*Note: This is a bonus section from the Navalmanack, which was edited out of the final published version. I have published it here. Enjoy this section and join the email list for updates, new material, and future offerings. You can listen to this post courtesy of Audiblogs here.
BUILDING STARTUPS
Startups are hard. Every time I forget, reality slaps me upside the head.
STARTUPS ARE HERE TO SAVE THE WORLD
You may not be in the tech business, but eventually tech will be in your business.
(Written by Babak Nivi on the VentureHacks blog)
Startups aren’t here to change the world, they’re here to save the world—by bringing us innovation that advances humankind.
Our universities, labs, and garages create enormous amounts of innovation—and there’s more coming every day. Today’s challenge is delivering it to customers in ways that advance humankind.
Super companies
Apple, Google, Facebook and Amazon all deliver innovation at scale: they reliably bring it to the whole world at once. I call them super companies. (And there are many more in information technology, hardware, healthcare, and energy.)
It might seem impossibly difficult, but super companies can be built. And the only way they get built is by starting a startup.
Our duty
If super companies are saving the world, and every company started as a startup, then it is our moral duty to remove the frictions along the startup’s way.
That’s our duty at AngelList: to serve the startups that are saving the world. By eliminating the frictions along their way, in the most meaningful way possible.
It is also the duty of every service provider in the startup ecosystem: investors, incubators, advisors, lawyers, recruiters, etc.
Entrepreneurs
If the service provider’s duty is to eliminate the frictions in the startup’s journey, then it is the entrepreneur’s duty to only start companies that can make a meaningful contribution to the advancement of humankind. That means saying no to businesses that are the Internet equivalent of McDonald’s.
And it is our duty as entrepreneurs to never sell, shut down or give up until we’re delivering innovation at scale. [23]
FOUNDING
Before you search for product / market fit, make sure you have passion / product fit. It's a long journey.
Building a product is a process, not a discrete action. And the Internet is efficiently arbitraged. Every single simple thing that can be done is being done, or has been done. The lesson of history is that product-market fit is very precise—one wrong tweak or slightly bad timing and you can miss the whole thing.
So the only way you’re likely to find product-market fit is if you’re almost irrationally obsessed with the market and if you’ve been working on it for a long time. Where the journey is the reward. Then, you’re likely to have unique insights (in the details) and consistent execution, through thick and thin, to find fit.
Often, the best companies are ones where the product is an extension of the founder’s personality, which shouldn’t be a big surprise, since everyone is passionate about themselves. [15]
Entrepreneurs hunt for "the idea," the bait that traps them for the next 5 years. Which prison do you want to be in? What do you love?
It's important for there to be a good fit between the founder's personality and the skills required to be successful in the start-up's market. Craig Newmark, a very patient and detail-oriented person, was an excellent fit with the requirements of building up Craigslist slowly over time.
By contrast, Zynga CEO Mark Pincus is a very aggressive person. Before founding Zynga, Pincus tried to compete with Craigslist but he did not have the patience of Newmark, and Tribe.net failed.
By contrast, Pincus's success in social gaming is a direct result of his aggressive nature -- a trait that helped him wipe out all the competition in a highly fragmented industry to take over the top spot in the industry.
Success and failure hinges heavily on getting an objective assessment of the real strengths and weaknesses of a founder and how well that personality fits with the skills needed to grow the venture. [16]
Above “product-market fit” is “founder-product-market fit.”
How do you evaluate if someone is ‘irrationally obsessed’, if they are picking the right idea and have the capacity to execute on that idea?
The best founders I’ve found are the ones who are very long-term thinkers. Even decisions that maybe they shouldn’t care much about early on, they do because they are not building a house, they’re putting bricks in the foundation of the skyscraper, at least in their minds.
What you’re looking for is looking for someone who knows the space well and understands how difficult it’s going to be, but doesn’t care because they love what they’re doing, and they commit for the long haul. Passion and vision alone are not enough. I think Steve Case said ‘vision without execution is hallucination.’ Execution alone isn’t enough. [4]
I meet a lot of entrepreneurs who are short-term thinkers, and that’s okay. It just means this is not the right idea for you. Go find the thing you can commit to for 10 years, because that’s how long it’s going to take, minimum, to get a good outcome. You have to enjoy the journey because there’s no guarantee on the outcome.
