News, Insights and Stories from the Australian and New Zealand tech ecosystem.

How not to be successful as a startup

It’s often very amusing trawling through the startup zeitgeist to see how many posts there are on ‘How to succeed’ or ‘The secret to startup success’. I read these articles and wonder how this journalist is in any position to be dictating specific steps on how to be successful within a technology business. What’s more, if there were specifically defined steps on being successful in life, wouldn’t everyone be successful? I don’t blame the journalist, I just think it’s merely a reflection of the Valley’s dogmatic view of success – a unicorn valuation after churning through Series A to pre-IPO.

I’m not going to declare that I’m incredibly successful, because I’m not. My first tech company was a flop (like most), and I’m now working on a second that prevents others from falling into my folly.

The lessons taken from the first were invaluable and important to my learning. In Poor Charlie’s Almanack by Charlie Munger, Warren Buffett’s business partner, one of Charlie’s greatest public speeches is given to the graduating class at Harvard Law School from 1986. He highlighted how he probably wasn’t sure of “how to succeed in life” either. Utilising the Prussian mathematician Karl Jacobi’s method, Charlie explained, “all I want to know is where I’m going to die.”

By using this thought process we’re able to identify and minimise risk, navigating from decisions that will guarantee failure, which is what the truly greatest entrepreneurs have always done.

‘Lifestyle’ vs Startup: “More startups die of ingestion than starvation” – Bill Gurley

Ignoring what will make you happy is a sure way to kill your company. If you want to work four hours a week, then you should create a technology startup focused on the VC finance model –  build, finance, scale, fail fast. That will essentially guarantee that at some point you will burn out and give up on your journey if it’s not what you truly want.

This is a key point missed by a lot of entrepreneurs; they assume they need the current survivorship bias narrative being pushed by the Valley-based unicorn companies. Don’t be fooled, VCs generally want this because it means they can return on their capital.

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So, if you fail to identify what really matters to you principally and what is valued in your life then when the shit hits the fan you won’t have the true grit needed to push through. CB Insights highlighted this in their recent studyshowing that over 13 percent fail from loss of focus and 9 percent from a lack of passion.

The opposing narrative is a ‘lifestyle business’, which Hunter Walk had a fantastic rant on recently, and I generally agree. Tim Ferriss has often pushed the cash-flow orientated business but has also been involved in some highly successful tech companies, and I strongly suggest listening to his view on both options.

I know that in my instance, I plan to mould both. When I need capital I’ll seek it (but it probably won’t be VC). I’m in this for the long game (20+ years) and I have no intention of growing for the sake of returning a VC’s investment.

Research and Qualify: “If we knew what it was we were doing, it would not be called research, would it?” – Albert Einstein

If you want to ensure that you don’t have a product or service that will fill a need, then definitely don’t spend your time here. 42 percent of startups fail due to “no market need” – do you really want to be a statistic? If so, proceed with no research.

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If not, researching and qualification is detrimental to your ability to succeed. Warren Buffett has always said that “when a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact.” That covers at least 18 percent of the startups who fail and again amplifies that research above all is critical to your success.

Tim Ferriss has also consistently affirmed that the best startups he has worked with have always researched their idea to an insatiable level or extended from a knowledge advantage. He is often astounded that most founders are willing to complete a project for 5-10 years, yet are unwilling to spend 10 percent of that time to research it consistently.

Product: “A Minimum Viable Product Is Not a Product, It’s a Process” – Yevgeniy Brikman

Creating a minimum viable product as the final product is another no brainer to guarantee your failure. Like most (and indeed as I did), you need to treat the MVP as a stage, not a process for reviewing your assumptions constantly in the market.

Yevgeniy Brikman recently highlighted on Y-Combinator’s blog “the Macro” that too many founders assume that the job is done once they’ve finalised their MVP. The whole point of the MVP is to “identify your riskiest assumption, find the smallest possible experiment to test that assumptions, and use the results of the experiment to course correct.” Assumptions in another sense are variables which can include the product, design, monetisation, marketing, and so forth.

This is emphasised by Jim’s identification from the previous cited CB Insights study that found 42 percent of startups fail due to “no market need”. So you can be sure that this is the stage that will put the final nails in the coffin.

Instead of Glengarry Glen Ross Always Be Closing (ABC), think about Always Be Changing…to your market need. From time to time you need to stick to your principles just like Mark Zuckerberg and Facebook did with the backlash received, as highlighted by Fred Wilson. But if you have no users perhaps you should think about changing.

