Doug Richard on his school for startups talks about the 10 business questions.
It's a great way to think about your start up and I heartly recommend (if you can) go on one of his courses.
So I wondered today - how well would EnterMobile - our new idea to bring gamifaction to the nation with low cost brandable mobile games - would stack up against the 10.
1. The Proposition: What do we do that people need or want?
- we provide a fun way for brands to get mobile numbers
2. The Customer and the Market: Who are they?
- bars, resturants, clubs, sports organisations - anyone in high passion / high dwell time sectors.
3. The Channel: How do we reach them?
- at the moment it has been word of mouth and online - we plan to create an app that will be a lost leader as well into the market place.
4. The Pricing Model: How much is it worth?
- we are still working this one out
5. What relationship do they want to have with you?
- a hands off one - our product is a self service platform for some of the options
6. The Partner: Who is our key partner?
- a series of developers from Project Massmob (another start up idea of ours)
7. The Competition: Who are we up against?
- inside the industry: mobile phone games, mobile app developers, mobile companies.
- outside the industry: anything that people do when bored rather than play games.
8. What do we have in common?
- we all love mobile
9. The Asset: What is our key asset?
- the behind the scenes IP of our self service platform and the route to market
10. The Competency: What must we be good at?
- developing games, developing back end, and marketing to our niche (which we are...)
I am hoping that be the time the Window of Opportunity events come along (Doug's heavy hitting and Free events providing a fresh perspective on raising and investing money) we will be ready with the number 4.
Which is kinda key. And what we will be working on next week.
Some more information about the investor events. Windows of Opportunity.What is it all about?
It is well known that banks aren’t lending; equity is scarce; and traditional investment returns can often be poor. Our aim is to demonstrate that there is another way…
Windows of Opportunity is a series of FREE events to inform entrepreneurs, businesses and investors about the new types of money and new investment opportunities that exist today.
Who is it for?
The overarching goal is to make sense of the range of investment and funding options for potential or existing investors and entrepreneurs or young businesses.
Entrepreneurs
Startups
Businesses
New Investors
Established Investors
Angel Investors
So if you are an entrepreneur, a startup, a new or an established investor you can’t afford not to know about this and attend one of these FREE Events!
http://www.schoolforstartups.co.uk/woo/
Who says I don't do anything for you :)
And could you therefore do something for me? And check out EnterMobile - all about creating branded mobile games for people - and give me your thoughts on it - and heck maybe even go social on it too and tell you peeps :)
Friday, 28 September 2012
Tuesday, 25 September 2012
Not the power of phones - but the power of intention
My iphone broke the other week - nothing amazing there - as over 2 years old.
Which is shocking when you think I am in mobile marketing - but it is interesting to see the phones of other people in the mobile industry - the CEO of Blippar's phone was more beat up than mine - and he runs one of the most successful mobile augmented reality companies in the world. So... it says something.
The point is that my phone broke and a good friend of mine gave me his old phone (another iphone that goodness) as he is off to Bali to do some soul searching.
And it was interesting to see what he left on his phone. On his itunes / ipod or podcasts. Some really spiritual and enlightened works which I was very happy to be reacquainted with.
As my blogs as of late have been a little tech heavy, mainly if not totally about startups and my passion for them, I wanted to pop this in here as well. Nothing to do with marketing. But everything to do with life.
"There is a universal source of energy that is called the “power of intention.” This source – whether you call it God, the divine, or something else – is always available to us and is infinite in its possibilities. - Dr Wayne Dyer
So in his podcast on my best friend's phone who I may never see again was the Seven Faces of Intention. And so I list them here... they are:
Creativity, Kindness, Love, Beauty, Expansion, Unlimited Abundance, and Receptivity - Dr W Dyer believes that they are the keys to unlocking the power of intention in your life. And so do I.
1. Creativity
– Realize that there is creativity within you, and learn to recognize and appreciate your creative impulses. You don’t have to be an artist or a writer – creativity is just as important to the business person looking for the next big idea.
“If you’ve ever felt inspired by a purpose or calling, you know the feeling of Spirit working through you. Inspired is our word for in-spirited.”
Learn to recognize this state of being in-spirited, and you’ll unlock your inner creativity.
2. Kindness
–Whether you call it karma, the law of reciprocity or the power of positive thinking, work from the belief that you’ll be rewarded for good intentions.
Dr. Dyer shares the science behind kindness in The Power of Intention. When you do something kind for someone else, their brain releases serotonin – and so does yours! Serotonin is a hormone that makes us feel good. So, every act of kindness makes two happier people in the world.
“If you want others to be happy, practice compassion. If you want to be happy, practice compassion.”
3. Love
- Think of this power of intention as the face of kindness exponentiation with the emotion of love.
Love means a lack of judgment, a lack of anger or resentment. It means recognizing God in others.
4. Beauty
– The face of beauty is the face of intention.
Learn to appreciate the beauty of everything around you.
The face of beauty is truth, honesty and a knowing that what "is" -- is exactly as it should be. You can use this power by re-framing any negative thoughts you have towards others and replace them with an appreciate (a thankfulness attitude) towards them.
5. Expansion
– Expand your awareness of what is possible.
Don’t set limits on yourself; instead, learn to listen to your intuition.
If you see the world as a negative and hurtful place, then you’re only ever going to experience it that way. Instead, learn to recognize your true nobility.
“True nobility isn’t about being better than someone else, it’s about being better than you used to be.”
6.Unlimited Abundance
– Realizing your unlimited abundance means facing down your fears and limitations. Dr. Dyer has a simple three-word suggestion for how to put this into action:
Act “as if”. This means acting as if the thing you want has already happened.
You were probably taught all of your life about limitations and about what is "not possible." Fortunately, this came from well-meaning people who believed in limitation and not abundance. This law does not require you to be intellectually perfect in order to receive the benefits. Believing in unlimited abundance has no downside, so why not take another look at your business life after you answer this question, "What if I could have it all?"
7. Receptivity
– This means being open without judgment. Being aware enough and engaged enough to see possibilities where others don’t. And most importantly, it means simply relaxing and letting the Power of Intention do its work.
So there you have it - not really about marketing or startups or mobile - but massively important in making sure that they bring you what you intend... not just what you want :)
Resources:
http://www.selfgrowth.com
Which is shocking when you think I am in mobile marketing - but it is interesting to see the phones of other people in the mobile industry - the CEO of Blippar's phone was more beat up than mine - and he runs one of the most successful mobile augmented reality companies in the world. So... it says something.
The point is that my phone broke and a good friend of mine gave me his old phone (another iphone that goodness) as he is off to Bali to do some soul searching.
And it was interesting to see what he left on his phone. On his itunes / ipod or podcasts. Some really spiritual and enlightened works which I was very happy to be reacquainted with.
As my blogs as of late have been a little tech heavy, mainly if not totally about startups and my passion for them, I wanted to pop this in here as well. Nothing to do with marketing. But everything to do with life.
"There is a universal source of energy that is called the “power of intention.” This source – whether you call it God, the divine, or something else – is always available to us and is infinite in its possibilities. - Dr Wayne Dyer
So in his podcast on my best friend's phone who I may never see again was the Seven Faces of Intention. And so I list them here... they are:
Creativity, Kindness, Love, Beauty, Expansion, Unlimited Abundance, and Receptivity - Dr W Dyer believes that they are the keys to unlocking the power of intention in your life. And so do I.
1. Creativity
– Realize that there is creativity within you, and learn to recognize and appreciate your creative impulses. You don’t have to be an artist or a writer – creativity is just as important to the business person looking for the next big idea.
“If you’ve ever felt inspired by a purpose or calling, you know the feeling of Spirit working through you. Inspired is our word for in-spirited.”
Learn to recognize this state of being in-spirited, and you’ll unlock your inner creativity.
2. Kindness
–Whether you call it karma, the law of reciprocity or the power of positive thinking, work from the belief that you’ll be rewarded for good intentions.
Dr. Dyer shares the science behind kindness in The Power of Intention. When you do something kind for someone else, their brain releases serotonin – and so does yours! Serotonin is a hormone that makes us feel good. So, every act of kindness makes two happier people in the world.
“If you want others to be happy, practice compassion. If you want to be happy, practice compassion.”
3. Love
- Think of this power of intention as the face of kindness exponentiation with the emotion of love.
Love means a lack of judgment, a lack of anger or resentment. It means recognizing God in others.
4. Beauty
– The face of beauty is the face of intention.
Learn to appreciate the beauty of everything around you.
The face of beauty is truth, honesty and a knowing that what "is" -- is exactly as it should be. You can use this power by re-framing any negative thoughts you have towards others and replace them with an appreciate (a thankfulness attitude) towards them.
5. Expansion
– Expand your awareness of what is possible.
Don’t set limits on yourself; instead, learn to listen to your intuition.
If you see the world as a negative and hurtful place, then you’re only ever going to experience it that way. Instead, learn to recognize your true nobility.