You have to be really, really good at it, which means that you probably love it so much you’re willing to put in the time before there’s any return on it. I think the best founders have a deep understanding of the space they’re going into, enough to be contrarian. They have a deep passion for it, so they’ll just keep working on it. They have execution skills. They just get things done. They solve problems. They’re capable. [4]
You have to pick something big to work on, because it's hard to commit your life to something small.
I was at dinner the other night with a group of entrepreneurs. One told the story of a 27-year-old whiz kid whose company will likely exit for $500M - $1B – the business now being less than two years old. You can imagine the effect this had on the brilliant, hardworking 35+ year old entrepreneurs in the group, who had their share of hits, but not at that magnitude and not that quickly.
These stories are getting more commonplace. It seems the entrepreneurs who “hit” these days are doing it more quickly, making more money, and doing it at a younger age. Back in the 70s, it took 10+ years to build a company and earning $10M, even in today’s dollars, was a big victory for an individual. Up until the late 90s dot-com boom, even though these stories existed, they were less common and took longer.
The storyteller said this 27-year-old is more brilliant and more hardworking than previous entrepreneurs he’s seen. That can’t be it.
There are only so many hours in the day, and the entrepreneurs of yesteryear worked just as hard as the entrepreneurs of today. And the ones who came before were just as brilliant. Human intelligence has not evolved that dramatically in 10-20 years.
Rather, I posit that the amount of leverage available to a modern Internet entrepreneur is far, far greater than was available to entrepreneurs of previous generations. The number of entrants has dramatically increased as well. The overall hit rate might be lower, but the ones who win, win bigger and faster thanks to the leverage.
Leverage:
- Youtube, $24m per employee
- Instagram: $70m per employee
- WhatsApp: $290m per employee
- Bitcoin: $1B per employee (Satoshi)
Gone are server farms, telesales and support, tradeshow booths, direct sales forces, licensed software, mountains of code, reseller agreements, plane tickets, hotel rooms, printing CDs, voicemail systems, and so on and so forth.
Modern Internet entrepreneurship starts with a few engineers working for nothing and carrying laptops and cellphones. They coordinate with Skype and GTalk and wikis and bug tracking systems. The company itself is snapped together with outsourced HR, cookie-cutter incorporation, and outsourced finance / payroll. Marketing is done virally, SEO, or SEM. Customer service is handled via the community and forums. PR and outreach through tweets and blogging. Payments come via Paypal. Ads are served up by third-party ad networks. Storage goes on Amazon. Computation scales via Amazon, Softlayer or Rackspace. Code is built upon stacks of open source, SaaS, and $10/month services.
What used to cost $1M-$2M to set up, now costs $10K. What used to cost $5M to build, now costs $250K. What used to cost $20M to go to market now costs $1M.
1999: $5M to launch a product, 30M serious computer users.
2014: $5K to launch, 3B serious phone users.
Leverage/$ is up 100,000x.
But the upside hasn’t gone down. It has gone *up.* The 3 billionth person will be online shortly. They can all use the product. Network effects are stronger than ever, and some businesses become natural monopolies very quickly. Most web products have no marginal cost of replication, so adding a new customer is pure profit.
Less labor required. Less capital required. Less cost to scale. Larger markets. Cheaper marketing. No cost to ship more product.
No, people aren’t getting any smarter or harder-working. But the amount of leverage is obscene. The hits – Yahoo!, EBay, Google, Skype, MySpace, YouTube, Facebook, Twitter, Zynga, are each arriving faster than the previous one did. And the leverage is increasing, not decreasing.
The returns to scale for being smart, young, skilled, and high-energy have gone up tremendously, and that has profound implications for society. The smart are getting richer.
An insightful comment on Hacker News said: Basically, the Internet is a wide and deep place. The depth creates a few huge winners and the breadth creates a large number of small winners (who would have been losers in the old system, but due to the above-mentioned low costs, can still win). What’s missing is the traditionally fat middle. We’ve gone from a normally distributed set of outcomes, to a power-law distribution. The median is a small fraction of the mean. This is bad news for anyone who has built their business predicated on their achieving mean outcomes. That includes mid-stage VC funds, moderately-capitalized companies (traditionally speaking), and societies that care about “equal” outcomes. [18]
"Make mistakes of ambition and not sloth. Develop the strength to do bold things, not to suffer." - @sama
It’s the nature of successful companies that become iconic that they’re non-consensus.
