Pete Tormey and I decided to do a podcast to address a number of team formation, business formation, and early revenue issues that we have seen in our own startups, in our practices, or hear questions about at the various Bootstrapper Breakfasts® meetings we take part in.
If you are a technology entrepreneurs who doesn’t fit the typical profile for a first time VC investment you can find it very difficult to generate interest in a business that is still at the planning stage. If you persevere because you want to solve a critical problem or create new possibilities for your customers, you need to start building your business with only limited financial resources.
Bootstrapping does not preclude seeking investment when your active business merits and requires it. But it starts by making a difference and building a real business as proof of both the need for and the value of your products.
I will addresses what you and your team need to do to bootstrap your business: to find early customers and early revenue using internal cash flow and organic profits. I will draw on my experiences with clients at SKMurphy, Inc. and insights I have gleaned from the more than 250 Bootstrapper Breakfasts I have attended since October of 2006. The ASL Emerging Business Seminars are famous for being very interactive and mine will be no exception: I welcome your questions and insights if you are able to join us.
This is a laundry list (not prioritized) for a set of challenges we currently wrestle with in helping clients monitor their external environment and craft strategies for new market creation and new product introduction into an existing market. I welcome any suggestions for resources or tools.
maintaining shared situational awareness at at team level on the external environment
understanding who prospective customers view as status quo / alternatives / competitive offerings to your product or service
monitoring emerging technology spaces for new entrants that may come into your space
monitoring your target market space for new entrants: especially discerning weak signals of a new competitor
counter-surveillance – staying off of competitor’s radar as long as possible (stealth is just one strategy here)
finding and monitoring forums where prospects are talking about current challenges and shortcomings of existing alternatives
identifying early adopters / earlyvangelists who are unsatisfied with an existing partner
understanding customer’s perception of the value proposition for competitive alternatives
using analysis of competitive hypotheses to discern competitor’s strategy from deceptive and ambiguous moves (by definition stealth or camouflaged moves are not detected, if they are they represent revealed strategy)
designing business wargames to explore complex ambiguous competitive situations and foster team alignment on strategy
Market Structure Analysis
modeling markets that don’t exist (yet)
creating markets where you have the potential to remain viable
developing segmentation strategies for existing markets
anticipating when a niche market may dissolve a larger category (either to your detriment or advantage)
cataloging all of the different descriptions and keywords for the same problem from different perspective in an early market
crafting and negotiating partnerships with incumbent players in an existing market
defining value chain and minimum viable footprint for a new offering (for more on these concepts see “The Wide Lens” by Ron Adner
In “Planning as Learning” Arie P. de Geus offers an interesting contrast between two bird species–titmouse and robin–based on an article by Jeff S. Wyles, Joseph G. Kunkel, and Allan C. Wilson, “Birds, Behavior and Anatomical Evolution,” Proceedings of the National Academy of Sciences, USA, July 1983.
Human beings aren’t the only ones whose learning ability is directly related to their ability to convey information. As a species, birds have great potential to learn, but there are important differences among them. Titmice, for example, move in flocks and mix freely, while robins live in well-defined parts of the garden and for the most part communicate antagonistically across the borders of their territories.
Virtually all the titmice in the U.K. quickly learned how to pierce the seals of milk bottles left at doorsteps. But robins as a group will never learn to do this (though individual birds may) because their capacity for institutional learning is low; one bird’s knowledge does not spread.
The same phenomenon occurs in management teams that work by mandate. The best learning takes place in teams that accept that the whole is larger than the sum of the parts, that there is a good that transcends the individual.
“I want the definition of startup back. To be used by anybody who is willing to take the risk to quit their corporate job and go out and try and build an innovative, disruptive, tech-enabled business that tries to change the way things work in the world.
It’s OK to build a company that stays small, has a few million dollars in revenue and builds careers, bank accounts and enriches client experiences.
It’s also OK to raise venture capital and try to build a monster business. But know that if you don’t go “up and to the right” you might find yourself abandoned (unable to raise more VC) or even ousted (to bring in a CEO who can show rapid growth or die trying) in the name of growth and returns. It happens more than is reported.
