How money can mess up your startup

Edited excerpt from MailChimp and the Un-Silicon Valley Way to Make It as a Start-Up by Farhad Manjoo:

Start-ups fueled by venture capital often need to figure out how to run like ordinary businesses; they embark on unsustainable growth, they forget about earning money, they don’t learn how to weather tough times. The tech economy is littered with companies that raised too much money — and suffered for it.

“One of the problems with raising money is it teaches you bad habits from the start,” said Jason Fried, the co-founder of the software company Basecamp. “If you’re an entrepreneur and you have a bunch of money in the bank, you get good at spending money.”

But if companies are forced to generate revenue from the beginning, “what you get really good at is making money,” Mr. Fried said. “And that’s a much better habit for a business to work on early on, to survive on their own rather than be dependent on money people.”

(1) Thank you Russell Rothstein, Founder CEO of IT Central Station, and Zach Abramowitz, Founder CEO of ReplyAll, for recommending the article.
(2) For startups that have already taken VC funding, see (i) Give your startup time and options — burn less (ii) Get to profitability — here’s how, and (iii) “We simply can’t cut costs without hurting our growth”.
(3) Cf. Why startups shouldn’t scale prematurely.

Provide what your users really want

Edited excerpt from How Will Tech Platforms Compete in the 21st Century? by Joe Edelman:

In the next decade, platforms will compete over alignment with their users’ human values. At present, all the platforms are terrible at this. Facebook, Apple, and Google — from their notification screens to their feeds — ignore their users’ will and intent, ignore their users’ values, and abuse users by directing their attention towards advertising or towards greater platform engagement.

The values revolution will be as big as the design revolution. There will be an Apple of values. And there will also be new players, new interface concepts, new types of careers in tech. The values revolution will begin when users start to see the possibility of values-aligned tech, and to discover that their lives are warped by tech with values contrary to their own.

(1) Cf. How tech products misframe our choices, and product managers should do better.
(2) Cf. What happens when you mistake user engagement for customer success.

Build for your best customers

Edited excerpt from My 8 Rules Of Great Products by Mitchell Harper:

Build for your best customers. Simply put, this means you give a higher weighting to product feedback from your best customers — the ones who spend the most money with you over time.

This leads you to build additional products (and improve existing ones) for your best customers, who are much more likely to pay more for those new and improved products, thus helping grow your revenue faster with fewer customers and less customer support.

Not all customer feedback should be treated equally. If one customer pays you $2,000 a month and another pays you $20 a month, the feedback from the $2,000 a month customer is actually more valuable if you use it in your marketing and product strategy to attract more customers like them and/or if it gets them to spend more money with you via upgrades or additional products.

It doesn’t take 10x the effort to get a $2,000/month customer as it does to get a $20/month customer. It probably takes 2–3x the effort but gives you 10x the revenue.

(1) Cf. Best practices in getting user feedback on your product.
(2) Cf. The contrarian view: With freemium, it’s easier to start with the paid product.

Why early stage startups should start narrow

Excerpt from Building Products by Julie Zhou:

If you are a start-up founder, your path will be easier if you go after a problem for a narrowly-defined audience, and then expand to broader audiences after you have some initial traction.

From an email I sent to a startup founder:

To maximize your chances of success, focus on a single vertical, and go deep into it.  There are two reasons for this:

1. If you focus on a single vertical, it’s much easier to understand the customers’ Job To Be Done, the solutions they currently use, how you can help them the most, and then to build a product that addresses their needs.

2. As a small startup, you don’t have the resources to compete with broader platforms; but you can win by specialized domain customization, and expand from there.

Choosing a vertical is a question of research, and should not involve any product development. Sit with customers in each vertical you’re considering. By asking them questions about their Job To Be Done you’ll be able to reach a conclusion about which vertical you can add most value in. Then focus all your effort on that vertical.

The three most important things for seed stage startups to get right

Edited excerpt from Product Thinking isn’t the next big thing in UX design. It’s the only thing by Mark Maloney:

You need to actually understand the problem before you look to solve it. And you need to solve it with a distinct point-of-view.

(1) Although this was written for UX designers, I think it applies more broadly to early stage startups.
(2) Seed stage startups need to get three things right: (i) Ensure there’s a real problem  (= Job To Be Done). (ii) Be clear about the unique focus, approach or insight you bring to solving that problem. (iii) Ensure you have a basic business model that will generate profits, based on what works in other businesses.
(3) What seed stage startups don’t need to get right immediately, because this is what you’ll be working on for the next few years: (i) You don’t need to nail down all the details of your product. (ii) You don’t need a detailed financial forecast, including pricing and margins.
(4) Re. “you need to solve it with a distinct point-of-view”: See the questions about competitive advantage in Six simple questions to test product-market fit and competitive advantage (from Y Combinator’s application form).

Automate and outsource everything

Edited excerpt from Five things I will do different for my next startup by Jeff Haynie:

Automate and outsource everything. OK, maybe not everything, but everything that is possible — which is a lot more than you probably think. We did a great job at Appcelerator with this — but we could have done better.

You’ll want to spend all your calories on things that you do best, different, uniquely and the thing that makes you and your business valuable. Trust me, that’s not your website (which of course, is not to say that’s not important). Sure, maybe your dev can do the corporate website by herself over the weekend much cheaper than finding an agency to do it or a contractor. It will seem and be cheaper (and maybe faster) in the short-term. But it will really cost you in so many areas.

Same with systems. Maybe one of your devs could just setup Gitlab on your own server and that’s a little bit cheaper than paying for the $7/month for a small plan at Github. But trust me, it’s not. It’s just not worth it.

Try and automate and outsource things that aren’t core to your mission. Keep your calories focused on activities that will create muscle — and don’t do anything (if you can avoid it) else.

Now, like other recommendations, this isn’t an absolute and sometimes this can conflict with “burn less”. But generally, if it seems cheaper in the short-term, make sure you consider the long term ROI and other non-financial metrics (such as distraction).

(1) For practical advice about how to outsource, see How to hire someone to handle outsourcing for your startup.
(2) Cf. Saying “no” to good ideas.

How startups can continue to innovate over long time periods

Edited excerpt from a Y Combinator interview with Michael Moritz:

Most organizations are capable of maintaining a consistent level of exceptional performance through a year, or five years, maybe ten years. Very few are able to do it over multiple decades. How have we done it?