People don’t believe in them when they first start out either because they seem frivolous or the market is too small. It’s easy to sit there and shoot holes in people’s ideas as being too small and say ‘go after the bigger trend’ but the reality is you want to focus on is something you have a deep conviction and belief in.
And most of the times you’ll be wrong. That’s the nature of the beast.
But you don’t want to go into something where you came up with the idea you just brainstormed with a friend a month ago, because that means the first time it hits a hiccup, you’re going to drop it, or you’re not going to have a deep enough insight to pick the right approach on the market.
I think you should look at your company as an extension of your life to date. The dots should connect moving forward. That way, you’re more likely to stick with it and more likely to have proprietary insights. [51]
Takes just as much work to build for a niche market as it does for a big one. Go after biggest opportunity that you can care about. [11]
Perhaps it isn't that responsible people become founders, but that the act of founding makes the person responsible.
Don’t debate people in the media when you can debate them in the marketplace.
OPERATING
Every early decision for your company is crucial. You are laying the bricks in the foundation of the skyscraper. Details matter.
(Following was written by Nivi on the VentureHacks blog)
For an entrepreneur, if it is possible to make it better, she must make it better. If it is possible to make it more accessible, she must make it more accessible. If it is impossible to make it better or broader, she innovates.
Starting a great Italian restaurant is not entrepreneurship because the proprietors make no attempt to scale it. Running McDonald’s is not entrepreneurship because they make no serious attempt to build a better product. Apple is an entrepreneurial venture because it is in the business of delivering ever-increasing quality at higher scale.
There is no tradeoff between quality and scale.
Quality measures how far a product advances the customer. Scale measures how many people use it.
For entrepreneurs, there is no tradeoff between quality and scale. The job is to do both—not one or the other. If it can’t be done, you innovate.
Quality without scale is not entrepreneurship—it is a tree falling in the forest with no one around.
Scale without quality is also not entrepreneurship—it is business as usual. And it leaves businesses exposed to competitors who steal its customers (and, worse, employees).
Anyone who attempts to serve a customer at a new level of quality and scale is an entrepreneur. Anyone who does not, is not. [27]
“Worried about somebody stealing your amazing idea? Get traction. That shit can't be stolen.” - @StartupLJackson
What is the key to finding Product Market Fit?
Specific knowledge, iteration, persistence, and luck.
It takes everything to find product-market fit, because product-market fit is everything. [11]
You won't get to Product / Market Fit on any meaningful product via A/B testing. [11]
Founders run every sprint as if they’re about to lose, but grind out the long race knowing that victory is inevitable.
The Myth of the 80-hour work week (A Blog Post by Naval)
Let’s get serious. Nobody works eighty hours a week. Not eighty real, productive hours. Look closely at workaholics (and I’ve been one, and worked with them), and a lot of the time is spent idling, re-charging, cycling, switching gears, etc. In the old days this was water-cooler talk. In Silicon Valley, it’s gaming, email, IM, lunches, and idle meetings. Let’s drop the farce, ok? Even when you had to work eighty hours, you didn’t, really. In economic terms, there is lower diminishing marginal productivity beyond some point. This point hits differently for different problems (some, like software engineering, require a lot of startup time to load a complex problem into your working memory).
You'll do better work if you're bored rather than busy.
In fact, your best work was probably done in tremendous, focused bursts, surrounded by long periods of dullness and inactivity. So, let’s try to figure out how to maximize the probability and productivity of such a burst, rather than try and force it to be predictable and prolonged.
First, measure outputs, not inputs, in yourself and your organization. Otherwise, you will be fooled by the modern knowledge worker, who is highly adapted to spend time at the office and manage upwards.
Second, measure productivity over a longer time-scale, say weeks and months rather than days. Some of the most creative and productive people I have ever met work in multi-week bursts and then have weeks where they just idle with little done. It’s the nature of the human animal.
One can optimize for productivity or one can optimize for creativity, but it’s hard to do both.
Third, introduce peer pressure into the mix. This is often done in software via “Extreme Programming” or in business by “Teamwork.” Whatever. Get two productive people in the same room on the same problem, and as soon as one hits the upward oscillation and is ready to work, odds are that he / she will inspire the other one and move them along.
Fourth, create a physical environment conducive to oscillatory productivity – eschew offices for non-traditional settings, let people have space, and let them keep their own hours.
Lastly, be ruthless on accountability and output over the long term. Nothing damages a startup like a mediocre and reliable performer.
Now go work harder…
Failure in a startup is preceded by 'I give up.’ If you don’t ever stop working, you can’t really fail.