“True nobility isn’t about being better than someone else, it’s about being better than you used to be.”
6.Unlimited Abundance
– Realizing your unlimited abundance means facing down your fears and limitations. Dr. Dyer has a simple three-word suggestion for how to put this into action:
Act “as if”. This means acting as if the thing you want has already happened.
You were probably taught all of your life about limitations and about what is "not possible." Fortunately, this came from well-meaning people who believed in limitation and not abundance. This law does not require you to be intellectually perfect in order to receive the benefits. Believing in unlimited abundance has no downside, so why not take another look at your business life after you answer this question, "What if I could have it all?"
7. Receptivity
– This means being open without judgment. Being aware enough and engaged enough to see possibilities where others don’t. And most importantly, it means simply relaxing and letting the Power of Intention do its work.
So there you have it - not really about marketing or startups or mobile - but massively important in making sure that they bring you what you intend... not just what you want :)
Resources:
http://www.selfgrowth.com
Monday, 24 September 2012
Ever think we might be in Startup Purgatory: No Man’s Land
Again nothing from my own thinking - this is PURELY a work by another - but it is sooooo good I don't change or add to it.
It's the Only Two Ways To Build A $100 Million Startup. By Boris Wertz, Version One Ventures.
Read more: http://versiononeventures.com/the-only-2-ways-to-build-a-100-million-business/#ixzz27Pct2OgV
With tens of thousands of new start-ups being created every year, the potential of a company to truly scale and become a large, stand-alone business is more crucial than ever before.
A great product is always the foundation but a clear distribution strategy becomes essential to cut through the noise.
So most early-stage VCs have started to evaluate investment opportunities with an imaginary benchmark in mind: can this company become a $100 million opportunity?
Generally speaking, there are two ways (and only two ways) to scale a business to hit that $100 million threshold:
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.
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.
Route One: High LTV per user
The exact definition of a “high” user LTV depends on the specific vertical, so it’s typically better to analyze the ratio between Customer Acquisition Costs (CAC) and the Life Time Value of the customer. In my experience, having an LTV that’s three to four times greater than CAC makes a business (and potential investment) interesting.
The biggest driver for high LTV is repeat purchase behavior (in an e-commerce business) respectively a low churn rate (in a SaaS company). Companies that score highest in this criteria are typically: E-commerce businesses that fulfill regular needs and offer a differentiated experience or SaaS businesses that help businesses or individuals manage core activities.
As a VC, the biggest challenge in evaluating LTV models is that metrics can dramatically change at scale. For example, Customer Acquisition Costs often increase once the more efficient marketing channels are maxed out and the company needs to find new users through less efficient means. In addition, churn tends to rise as a company grows. Early users of a product are often strong advocates and company ambassadors, while those users acquired through paid marketing channels down the road show far less loyalty.
Route Two: The Viral Effect
The other way to scale a business is through a strong viral and/or network effects that lets businesses grow to tens of even hundreds of millions of users. With this model, user acquisition is generally close to free, and monetization per user is often low (advertising-based or freemium businesses).
Many businesses built in the early days of the Facebook platform (like Zynga) benefitted from a huge viral co-efficient and scaled very rapidly. (As we all know, this is no longer the case as Facebook has essentially removed most of the free viral channels and businesses must now pay for most of their user acquisition via Facebook.)
Even more interesting are businesses that create network effects like marketplaces or social networks. Not only do they acquire lots of users for free due to viral effects but also create important barriers to entry and lock-in effects as the network grows over time.
Startup Purgatory: No Man’s Land
Unfortunately, many consumer internet startups find themselves stuck in the middle of these two strategies: they have a low monetization per user and limited viral effects. That unfortunate combination makes it rather difficult to reach the $100M mark.
As the consumer Internet space becomes more and more crowded, every startup founder needs to be thinking about these two ways to scale a business. Too often I have seen entrepreneurs believe that customers will automatically flock to their cool new service, completely underestimating how tough it is to cut through the noise and build an audience.
To build a standalone company and capture the attention of investors, you need a viable way to scale your business. The earlier you figure this out the better, since it may require you to build your product differently. While the $100 million mark may seem far away in those early days, it’s important to begin thinking about paths to reach this threshold from the start.
Read more: http://versiononeventures.com/the-only-2-ways-to-build-a-100-million-business/#ixzz27PbywRrO
It's the Only Two Ways To Build A $100 Million Startup. By Boris Wertz, Version One Ventures.
Read more: http://versiononeventures.com/the-only-2-ways-to-build-a-100-million-business/#ixzz27Pct2OgV
With tens of thousands of new start-ups being created every year, the potential of a company to truly scale and become a large, stand-alone business is more crucial than ever before.
A great product is always the foundation but a clear distribution strategy becomes essential to cut through the noise.
So most early-stage VCs have started to evaluate investment opportunities with an imaginary benchmark in mind: can this company become a $100 million opportunity?
Generally speaking, there are two ways (and only two ways) to scale a business to hit that $100 million threshold:
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.
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.
Route One: High LTV per user
The exact definition of a “high” user LTV depends on the specific vertical, so it’s typically better to analyze the ratio between Customer Acquisition Costs (CAC) and the Life Time Value of the customer. In my experience, having an LTV that’s three to four times greater than CAC makes a business (and potential investment) interesting.
The biggest driver for high LTV is repeat purchase behavior (in an e-commerce business) respectively a low churn rate (in a SaaS company). Companies that score highest in this criteria are typically: E-commerce businesses that fulfill regular needs and offer a differentiated experience or SaaS businesses that help businesses or individuals manage core activities.
As a VC, the biggest challenge in evaluating LTV models is that metrics can dramatically change at scale. For example, Customer Acquisition Costs often increase once the more efficient marketing channels are maxed out and the company needs to find new users through less efficient means. In addition, churn tends to rise as a company grows. Early users of a product are often strong advocates and company ambassadors, while those users acquired through paid marketing channels down the road show far less loyalty.
Route Two: The Viral Effect
The other way to scale a business is through a strong viral and/or network effects that lets businesses grow to tens of even hundreds of millions of users. With this model, user acquisition is generally close to free, and monetization per user is often low (advertising-based or freemium businesses).
Many businesses built in the early days of the Facebook platform (like Zynga) benefitted from a huge viral co-efficient and scaled very rapidly. (As we all know, this is no longer the case as Facebook has essentially removed most of the free viral channels and businesses must now pay for most of their user acquisition via Facebook.)
Even more interesting are businesses that create network effects like marketplaces or social networks. Not only do they acquire lots of users for free due to viral effects but also create important barriers to entry and lock-in effects as the network grows over time.
Startup Purgatory: No Man’s Land
Unfortunately, many consumer internet startups find themselves stuck in the middle of these two strategies: they have a low monetization per user and limited viral effects. That unfortunate combination makes it rather difficult to reach the $100M mark.
As the consumer Internet space becomes more and more crowded, every startup founder needs to be thinking about these two ways to scale a business. Too often I have seen entrepreneurs believe that customers will automatically flock to their cool new service, completely underestimating how tough it is to cut through the noise and build an audience.
To build a standalone company and capture the attention of investors, you need a viable way to scale your business. The earlier you figure this out the better, since it may require you to build your product differently. While the $100 million mark may seem far away in those early days, it’s important to begin thinking about paths to reach this threshold from the start.
Read more: http://versiononeventures.com/the-only-2-ways-to-build-a-100-million-business/#ixzz27PbywRrO
Start ups and Growth .... what you might need to know...
This is PURELY taken from someone else - I put it here only so I can remember it more and click back to it when I am in Malaysia.
The blog is by - Paul Graham. And it is wonderful.
Startup = Growth
September 2012
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.
If you want to start one it's important to understand that. Startups are so hard that you can't be pointed off to the side and hope to succeed. You have to know that growth is what you're after. The good news is, if you get growth, everything else tends to fall into place. Which means you can use growth like a compass to make almost every decision you face.
Redwoods
Let's start with a distinction that should be obvious but is often overlooked: not every newly founded company is a startup. Millions of companies are started every year in the US. Only a tiny fraction are startups. Most are service businesses—restaurants, barbershops, plumbers, and so on. These are not startups, except in a few unusual cases. A barbershop isn't designed to grow fast. Whereas a search engine, for example, is.
When I say startups are designed to grow fast, I mean it in two senses. Partly I mean designed in the sense of intended, because most startups fail. But I also mean startups are different by nature, in the same way a redwood seedling has a different destiny from a bean sprout.
That difference is why there's a distinct word, "startup," for companies designed to grow fast. If all companies were essentially similar, but some through luck or the efforts of their founders ended up growing very fast, we wouldn't need a separate word. We could just talk about super-successful companies and less successful ones. But in fact startups do have a different sort of DNA from other businesses. Google is not just a barbershop whose founders were unusually lucky and hard-working. Google was different from the beginning.
