable truths. If you consistently lose at a game, it's a good sign that focusing on this game will make you progress in the game of self. If you're consistently winning, you're probably not learning as much.

Chess is perhaps the ultimate example of a game that rates highly on all three scales. No matter how much you play it and how good you are, you can always find someone who will beat you in novel and interesting ways and force you to think, and learn, and grow.

Life is a game of mechanics, people and self, and the multitude of artificial games humanity has concocted over the centuries can help teach you how to be better at all three dimensions.

Will you make it past being a founder?  

Great article by Marc Barros. From my own current experience, it is a hard transition:

Being a CEO is a very different role. Still the visionary and champion of culture, they are the ultimate leader. Yes a founder is a leader, but this type of leadership is not the same thing. What works as a founder to lead by example, has the opposite effect when you are the CEO. Leading not by doing, but by inspiring, enabling, and holding people accountable. Everyone has a slightly different definition, but I have found the following to be key areas of focus.

My most important and foremost principle over the last year is: delegate everything you possibly can. It's the only way to survive and create the time and space you need to think.

Marc's article is full of advice that resonates with me. Worth a read if you're lucky enough to be in this tricky situation!

Fertile Ground  

Do you listen to opportunity when it comes knocking? If you're an iOS developer, the time might be now, according to this article by Marco Arment:

Apple has set fire to iOS. Everything's in flux. Those with the least to lose have the most to gain, because this fall, hundreds of millions of people will start demanding apps for a platform with thousands of old, stale players and not many new, nimble alternatives. If you want to enter a category that's crowded on iOS 6, and you're one of the few that exclusively targets iOS 7, your app can look better, work better, and be faster and cheaper to develop than most competing apps.

Whatever your reaction may be to whether this is good for consumers, this is certainly an opportunity worth noting if you're in this game.

The cost of funding may be your freedom  

This article by Kirill Zubovsky underlines the point I made on Monday about the difference between Entrepreneurs and Startup Founders.

I was free; free to think, free to learn, free to do whatever I wanted, as long as it didn't require money. Sure, there was a question of what would happen when I ran out of money, but that question was for the future, and I didn't concern myself much with the answer. Life was simple and life was good!

Then Kirill raised money.

The way I see it, I am now responsible for the dreams of my team, and that's not something that should be taken lightly. I don't mind the pressure, I love it, actually. But No one tells you about the long tail, when you start a side project, dreaming of it to become the next big success story. Keep in mind that starting is easy, but you will need to have the energy and the dedication to keep going. If you start a company, be ready to commit to the lifestyle.

And the money line:

I promised our team that we will solve certain problems together, that they will get to work in an environment we've created, and as much as achieving these goals is everyone's responsibility, I have promised and I cannot fail. This is my strongest motivator to wake up in the morning.

Taking funding (which, once again, I think is valid for some businesses) makes a big change to your attitude, to your life. From freedom to commitment, from profit to promises, from responsibility to yourself, to responsibility to others.

If one of the things you want out of running a business is the independence of making your own decisions rather than being beheld to someone else's opinion (and I know a fair few serial entrepreneurs who are fiercely independent in this way) don't take funding.

Startup advice by Sam Altman  

Interesting list by Sam Altman, of YC, though to be taken with a grain of salt, and thoroughly understanding Sam's (valuable) vantage point.

Like all good advice, many of these can hurt you or your startup very badly under the wrong circumstances.

Caveat Emptor, but worth thinking of as a great collection of aphorism which will remind you of useful things if you've got the experience to understand them.

Startup founders vs Entrepreneurs

There are more than a few falsehoods within the world of startups. Most are not worth worrying about, but some are very damaging. Some have side-effects that can ruin or kill people.

Every once in a while, the debate about "startups vs lifestyle businesses" recurs. It's one of those never-ending debates, with one side, let's call them the "scalable startups", bemoaning the lack of ambition of the "lifestyle businesses", and the other bemoaning the hare-brained, risk-it-all attitude of the startup crowd.

This is not the main contradiction I want to address in this article, but it's related.

The falsehood I want to address is exposed when you look at the terms in the title: startup founders, entrepreneurs. Pretty much all startup founders believe they are entrepreneurs. They consider themselves an exclusive, elite subset of entrepreneurs who start an elite subset of businesses: the scalable tech startup. They therefore naturally look down on the wider world of entrepreneurs, who do business in a less fashionable, sometimes less scalable manner.

However, that belief is a falsehood. Many startup founders are not entrepreneurs.

What is an entrepreneur?

It helps to start with a good definition for entrepreneurs. Here I am not concerned with the dictionary definition, which is based on usage. I want a useful definition.

An entrepreneur is someone who sets out to find business opportunities and create business systems to exploit those opportunities for financial gain.

I have deliberately excluded "internal entrepreneurs" at large corporations, and "social entrepreneurs" who aim for social good rather than financial gain. I believe those should be considered as separate categories. Although many successful businesses lead to social good, making social good the primary objective of a venture makes it a social venture rather than an entrepreneurial venture.

This definition is useful because it is broad enough to include anyone who genuinely tries to create viable businesses, but not so broad as to include anyone who does anything of their own initiative in the vague hope that maybe some day it might make some money, however unlikely. Creating a blog or site which perhaps some day could make you money through advertising does not make you an entrepreneur, neither do owning a good domain name, having ideas for cool products, or registering a dormant business. Those things may lead one to later becoming an entrepreneur, but they are not, of themselves, sufficient.

However, the definition does include anyone who tries to find business opportunities (through pot luck, determined research, personal connections, etc) and do useful work (themselves or via employees) that results in substantial enough amounts of money being made that the enterprise has a chance of becoming profitable at some point.