1. Yesterday is irrelevant. The best leaders want to make sure that their product is fresh, that it changes with the times; that they never rest on their laurels, or get complacent; that they always have an element of insecurity about feeling that they can always get eaten by a competitor, and that past successes don’t mean all that much. All your past success is yesterday, and it’s irrelevant to the future.

2. Maintain a fresh team. You have to focus on the team. Field the best team at any one time, no matter how long people have been with you. Don’t be unfair, or ruthless, or harsh; but detached, objective and clinical about the performance of each individual. No matter how well they’ve performed in the past, if their heart is no longer in it, if they no longer have the burning desire to compete, it’s time for them to move on. Bring in young people who have zest, ambition, energy.

3. Change with the market. Stay alert to market opportunities. When we started a long time ago we were just here in Menlo Park, but the world of technology has changed, because of what’s happening principally in China. So about 12, 13 years ago, we started a business in China because we felt that, over time, it was going to be increasingly important for Sequoia, for the companies that we have investments in in Silicon Valley, to really understand the Chinese market because of what was going to happen there.

(1) Re. Maintain a fresh team — for practical advice, see: How to hire – drill a well before you need a drink.
(2) Re. Change with the market — contrast that with The question that Amazon answers to set its strategy.

Build value for your users

Edited excerpt from How We Got off the Addiction to Venture Capital and Created Our Own Way to Profits by Rafat Ali:

We became obsessed with the idea of our utility value to users who swear by us. This is a two-step test, which essentially says this: How much of a personal or professional utility value do your users ascribe to your brand? And how indispensable are you to the ecosystem you exist in? While media companies focused on scale-for-scale-sake talk about unique visitors to their sites, we talk about unique residents.

There are people who build media companies for valuation, then there are others who build media brands for value. Internalizing that difference has made all the difference to us.

All of this hides an ugly unspoken truth about media in general: that it is disposable, in so many ways. The key is to move towards making yourself non-disposable, by adding enough value.

(1) Focusing on genuine value creation creates a pathway to subscription revenue. It’s what we did at Seeking Alpha — started free while focusing on genuine value creation for investors, then added subscription products. See: Charging for content will only be successful if this condition is fulfilled.
(2) Cf. The content business: Entertainment, or helping users make decisions?

Give your startup time and options — burn less

Edited excerpt from Five things I will do different for my next startup by Jeff Haynie:

Burn less. This is directly related to “monetize earlier” and “scale slower”. The faster you monetize and the slower you scale, the chances are you’re going to burn less.

Burn less is about optionality. And the one thing you want as a founder of a startup are options. You’re going to die much much faster because you ran out of options. Options are really what it’s all about. Options give you a chance to control your own destiny. When the times get tough, if you have options, you can use them. Without optionality, you’re screwed.

Burn is more or less an indicator of your optionality. If you burn less and have more runway, you have options (or at least you can create options with enough time). If you burn more, you reduce your options while reducing how long you can exercise them. And this is one of those things that it’s very easy to convince yourself otherwise. Spending money is fun!

Trust me, your board and investors will likely not agree with you. When you are nervous and want to go slower, they won’t always agree and will push you. Not everyone, but most. And it will always be much more fun to burn faster, not gonna lie. Burning less takes a tremendous amount of self-discipline and organizational priority and restraint.

When things are looking up and to the right, everyone around you, including your investors, will be saying “go go go”. But if you slip up, they won’t be there to admit that they themselves pushed you in that direction.

Remember, you can always increase spending — that’s very easy. Reducing spending is very, very hard and takes so much longer than you realize.

(1) I’m blessed to have wonderful VCs on the Seeking Alpha board. Nick Pianim of DAG Ventures, who is thoughtful, modest and insightful, would say exactly this: One of the key factors in startup success is time. So give yourself time.
(2) Cf. Reach versus monetization and Get to profitability — here’s how.

Reach versus monetization

Edited excerpt from Five things I will do different for my next startup by Jeff Haynie:

We delayed monetization way too long, using venture capital to extend the time to create a sustainable monetization engine for our business. We always had a plan for monetization, but we waited way too long to get focused on it.

The conundrum that a lot of companies face — in fact most of them — is the balance between reach and revenue (or in another way to frame it: the conflict between the two). The further you maximize reach the harder it is to scale revenue — or at the very least, more friction is introduced in capturing it.

Everyone loves something for free. However, I would prefer to have fewer dedicated power users that get enough value and can’t live without it that they are willing to pay for it, than a lot of users that like it only on the condition that it’s always free.

We learned that it’s never too early to charge (something, anything) if you want to eventually have a business that is sustainable. Even if you have to risk reach in some regards. That won’t always make you the most popular startup but maybe you’ll be around when others fail.

(1) It might be OK to delay monetization if you know exactly how you will generate revenue, and you want to optimize for reach over monetization at this stage. The problem is that most startups that delay monetization haven’t figured out how to generate revenue successfully. Revenue generation is core to building a company — it impacts the product, the target customer base, the distribution channels, and the HR structure of the company. So figuring it out shouldn’t be delayed.
(2) Re. “we delayed monetization way too long, using venture capital…”: cf. Why you should bootstrap your startup before raising money.
(3) Cf. Get to profitability — here’s how.

Why network effects matter so much

Edited excerpt from Our (refocused) investment thesis by Boris Wertz:

Looking back, we feel that we made the best decisions with (and hopefully provided the most help to) businesses displaying strong network effects. This brings us to our refocused thesis: we like to invest in businesses with potentially large network effects built around people and/or data.

We think that network effects can provide a long-lasting competitive advantage and can be very capital-efficient. Connecting people and data over the web and mobile also creates something that wasn’t possible before – the end result is new and unique, not just something faster, cheaper, or better. Network effects can be found in many categories, from marketplaces, to (social) platforms or SaaS, and in many products built specifically around (big) data.

(1) This explains why Seeking Alpha, where insight is generated by a community of contributors and commenters, is so much more powerful than finance sites where content is generated by paid journalists. Community has network effects.
(2) Cf. Why the best products don’t always win, AKA how to build a moat around your business and Reverse network effects, and how to combat them.
(3) See also: How to stress test your strategy.

Three essential actions to survive the coming startup storm

Edited excerpt from How to prepare for the coming startup storm by Jeff Haynie:

The weather just took a turn for the worse and the storm is moving in fast. If you’re a startup founder, what do you do?