To grow rapidly, you need to make something you can sell to a big market. That's the difference between Google and a barbershop. A barbershop doesn't scale.
For a company to grow really big, it must (a) make something lots of people want, and (b) reach and serve all those people. Barbershops are doing fine in the (a) department. Almost everyone needs their hair cut. The problem for a barbershop, as for any retail establishment, is (b). A barbershop serves customers in person, and few will travel far for a haircut. And even if they did the barbershop couldn't accomodate them. [1]
Writing software is a great way to solve (b), but you can still end up constrained in (a). If you write software to teach Tibetan to Hungarian speakers, you'll be able to reach most of the people who want it, but there won't be many of them. If you make software to teach English to Chinese speakers, however, you're in startup territory.
Most businesses are tightly constrained in (a) or (b). The distinctive feature of successful startups is that they're not.
Ideas
It might seem that it would always be better to start a startup than an ordinary business. If you're going to start a company, why not start the type with the most potential? The catch is that this is a (fairly) efficient market. If you write software to teach Tibetan to Hungarians, you won't have much competition. If you write software to teach English to Chinese speakers, you'll face ferocious competition, precisely because that's such a larger prize. [2]
The constraints that limit ordinary companies also protect them. That's the tradeoff. If you start a barbershop, you only have to compete with other local barbers. If you start a search engine you have to compete with the whole world.
The most important thing that the constraints on a normal business protect it from is not competition, however, but the difficulty of coming up with new ideas. If you open a bar in a particular neighborhood, as well as limiting your potential and protecting you from competitors, that geographic constraint also helps define your company. Bar + neighborhood is a sufficient idea for a small business. Similarly for companies constrained in (a). Your niche both protects and defines you.
Whereas if you want to start a startup, you're probably going to have to think of something fairly novel. A startup has to make something it can deliver to a large market, and ideas of that type are so valuable that all the obvious ones are already taken.
That space of ideas has been so thoroughly picked over that a startup generally has to work on something everyone else has overlooked. I was going to write that one has to make a conscious effort to find ideas everyone else has overlooked. But that's not how most startups get started. Usually successful startups happen because the founders are sufficiently different from other people that ideas few others can see seem obvious to them. Perhaps later they step back and notice they've found an idea in everyone else's blind spot, and from that point make a deliberate effort to stay there. [3] But at the moment when successful startups get started, much of the innovation is unconscious.
What's different about successful founders is that they can see different problems. It's a particularly good combination both to be good at technology and to face problems that can be solved by it, because technology changes so rapidly that formerly bad ideas often become good without anyone noticing. Steve Wozniak's problem was that he wanted his own computer. That was an unusual problem to have in 1975. But technological change was about to make it a much more common one. Because he not only wanted a computer but knew how to build them, Wozniak was able to make himself one. And the problem he solved for himself became one that Apple solved for millions of people in the coming years. But by the time it was obvious to ordinary people that this was a big market, Apple was already established.
Google has similar origins. Larry Page and Sergey Brin wanted to search the web. But unlike most people they had the technical expertise both to notice that existing search engines were not as good as they could be, and to know how to improve them. Over the next few years their problem became everyone's problem, as the web grew to a size where you didn't have to be a picky search expert to notice the old algorithms weren't good enough. But as happened with Apple, by the time everyone else realized how important search was, Google was entrenched.
That's one connection between startup ideas and technology. Rapid change in one area uncovers big, soluble problems in other areas. Sometimes the changes are advances, and what they change is solubility. That was the kind of change that yielded Apple; advances in chip technology finally let Steve Wozniak design a computer he could afford. But in Google's case the most important change was the growth of the web. What changed there was not solubility but bigness.
The other connection between startups and technology is that startups create new ways of doing things, and new ways of doing things are, in the broader sense of the word, new technology. When a startup both begins with an idea exposed by technological change and makes a product consisting of technology in the narrower sense (what used to be called "high technology"), it's easy to conflate the two. But the two connections are distinct and in principle one could start a startup that was neither driven by technological change, nor whose product consisted of technology except in the broader sense. [4]
Rate
How fast does a company have to grow to be considered a startup? There's no precise answer to that. "Startup" is a pole, not a threshold. Starting one is at first no more than a declaration of one's ambitions. You're committing not just to starting a company, but to starting a fast growing one, and you're thus committing to search for one of the rare ideas of that type. But at first you have no more than commitment. Starting a startup is like being an actor in that respect. "Actor" too is a pole rather than a threshold. At the beginning of his career, an actor is a waiter who goes to auditions. Getting work makes him a successful actor, but he doesn't only become an actor when he's successful.
So the real question is not what growth rate makes a company a startup, but what growth rate successful startups tend to have. For founders that's more than a theoretical question, because it's equivalent to asking if they're on the right path.
The growth of a successful startup usually has three phases:
There's an initial period of slow or no growth while the startup tries to figure out what it's doing.
As the startup figures out how to make something lots of people want and how to reach those people, there's a period of rapid growth.
Eventually a successful startup will grow into a big company. Growth will slow, partly due to internal limits and partly because the company is starting to bump up against the limits of the markets it serves. [5]
Together these three phases produce an S-curve. The phase whose growth defines the startup is the second one, the ascent. Its length and slope determine how big the company will be.
The slope is the company's growth rate. If there's one number every founder should always know, it's the company's growth rate. That's the measure of a startup. If you don't know that number, you don't even know if you're doing well or badly.
When I first meet founders and ask what their growth rate is, sometimes they tell me "we get about a hundred new customers a month." That's not a rate. What matters is not the abolute number of new customers, but the ratio of new customers to existing ones. If you're really getting a constant number of new customers every month, you're in trouble, because that means your growth rate is decreasing.
During Y Combinator we measure growth rate per week, partly because there is so little time before Demo Day, and partly because startups early on need frequent feedback from their users to tweak what they're doing. [6]
A good growth rate during YC is 5-7% a week. If you can hit 10% a week you're doing exceptionally well. If you can only manage 1%, it's a sign you haven't yet figured out what you're doing.
The best thing to measure the growth rate of is revenue. The next best, for startups that aren't charging initially, is active users. That's a reasonable proxy for revenue growth because whenever the startup does start trying to make money, their revenues will probably be a constant multiple of active users. [7]
Compass
We usually advise startups to pick a growth rate they think they can hit, and then just try to hit it every week. The key word here is "just." If they decide to grow at 7% a week and they hit that number, they're successful for that week. There's nothing more they need to do. But if they don't hit it, they've failed in the only thing that mattered, and should be correspondingly alarmed.
Programmers will recognize what we're doing here. We're turning starting a startup into an optimization problem. And anyone who has tried optimizing code knows how wonderfully effective that sort of narrow focus can be. Optimizing code means taking an existing program and changing it to use less of something, usually time or memory. You don't have to think about what the program should do, just make it faster. For most programmers this is very satisfying work. The narrow focus makes it a sort of puzzle, and you're generally surprised how fast you can solve it.
Focusing on hitting a growth rate reduces the otherwise bewilderingly multifarious problem of starting a startup to a single problem. You can use that target growth rate to make all your decisions for you; anything that gets you the growth you need is ipso facto right. Should you spend two days at a conference? Should you hire another programmer? Should you focus more on marketing? Should you spend time courting some big customer? Should you add x feature? Whatever gets you your target growth rate. [8]
Judging yourself by weekly growth doesn't mean you can look no more than a week ahead. Once you experience the pain of missing your target one week (it was the only thing that mattered, and you failed at it), you become interested in anything that could spare you such pain in the future. So you'll be willing for example to hire another programmer, who won't contribute to this week's growth but perhaps in a month will have implemented some new feature that will get you more users. But only if (a) the distraction of hiring someone won't make you miss your numbers in the short term, and (b) you're sufficiently worried about whether you can keep hitting your numbers without hiring someone new.
It's not that you don't think about the future, just that you think about it no more than necessary.
In theory this sort of hill-climbing could get a startup into trouble. They could end up on a local maximum. But in practice that never happens. Having to hit a growth number every week forces founders to act, and acting versus not acting is the high bit of succeeding. Nine times out of ten, sitting around strategizing is just a form of procrastination. Whereas founders' intuitions about which hill to climb are usually better than they realize. Plus the maxima in the space of startup ideas are not spiky and isolated. Most fairly good ideas are adjacent to even better ones.
The fascinating thing about optimizing for growth is that it can actually discover startup ideas. You can use the need for growth as a form of evolutionary pressure. If you start out with some initial plan and modify it as necessary to keep hitting, say, 10% weekly growth, you may end up with a quite different company than you meant to start. But anything that grows consistently at 10% a week is almost certainly a better idea than you started with.
There's a parallel here to small businesses. Just as the constraint of being located in a particular neighborhood helps define a bar, the constraint of growing at a certain rate can help define a startup.