BUILDING A TEAM
Avoid skeptics for your early hires. You want optimists with good judgment and execution skills.
Why you can’t hire (Blog Post)
There isn’t a shortage of developers and designers. There’s a surplus of founders.
The cost of starting a company has collapsed. It’s now just (minimal) salaries. For entrepreneurs desks are free, hosting is free, marketing is online, and company setup is cheap.
Raising the first $25K for product development is easy – join an incubator. Raising the next $100K is easy – investors are following the incubators with automatic notes. Building a product and launching a product are easy – develop on Open Source Stacks, host on Amazon, launch on Facebook, Android or iOS, get your early traction.
Getting real traction is hard. Raising millions of dollars is hard. Building a sustainable, long-term company is hard.
Yammer can hire. Square can hire. Twitter can hire. These companies have achieved product / market fit. Your pre-traction company has not, and so it has a hard time hiring.
If the costs of founding a pre-traction company have gone down, then returns to pre-traction founders must go down.
Throw out the old cap tables. A founder doesn’t get 30% and an early engineer shouldn’t get 0.25%. Those are old numbers from when you had to raise VC capital before you could build a product. Before everyone could and did start a company.
Post-traction companies can use the old numbers – you can’t. Your first two engineers? They’re just late founders. Treat them as such. Expect as much.
Your next five designers and developers? Your cap table probably can’t even afford them until you have traction, and the cash that follows it.
Close the equity gap, and hiring will get a lot easier. [17]
Startups’ options should last for 10 years or allow net exercise. Otherwise employees often have to forfeit on departure. Borderline scam.
There used to be a very steep decline, where the founder would own 40% and the first employee would own like 0.15% or 0.25%. I think those days are ending. I think future companies, especially those that haven’t raised money yet or haven’t raised substantial capital or haven’t gotten product/market fit even loosely, when they’re hiring early employees, they’re really just hiring late founders. And so they should be giving 1, 2, 3, 4% of the company, instead of giving 0.1, 0.2, 0.3, 0.4%.
The issue with hiring engineers into early-stage companies today is not a shortage of engineers, but a surplus of founders. You have to basically treat them more like founders, because there’s opportunity cost for early engineers who could go start a company or join YC. [30]
If you don’t have product-market fit, people you hire are just like late founders, and you have to treat them as such. [42]
Build a Team that Ships
I started my first company 15 years go, and I still can’t manage. I suspect that very few people can. With AngelList, we want a team of self-managing people who ship code.
Here’s what we do:
Keep the team small. All doers, no talkers. Absolutely no middle managers. All BD via APIs.
Outsource everything that isn’t core. Resist the urge to pick up that last dollar. Founders do Customer Service.
People choose what to work on. Better they ship what they want than not ship what you want.
No tasks longer than one week. You have to ship something into live production every week – worst case, two weeks. If you just joined, ship something.
Peer-management. Promise what you’ll do in the coming week on internal Yammer. Deliver – or publicly break your promise – next week.
One person per project. Get help from others, but you and you alone are accountable.
If they can’t ship, release them. Our environment is wrong for them. They should go find someplace where they can thrive. There’s someplace for everyone.
It’s not perfect. We ship too many features, many half-baked. The product is complex, with many blind alleys. It’s hard to integrate non-engineers – they aren’t valued.
But, we ship. [19]
The moment when you realize that it's out of your control and now up to the team and culture that you inadvertently built.
Our heroes today as entrepreneurs should be [Bitcoin creator] Satoshi Nakamoto, who built a multibillion-dollar enterprise single-handedly, or just two people, whoever he or they are, anonymously. Or WhatsApp, 50 or so people, bought for $19 billion. YouTube, when it was bought, was probably under 60 people. And most of those people were working in datacenters and doing servers. In an AWS world, I’m not even sure they would have needed that many people. Instagram, when it was bought, was just a few people. So it’s possible to build something of huge value today with very few people. [30]
Scaling product reduces external coordination costs. Scaling team increases internal coordination costs. Ratio of the two is leverage. [11]
A startups' ability to scale headcount is not so much a function of the manager, as it is of the managed.
The nature of human beings is that you come into a company, you work like a dog, you work really hard, and then you get tired and hire someone to do your job. And it always takes two new hires to do your job. Just repeat that ad nauseam, and you end up with five thousand people sitting around at a web app company.