1. Take a hard look at your finances. Immediately freeze all planned future increase in spending.  Stop. Spending. Right. Now. You and your CFO should immediately assume that you will need to live with whatever you have in the bank for the next 12 months (at a minimum, ideally longer) — assuming conservative revenue assumptions. If you don’t have the runway with your current burn (excluding all the new spending you just cut), then you now need to take immediate action. The primary goal is a flight to safer ground. Screw this up and your startup will not survive.

2. Take a hard look at your priorities. What can you stop doing that you are doing right now? If it’s not core to the mission and not going to drive immediate short-term revenue (less than 6 months), stop doing it right now. Make sure everyone now clearly understands that revenue is going to be the priority over everything else. Growth at all costs doesn’t work right now, it’s now about survival.

3. Take a hard look at your people. Based on the past 2–3 years, you’ve likely got extra resources doing things that have now been deemed not a priority in the interim. Make a priority list. Rank each team member by the following: (1) must have or we cannot run the business, (2) really need to have them or things start to get difficult, (3) nice to have but in a worse case could live without, and (4) extra. What you do the list will greatly depend on your situation — mainly your burn rate, cash in the bank and your financing plan. With this list, you’re going to be able to have a rational and financial way to evaluate your situation with the least amount of emotion doing it.

(1) Cf. Rafat Ali’s advice in Get to profitability — here’s how and “We simply can’t cut costs without hurting our growth”.
(2) If, after looking at your finances, you think you won’t survive, read: (i) There is always a move, (ii) One way for startups to gain time.

“We simply can’t cut costs without hurting our growth”

Edited excerpt from The Resetting of the Startup Industry by Marc Suster:

The smartest companies in the market that I know are working aggressively to lower burn rates through pragmatic cost cutting, knowing that the next fund-raising cycle may be unpleasant. This prudence is smart and welcomed.

I’ve heard enough companies say “we simply can’t cut costs as it will hurt the long-term potential of the business” for them to get a wry smile from me. We entrepreneurs have been spinning that line for decades in every boom cycle. It’s simply not true. Pragmatic cost cuts are always possible and often productive.

Start early. Give yourself enough runway by controlling costs.

(1) Mark’s entire post is a timely must-read for startups and VCs. Typical of Mark; it’s outstanding.
(2) Practical advice, from Rafat Ali: Get to profitability — here’s how.
(3) The context, from Ben Horowitz: Profitability = control of your own destiny.
(4) An extreme case: One way for startups to gain time.

Get to profitability — here’s how

Edited excerpt from How We Got off the Addiction to Venture Capital and Created Our Own Way to Profits by Rafat Ali:

I focused on revenues and revenues alone. That meant doing things today that brought in revenues today. That meant media, branded content, subscription reports, a conference. We knew how to do this from experience and our team knew how to wrap their heads around it.

We learned to focus on the efficiency of our effort. It meant doing one big thing a year that brought in big revenues in one go, instead of four small things which took almost 4X more effort but perhaps all added up equal in revenues to that one big effort. That meant we would only do one big multi-million dollar franchise conference a year, not 10 one-day smaller conferences like I did in my previous company.

I learned to say no, again and again, to anything that deviated me and our company from the focus. It meant we would only entertain the enquiry if it brought us direct revenues, or emails to build our newsletter list.

It meant saying no to going to random media or startup conferences for us founders. I created a rule that if we didn’t have any customers at a conference (which for us meant the travel industry), we wouldn’t even consider it, and even then we would only go to if we could see direct revenues coming out of spending time there.

(1) Rafat focused on growing revenue and profits so Skift wouldn’t be dependent on outside funding. See Profitability = control of your own destiny.
(2) There’s more to it than that, though. Many startups are struggling to achieve dramatic user growth, for two reasons: (i) search, social and other user acquisition channels work less well now than they did a few years ago, and (ii) many companies — I’d include Seeking Alpha in this — aren’t willing to dumb-down their product or generate link-bait to attract a mass audience. Since growth rate in revenue or active users are the only metrics that matter, this has pushed high quality companies to focus on revenue growth, ie. to deepen value for their current users and target users.
(3) For the case against focusing on revenue as opposed to user growth, see Is revenue a good metric for early stage startups?
(4) Even if you focus on revenue growth, Don’t be satisfied with sales, seek love.

There are only two ways to build a $100m business

Edited excerpt from The only 2 ways to build a $100 million business by Boris Wertz:

There are only two ways to scale a business to hit that $100 million threshold:

1. Your business has a high Life Time Value (LTV) per user, giving you the freedom to spend a significant amount of money in customer acquisition. High LTV can usually be found in transactional or subscription businesses. The biggest driver for high LTV is repeat purchase behavior in an e-commerce business, and a low churn rate in a SaaS company.

2. Your business has a high viral co-efficient (or perhaps even a network effect) that lets you amass users cheaply without worrying too much about the monetization per user or spending money on paid acquisition. User acquisition is generally close to free, and monetization per user is often low (advertising-based or freemium businesses).

Unfortunately, many consumer internet startups find themselves stuck in the middle of these two strategies: they have low monetization per user and limited viral effects.

(1) In the early days of Seeking Alpha, one of our investors felt we should be spending far more on PR and marketing. But with an ad-based revenue model and thus low lifetime value per user, that never made sense to me. Boris’ post puts its finger on why this is the case.
(2) Re. “Your business has a high viral co-efficient (or perhaps even a network effect) that lets you amass users cheaply”. Many businesses relied on social networks for viral growth, but forgot that they weren’t in control of the viral mechanism. As the social networks increased their own monetization, the traffic they sent to publishers plummeted.
(3) Both models require high frequency of use, because even in a viral model it’s hard to amass users who use your product infrequently. See Google’s Toothbrush Test.
(4) Re. “The biggest driver for high LTV is repeat purchase behavior in an e-commerce business, and a low churn rate in a SaaS company”: see the posts on Churn and Retention in Startup Best Practices.

Why startups shouldn’t scale prematurely

Edited excerpt from The most fatal mistake to avoid as a startup, a presentation I gave to a group of startup founders:

What’s so bad about scaling prematurely?

  • Low ROI, high burn rate: Sales and marketing for a product without product-market fit will suffer from low conversions and low renewals.
  • Frustration: When you don’t have product-market fit, everything seems too hard, and everyone is frustrated. See:
  • Not building permanent value: When you eventually fix your product, you’ll have to redo your sales and marketing anyway.
  • Distraction: Managing all those people will distract you from your key task — finding product-market fit. (See: The most important factor in startup success.)