You'll generally do best to follow that constraint wherever it leads rather than being influenced by some initial vision, just as a scientist is better off following the truth wherever it leads rather than being influenced by what he wishes were the case. When Richard Feynman said that the imagination of nature was greater than the imagination of man, he meant that if you just keep following the truth you'll discover cooler things than you could ever have made up. For startups, growth is a constraint much like truth. Every successful startup is at least partly a product of the imagination of growth. [9]
Value
It's hard to find something that grows consistently at several percent a week, but if you do you may have found something surprisingly valuable. If we project forward we see why.
weekly yearly
1% 1.7x
2% 2.8x
5% 12.6x
7% 33.7x
10% 142.0x
A company that grows at 1% a week will grow 1.7x a year, whereas a company that grows at 5% a week will grow 12.6x. A company making $1000 a month (a typical number early in YC) and growing at 1% a week will 4 years later be making $7900 a month, which is less than a good programmer makes in salary in Silicon Valley. A startup that grows at 5% a week will in 4 years be making $25 million a month. [10]
Our ancestors must rarely have encountered cases of exponential growth, because our intutitions are no guide here. What happens to fast growing startups tends to surprise even the founders.
Small variations in growth rate produce qualitatively different outcomes. That's why there's a separate word for startups, and why startups do things that ordinary companies don't, like raising money and getting acquired. And, strangely enough, it's also why they fail so frequently.
Considering how valuable a successful startup can become, anyone familiar with the concept of expected value would be surprised if the failure rate weren't high. If a successful startup could make a founder $100 million, then even if the chance of succeeding were only 1%, the expected value of starting one would be $1 million. And the probability of a group of sufficiently smart and determined founders succeeding on that scale might be significantly over 1%. For the right people—e.g. the young Bill Gates—the probability might be 20% or even 50%. So it's not surprising that so many want to take a shot at it. In an efficient market, the number of failed startups should be proportionate to the size of the successes. And since the latter is huge the former should be too. [11]
What this means is that at any given time, the great majority of startups will be working on something that's never going to go anywhere, and yet glorifying their doomed efforts with the grandiose title of "startup."
This doesn't bother me. It's the same with other high-beta vocations, like being an actor or a novelist. I've long since gotten used to it. But it seems to bother a lot of people, particularly those who've started ordinary businesses. Many are annoyed that these so-called startups get all the attention, when hardly any of them will amount to anything.
If they stepped back and looked at the whole picture they might be less indignant. The mistake they're making is that by basing their opinions on anecdotal evidence they're implicitly judging by the median rather than the average. If you judge by the median startup, the whole concept of a startup seems like a fraud. You have to invent a bubble to explain why founders want to start them or investors want to fund them. But it's a mistake to use the median in a domain with so much variation. If you look at the average outcome rather than the median, you can understand why investors like them, and why, if they aren't median people, it's a rational choice for founders to start them.
Deals
Why do investors like startups so much? Why are they so hot to invest in photo-sharing apps, rather than solid money-making businesses? Not only for the obvious reason.
The test of any investment is the ratio of return to risk. Startups pass that test because although they're appallingly risky, the returns when they do succeed are so high. But that's not the only reason investors like startups. An ordinary slower-growing business might have just as good a ratio of return to risk, if both were lower. So why are VCs interested only in high-growth companies? The reason is that they get paid by getting their capital back, ideally after the startup IPOs, or failing that when it's acquired.
The other way to get returns from an investment is in the form of dividends. Why isn't there a parallel VC industry that invests in ordinary companies in return for a percentage of their profits? Because it's too easy for people who control a private company to funnel its revenues to themselves (e.g. by buying overpriced components from a supplier they control) while making it look like the company is making little profit. Anyone who invested in private companies in return for dividends would have to pay close attention to their books.
The reason VCs like to invest in startups is not simply the returns, but also because such investments are so easy to oversee. The founders can't enrich themselves without also enriching the investors. [12]
Why do founders want to take the VCs' money? Growth, again. The constraint between good ideas and growth operates in both directions. It's not merely that you need a scalable idea to grow. If you have such an idea and don't grow fast enough, competitors will. Growing too slowly is particularly dangerous in a business with network effects, which the best startups usually have to some degree.
Almost every company needs some amount of funding to get started. But startups often raise money even when they are or could be profitable. It might seem foolish to sell stock in a profitable company for less than you think it will later be worth, but it's no more foolish than buying insurance. Fundamentally that's how the most successful startups view fundraising. They could grow the company on its own revenues, but the extra money and help supplied by VCs will let them grow even faster. Raising money lets you choose your growth rate.
Money to grow faster is always at the command of the most successful startups, because the VCs need them more than they need the VCs. A profitable startup could if it wanted just grow on its own revenues. Growing slower might be slightly dangerous, but chances are it wouldn't kill them. Whereas VCs need to invest in startups, and in particular the most successful startups, or they'll be out of business. Which means that any sufficiently promising startup will be offered money on terms they'd be crazy to refuse. And yet because of the scale of the successes in the startup business, VCs can still make money from such investments. You'd have to be crazy to believe your company was going to become as valuable as a high growth rate can make it, but some do.
Pretty much every successful startup will get acquisition offers too. Why? What is it about startups that makes other companies want to buy them? [13]
Fundamentally the same thing that makes everyone else want the stock of successful startups: a rapidly growing company is valuable. It's a good thing eBay bought Paypal, for example, because Paypal is now responsible for 43% of their sales and probably more of their growth.
But acquirers have an additional reason to want startups. A rapidly growing company is not merely valuable, but dangerous. If it keeps expanding, it might expand into the acquirer's own territory. Most product acquisitions have some component of fear. Even if an acquirer isn't threatened by the startup itself, they might be alarmed at the thought of what a competitor could do with it. And because startups are in this sense doubly valuable to acquirers, acquirers will often pay more than an ordinary investor would. [14]
Understand
The combination of founders, investors, and acquirers forms a natural ecosystem. It works so well that those who don't understand it are driven to invent conspiracy theories to explain how neatly things sometimes turn out. Just as our ancestors did to explain the apparently too neat workings of the natural world. But there is no secret cabal making it all work.
If you start from the mistaken assumption that Instagram was worthless, you have to invent a secret boss to force Mark Zuckerberg to buy it. To anyone who knows Mark Zuckerberg that is the reductio ad absurdum of the initial assumption. The reason he bought Instagram was that it was valuable and dangerous, and what made it so was growth.
If you want to understand startups, understand growth. Growth drives everything in this world. Growth is why startups usually work on technology—because ideas for fast growing companies are so rare that the best way to find new ones is to discover those recently made viable by change, and technology is the best source of rapid change. Growth is why it's a rational choice economically for so many founders to try starting a startup: growth makes the successful companies so valuable that the expected value is high even though the risk is too. Growth is why VCs want to invest in startups: not just because the returns are high but also because generating returns from capital gains is easier to manage than generating returns from dividends. Growth explains why the most successful startups take VC money even if they don't need to: it lets them choose their growth rate. And growth explains why successful startups almost invariably get acquisition offers. To acquirers a fast-growing company is not merely valuable but dangerous too.
It's not just that if you want to succeed in some domain, you have to understand the forces driving it. Understanding growth is what starting a startup consists of. What you're really doing (and to the dismay of some observers, all you're really doing) when you start a startup is committing to solve a harder type of problem than ordinary businesses do. You're committing to search for one of the rare ideas that generates rapid growth. Because these ideas are so valuable, finding one is hard. The startup is the embodiment of your discoveries so far. Starting a startup is thus very much like deciding to be research scientist: you're not committing to solve any specific problem; you don't know for sure which problems are soluble; but you're committing to try to discover something no one knew before. A startup founder is in effect an economic research scientist. Most don't discover anything that remarkable, but some discover relativity.
Notes
[1] Strictly speaking it's not lots of customers you need but a big market, meaning a high product of number of customers times how much they'll pay. But it's dangerous to have too few customers even if they pay a lot, or the power that individual customers have over you could turn you into a de facto consulting firm. So whatever market you're in, you'll usually do best to err on the side of making the broadest type of product for it.
[2] One year at Startup School David Heinemeier Hansson encouraged programmers who wanted to start businesses to use a restaurant as a model. What he meant, I believe, is that it's fine to start software companies constrained in (a) in the same way a restaurant is constrained in (b). I agree. Most people should not try to start startups.
[3] That sort of stepping back is one of the things we focus on at Y Combinator. It's common for founders to have discovered something intuitively without understanding all its implications. That's probably true of the biggest discoveries in any field.
[4] I got it wrong in "How to Make Wealth" when I said that a startup was a small company that takes on a hard technical problem. That is the most common recipe but not the only one.
[5] In principle companies aren't limited by the size of the markets they serve, because they could just expand into new markets. But there seem to be limits on the ability of big companies to do that. Which means the slowdown that comes from bumping up against the limits of one's markets is ultimately just another way in which internal limits are expressed.
It may be that some of these limits could be overcome by changing the shape of the organization—specifically by sharding it.