It’s also OK not to raise venture capital. To aim at changing a small corner of your world or industry. Or your life.
4. Don’t make leaps.
Most environmental entrepreneurs have visions of fixing entire systems–after all, that’s what’s broken–and design solutions that promise wholly new technologies enabling (and requiring) wholly new behaviors. Think hydrogen fuel cell vehicles, which require innovations in fuel cells, fuel, fueling stations, fuel companies, and fuel distributors, to mention just a few. But that’s where most promising ideas fail. Innovations succeed when they offer evolutionary, not revolutionary, changes in behavior. Create a design that provides small steps, easy changes, for your customers. Edison designed his electric light to look and act just like the gas lighting existing customers were used to. Only later did people start using electricity for other uses. Natura non facit saltum: Nature does not make leaps. Neither will customers.
It takes a long time to appreciate how a technology will mature. To do foundational work and move down the learn curve faster than your competitors in the early going requires patience. Bill Buxton makes offers several examples of this in “The Long Nose of Innovation” concluding
“The bulk of innovation is low-amplitude and takes place over a long period. Companies should focus on refining existing technologies as much as on creation.”
Suster’s blog post is a rebuttal to Paul Graham’s “Startup=Growth” which opens with
A startup is a company designed to grow fast. Being newly founded does not in itself make a company a startup. Nor is it necessary for a startup to work on technology, or take venture funding, or have some sort of “exit.” The only essential thing is growth. Everything else we associate with startups follows from growth.
Two of the examples Graham points to are Apple and Google. Both of these had a long period of exploration early in the life of a new technology (microprocessors and Internet Search) before they really started to grow. He also neglects the franchise model as a way for a brick and mortar or geographically limited startup like a restaurant or a barbershop to become a McDonald‘s or a Supercuts.
I agree with Suster that “Startup = Taking Risks & Creating Value.” Growth is an outcome of impact. Bootstrappers raise capital for a startup that both merits it based on demonstrated traction and requires it because of the growth opportunity that has now been identified.
But it was a startup when they took a risk to create new value for their customers.
This is a superb essay delineating the attributes of a fast-growth, all-or-nothing type of startup. No surprise here. Who besides pg has had the depth and breadth of quality first-hand experience with such ventures over such a sustained period and in such an explosive context as that of recent years? He has here given us a classic analysis of the prototypical, Google-style startup.
I think the idea of a startup should not be so narrowly defined, however, and the big reason is this: many founders set out to build ventures that are tech-based, innovative, aimed at winning key niches via hoped-for rapid growth and scaling, positioned for outside funding as suited to their needs, and aimed at liquidity via capital gains as the primary ROI for their efforts . . . but who also place a huge premium on minimizing dilution and maximizing founder control. These are the independents. The ones who, by design, want to defer or even avoid VC funding so as to build their ventures on their own timing and on their own terms. Now this is not the Google startup model. It is, in a sense, its opposite. But it is not the model of a small business either. It is just a different type of startup.
The trend over this past decade has moved decidedly toward greater founder independence in the startup world. Back in the bubble days, as a founder, you had very little information available to learn how startups worked, you often had heavy capital needs (e.g., $2M to $4M) right up front to do such things as build your own server banks, and you would almost certainly have little leverage by which to minimize dilution or loss of control at the time of first funding. Today, this has completely flipped. Vast resources are extant teaching founders how startups work. Initial capital needs are often minimal. And it is relatively easy to get reasonable funding on founder-friendly terms. What this means is that, today more than ever, the independent-style startup is more open to founders than ever before.
Given the above, it seems to me that this is not the time to say that the only style of startup worthy of the name is that of the super-rapid-growth type. The rapid-growth type may be more glamorous by far but it really defines only the tip of the startup world. Beneath it is a vast world offering incredible opportunities to founders who want more control over the timing, scale, and management of their ventures and who seek to realize gains and manage risks accordingly.