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Market Fit: “Timid salesmen have skinny kids.” – Zig Ziglar

AirBnb used to visit their first hosts in New York, so you probably want to do the opposite of that. Interviewing users, iterating your product and valuing your first adopters is a sure way to create enough value in the marketplace and is something to be avoided like the plague if you don’t want to succeed. This is the primary difference between an entrepreneur and a wantrepreneur.

Entrepreneurs know the race starts once their first product is built, wantrepreneurs just think that users will flock to them with marketing. 14 percent of startups fail due to ignoring their customers and 17 percent lack a business model – if that’s not telling you that at some point you need to speak to your users, one on one, and sell to them, then no one can help you.

Don’t let companies like Palantir or Atlassian fool you, someone (most often the leading founder) needs to be out there recruiting early adopters or clients. This helps identify the kinks in the product, pushing through your riskiest assumptions (most often price and value received). You don’t do this by marketing only – yes you need to market the product, but you need to affirm that the product fits the market otherwise you have no chance and no conversion.

If you don’t know much about selling then I’d strongly suggest visiting and watching Gary Vaynerchuk. A night time session on YouTube with the social media ad king will show you what is required to identify value with your potential clients. It may be as simple as going to a meetup or event where your users congregate and learning how they would use the product, if they enjoy it, would they pay for it and is it actually fulfilling anything for them? Who knows, you might even make some friends along the way.

Founders and StaffTiming is everything – Tommy Shaw

A sure-fire way to guarantee failure is to assume you need cofounders. Recruiting cofounders that you’ve never worked with before, don’t know very well, or that aren’t essential to the success of your company will almost assure that you will be bogged down in disagreements ranging from equity to product.

Instead, if you have the resources and drive you should focus your time on building the product to fit to the small group of users you’re selling to. This will put you in a stronger position for bringing in a cofounder (if needed) and also proving to a high calibre partner that you have the ability to execute on your responsibilities. Remember, they’re evaluating you as much as you are to them.

From my own past experience, I will not be engaging any potential cofounders unless they are detrimental to pushing the business forward. This would be focused on areas of the business I’m not as capable in (technology or engineering) – call this just in time, not just in case recruiting. Looking to our CB Insights research again we can see that 13 percent of startups fail due to team disharmony, so be sure you actually need a founder.

Alan Jones rebutted one of the most common points made by searching single founders, that the industry requires you to have a cofounder to succeed. Like Alan, I would say this argument is a fallacy and instead of believing your product requires a founder to get the MVP to market, you just need to get it done. However, this brings me back to a conversation on YCombinator Hacker News with Paul Graham debating with another member on why cofounders are essential.

I believe that this is a contentious topic with no right or wrong answers. So the only way to reduce your downside is to follow some basic principles of involving someone who fits one ore more of the following:
– You know them very well
– You have worked with before and thus can evaluate their skills
– You enjoy working with them
– You believe that their input could add a 5-10x increase in your management team
– You can ensure that hierarchy, decision making, and responsibility will be well-defined

Finance: “All you need to find is a bigger and wealthier idiot.” – Anonymous

If you want to ensure that you will lose control fast, and put your company on a growth-at-all-costs trajectory, then by all mean pursue outside finance with no research.

One of my greatest frustrations with Silicon Valley culture right now is that you must gather VC finance to scale your business at the seed stage. The frothy environment of capital and numerous startups has caused this assumption, and while I believe there are some great VCs out there (Peter Thiel, Chamath Palihapitiya, Naval Ravikant to name a few), it doesn’t mean that it should be gospel as you first option.

So who do I look to? Try Atlassian.

You can read more about the Atlassian story here and here, or read about their history. But the lesson is simple: you don’t always need money to build, you just need hustle and some smarts.

The result for the Atlassian cofounders, who waited almost six years before any outside finance, is retainment of nearly 33 percent of the company a piece by IPO, and control of an organisation that they most likely intend to spend a major portion of their life in.

Think about whether the long term implications of finance are a) what you desire, and b) what you require.

Summary: “All I want to know, is where I’m going to die” – Charles T Munger

I honestly believe there’s a lot we can take from critical thinking with inversion. Think about some of the greatest mistakes startups make and avoid them. It’s your job to weather the risk as a founder and doing so will ensure that the probability of success only increases with time.

Image: Warren Buffett and Charles Munger. Source: Lauren Lopatko.





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