Bottom line: Don’t scale before you have product-market fit. You’ll burn money, delay true success, and be miserable.

Your biggest competitor may not be who you think it is

Edited excerpt from Mint Sales and Marketing: How Mint Beat Wesabe by Noah Cagan:

We spent countless weeks figuring out what people really wanted before we launched our beta. Guess who we found out Mint’s biggest competitor was? No one. Apathy. This shocked me! Most people would rather not track anything and just see how they are doing when they go to the ATM. Guess who was #2? Ms Money, Intuit, Wesabe? NOPE. Microsoft Excel. Who would have believed that!

Learning about all this provided us with the messaging, approach and branding to appeal to the right audience. Internally and externally we were similar to Firefox in saying “take back your money.”

(1) I bet this is true for most disruptive startups — the real challenge is creating a compelling user experience, rather than being incrementally better than an existing competitor.
(2) This is why “worry more about your customers than your competitors” is good advice.

How to decide what to prioritize — a simple rule for startup CEOs

Edited excerpt from From 0 to $1.2M RunRate (and profitability!) in just 5 quarters. 9 lessons learned in creating an impossible company by Armando Biondi:

The problem with “what matters” is that it changes all the time, every day, often several times per day. So how do you decide what matters most? We use two fairly simple algorithms:

Does this contribute to hitting our month-over-month growth goal?

If/when the answer is “yes” to several things, the following question is:

Which one requires the lowest effort and the shortest time to generate the biggest impact with the highest chance of success?

(1) These rules help you prioritize projects and can also be used for resource allocation. Are these resources helping me hit my month-over-month growth targets? If I reduced resources here, would it impact my growth rate over the next x months?
(2) The follow up question actually contains 4 criteria (lowest effort, shortest time, biggest impact, highest chance of success). Which do you prioritize? You could weight the factors, and chose the project with the highest weighted outcome, or rank the factors and use lower priority factors only in the event of a tie.
(3) In Seeking Alpha, we prioritize the project with the highest chance of success, not the project with the highest probability-weighted outcome. This is because we want to optimize for speed of learning, and you learn only from successes, not failures.
(4) Re. “Does this contribute to our month-over-month growth goal?” — see Growth rate in revenue or active users is the paramount startup metric and The three steps to building a great company, and why most startups fail on the first step.

Reverse network effects, and how to combat them

Edited excerpt from Reverse network effects: Why scale may be the biggest threat facing today’s social networks by Sangeet Paul Choudary:

There are three sources of value created on networks: Connection, Content and Clout. As networks scale, the value for users may drop for several reasons:

1. Connection
Networks allow users to discover and/or connect with other users. As more users join the network, there is greater value for every individual user. However, new users joining the online community may lower the quality of interactions and increase noise/spam through unsolicited connection requests. To prevent this, an appropriate level of friction needs to be created, either at the point of access or when users try to connect with other users.

2. Content
Users discover and consume content created by other users on the network. As more users come on board, the corpus of content scales, leading to greater value for the user base. However, the network may fail to manage the abundance of content created on it. To ensure that the content is relevant and valuable, the network needs strong content curation and personalization of the user experience. Reverse network effects set in if the content curation and personalization systems don’t scale well.

3. Clout
Some networks have power users, who enjoy influence and clout on the network. The larger the network, the larger is the following that a power user can develop. However, the network may get inadvertently biased towards early users and promote them over users who join later. These networks need a mechanism to ensure new users have equal access and exposure to the community to develop network clout.

Why startups should do less

Edited excerpt from Do Less. More. by Mark Suster:

Do less. And do the things that you ARE doing better and with higher quality. Have a shorter to-do list with more things that are in the “done” category. Do fewer business development deals but make the ones you do have more impact. Hire fewer employees until you’re bursting at the seems with work for the ones you have. Score a beautiful and functional office but rightsize it for today not 2 years from now.

Success often comes from doing a few things extraordinarily well and noticeably better than the competition and is measured in customer feedback, product engagement, growth in usage and ultimately in revenue growth.

(1) Bullseye! My answer to Peter Thiel’s question: “Most entrepreneurs and VCs believe that when you’re not growing fast enough, you should do more. I believe you should do less. By reducing the scope of your activities, you can focus more easily on the core of what will make you great.”
(2) Note the similarity to product management, where you should also “do less” by focusing on the core of your product instead of adding features. See: Why another new feature won’t get people to use your product.

Don’t be satisfied with sales, seek love

Edited excerpt from Happy Birthday HubSpot! 9 Lessons From Our First 9 Years by Dharmesh Shah:

Because you’re human, you probably seek love. It’s natural. We spend a fair amount of time and energy looking for love (hopefully in some of the right places). I’m going to posit to you that you need to carry that sentiment to your startup. I’m talking about the hope to find someone that “gets you” and “likes you for who you are and what you believe”.

Yes, I know that sounds a bit strange. But it’s not that strange. Chances are, there are some companies or brands that you love. All I’m saying is that as a startup, you need to seek that love.

Let me explain by telling you how we do this at HubSpot. Like most growing companies, we want to get people to buy from us and become customers. But, unlike most companies, for us, deep-down inside, that’s not enough. We don’t just want people to buy from us. We want people to love us. We want them to love what we love and respect what we do, even if they don’t buy from us. Even if they are unlikely to ever buy from us. Because what we believe is that the more people that love us, and want us to succeed, the more likely we are to do so.

(1) People who say they love your company are often drowned out by complainers, because complainers tend to be more vocal. In Jason Fried’s words, “remember that negative reactions are almost always louder and more passionate than positive ones”. Cf. When your product change is greeted by a torrent of complaints, what should you do?
(2) Sometimes events prompt the people who love your product to speak up. I just promoted Eli Hoffmann to replace me as CEO of Seeking Alpha. The announcement prompted a remarkable outpouring of appreciation for Seeking Alpha. As I pass the running of the company to Eli, it’s inspiring for the team to see how much they and their work are loved by our readers and contributors. See the remarkable comment thread on the announcement.