Q: I saw that you were hosting this “working for equity” panel but I am not in Silicon Valley so I won’t be able to attend. I understand the normal protocols for working at normal jobs but am now considering whether or not to apply for work at startups. What level of salary/benefits should I expect? I understand that at many startups, equity is used as a substitute for salary.
A: like many compensation issues, it’s a negotiation. Deciding how to value the equity in a very early stage company can be quite challenging. Most people become early employees at a startup because they like the freedom of the work environment and they hope to learn enough to start a business of their own at some point.
Unless you really like the team or are confident you will learn something by working at an early stage startup you are probably better served to work at a venture backed startup. This can be very similar to working for an established company. Many of these firms fail but they can normally pay competitive salaries to regular employees. Officers and executives may take a pay cut but have substantially more equity than the average employee (e.g. 10-40X).
Joining a team that’s bootstrapping means that you have to collaborate with them to create and market something of value that customers will pay for.
Entrepreneurship gets a lot of hype but it’s not for everyone, in the same way that we need doctors and accountants and public safety officers but these careers require different personalities and strengths. I have been entrepreneurially inclined since my early teens, much to the disappointment of my father and grandfather who were both attorneys. I have done stints in big companies but migrated to opportunities for intrapreneurship–new business units, new products, new services–and have come to the conclusion entrepreneurship is not a voluntary career.
For the most part bootstrapping a startup is not the path to riches but to autonomy. Some people value that more than others.
If salary and benefits are of utmost concern you will probably be more comfortable working as an employee in an established firm. Most people do and they are what keeps our society running.
But even venture backed firms and large enterprises have layoffs and go bankrupt. I don’t think there are any careers that you can hope to work in for more than decade without continuing to improve your skills. Medicine, law, teaching at both the K12 and college level are all likely to undergo tremendous change in the next decade. The only security is to keep learning and to focus on areas where you can offer your employer or your customers value.
Many of us in Silicon Valley seek to found or be an early employee at a technology startup. If you aspire to create a startup come take part in a conversation with four startup founders about what’s really involved in leaving your day job and striking out on your own or with partners. The startup founders range from serial entrepreneurs to first-time CEOs, they will share their vision, drive and passion as they discuss the nuts and bolts of following their dreams to building something that will change the world.
Lenny Greenberg CTO of Assityx, Inc.
Lenny Greenberg is founder and CTO of Assistyx, leading developer of assistive communication products, including the award-winning TapToTalk app that help individuals with physical and mental challenges reach their full potential. A serial entrepreneur, Lenny has led organizations in planning and developing advanced technology-based products.
Ruoting Sun, co-founder of Temvi, Inc. Ruoting Sun is co-founder of Temvi, a Mountain View based startup focused on simplifying social discovery. Temvi enables users to easily find, share, and experience cool events that are happening around them, based on their interests and passions. Routing is a first time entrepreneur heading a team of 5 others in creating a mobile app that gamifies social discovery.
Sam King, CEO of ExpressMango, Inc.
After working as a key contributor to many startups, Sam King co-founded Express Mango, a the social networking appointment system. Express Mango’s online scheduling and appointment reminders reduce no shows. The facebook virtual receptionist helps grow your business 24/7/365.
Giacomo Vacca, CEO of Kinetic River, Corp. Giacomo Vacca founded Kinetic River to focus on products and services at the intersection of laser optics, microfluidics and medical diagnostic devices. He earned his B.A. and M.A. in Physics from Harvard University, and his Ph.D. in Applied Physics from Stanford University. His most recent honors are having been elected to Senior Member of the Optical Society of America and to Research Fellow of the Volwiler Society at Abbott Laboratories.
Moderator: Sean Murphy, CEO of SKMurphy Inc. Sean Murphy has taken an entrepreneurial approach to life since he could drive. His firm specializes in early stage and emerging market technology companies who are challenged either by new product introduction or the need to diversify beyond their initial success.
Silicon Valley Code Camp is an amazing experience that has improved each of the five years that I have attended. It’s held at Foothill College (12345 El Monte Road, Los Altos Hills, CA 94022) and this year will convent the weekend of Saturday October 6th and Sunday October 7th. There is no charge to attend.