[6] This is, obviously, only for startups that have already launched or can launch during YC. A startup building a new database will probably not do that. On the other hand, launching something small and then using growth rate as evolutionary pressure is such a valuable technique that any company that could start this way probably should.
[7] If the startup is taking the Facebook/Twitter route and building something they hope will be very popular but from which they don't yet have a definite plan to make money, the growth rate has to be higher, even though it's a proxy for revenue growth, because such companies need huge numbers of users to succeed at all.
Beware too of the edge case where something spreads rapidly but the churn is high too, so that you have good net growth till you run through all the potential users, at which point it suddenly stops.
[8] Within YC when we say it's ipso facto right to do whatever gets you growth, it's implicit that this excludes trickery like buying users for more than their lifetime value, counting users as active when they're really not, bleeding out invites at a regularly increasing rate to manufacture a perfect growth curve, etc. Even if you were able to fool investors with such tricks, you'd ultimately be hurting yourself, because you're throwing off your own compass.
[9] Which is why it's such a dangerous mistake to believe that successful startups are simply the embodiment of some brilliant initial idea. What you're looking for initially is not so much a great idea as an idea that could evolve into a great one. The danger is that promising ideas are not merely blurry versions of great ones. They're often different in kind, because the early adopters you evolve the idea upon have different needs from the rest of the market. For example, the idea that evolves into Facebook isn't merely a subset of Facebook; the idea that evolves into Facebook is a site for Harvard undergrads.
[10] What if a company grew at 1.7x a year for a really long time? Could it not grow just as big as any successful startup? In principle yes, of course. If our hypothetical company making $1000 a month grew at 1% a week for 19 years, it would grow as big as a company growing at 5% a week for 4 years. But while such trajectories may be common in, say, real estate development, you don't see them much in the technology business. In technology, companies that grow slowly tend not to grow as big.
[11] Any expected value calculation varies from person to person depending on their utility function for money. I.e. the first million is worth more to most people than subsequent millions. How much more depends on the person. For founders who are younger or more ambitious the utility function is flatter. Which is probably part of the reason the founders of the most successful startups of all tend to be on the young side.
[12] More precisely, this is the case in the biggest winners, which is where all the returns come from. A startup founder could pull the same trick of enriching himself at the company's expense by selling them overpriced components. But it wouldn't be worth it for the founders of Google to do that. Only founders of failing startups would even be tempted, but those are writeoffs from the VCs' point of view anyway.
[13] Acquisitions fall into two categories: those where the acquirer wants the business, and those where the acquirer just wants the employees. The latter type is sometimes called an HR acquisition. Though nominally acquisitions and sometimes on a scale that has a significant effect on the expected value calculation for potential founders, HR acquisitions are viewed by acquirers as more akin to hiring bonuses.
[14] I once explained this to some founders who had recently arrived from Russia. They found it novel that if you threatened a company they'd pay a premium for you. "In Russia they just kill you," they said, and they were only partly joking. Economically, the fact that established companies can't simply eliminate new competitors may be one of the most valuable aspects of the rule of law. And so to the extent we see incumbents suppressing competitors via regulations or patent suits, we should worry, not because it's a departure from the rule of law per se but from what the rule of law is aiming at.
Thanks to Sam Altman, Marc Andreessen, Paul Buchheit, Patrick Collison, Jessica Livingston, Geoff Ralston, and Harj Taggar for reading drafts of this.
The blog is by - Paul Graham. And it is wonderful.
Startup = Growth
September 2012
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.
If you want to start one it's important to understand that. Startups are so hard that you can't be pointed off to the side and hope to succeed. You have to know that growth is what you're after. The good news is, if you get growth, everything else tends to fall into place. Which means you can use growth like a compass to make almost every decision you face.
Redwoods
Let's start with a distinction that should be obvious but is often overlooked: not every newly founded company is a startup. Millions of companies are started every year in the US. Only a tiny fraction are startups. Most are service businesses—restaurants, barbershops, plumbers, and so on. These are not startups, except in a few unusual cases. A barbershop isn't designed to grow fast. Whereas a search engine, for example, is.
When I say startups are designed to grow fast, I mean it in two senses. Partly I mean designed in the sense of intended, because most startups fail. But I also mean startups are different by nature, in the same way a redwood seedling has a different destiny from a bean sprout.
That difference is why there's a distinct word, "startup," for companies designed to grow fast. If all companies were essentially similar, but some through luck or the efforts of their founders ended up growing very fast, we wouldn't need a separate word. We could just talk about super-successful companies and less successful ones. But in fact startups do have a different sort of DNA from other businesses. Google is not just a barbershop whose founders were unusually lucky and hard-working. Google was different from the beginning.
To grow rapidly, you need to make something you can sell to a big market. That's the difference between Google and a barbershop. A barbershop doesn't scale.
For a company to grow really big, it must (a) make something lots of people want, and (b) reach and serve all those people. Barbershops are doing fine in the (a) department. Almost everyone needs their hair cut. The problem for a barbershop, as for any retail establishment, is (b). A barbershop serves customers in person, and few will travel far for a haircut. And even if they did the barbershop couldn't accomodate them. [1]
Writing software is a great way to solve (b), but you can still end up constrained in (a). If you write software to teach Tibetan to Hungarian speakers, you'll be able to reach most of the people who want it, but there won't be many of them. If you make software to teach English to Chinese speakers, however, you're in startup territory.
Most businesses are tightly constrained in (a) or (b). The distinctive feature of successful startups is that they're not.
Ideas
It might seem that it would always be better to start a startup than an ordinary business. If you're going to start a company, why not start the type with the most potential? The catch is that this is a (fairly) efficient market. If you write software to teach Tibetan to Hungarians, you won't have much competition. If you write software to teach English to Chinese speakers, you'll face ferocious competition, precisely because that's such a larger prize. [2]
The constraints that limit ordinary companies also protect them. That's the tradeoff. If you start a barbershop, you only have to compete with other local barbers. If you start a search engine you have to compete with the whole world.
The most important thing that the constraints on a normal business protect it from is not competition, however, but the difficulty of coming up with new ideas. If you open a bar in a particular neighborhood, as well as limiting your potential and protecting you from competitors, that geographic constraint also helps define your company. Bar + neighborhood is a sufficient idea for a small business. Similarly for companies constrained in (a). Your niche both protects and defines you.
Whereas if you want to start a startup, you're probably going to have to think of something fairly novel. A startup has to make something it can deliver to a large market, and ideas of that type are so valuable that all the obvious ones are already taken.
That space of ideas has been so thoroughly picked over that a startup generally has to work on something everyone else has overlooked. I was going to write that one has to make a conscious effort to find ideas everyone else has overlooked. But that's not how most startups get started. Usually successful startups happen because the founders are sufficiently different from other people that ideas few others can see seem obvious to them. Perhaps later they step back and notice they've found an idea in everyone else's blind spot, and from that point make a deliberate effort to stay there. [3] But at the moment when successful startups get started, much of the innovation is unconscious.
What's different about successful founders is that they can see different problems. It's a particularly good combination both to be good at technology and to face problems that can be solved by it, because technology changes so rapidly that formerly bad ideas often become good without anyone noticing. Steve Wozniak's problem was that he wanted his own computer. That was an unusual problem to have in 1975. But technological change was about to make it a much more common one. Because he not only wanted a computer but knew how to build them, Wozniak was able to make himself one. And the problem he solved for himself became one that Apple solved for millions of people in the coming years. But by the time it was obvious to ordinary people that this was a big market, Apple was already established.
Google has similar origins. Larry Page and Sergey Brin wanted to search the web. But unlike most people they had the technical expertise both to notice that existing search engines were not as good as they could be, and to know how to improve them. Over the next few years their problem became everyone's problem, as the web grew to a size where you didn't have to be a picky search expert to notice the old algorithms weren't good enough. But as happened with Apple, by the time everyone else realized how important search was, Google was entrenched.
That's one connection between startup ideas and technology. Rapid change in one area uncovers big, soluble problems in other areas. Sometimes the changes are advances, and what they change is solubility. That was the kind of change that yielded Apple; advances in chip technology finally let Steve Wozniak design a computer he could afford. But in Google's case the most important change was the growth of the web. What changed there was not solubility but bigness.
The other connection between startups and technology is that startups create new ways of doing things, and new ways of doing things are, in the broader sense of the word, new technology. When a startup both begins with an idea exposed by technological change and makes a product consisting of technology in the narrower sense (what used to be called "high technology"), it's easy to conflate the two. But the two connections are distinct and in principle one could start a startup that was neither driven by technological change, nor whose product consisted of technology except in the broader sense. [4]
Rate
How fast does a company have to grow to be considered a startup? There's no precise answer to that. "Startup" is a pole, not a threshold. Starting one is at first no more than a declaration of one's ambitions. You're committing not just to starting a company, but to starting a fast growing one, and you're thus committing to search for one of the rare ideas of that type. But at first you have no more than commitment. Starting a startup is like being an actor in that respect. "Actor" too is a pole rather than a threshold. At the beginning of his career, an actor is a waiter who goes to auditions. Getting work makes him a successful actor, but he doesn't only become an actor when he's successful.