The three steps to building a great company, and why most startups fail on the first step

From Growth Advice from YCombinator’s Sam Altman at PlatziConf Mexico, May 2015, a talk by Sam Altman:

The 3 key tasks for successful CEOs:

  • Task #1: Build a product that users love
  • Task #2: Figure out how you are going to grow
  • Task #3: Make sure you are going to stay a winner if you win

(1) I love Sam’s clarity and simplicity. This is similar to Peter Nixey’s The only startup goal worth your undivided attention, but with more structure.
(2) Are the three tasks sequential? In other words, should you figure out growth only after you’ve finished building a product that users love? I think there’s overlap, but broadly speaking — yes, they’re sequential.
(3) In my experience, the most common fatal error made by entrepreneurs (often encouraged by their VCs) is to focus insufficiently on building a product users love. We move from core product development to growth — prematurely. This is a mistake we’ve made numerous times in Seeking Alpha.
(4) Why do we move prematurely from “build a product people love” to growth? (i) It’s easier to measure user or revenue growth than it is to measure how much users love your product. (ii) Since sustainable growth is impossible without a successful product, growth metrics assume product success; so we think we can measure product success by measuring growth. (iii) Growth is the true measure of startup success, and entrepreneurs (and particularly VCs) like to measure end results.
(5) There are two approaches to measuring how much your users love your product: (i) Net promoter score. (ii) User engagement – how frequently your users use your product. I prefer the latter because it’s based on actual behavior, not what people say.
(6) Your target for user engagement should take into account the frequency of habit of your product area. For example, investing is a daily habit, so Seeking Alpha targets high user frequency.
(7) See How to set priorities in product development and (also by Sam Altman) For product managers: “The best startup advice I’ve heard”.

First-mover advantage is over-rated

Edited excerpt from Zero to One: Notes on Startups, or How to Build the Future by Peter Thiel:

You’ve probably heard about “first mover advantage”: if you’re the first entrant into a market, you can capture significant market share while competitors scramble to get started. That can work, but moving first is a tactic, not a goal. What really matters is generating cash flows in the future, so being the first mover doesn’t do you any good if someone else comes along and unseats you. It’s much better to be the last mover – that is, to make the last great development in a specific market and enjoy years or even decades of monopoly profits.

How to ensure your company is customer-centric, and the challenge for ad-supported services

Edited excerpt from 3 Ways To Turn Customers Into Rabid Fans by Erica Andersen:

1) Use “Will the customer love it?” as your primary screen for action.
2) Work backwards from the customer.
3) Support your great customers vs. policing the bad ones.

1. What if your customers aren’t your users?  This is the case for free, ad-supported services. The revenue comes from advertisers, but depends on users. The conflict between the interests of your users and your customers (advertisers) is non-trivial.
2. The solution: Follow Google’s principle: “Focus on the user and all else will follow”. However, this only works if your ads don’t detract from the user experience.
3. In the cases where we’ve been insufficiently user-centric at Seeking Alpha, the reason has been because our ad products don’t enhance the user experience, leading to a clash of interests between users and advertisers. This is a systemic problem in the digital advertising industry.
4. Google search ads enhance the user experience. But what do you think about Facebook, LinkedIn and Twitter ads, or native advertising on publishers’ websites?
5. On setting a clear principle to be customer-centric, see Polyvore CEO Jess Lee on what makes startups successful and Jeff Bezos on strategy.

Tom Tunguz’ five keys to building a successful company

Edited excerpt from Why The Bubble Question Doesn’t Matter by Tom Tunguz:

1. Think long term. No matter the uncertainties and the fluctuations of the market, the business must survive. To survive, a startup must build a differentiated product that customers want to use and buy. The company must offer the best product in the market.

2. Manage your cash effectively. The business must achieve profitable unit economics; only invest substantial dollars in marketing efforts with positive return on investment; curtail unnecessary expenses; collect cash from customers religiously; maintain an upside and a downside plan that ensures the business enough cash to survive in the downside case.

3. Only hire the right people, and grow the team when justified by the needs of the business and the incremental revenue possibilities.

4. Mitigate churn. Companies ought to build the best customer success organizations, structure pricing plans properly, plan the right product roadmap, cultivate a diversified customer base, and ensure customers achieve positive return on their investment.

5. Raise capital opportunistically to amass a war-chest large enough to achieve your vision. Position the business so that it can always be in a good position to raise capital or cut costs to achieve profitability quickly, should the need arise. This means running an efficient go-to-market organization.

(1) Tom Tunguz is an authority on SaaS businesses. But I think this advice is relevant to every business.
(2) On “Think long term” — see How Amazon resists short-term thinking.
(3) On “Mitigate churn” — see Product strategy — retention trumps acquisition and Sustainable growth vs. growth hacking.

The key factor in startup success, and what to do about it

Edited excerpt from notes from Why Startups Like Uber, Airbnb, and SpaceX Succeed, While Others Fail, a talk by Bill Gross:

Bill investigated how 5 key factors affected the success of the 125 companies in his portfolio at Idealab and 125 companies outside of his portfolio. The 5 factors were: (i) idea, (ii) team and execution, (iii) business model, (iv) funding and (v) timing.

The no. 1 thing that mattered was timing. Timing accounted for 42 percent of the successes relative to failures.

Take Airbnb as an example. Everybody thinks Airbnb is an incredible business model. It is a good business model. But “the Airbnb model” had been done multiple times before Airbnb became successful.

One of the things that accounted for Airbnb’s huge success is that it came out right when the huge recession hit around the world. People needed extra money badly. People were willing to rent out their rooms or their homes.

So what can you do about it? First, see if the market is really ready for what you have. Second, adjust your burn rate so you can last long enough to be there when the market is ready for your product.

(1) Thank you Guy Cohen for the tip.
(2) The key take away: don’t scale your costs until you’re sure you have product-market fit.
(3) See: Profitability = control of your own destiny and — more extreme — One way for startups to gain time.

One way for startups to gain time

Edited excerpt from This Entrepreneur Raised $70 Million by Ignoring Some Popular Startup Advice by Ben Baldwin:

In 2006, Allen Lau decided to leave his full-time job and focus on building Wattpad. Lau expected that at the end of 12 months he would be able to raise capital for Wattpad. But a year later, Lau and Yuen could only muster enough revenue to buy a single cup of coffee, and they had only around a few hundred people using Wattpad. With a product that wasn’t gaining traction, they stood no chance of raising money. But both still believed in Wattpad’s potential, and both badly wanted to realize their vision of a global storytelling community.