So I think you should hire extremely slowly. Hire only after there’s a burning need for that person. I think you have to be ruthless about firing and trimming the ranks. And I know that’s not popular—I know people don’t like that model—but it’s worked well for me and for us. The founder just has to keep a very, very tight eye on waste. And there’s always waste.
Do you think the granting of stock to people is an outdated model?
I think it’s better than the other model, which was no stock. But I do believe it’s outdated. So we do six-year vests. Venture capital firms do ten-year vests. So I think in a rational model you would not only do longer vests, but you would also probably not have permanent issuances of value. Maybe you would have stock for the early people, because they’re creating scaffolding that then turns into a big company. But the older a company gets, the further along it gets, the more your grants should shift to profit sharing.
Profit sharing can be very tax inefficient. AngelList is set up as an LLC, so for us it’s actually more efficient to do that because we only have one layer of taxation. But I just think that as companies get larger and larger, and get further and further along—you can hack it even before you’re profitable—you can do revenue sharing. Or you can give very outsize grants. So you do small grants for everybody starting out, a standard grant that everybody gets. But then next year you either increase a person’s grant substantially or you let them go. [30]
Recruiting hack - exploit Consistency Bias - “Why do you want to join us?”
—
RAISING MONEY
Money follows execution, not precedes it.
How much money should I raise?
Raise less if you want to keep your valuation down and keep the option open for an early exit where everyone (investors, employees and founders) makes money.
Raise more if you’re here for the long term and you want to protect your company from poor funding environments or hiccups in your growth. Just try to maintain control, monitor your liquidation preference, and monitor your dilution. Also understand that, if your valuation is high in this round, you will have to make a lot of progress for the next round to be an up round.
In summary, raise too little money and you may go out of business when you run into trouble. Raise too much money and you may make less dough when you exit. Take your pick: disaster vs. dilution.
In either case, try to act like you don’t have a lot of money. The conventional wisdom is when you do have a lot of money you tend to slow down, because you start spending it (which takes time in and of itself) and you start thinking “we have a lot of time left before we die, so what’s the hurry?” [29]
An abundance of money and time can kill even the best-intentioned product.
The downside, the subtle difficulty of raising money, is that when you raise more money you do spend more money. There’s just no way around that, no matter how disciplined you are. And what’s worse is you move slower. You get less stuff done.
The meetings are bigger, the groups of stakeholders that have to be coordinated are larger. You’re less focused as a company; you take on too many projects because you have all these resources. So it’s just human nature that when you have money you will spend it, and not always for the better. I think it takes your eye off the ball. In that sense, companies who are at least somewhat cash-constrained do better.
Pierre Omidyar is a famous example—this is back in the old days, from eBay. He had a lot of competitors, and he actually credited his success to being the only one who didn’t have much outside financing for a long time. So when people were trading on his site, doing auctions, he came up with a rating system, which was very novel at the time. It seems obvious in hindsight, but his was one of the first sites to have automated ratings.
Everybody else wanted to have a better customer experience, so they had individuals getting in the middle of every transaction. Which meant that as the whole thing spiked, he scaled much, much, faster than them and ran away with the market. By not having the headcount, he was forced to build scalable processes from day one. [30]
Startup valuation is not a science. It's an art that combines current market valuations, your traction, and your negotiating leverage…
How should I interact with my board?
No committee ever built anything great. So related to that, no board ever built anything great. Boards can be helpful; they can be sounding boards. But you do not want the board to be running the company. And the larger the board, the more you’re going to find yourself spending time just keeping them up-to-date and in sync.
Drive-by ideas from investors are largely worthless.
Usually a distraction, and the best founders know their own space better.
There is a belief venture capitalists can add a lot of value on the board. They can—under very specific circumstances and situations. They’re experts at financing, they’re experts at knowing the external market, they might have deep domain expertise in one particular thing that you encounter.
When should I have investors join the board?
You don’t want your board to be too large. The larger your board, the less it is going to get done. Every experienced board member will tell you they favor private company boards of five or six people or less. You can keep the board small in multiple ways: one is, don’t give up more than one board seat per round. The most common mistake I see entrepreneurs make is this: they want to get two investors involved, they do a two-VC round, and they’ve got two board seats from one round. That adds up really fast. Because then when you get to series C, series D, series E, you’ve suddenly got a six-, seven-, eight-person board. Second, you can actually put it in the early term sheets that the investor will leave that board seat when another board seat comes in later.