So the real question is not what growth rate makes a company a startup, but what growth rate successful startups tend to have. For founders that's more than a theoretical question, because it's equivalent to asking if they're on the right path.
The growth of a successful startup usually has three phases:
There's an initial period of slow or no growth while the startup tries to figure out what it's doing.
As the startup figures out how to make something lots of people want and how to reach those people, there's a period of rapid growth.
Eventually a successful startup will grow into a big company. Growth will slow, partly due to internal limits and partly because the company is starting to bump up against the limits of the markets it serves. [5]
Together these three phases produce an S-curve. The phase whose growth defines the startup is the second one, the ascent. Its length and slope determine how big the company will be.
The slope is the company's growth rate. If there's one number every founder should always know, it's the company's growth rate. That's the measure of a startup. If you don't know that number, you don't even know if you're doing well or badly.
When I first meet founders and ask what their growth rate is, sometimes they tell me "we get about a hundred new customers a month." That's not a rate. What matters is not the abolute number of new customers, but the ratio of new customers to existing ones. If you're really getting a constant number of new customers every month, you're in trouble, because that means your growth rate is decreasing.
During Y Combinator we measure growth rate per week, partly because there is so little time before Demo Day, and partly because startups early on need frequent feedback from their users to tweak what they're doing. [6]
A good growth rate during YC is 5-7% a week. If you can hit 10% a week you're doing exceptionally well. If you can only manage 1%, it's a sign you haven't yet figured out what you're doing.
The best thing to measure the growth rate of is revenue. The next best, for startups that aren't charging initially, is active users. That's a reasonable proxy for revenue growth because whenever the startup does start trying to make money, their revenues will probably be a constant multiple of active users. [7]
Compass
We usually advise startups to pick a growth rate they think they can hit, and then just try to hit it every week. The key word here is "just." If they decide to grow at 7% a week and they hit that number, they're successful for that week. There's nothing more they need to do. But if they don't hit it, they've failed in the only thing that mattered, and should be correspondingly alarmed.
Programmers will recognize what we're doing here. We're turning starting a startup into an optimization problem. And anyone who has tried optimizing code knows how wonderfully effective that sort of narrow focus can be. Optimizing code means taking an existing program and changing it to use less of something, usually time or memory. You don't have to think about what the program should do, just make it faster. For most programmers this is very satisfying work. The narrow focus makes it a sort of puzzle, and you're generally surprised how fast you can solve it.
Focusing on hitting a growth rate reduces the otherwise bewilderingly multifarious problem of starting a startup to a single problem. You can use that target growth rate to make all your decisions for you; anything that gets you the growth you need is ipso facto right. Should you spend two days at a conference? Should you hire another programmer? Should you focus more on marketing? Should you spend time courting some big customer? Should you add x feature? Whatever gets you your target growth rate. [8]
Judging yourself by weekly growth doesn't mean you can look no more than a week ahead. Once you experience the pain of missing your target one week (it was the only thing that mattered, and you failed at it), you become interested in anything that could spare you such pain in the future. So you'll be willing for example to hire another programmer, who won't contribute to this week's growth but perhaps in a month will have implemented some new feature that will get you more users. But only if (a) the distraction of hiring someone won't make you miss your numbers in the short term, and (b) you're sufficiently worried about whether you can keep hitting your numbers without hiring someone new.
It's not that you don't think about the future, just that you think about it no more than necessary.
In theory this sort of hill-climbing could get a startup into trouble. They could end up on a local maximum. But in practice that never happens. Having to hit a growth number every week forces founders to act, and acting versus not acting is the high bit of succeeding. Nine times out of ten, sitting around strategizing is just a form of procrastination. Whereas founders' intuitions about which hill to climb are usually better than they realize. Plus the maxima in the space of startup ideas are not spiky and isolated. Most fairly good ideas are adjacent to even better ones.
The fascinating thing about optimizing for growth is that it can actually discover startup ideas. You can use the need for growth as a form of evolutionary pressure. If you start out with some initial plan and modify it as necessary to keep hitting, say, 10% weekly growth, you may end up with a quite different company than you meant to start. But anything that grows consistently at 10% a week is almost certainly a better idea than you started with.
There's a parallel here to small businesses. Just as the constraint of being located in a particular neighborhood helps define a bar, the constraint of growing at a certain rate can help define a startup.
You'll generally do best to follow that constraint wherever it leads rather than being influenced by some initial vision, just as a scientist is better off following the truth wherever it leads rather than being influenced by what he wishes were the case. When Richard Feynman said that the imagination of nature was greater than the imagination of man, he meant that if you just keep following the truth you'll discover cooler things than you could ever have made up. For startups, growth is a constraint much like truth. Every successful startup is at least partly a product of the imagination of growth. [9]
Value
It's hard to find something that grows consistently at several percent a week, but if you do you may have found something surprisingly valuable. If we project forward we see why.
weekly yearly
1% 1.7x
2% 2.8x
5% 12.6x
7% 33.7x
10% 142.0x
A company that grows at 1% a week will grow 1.7x a year, whereas a company that grows at 5% a week will grow 12.6x. A company making $1000 a month (a typical number early in YC) and growing at 1% a week will 4 years later be making $7900 a month, which is less than a good programmer makes in salary in Silicon Valley. A startup that grows at 5% a week will in 4 years be making $25 million a month. [10]
Our ancestors must rarely have encountered cases of exponential growth, because our intutitions are no guide here. What happens to fast growing startups tends to surprise even the founders.
Small variations in growth rate produce qualitatively different outcomes. That's why there's a separate word for startups, and why startups do things that ordinary companies don't, like raising money and getting acquired. And, strangely enough, it's also why they fail so frequently.
Considering how valuable a successful startup can become, anyone familiar with the concept of expected value would be surprised if the failure rate weren't high. If a successful startup could make a founder $100 million, then even if the chance of succeeding were only 1%, the expected value of starting one would be $1 million. And the probability of a group of sufficiently smart and determined founders succeeding on that scale might be significantly over 1%. For the right people—e.g. the young Bill Gates—the probability might be 20% or even 50%. So it's not surprising that so many want to take a shot at it. In an efficient market, the number of failed startups should be proportionate to the size of the successes. And since the latter is huge the former should be too. [11]
What this means is that at any given time, the great majority of startups will be working on something that's never going to go anywhere, and yet glorifying their doomed efforts with the grandiose title of "startup."
This doesn't bother me. It's the same with other high-beta vocations, like being an actor or a novelist. I've long since gotten used to it. But it seems to bother a lot of people, particularly those who've started ordinary businesses. Many are annoyed that these so-called startups get all the attention, when hardly any of them will amount to anything.
If they stepped back and looked at the whole picture they might be less indignant. The mistake they're making is that by basing their opinions on anecdotal evidence they're implicitly judging by the median rather than the average. If you judge by the median startup, the whole concept of a startup seems like a fraud. You have to invent a bubble to explain why founders want to start them or investors want to fund them. But it's a mistake to use the median in a domain with so much variation. If you look at the average outcome rather than the median, you can understand why investors like them, and why, if they aren't median people, it's a rational choice for founders to start them.
Deals
Why do investors like startups so much? Why are they so hot to invest in photo-sharing apps, rather than solid money-making businesses? Not only for the obvious reason.
The test of any investment is the ratio of return to risk. Startups pass that test because although they're appallingly risky, the returns when they do succeed are so high. But that's not the only reason investors like startups. An ordinary slower-growing business might have just as good a ratio of return to risk, if both were lower. So why are VCs interested only in high-growth companies? The reason is that they get paid by getting their capital back, ideally after the startup IPOs, or failing that when it's acquired.
The other way to get returns from an investment is in the form of dividends. Why isn't there a parallel VC industry that invests in ordinary companies in return for a percentage of their profits? Because it's too easy for people who control a private company to funnel its revenues to themselves (e.g. by buying overpriced components from a supplier they control) while making it look like the company is making little profit. Anyone who invested in private companies in return for dividends would have to pay close attention to their books.
The reason VCs like to invest in startups is not simply the returns, but also because such investments are so easy to oversee. The founders can't enrich themselves without also enriching the investors. [12]
Why do founders want to take the VCs' money? Growth, again. The constraint between good ideas and growth operates in both directions. It's not merely that you need a scalable idea to grow. If you have such an idea and don't grow fast enough, competitors will. Growing too slowly is particularly dangerous in a business with network effects, which the best startups usually have to some degree.