As they considered what to do, Lau thought about the prevailing wisdom of startup success. Unless you were laser focused on building your product, evolving it, driving users to it, and quickly creating critical mass, the startup would never get off the ground. There was no point limping along.

Or was there? As Lau thought more about Wattpad’s problem, he began to feel that limping along for the time being might just be the road to success for Wattpad. As he saw it, the company was where it was because its timing was off.

So Lau decided he and Yuen would dabble in Wattpad in their spare time. Over the ensuing months and years, people started to sign up. Wattpad’s number of users grew. By 2009, Wattpad had a million monthly users. Lau and Yuen left the new startup they were working on at the time, and jumped back into Wattpad full time. Today, Wattpad is the largest community in the world for reading and sharing stories, with 40 million users each month.

(1) This is an extreme story, but illustrates a key point: you can’t thrive if you don’t survive, and timing is often out of your control.
(2) Cf. Profitability = control of your own destiny.

Clarifying your strategy using a simple template

Edited excerpt from A Startup Positioning Template by April Dunford:

How you position your startup in the market is crucial to early startup success. I’ve usually used a canvas–like structure to capture positioning that looks something like this:

What is it?
The shortest possible statement that describes what you are. The key here is to keep it really short and use plain English words.

Target Segment
The specific target market you are targeting in the short term. The trick here is to focus on who you will sell to over the next 6 months (not the ultimate market which is typically much broader).

Market Category
The market that you compete in. It’s important because often startups have a choice of multiple categories that they could compete in but the one you choose will define what the real competitive alternatives will be.

Competitive Alternatives
If your customers don’t use you, what do they use? This should take the customer’s perspective and can include things that aren’t necessarily products such as “hire an intern” or “do nothing”.

Primary Differentiation
The one thing that sets you apart the most from the competitive alternatives.

Key Benefit
The biggest benefit that your target market derives from your offering. This is the one thing you would talk to customers about if you could only talk about a single benefit.

(1) April uses this template as a tool for marketing. But marketing flows from strategy, so it’s an excellent tool for clarifying strategy as well.
(2) Cf. Is your company truly disruptive? Try this simple litmus test.
(3) Thanks to David Cummings for the link.

Five insights from an ex-VC that are useful for entrepreneurs

Edited excerpt from Seven things I learned in venture by Sam Gerstenzang:

1. The winners always have something that looks hugely wrong with them.
2. The best way to become quickly knowledgeable is to find the right people and talk to them.
3. There is no template for success, and no one knows what works.
4. Big things growing really fast get really big, really fast.
5. There is a huge advantage to being right early on.

How Amazon resists short-term thinking

Edited excerpt from The Institutional Yes, an interview with Jeff Bezos by Julia Kirby and Thomas A. Stewart:

We are willing to plant seeds and wait a long time for seeds to turn into trees. I’m very proud of this piece of our culture, because I think it is somewhat rare. We’re not always asking ourselves what’s going to happen in the next quarter, and focusing on optics, and doing those other things that make it very difficult for some publicly traded companies to have the right strategy.

Every new business we’ve ever engaged in has initially been seen as a distraction by people externally, and sometimes even internally. They’ll say, “Why are you expanding outside of media products? Why are you going international? Why are you entering the marketplace business with third-party sellers?” We’re getting it now with our new infrastructure web services: “Why take on this new set of developer customers?”

These are fair questions. There’s nothing wrong with asking them. But they all have at their heart one of the reasons that it’s so difficult for incumbent companies to pursue new initiatives. It’s because even if they are wild successes, they have no meaningful impact on the company’s economics for years. What I have found—and this is an empirical observation; I see no reason why it should be the case, but it tends to be—is that when we plant a seed, it tends to take five to seven years before it has a meaningful impact on the economics of the company.

For more on Jeff Bezos’ thinking see: (i) Jeff Bezos on strategy, (ii) Jeff Bezos on how much you should spend on potential vs. actual customers, (iii) The question that Amazon answers to set its strategy, (iv) Lessons from Jeff Bezos: Set “audacious and inspirational” goals.

The question that Amazon answers to set its strategy

Edited excerpt from The Institutional Yes, an interview with Jeff Bezos by Julia Kirby and Thomas A. Stewart:

It helps to base your strategy on things that won’t change. When I’m talking with people outside the company, there’s a question that comes up very commonly: “What’s going to change in the next five to ten years?” But I very rarely get asked “What’s not going to change in the next five to ten years?” At Amazon we’re always trying to figure that out, because you can really spin up flywheels around those things. All the energy you invest in them today will still be paying you dividends ten years from now. Whereas if you base your strategy first and foremost on more transitory things—who your competitors are, what kind of technologies are available, and so on—those things are going to change so rapidly that you’re going to have to change your strategy very rapidly, too.

For our business, most of them turn out to be customer insights. Look at what’s important to the customers in our consumer-facing business. They want selection, low prices, and fast delivery. This can be different from business to business: There are companies serving other customers who wouldn’t put price, for example, in that set. But having found out what those things are for our customers, I can’t imagine that ten years from now they are going to say, “I love Amazon, but if only they could deliver my products a little more slowly.” And they’re not going to, ten years from now, say, “I really love Amazon, but I wish their prices were a little higher.” So we know that when we put energy into defect reduction, which reduces our cost structure and thereby allows lower prices, that will be paying us dividends ten years from now. If we keep putting energy into that flywheel, ten years from now it’ll be spinning faster and faster.

A lot of our strategy comes from having very deep points of view about things like this, believing that they are going to be stable over time, and making sure our activities line up with them.

Of course there could also come a day when one of those things turns out to be wrong. So it’s important to have some kind of mechanism to figure out if you’re wrong about a deeply held precept.

Lessons from Mark Zuckerberg: How to beat your competitors

Edited quote from Mark Zuckerberg, in Entrepreneurial Lessons from Mark Zuckerberg:

We had this concept that we actually still have in the company today, called lockdown. Which is — whenever any other company got ahead of us on something that we thought was strategic to us, we literally did not leave the house until we had addressed the problem.

Now it’s a little looser of an interpretation. We don’t literally lock everyone inside the office, but about as close to that as we can legally get.

Now the funny thing is that inside Facebook, because we have a lot of different initiatives, teams kind of do this themselves. It’s like “alright there’s some competitor that has something that we feel like we really need — we’re going into lockdown to get this thing because we’re not going to let (a competitor or disrupter) get ahead of us”.