It’s sad, but I see too many late-stage entrepreneurs spending literally half their time just doing board management.
Large Boards are committees designed to protect existing revenue streams in large companies. Inappropriate for nimble startups.
The other thing you can do is space the board meetings out further. So maybe have a board meeting every three months, and then do an update call every month. And keep that call short.
I’m a bit of a jerk (when I’m the entrepreneur) in that I set the expectation very, very early on that I’m not going to do a fancy PowerPoint deck. I’m going to have a sheet of paper with the big points on it and the big numbers on it, and then we’re going to get together and have a conversation. It’s very important as a founder-CEO that you manage your board. Because if you don’t, then whoever the next most aggressive board member is will step in and fill that vacuum. You don’t want to be in that position where you’re always responding to them or answering their questions. You want to guide the board and guide the company.
My solution to most board problems is going to be highly unacceptable to the venture community, but we don’t give out permanent board seats. We would never ever give out a board seat that we could not remove. And in AngelList and my company, that’s what I’ve done. The only board seats I’ve given out are ones that can be removed; there’s no such thing as a permanent board seat.
It sounds like that’s something you should start negotiating from your very first round?
Experienced entrepreneurs will. Otherwise it’s marriage with no possibility of divorce. The way my company is structured is that everyone can be removed, including me. Then it is actually a very consistent moral argument that I can make, which is saying, “Hey guys, you can remove me as well if I’m out of line.” Nobody is safe, and that forces everybody to behave.
We used to have a saying at VentureHacks: “Valuation is temporary. Control is forever.” Whoever has control can effectively end up controlling your valuation later. Never give up control. And control is given up in subtle ways: A lot of term sheets will have so-called protective provisions that originally existed to protect the preferred shareholders, because they were minority shareholders. But effectively they give those shareholders control over the company.
So, for example, if your preferred investor has the right to veto future fundraising, they effectively have a lock on your company. If you ever need more money, you have to get them to agree, which means they run the place. Same for expanding your option pool and issuing more shares to new employees, or to keep existing people. Same with M&A. That’s probably the big one, where the biggest fights happen. Sometimes the founders want to sell or don’t want to sell the company, and then the preferred shareholders try to control them for an opposite outcome. So, in my ideal world, if I had a hot, late-stage, high-growth company, I would essentially sell common stock. [30]
How should people think about those new sources of capital (family offices, corporate venture, hedge funds, etc) and what do you think are the trade-offs?
I actually think it’s a positive development for entrepreneurs. I know VCs like to bash on them as dumb money. But you have to keep in mind that that’s like your local laundromat owner getting angry that a new laundromat opened up down the street. They don’t like competition. So you always have to filter venture advice through venture incentives.
Fundamentally, venture capital is a bundle—it’s a bundle of advice, control, and money. The more options you have, the more you can unbundle those three things, and get the advice from the people you want and the money from the cheapest source of money, and leave the control behind. So I think it’s good.
Irrelevant how much money an investor has.
If they don't get it, don't do it their way.
But exactly as you said, you want to interview your investors. And you really want to look for the subtle signals—I think people’s true motivations and behavior are revealed, not said. If somebody spends ten minutes telling you how honest they are, I can guarantee you that’s a dishonest person. You should reference-check the hell out of them, you spend time with them, and you see how they treat you during the negotiation process. If they’re relatively easy during the term sheet negotiation process, if they’re quick to respond, if they’re no hassle, if they say smart things, they’re probably going to be good people to work with. If they give you an exploding term sheet, if they’re difficult to work with, if they’re inflexible, intransigent, they’re going to be ten times worse once the money is in.
By the way, that’s true of VCs too. You can learn everything you need to know about a VC during the term sheet process before the close. And don’t be afraid to call off the close if you’re getting negative signals. I’ve done it and I’ve never regretted it. The moment you know that you’re working with someone that you would not work with for the rest of your life, stop working with them right there. Save your time. Because you get married to investors, with almost no possibility of divorce. And your dating period with them ranges from a week to a year. A year if you’re really lucky, but it’s usually just a few weeks. So you really have to look for the subtle signals. [30]
Pitching skills are overrated.
Find the right co-founder.
Attack the right market.
Craft the right product.
Investors will pitch you.
If you are one of these talented entrepreneurs in a “frontier” location where there aren’t enough angels around, you have two choices. You’re either going to have to bootstrap to the point that you can show real financial returns, which will attract local and foreign investors. Or, you should consider relocating your headquarters (although not necessarily the whole company) to a funding hub. [22]
Startup outcomes fall on a power law distribution.