Almost every company needs some amount of funding to get started. But startups often raise money even when they are or could be profitable. It might seem foolish to sell stock in a profitable company for less than you think it will later be worth, but it's no more foolish than buying insurance. Fundamentally that's how the most successful startups view fundraising. They could grow the company on its own revenues, but the extra money and help supplied by VCs will let them grow even faster. Raising money lets you choose your growth rate.
Money to grow faster is always at the command of the most successful startups, because the VCs need them more than they need the VCs. A profitable startup could if it wanted just grow on its own revenues. Growing slower might be slightly dangerous, but chances are it wouldn't kill them. Whereas VCs need to invest in startups, and in particular the most successful startups, or they'll be out of business. Which means that any sufficiently promising startup will be offered money on terms they'd be crazy to refuse. And yet because of the scale of the successes in the startup business, VCs can still make money from such investments. You'd have to be crazy to believe your company was going to become as valuable as a high growth rate can make it, but some do.
Pretty much every successful startup will get acquisition offers too. Why? What is it about startups that makes other companies want to buy them? [13]
Fundamentally the same thing that makes everyone else want the stock of successful startups: a rapidly growing company is valuable. It's a good thing eBay bought Paypal, for example, because Paypal is now responsible for 43% of their sales and probably more of their growth.
But acquirers have an additional reason to want startups. A rapidly growing company is not merely valuable, but dangerous. If it keeps expanding, it might expand into the acquirer's own territory. Most product acquisitions have some component of fear. Even if an acquirer isn't threatened by the startup itself, they might be alarmed at the thought of what a competitor could do with it. And because startups are in this sense doubly valuable to acquirers, acquirers will often pay more than an ordinary investor would. [14]
Understand
The combination of founders, investors, and acquirers forms a natural ecosystem. It works so well that those who don't understand it are driven to invent conspiracy theories to explain how neatly things sometimes turn out. Just as our ancestors did to explain the apparently too neat workings of the natural world. But there is no secret cabal making it all work.
If you start from the mistaken assumption that Instagram was worthless, you have to invent a secret boss to force Mark Zuckerberg to buy it. To anyone who knows Mark Zuckerberg that is the reductio ad absurdum of the initial assumption. The reason he bought Instagram was that it was valuable and dangerous, and what made it so was growth.
If you want to understand startups, understand growth. Growth drives everything in this world. Growth is why startups usually work on technology—because ideas for fast growing companies are so rare that the best way to find new ones is to discover those recently made viable by change, and technology is the best source of rapid change. Growth is why it's a rational choice economically for so many founders to try starting a startup: growth makes the successful companies so valuable that the expected value is high even though the risk is too. Growth is why VCs want to invest in startups: not just because the returns are high but also because generating returns from capital gains is easier to manage than generating returns from dividends. Growth explains why the most successful startups take VC money even if they don't need to: it lets them choose their growth rate. And growth explains why successful startups almost invariably get acquisition offers. To acquirers a fast-growing company is not merely valuable but dangerous too.
It's not just that if you want to succeed in some domain, you have to understand the forces driving it. Understanding growth is what starting a startup consists of. What you're really doing (and to the dismay of some observers, all you're really doing) when you start a startup is committing to solve a harder type of problem than ordinary businesses do. You're committing to search for one of the rare ideas that generates rapid growth. Because these ideas are so valuable, finding one is hard. The startup is the embodiment of your discoveries so far. Starting a startup is thus very much like deciding to be research scientist: you're not committing to solve any specific problem; you don't know for sure which problems are soluble; but you're committing to try to discover something no one knew before. A startup founder is in effect an economic research scientist. Most don't discover anything that remarkable, but some discover relativity.
Notes
[1] Strictly speaking it's not lots of customers you need but a big market, meaning a high product of number of customers times how much they'll pay. But it's dangerous to have too few customers even if they pay a lot, or the power that individual customers have over you could turn you into a de facto consulting firm. So whatever market you're in, you'll usually do best to err on the side of making the broadest type of product for it.
[2] One year at Startup School David Heinemeier Hansson encouraged programmers who wanted to start businesses to use a restaurant as a model. What he meant, I believe, is that it's fine to start software companies constrained in (a) in the same way a restaurant is constrained in (b). I agree. Most people should not try to start startups.
[3] That sort of stepping back is one of the things we focus on at Y Combinator. It's common for founders to have discovered something intuitively without understanding all its implications. That's probably true of the biggest discoveries in any field.
[4] I got it wrong in "How to Make Wealth" when I said that a startup was a small company that takes on a hard technical problem. That is the most common recipe but not the only one.
[5] In principle companies aren't limited by the size of the markets they serve, because they could just expand into new markets. But there seem to be limits on the ability of big companies to do that. Which means the slowdown that comes from bumping up against the limits of one's markets is ultimately just another way in which internal limits are expressed.
It may be that some of these limits could be overcome by changing the shape of the organization—specifically by sharding it.
[6] This is, obviously, only for startups that have already launched or can launch during YC. A startup building a new database will probably not do that. On the other hand, launching something small and then using growth rate as evolutionary pressure is such a valuable technique that any company that could start this way probably should.
[7] If the startup is taking the Facebook/Twitter route and building something they hope will be very popular but from which they don't yet have a definite plan to make money, the growth rate has to be higher, even though it's a proxy for revenue growth, because such companies need huge numbers of users to succeed at all.
Beware too of the edge case where something spreads rapidly but the churn is high too, so that you have good net growth till you run through all the potential users, at which point it suddenly stops.
[8] Within YC when we say it's ipso facto right to do whatever gets you growth, it's implicit that this excludes trickery like buying users for more than their lifetime value, counting users as active when they're really not, bleeding out invites at a regularly increasing rate to manufacture a perfect growth curve, etc. Even if you were able to fool investors with such tricks, you'd ultimately be hurting yourself, because you're throwing off your own compass.
[9] Which is why it's such a dangerous mistake to believe that successful startups are simply the embodiment of some brilliant initial idea. What you're looking for initially is not so much a great idea as an idea that could evolve into a great one. The danger is that promising ideas are not merely blurry versions of great ones. They're often different in kind, because the early adopters you evolve the idea upon have different needs from the rest of the market. For example, the idea that evolves into Facebook isn't merely a subset of Facebook; the idea that evolves into Facebook is a site for Harvard undergrads.
[10] What if a company grew at 1.7x a year for a really long time? Could it not grow just as big as any successful startup? In principle yes, of course. If our hypothetical company making $1000 a month grew at 1% a week for 19 years, it would grow as big as a company growing at 5% a week for 4 years. But while such trajectories may be common in, say, real estate development, you don't see them much in the technology business. In technology, companies that grow slowly tend not to grow as big.
[11] Any expected value calculation varies from person to person depending on their utility function for money. I.e. the first million is worth more to most people than subsequent millions. How much more depends on the person. For founders who are younger or more ambitious the utility function is flatter. Which is probably part of the reason the founders of the most successful startups of all tend to be on the young side.
[12] More precisely, this is the case in the biggest winners, which is where all the returns come from. A startup founder could pull the same trick of enriching himself at the company's expense by selling them overpriced components. But it wouldn't be worth it for the founders of Google to do that. Only founders of failing startups would even be tempted, but those are writeoffs from the VCs' point of view anyway.
[13] Acquisitions fall into two categories: those where the acquirer wants the business, and those where the acquirer just wants the employees. The latter type is sometimes called an HR acquisition. Though nominally acquisitions and sometimes on a scale that has a significant effect on the expected value calculation for potential founders, HR acquisitions are viewed by acquirers as more akin to hiring bonuses.
[14] I once explained this to some founders who had recently arrived from Russia. They found it novel that if you threatened a company they'd pay a premium for you. "In Russia they just kill you," they said, and they were only partly joking. Economically, the fact that established companies can't simply eliminate new competitors may be one of the most valuable aspects of the rule of law. And so to the extent we see incumbents suppressing competitors via regulations or patent suits, we should worry, not because it's a departure from the rule of law per se but from what the rule of law is aiming at.
Thanks to Sam Altman, Marc Andreessen, Paul Buchheit, Patrick Collison, Jessica Livingston, Geoff Ralston, and Harj Taggar for reading drafts of this.
Tuesday, 18 September 2012
This is a brilliant piece about new social media marketing the rise of visual.
I didnt write most of it - as written By Ekaterina Walter
What I will do is at a couple of thoughts and a couple more links.
And occassionally argue against it as sometimes heavy tech users can believe the world is doing something which data wise says the opposite. We get this with mobile marketing - when mobile marketing people believe everyone has an smartphone - and they do not. Ok in the UK it's about 61% but that still is NOT everyone - and no I don't think it will be everyone by 2014 either.
Anyhoo, Miss Walter writes - Blog posts became Facebook updates and Tumblr posts, which shrunk to Tweets and finally to Instagram or Pinterest. Here's how smart brands are navigating the new visual social-media era.
Social media sites like Facebook, Instagram, and Pinterest have ushered in visual marketing as the breakout trend for 2012. When it comes to their products, businesses are learning to show, not tell, and visual content sites are fueling our desire for beautiful photography and sensational design.