There is always a move

From The Struggle by Ben Horowitz:

You think you have no moves? How about taking your company public with $2M in trailing revenue and 340 employees, with a plan to do $75M in revenue the next year? I made that move. I made it in 2001, widely regarded as the worst time ever for a technology company to go public. I made it with six weeks of cash left.

There is always a move.

(1) This applies to all managers, not just CEOs. If you’re missing your numbers, there’s always a move.
(2) Ben Horowitz is referring to situations you need to react to. But thinking outside the box should be proactive too.
(3) Cf. Set stretch goalsDon’t set goals based on what you think you can achieve and Think big.

The causes of distraction

From Don’t Let Mission Distraction Kill Your Business by David Frankel:

Whenever a company strays from its core market, message or mission, the results can be devastating, particularly for small companies and startups. Here are just a few common causes for distraction at the executive level:

— Waning confidence in current market position or pricing
— Overreaction to existing competitors or new, “hot” entrants in the market
— Sudden stagnation or rapid decline in growth
— Strategic partnerships with no clear metrics for success
— Pressure from investors or board members to change direction
— Internal politics overruling logical decision making
— Successful companies expanding model to markets adjacent to where they achieved their growth

The continuum from “figuring-it-out” to “scaling”

From The First Breaking Point by Ho Nam:

A framework we’ve found useful in assessing progress along a continuum is the Capability Maturity Model. Within any company, there will always be processes at different levels of maturity:

Initial – the process is new, ad hoc, chaotic and undocumented. Individual heroics are relied upon to get the job done. The focus is on outputs.

Repeatable – the process is somewhat documented. Repeating the same steps may be attempted. It’s not clear if the process will yield desired outputs.

Defined – the process is well defined, documented and confirmed as a standard process that can produce results.

Managed – the process is quantitatively managed in accordance with agreed-upon metrics.

Optimizing – process management includes deliberate process optimization and improvement.

Startup = pro-active risk-taking

From The most important question in a startup: Am I being proactive? by Peter Nixey:

In a big company, your job is to maintain the status quo. Startups are entirely the opposite. If startups are not changing then they are dying. Everything we do is about changing numbers not maintaining them. We do not fail in unsuccessful attempts to take new ground, we fail in not making those attempts in the first place.

Reactive tasks are about maintaining your current position, they are about not losing ground, they are low risk. Pro-active tasks require taking new ground and taking ground that you’re not sure can even be taken.

Being proactive is hard and comes hand in hand with failure. But these are the jobs that actually move us forward. These are the jobs which, while infused with risk, are also laced with sparkly rewards.

So – as you put jobs into your daily to-do list, ask yourself: “is this proactive or reactive”? If it’s the former and it’s “tangible, fail-able and do-able” then it’s probably an excellent task. If it’s not then perhaps it really does need to happen but also ask yourself whether there is another way that you to spend that time that really moves the company forward.

The only startup goal worth your undivided attention

From The most important question in a startup: Am I being proactive? by Peter Nixey:

Our goal is to find a repeatable, scalable business model, our job is the search for that. We are literally discovering what works and what we can successfully repeat. We are figuring out what product our users want, who wants it most and how we can reach them. Once we have tested that then we can repeat it but first we must test it.

(1) Most startup founders know that success comes from figuring out a repeatable, scalable business model. And yet… so many of us get distracted by other issues along the way.
(2) An exercise: “What’s our repeatable, scalable business model? Which parts aren’t yet working well enough and therefore still need figuring out?”

How to stress test your strategy

From How Would An Entrepreneur Attack Your Business? by Fred Wilson:

This is a question I like to ask our more developed portfolio companies who have built large markets/networks/user bases. I ask them “if you were a startup and you wanted to compete with our company, how would you go about it?”

I think it is very important to understand your weakest flanks/vulnerabilities and then shore them up. If someone will compete with you by coming at the market “mobile only” while you struggle with maintaining a large web and mobile presence, then you should know that. And it probably means you need to rethink your mobile strategy so you can close off that open flank. If someone will compete with you by offering a free version of what you charge $10,000 a month for, then maybe you need to think about a freemium offering to close off that open flank.

Profitability = control of your own destiny

From Cash Flow and Destiny by Ben Horowitz:

When I sat down with my team and told them that we would generate positive cash flow no later than Q2 of 2003 and I planned to commit that to Wall Street, one of the best people on my team questioned the direction. He pointed to our low cash burn, money in the bank and long list of urgent features to be completed. He asked, “Why draw a line in the sand if we don’t have to?” Sometimes it takes a tough question like that to gather one’s thoughts. My response then is my response now to entrepreneurs who ask me this question:

“We should first decide how much we like laying people off, because if we love it then lets stay cash flow negative, because when we don’t generate cash, the capital markets decide when we have to lay people off. In fact, we will have to listen very carefully to investors on everything because as soon as they stop liking us, we will start dying. I don’t know about you, but I do not want to live my life that way. I do not want to have to tell all of our employees that we will do what we think is right until investors tell us we have to do otherwise. I want to control my destiny.”

Lessons from Dropbox

From Startup Lessons Learned by Dropbox co-founder and CEO Drew Houston:

What we learned:

– Lots of pressure (or guilt) to do things the traditional way. But think first principles
– Fortunately, we spent almost all our effort making an elegant, simple product that just works and making users happy
– And we worked our asses off
– And hired the smartest people we knew
– “Keep the main thing the main thing”
– Mostly ignored: Hiring non-engineers; mainstream PR; traditional messaging / positioning; deadlines, process, “best practices”; having a “real” website; partnerships /  bizdev; having lots of features.
– Product-market fit cures many sins of management

Staying focused: a remarkable example from Steve Jobs

Steve Jobs Rejected The First Medical App In 1977 describes how George Diamond developed a medical app for the Apple II in 1977. Thinking that “a computer like this should be on the desk of every doctor in the world”, he approached Steve Jobs to ask for help:

He said he was very impressed with what I had done, and that he agreed about the potential for the future, but ‘frankly I’m not interested in working with you on this.’ I asked why. He said: ‘You have to understand. This is something that nobody in the world yet understands. I can’t be distracted. I’m trying to make the best hammer I can make, the best hammer in the world. You can use my hammer to tear something down, or you can use it to build something up. I really don’t care what you do with my hammer. I just want to make the best possible hammer. And what you are doing is a wonderful bit of construction, but to me it’s a distraction.’