There are many tens of millions of entrepreneurs in the world, perhaps hundreds of millions, or even more. In poor countries, many people have to be entrepreneurs to survive. They spot business opportunities and exploit them to make a living. Because the opportunities tend to be small and conditions are very uncertain, they are never able to scale those businesses up, but the person who runs their own clothes shop in Liberia under incredibly difficult circumstances is every bit as much an entrepreneur as the one who starts a global fashion brand in New York.

Startup founders

Many startup founders are in fact entrepreneurs. I consider myself to be both, for example, though only since launching GrantTree.

Startup founders are, quite simply, people who found startups. They register a business (maybe) and create something that might turn into a business at some point, or even do turn it into a business successfully. So far, they sound a lot like entrepreneurs.

One difference is the goal. Entrepreneurship always has a financial motive. For startup founders, though, that motive is often secondary. They usually want to change the world, build cool products, become famous, have a big exit - oh, and perhaps, if it's socially acceptable at the time, enjoy the money that they've made as a side-effect of their chosen career. The money motive is often discouraged as a primary driver.

The even bigger difference comes when considering the concept of closing the loop. A business is not viable until the loop between creating value, delivering it to customers, and being paid for it, is closed. For entrepreneurs, closing the loop is essential, the main task on their task list until it is done. There is no business until the loop is closed. For startup founders, closing the loop is often secondary, perhaps even toxic (since if the loop does not generate large profits as soon as it's closed, funding will often dry up).

This is not to say that closing the loop is the only way to build a business. Erstwhile startups like Facebook, Google and Twitter, show that it is possible to build huge businesses, some of them very viable, without worrying about making money for years. Success stories like Instagram, Tumblr or Youtube show that it is possible to achieve a billion-dollar exit without having ever closed any viable loop whatsoever.

In Silicon Valley, it is even plausible to make "the loop" be the creation and acquihire of the startup itself. That is a valid model for investors, and even for some founders, though it presents a lot of downsides that I believe most first-time entrepreneurs wouldn't accept if they were fully aware of the alternatives.

The downside of being a startup founder

As I mentioned earlier, most startup founders believe they are entrepreneurs, even if their startups are completely divorced from the financial reality of business. Cushioned under a blanket of (relatively) easy VC money, surrounded by the hype bubble, drenched in startup articles from Hacker News, one could be forgiven for thinking this is the only way to do business in the 21st Century. Meanwhile, the rest of the entrepreneurial world looks on at this incredible machine that takes unviable businesses, pumps them full of venture money, and sells them on for stratospheric valuations.

It's a wonderful system for the savvy investors who know how to play it, but what about the founders?

The downside of this system for the founders is pretty simple: the risk and pressure are enormous. In order to succeed at this game, the game usually requires the founder to tie the startup to his identity. The failure of the startup and the founder's fate become closely tied. Importantly, the outcome, success or failure, is only known years into the venture. Youtube succeeded in a lightning-fast 1-2 years, but they are the exception, and even they must have been under enormous stresses approaching the exit event (Youtube was, I recall, being sued by content holders when Google acquired them). It could have gone very badly very quickly for them. Tumblr was running for 6 years before being acquired, and had, from the sound of it, a failing business model. Imagine the stresses David Karp was under.

Any startup where you're going to have to raise lots of money, make lots of promises, hire lots of people and generally tie your fate to the startup very publicly, for years, before you can find out if you're successful, is going to be a pressure cooker for the founders.

The result of such a game is tragedies like Jody Sherman and Ecomom. While tying the two together remains speculative since Jody left no note, it is fairly credible that the two were strongly linked.

Even if the outcome is not so dramatic as a suicide, such stresses take their toll. Binary outcomes that can change your life from heaven to (subjective) hell are always extremely stressful.

A funded startup always carries with it the possibility that you will exit as broke as you came in.

An alternative

Despite its apparent anti-startup stance, this article is actually not an attack on startups and startup founders. I believe that the startup game can be a valid way to create businesses. Some day, I will probably venture down that road too.

However, it should not be painted as the default or superior option. Choose the startup founder path if you want to, but choose it in full knowledge of what you're doing.

The alternative is to do business the way it's been successfully done for millenia: find business opportunities and exploit them to make money.

There is much less risk in this approach (you know whether the business is working out within months, if not sooner), and it is more rewarding emotionally and financially. The skills are also more transferrable. You can apply the skills of the entrepreneur anywhere in the world, whether there's war (Milo from Catch 22 and Oskar Schindler come to mind) or peace. The startup founder path is only truly viable in a few places in the world right now - most of them in or near Silicon Valley. It could close up quickly if the historically rare, 60+ year long period of peace we're experiencing comes to an end.

And lest someone thinks entrepreneurship is destined to create only smaller businesses, there are many giant companies out there that started as level-headed entrepreneurial ventures - including such Tech household names as Apple, Microsoft, HP and Cisco. There was no guarantee that any of those would become the behemoths they are today without additional capital, but even if they had ultimately failed, their founders would have retired wealthy.


Either path is viable, and if you're determined to go down one path or the other, no article is ever going to stop you.

But if the thoughts in this article are news to you, I urge you to consider which option is more suitable to you at this point of your life, and to remember that you don't have to restrict yourself to just one of those. You can be an entrepreneur today and a startup founder tomorrow, or both at the same time, or just a startup founder. Which of those three you pick will make a huge difference to the risks you take and the pressures you face.

My personal opinion is that if you're starting off from a position of weakness (i.e. you're poor and not famous), and especially if you're not in a startup hub like Silicon Valley, it makes a lot more sense to go down the entrepreneurial route than to go via the startup route.

And if you do, don't let anyone who's chosen the startup route tell you that your business is somehow less worthy than theirs. Both are viable approaches with different risk and pressure profiles.