Q: I see a lot of opportunities for a startup, but I am not sure how to evaluate them?
A: Here is a short checklist we use to help entrepreneurs sort through where they are, this is typically most useful in the “idea / team formation” phase or in preparation for “open for business” and complements the “First Seven Questions” that focus more on the product than the team’s core competencies, the unknowns, or the plan.
What is the Opportunity? Who is the customer and what is their need or problem. You can read a blog post or trends article to find many of these but you cannot stop there.
Why You? You are not a blank slate, you have skills, experience, and interests that can form a basis for a differentiated offering.
Why Now? What’s changed either in the industry or in adjacent or supporting industries, that will enable new opportunities for an entrant to gain advantage over incumbents and other larger firms?
Issues: what challenges do you face in going after this opportunity. The most two most common early issues:
Domain Knowledge: Either problem or customer intimacy or both.
Team: If you can’t make progress on your own pick a different idea, but you should use your progress to recruit other team members if you are working solo to increase your chances for success. The idea is only the first 1%, you might consider joining another team and working to help them refine and improve their idea. Finding a core team you can work with is as important as the idea.
Key Assumptions: What information or missing pieces of the final solution do you still need to discover. Can you construct a simple model for your business as a sketch or a spreadsheet that models just the key variables and their relationships? What do you know that you need to find out?
Next Steps: what can you do with the knowledge you have, the people who are willing to help, and the time and resources you have to move your idea forward? You will be working on your startup for at least a year or two, I would pick a problem that you find energizing and that at least one other person is interested on working on with you.
This can also be a useful list of questions to revisit even as you are doing customer interviews and have early customers, especially if you learn something that challenges a key assumption about the business.
I found a recent essay by George Gilder “Unleash the Mind” very thought provoking. I have selected some key excerpts and added my thoughts as to how they are particularly applicable to startups.
America’s wealth is not an inventory of goods; it is an organic entity, a fragile pulsing fabric of ideas, expectations, loyalties, moral commitments, visions.
This is also a good list for what’s needed for a startup to succeed: ideas, expectations, loyalties, moral commitments, and visions.
Capitalism is the supreme expression of human creativity and freedom, an economy of mind overcoming the constraints of material power. [...] It is dynamic, a force that pushes human enterprise down spirals of declining costs and greater abundance. The cost of capturing technology is mastery of the underlying science. The means of production of entrepreneurs are not land, labor, or capital but minds and hearts.
Entrepreneurs succeed when they create a sense of mission that captures the hearts and minds of an early team with the requisite skills.
Under capitalism, wealth is less a stock of goods than a flow of ideas, the defining characteristic of which is surprise. Creativity is the foundation of wealth. [...] Entrepreneurship is the launching of surprises. [...] Creativity cannot be planned because it is defined by information measured as surprise.
Early stage teams have to identify and exploit emerging market situations characterized by a high degree of uncertainty, they have to be ready to be surprised and to improvise solutions to unexpected problems and seize unanticipated opportunities. I observed in “Early Markets Offer Fluid Opportunities“ that startups see fluid opportunities in dynamic environments, but no certainties before opportunities pass or the “situation changes.”
Entrepreneurial knowledge has little to do with certified expertise, advanced degrees, or the learning of establishment schools. [...] [Entrepreneurs succeed] “not by leaving it to the experts but by creating new expertise, not by knowing what the experts know but by learning what they think is beneath them.”
It’s this willingness not only to sweat the details but to be wrong or at least be thought of as wrong–perhaps for a very long time–that characterizes the powerful kind of entrepreneurial persistence
As Peter Drucker has written, within companies there are no profit centers, only cost centers. Whether a particular cost yields a profit is determined voluntarily by customers and investors. Capitalism feeds on information that is outside of the company itself and therefore under the control of others. Only an altruistic orientation can tap the outside incandescence of information and learning that determine the success of capitalism’s gifts.
You have to care about your customers enough to aspire to create value by serving them. This aspiration can sustain you as you venture into the uncertain and the ambiguous opportunities. You hope at least to survive surprises you find, if not to be nimble and creative enough to take advantage of them.