So startup financings look the same way.
You're unfundable until you're oversubscribed.
STRATEGY
The fluffy, save-the-world visions sometimes are the founding basis of the business, sometimes they emerge as you build the business, and sometimes they are tacked on afterwards for a good story. There is no single formula to building a business. If there were a single formula we would have systematized it and it would be straightforward and all the returns would be gone because you would do it all the time.
But by definition, technology is the set of things that don’t quite work yet. Startup businesses are trying to solve the things that are still broken, and so there is no single path to fixing them. I think entrepreneurship by definition attacks the boundary cases where it advances human knowledge in creation, learning at the edge, and so it’s always solving the hard problems. [12]
Leverage in business used to be product, capital, labor. Now it's code, platforms, and community.
The entrepreneurial age will be as important as the industrial age and the information age.
In the industrial and information ages, we learned how to put physics and information to great use. Physics and information were also the basis for an organization’s differentiation and victory.
In the entrepreneurial age, physics and information will be replaced by entrepreneurship: the ability to serve a customer at the highest level of quality and scale, simultaneously. We will learn to put entrepreneurship to great use and it will be the basis for an organization’s differentiation and victory.
This is not a statement that the winners are going to win. It is a statement that (1) the best strategy is to attempt to deliver the highest quality with the highest scale and (2) other types of differentiation should only be tactics that serve an organization’s entrepreneurial capability.
Differentiation is being commoditized.
Physics, information, hardware, software, marketing, press, business development, recruiting, training and every damn thing a business needs to do is quickly becoming available as a service. And innovations by one company are quickly made available to its competitors by other entrepreneurs.
It is no longer effective to rely on any type of differentiation—organizations must focus on delivering the best product in the world to as many people as possible. All other activities just help them on their way.
Scale is getting easier.
In the past, scale (low cost, high distribution) was so difficult that organizations with bad products and great scale could win. And it was so difficult to scale the very best products that they never left the boutique.
The challenges of scale are now diminishing rapidly. Scale is now available as a service—see Foxconn (manufacturing), AWS (hosting) or Facebook Platform (distribution).
But scale is not being commoditized.
Scale is getting easier and other forms of differentiation are being commoditized. But scale will not be commoditized. It is as important as an organization’s product development capabilities.
Why? Because the best products require unique means of scaling. The delivery of the best products is tied into the product itself. For example, look at Apple’s efforts to develop new manufacturing techniques and stores for its products.
If you don’t scale quality, you will be shut out of the marketplace.
Today, it’s too easy to spread the word about the best products to leave any room in the marketplace for merely good products.
The organizations with the greatest entrepreneurial capability will collect the most customers and greatest profit. They will also attract the best talent, who will continue to build the best products, with the greatest distribution and highest profits, which will attract the best talent and so on.
It’s not bad enough that the winner is collecting the greatest profits, it’s also collecting the best talent, leaving competitors without the people it needs to stage a comeback.
The industrial and information revolutions are enabling the entrepreneurial revolution.
The continuous improvements in our ability to manipulate physics and information are helping us commoditize every capability on the planet.
These improvements enable entrepreneurs to deliver services to other entrepreneurs—and these services are commoditizing every type of differentiation except product development and delivery. [24]
"Innovation without a moat is consumer surplus" - @trengriffin
Many startups would do well to pin that up next to their organic brownies.
I think the thing is to step back and look at and say, Why is it that every time a company becomes big it slows down, it stops innovating, it just starts working on protecting its existing revenue stream?
And then some little startup that has one thousandth of resources and really has no right to come over and attack this big company does so and kills it? It happens all the time. [16]
The larger a hierarchical organization, the more dysfunctional it is.
I think the principal-agent problem is literally what allows startups to exist. If agents were just as effective as principals, there would be no startups. IBM would have crushed Microsoft, Microsoft would have crushed Google, Google would have crushed Facebook, Facebook would have crushed Instagram.
But a small number of people and principals are dedicated to what they are doing and really care, whereas the agents are too busy optimizing their lifestyle. They’re not going to optimize for the company as a whole. [12]
To a first approximation, the larger the organization, the lower the competence. Thus, startups.
Great companies are all about the people and nothing but the people.
(Save this tweet -- it'll make more & more sense with every year)
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