When your product should no longer be your top priority

From When a great product hits the funding crunch by Andrew Chen:

The problem with hyper product-oriented entrepreneurs is that they often have one tool in their pocket: Making a great product. That’s both admirable, and dangerous. Once the initial product is working, the team has to quickly transition into marketing and user growth, which requires a different set of skills. It has to be more about metrics rather than product design: running experiments, optimizing signup flows, arbitraging LTVs and CACs, etc. It’s best when this is built on the firm foundation of user engagement that’s already been set up.

In contrast, an entrepreneur that’s too product oriented will just continue polishing features or possibly introducing “big new ideas” that ultimately screw the product up. Or keep doing the same thing unaware of the milestone cliff in front of them.

Does this contradict Mark Andreesen’s claim that product-market fit is the decisive factor in startup success? Not necessarily. Without product-market fit, nothing else will work. But once you have basic product-market fit, you need to shift your attention to the other elements which will lead to profitable growth.

A journalist recently asked me why Seeking Alpha “has a website that looks like it’s from the 1990s”. I was embarrassed. But then I realized that this was the result of a conscious decision I’d made. We’d nailed product-market fit. So we shifted our priorities to steady improvements in content quality, increased user engagement (via mobile apps and email alerts), building our ad sales team, and developing PRO, the subscription version of Seeking Alpha for professional stock pickers. Andrew Chen’s article explains why de-prioritizing product enhancements can be the right decision.

Evernote vs. Foursquare: Two approaches to privacy

Foursquare CEO Dennis Crowley, quoted in Why Do People Keep Giving Foursquare Money?:

Knowing what places you’ve been inside of no longer requires you to actually check into places in the app… We have ‘Big Data’ about where people go, where they go after they go there, where they went before, where they don’t go anymore—there is tremendous value in all that check-in data. It is our job to harvest that.

Evernote CEO Phil Libin, quoted in Seven Questions for Evernote CEO Phil Libin:

There are bright lines that we won’t cross. We wouldn’t do anything where we’re seen as trying to make money from people’s information. Not that there is anything inherently wrong with that, but to us it violates trust. Anything you put into Evernote is private, and it’s yours.

And here’s a prescient talk (pre-NSA revelations) by security expert Bruce Schneier explaining how private companies know more about us than the government, and the risks of that.

Polyvore CEO Jess Lee on what makes startups successful

From an interview with Jess Lee:

We have three values. The first one is “delight the user.” The others are “do a few things well’ and “make an impact.”

We believe that you have to keep things as simple as possible, edit out the things that are unnecessary or extraneous and focus on polishing the details. This applies to our user experience, as well as to the processes in the company. A pretty extreme example of this is that we did a “simplification month” in January. We just asked everyone in the company to make a list of everything that they do, identify the things that are important, and for the rest of the list, simplify it, optimize it or delete it so we can get the company to the simplest possible state. It’s really important to take the time to clean up all the entropy that otherwise will happen.

(1) Jess came from Google, and Google’s Ten Things We Know To Be True start with Focus on the user and all else will follow, and It’s best to do one thing really, really well. Jess has reduced Google’s ten principles to three — perhaps itself an application of the second principle, to focus like crazy.
(2) My experience in Seeking Alpha has been that extreme focus is only possible when you have a clear sense of what makes the biggest difference. Similarly, it’s hard to achieve excellence without extreme focus.
(3) So Jess’s three values are causally linked in reverse order: First, figure out how to maximize your impact. Second, from that derive extreme focus. Third, thereby delight the user.

Startup strategy advice from Mint founder Aaron Patzer

From two interviews with Aaron Patzer:

Stepping back and looking over the entrepreneurial community, what trends do you see?

It’s getting cheaper and easier to start companies, and the software frameworks are much better than they were even when I started in Mint back in 2006. My biggest concern, though, is there are a huge number of startups working on what I think are very, very small ideas, whether they be gaming or social or local things that just don’t have the groundswell necessary to beat the big companies, which tends to happen at a time of transformation. If you got into mobile in 2007, 2008 you can definitely win that market. Now, sometimes, I feel like it’s too late, and there are 500,000 apps in the App Store and they’re all beholden to Apple or a couple of large companies, so I’ve seen a lot more wealth being created in enterprise and internationally.

What’s the biggest piece of advice you have for other entrepreneurs?

Solve a real problem. You don’t start a company because you want to be an entrepreneur or the fame and glory that comes along with it. You become an entrepreneur and you create a company to solve a real problem. And by real problem, I mean a problem that is going to exist down the line… A lot of people start companies that are really just features, like a URL shortener, and some of those companies raise millions of dollars. And is this a problem that’s going to exist ten years from now?

Reminds me of Zach Abramowitz’s litmus test for disruptive companies.

How do you view your career and your startup? Sprint or marathon?

Kejia Zhu writes in Does Life End at 35?:

I, like many other insecure overachievers, feel an urgency to do big things. Deep down I know this anxiety is rooted in fear. That I’m not actually any good. That I will waste my shot at life and be a disappointment. So I strive for a quick success because I need to validate my worth. After that I can relax and everything will be plain sailing. Right? Instead, this warped expectation more often leads me to behave in a manner that’s unsustainable and counterproductive.

It’s easy to forget that our careers extend for decades beyond our 20s and 30s. The truth is significant works usually take a long time. Whether it’s business, academia or the arts, most of the contributions made have been the result of many years of toil. It’s just that we hear of the young overnight success because that’s a more attractive narrative.

I think the same is true of companies. The “young overnight success” is a more attractive narrative than the great company which takes years to build. So the media suffers from sample bias. And that can lead entrepreneurs to unrealistic expectations and behavior which is “unsustainable and counterproductive”.

Lessons learned — advice from one entrepreneur to another

From Amir Elaguizy‘s 58 things I learned at YC:

  • There is no shortcut around learning, you just have to learn it
  • Everything is harder than it looks
  • Real businesses have customers
  • There is no one thing that makes a company work
  • The best companies strive to empower the individual
  • The worst companies strive to maintain control
  • If there is no competition you’re probably screwed
  • It gets harder, not easier

Fail fast

From Dave Goldberg’s advice to entrepreneurs:

Most new ideas won’t work but you need to keep trying. Then, be ruthless about killing the ones that aren’t working and try to do it as quickly as possible. Time, money and focus are very limited resources in a startup. An idea that isn’t working can be a big drain.