Some related blogs posts on exploring ambiguous situations and surviving if not exploiting the surprises they hide:
“And being an excellent commander, about to go into a real battle, he had the wit to bring along a few people who could actually get things done for him. It may seem hard for you to believe, but mark my word–whenever serious and competent people need to get things done in the real world, all considerations of tradition and protocol fly out the window.” Neal Stephenson in “Quicksilver”
What attracts me to working with startups is the sense of creative flow that comes from contributing to a small fast moving team that just wants to get things done. It’s not so much about “breaking the rules” as focusing on what’s important and embracing a mission to make a difference. If protocol is “the customs and regulations dealing with diplomatic formality, precedence, and etiquette” then startups need to selectively break with tradition to succeed.
In “Building Codes for Software” I defined traditions as “solutions to problems that we forgot we had.” I think the challenge to breaking with tradition is making sure you understand the original problems that the tradition developed to prevent. This requires you to mentally simulate the impact of dispensing with a precedent or tradition before actually doing so. A team effort at imagining possible consequences will often outperform any one individual’s ability to anticipate likely outcomes.
The best startups are driven by a sense of mission, driven by a common purpose to move toward a better future, and not by a desire to rebel or to reject what may be obsolete methods and approaches without determining what can replace them. I think effective founders have a lot of order in their lives, stable relationships, self-discipline, and the ability to not only be creative but make and meet commitments.
We first met Jim Daily and Alan Wall underneath that big Carlsberg sign, sitting out in a late-afternoon rainstorm under an umbrella, having a couple of beers – “the only ferangshere,” as Wall told me on the phone, using the local term for foreign devil. Daily is American, 2 meters tall, blond, blue-eyed, khaki-and-polo-shirted, gregarious, absolutely plain-spoken, and almost always seems to be having a great time. Wall is English, shorter, dark-haired, impeccably suited, cagey, reticent, and dry. Both are in their 50s. It is of some significance to this story that, at the end of the day, these two men unwind by sitting out in the rain and hoisting a beer, paying no attention whatsoever to the industrial-scale whorehouse next door. Both of them have seen many young Western men arrive here on business missions and completely lose control of their sphincters and become impediments to any kind of organized activity. Daily hired Wall because, like Daily, he is a stable family man who has his act together. They are the very definition of a complementary relationship, and they seem to be making excellent progress toward their goal, which is to run two really expensive wires across the Malay Peninsula.
Since these two, and many of the others we will meet on this journey, have much in common with one another, this is as good a place as any to write a general description. They tend to come from the US or the British Commonwealth countries but spend very little time living there. They are cheerful and outgoing, rudely humorous, and frequently have long-term marriages to adaptable wives. They tend to be absolutely straight shooters even when they are talking to a hacker tourist about whom they know nothing. Their openness would probably be career suicide in the atmosphere of Byzantine court-eunuch intrigue that is public life in the United States today. On the other hand, if I had an unlimited amount of money and woke up tomorrow morning with a burning desire to see a 2,000-hole golf course erected on the surface of Mars, I would probably call men like Daily and Wall, do a handshake deal with them, send them a blank check, and not worry about it.
Update May 1, 2013: I received a question about this post
Q: An interesting paradox is that men like Daily and Wall challenge Neal Stephenson’s quote: “Software development, like professional sports, has a way of making thirty-year-old men feel decrepit.”
The question is…are they an exception to the rule or is the common notion that there is no place for thirty-plus-old men (and women) in a startup just plain wrong? I think it’s the latter. It’s true that youger people get more things done, but the older, more experienced ones do more of the right things.
I see advantages to mixed teams. Many of the soft skills required for success continue to accumulate with experience: e.g. management, sales, business development,… I have a pair of posts that address this:
I think there is also a difference between something making you feel old and not being able to play the game. I think the larger challenge is not that startups require the energy that only the young can summon, but that experience can blind you to novel combinations between old and new technologies that meet customer needs in a way that creates distinctive value.