Two years ago, marketers were spreading the maxim that "content is king," but now, it seems, "a picture really is worth a thousand words." But are either of these things really new or news when it comes to marketing?
The real point so often over looked by tech lovers is that it is the human experience enabled by the technology which is the driver and NOT the other way around i.e. people like stuff and like to tell their friends, nothing new. But add one click and tell all your 'friends' on facebook - and you have yourself a marketing revolution (if not a social one as well...)
This evolution of marketing is nothing more than tech catching up with what we as human's already want - which is why augmented reality (a terrible name for a game changing technology is so exciting...) and why mobile visual discovery companies like Blippar could really be on to something.
"Blogs were one of the earliest forms of social networking where people were writing 1,000 words," says Dr. William J. Ward, Social Media professor at Syracuse University. "When we moved to status updates on Facebook, our posts became shorter. Then micro-blogs like Twitter came along and shortened our updates to 140 characters. Now we are even skipping words altogether and moving towards more visual communication with social-sharing sites like Pinterest."
Oh and if you don't know much about Pinterest - here is a great interview with it's creator.... It could be the greatest PPC advertising platform in history. However underneath all of it is something more. The trend towards the visual...
This trend toward the visual is also influenced by the shifting habits of technology users. As more people engage with social media via smartphones, they're discovering that taking a picture "on the go" using a high-resolution phone is much less tedious than typing out a status update on a two-inch keyboard.
A 2012 study by ROI Research found that when users engage with friends on social media sites, it's the pictures they took that are enjoyed the most. Forty-four percent of respondents are more likely to engage with brands if they post pictures than any other media. Pictures have become one of our default modes of sorting and understanding the vast amounts of information we're exposed to every day.
Detavio Samuals is the EVP and Director of Client Services at GlobalHue, one of the nation's top market advertising agencies. He explains that pictures are a bit like movie trailers for written content--they provide a snippet of what an article, brand, site or other piece of content is about, so that you can quickly decide if it's what you wanted or not.
"Pictures have also become a short form way of communicating lots of information quickly and succinctly," says Samuals. "The need for publishers to get to the point quicker than ever came about as humans became more pressed for time and content became more infinite. For publishers, it was evolve or risk losing their audience, and the only thing shorter than a tweet or post is a picture."
So what does all this visual stimulation mean for brands?
Fashion designer Kahri-Anne Kerr uses visual social media sites like Pinterest and Facebook to market her Kahri collection. In the fashion world, visual fantasy sells product, as customers need to see the cut of a garment on a model and feel as though they could make that item work in their own wardrobe. "When I post pictures on Facebook, they get the most feedback of all my posts," says Kahri. Visual media is a great way to share more about what inspires the designs, as well as linking to your online store and straight product shots."
"I am just getting into Instagram, which I use to give a personal look at the person behind the label by taking shots around my studio and in my everyday life."
Designer paper/analog brand Moleskine has harnessed the power of visual media to create one of the world's most active, prolific, and creative online communities. Their visual content strategy focuses on user-generated content: They create large-scale projects that users participate in by posting their own images and videos.
A popular campaign called What's In Your Bag? had users update pictures of the contents of their bags into a Facebook album. The project generated thousands of likes and comments as readers looked at the contents of other bags (which included Moleskine notebooks, naturally), and shared photos with their friends.
Inspiring fans to create and spread images, customize their notebooks, organize online competitions, and otherwise engage with the brand on a creative level has set Moleskine apart in its highly specialized market.
Search engines now rank content based on social conversations and sharing, not just websites alone. Brands can use visual content on their social media to increase engagement and inspire sharing and viral marketing. The rise of platforms like Pinterest and Instagram, and Facebook's multimillion-dollar acquisition of the latter, shows how visual content is becoming an increasingly important force for communication online.
Brands that can rock visual media will find themselves market leaders.
But let's be honest is it really for ALL brands? It seems from the above and the known demographics for Pinterest (at present around 90% women) that certain things and sectors will work well with visiual marketing and perhaps others would not.
The other thing that worries me a little with this obbession with the visual means is marketing truly to become all style over substance? It is going to become that you ONLY judge a book by it's cover, a brand from it's Pinterest board, a company from their meta narrative on Facebook Timeline etc.
We all feel like we are too busy to investigate more, to read more, to slow down more, to make better less superficial decisions (which is surely what giving something less than a second to sum it up is doing...) but time is a feeling.
Ask how much TV people watch and hope much time do they feel they have.
I suppose the above comment is NOT about marketing at all. Maybe it's just a race to the bottom - the quickest - and the prettiest. All of which might give the people what they want in a way they want it. This used to be a maxim of mine.
But as a got older and really looked at marketing - perhaps we should give the people the very best of what's out there - not just a one second picture flash.
Just some thoughts. And mainly from - Ekaterina Walter who is Intel's social media strategist. Follow her if you would like to on @ekaterina on twitter.
As for me I am going to think about how this makes mobile marketing either better or worse and blog about it here...
I didnt write most of it - as written By Ekaterina Walter
What I will do is at a couple of thoughts and a couple more links.
And occassionally argue against it as sometimes heavy tech users can believe the world is doing something which data wise says the opposite. We get this with mobile marketing - when mobile marketing people believe everyone has an smartphone - and they do not. Ok in the UK it's about 61% but that still is NOT everyone - and no I don't think it will be everyone by 2014 either.
Anyhoo, Miss Walter writes - Blog posts became Facebook updates and Tumblr posts, which shrunk to Tweets and finally to Instagram or Pinterest. Here's how smart brands are navigating the new visual social-media era.
Social media sites like Facebook, Instagram, and Pinterest have ushered in visual marketing as the breakout trend for 2012. When it comes to their products, businesses are learning to show, not tell, and visual content sites are fueling our desire for beautiful photography and sensational design.
Two years ago, marketers were spreading the maxim that "content is king," but now, it seems, "a picture really is worth a thousand words." But are either of these things really new or news when it comes to marketing?
The real point so often over looked by tech lovers is that it is the human experience enabled by the technology which is the driver and NOT the other way around i.e. people like stuff and like to tell their friends, nothing new. But add one click and tell all your 'friends' on facebook - and you have yourself a marketing revolution (if not a social one as well...)
This evolution of marketing is nothing more than tech catching up with what we as human's already want - which is why augmented reality (a terrible name for a game changing technology is so exciting...) and why mobile visual discovery companies like Blippar could really be on to something.
"Blogs were one of the earliest forms of social networking where people were writing 1,000 words," says Dr. William J. Ward, Social Media professor at Syracuse University. "When we moved to status updates on Facebook, our posts became shorter. Then micro-blogs like Twitter came along and shortened our updates to 140 characters. Now we are even skipping words altogether and moving towards more visual communication with social-sharing sites like Pinterest."
Oh and if you don't know much about Pinterest - here is a great interview with it's creator.... It could be the greatest PPC advertising platform in history. However underneath all of it is something more. The trend towards the visual...
This trend toward the visual is also influenced by the shifting habits of technology users. As more people engage with social media via smartphones, they're discovering that taking a picture "on the go" using a high-resolution phone is much less tedious than typing out a status update on a two-inch keyboard.
A 2012 study by ROI Research found that when users engage with friends on social media sites, it's the pictures they took that are enjoyed the most. Forty-four percent of respondents are more likely to engage with brands if they post pictures than any other media. Pictures have become one of our default modes of sorting and understanding the vast amounts of information we're exposed to every day.
Detavio Samuals is the EVP and Director of Client Services at GlobalHue, one of the nation's top market advertising agencies. He explains that pictures are a bit like movie trailers for written content--they provide a snippet of what an article, brand, site or other piece of content is about, so that you can quickly decide if it's what you wanted or not.
"Pictures have also become a short form way of communicating lots of information quickly and succinctly," says Samuals. "The need for publishers to get to the point quicker than ever came about as humans became more pressed for time and content became more infinite. For publishers, it was evolve or risk losing their audience, and the only thing shorter than a tweet or post is a picture."
So what does all this visual stimulation mean for brands?
Fashion designer Kahri-Anne Kerr uses visual social media sites like Pinterest and Facebook to market her Kahri collection. In the fashion world, visual fantasy sells product, as customers need to see the cut of a garment on a model and feel as though they could make that item work in their own wardrobe. "When I post pictures on Facebook, they get the most feedback of all my posts," says Kahri. Visual media is a great way to share more about what inspires the designs, as well as linking to your online store and straight product shots."
"I am just getting into Instagram, which I use to give a personal look at the person behind the label by taking shots around my studio and in my everyday life."
Designer paper/analog brand Moleskine has harnessed the power of visual media to create one of the world's most active, prolific, and creative online communities. Their visual content strategy focuses on user-generated content: They create large-scale projects that users participate in by posting their own images and videos.
A popular campaign called What's In Your Bag? had users update pictures of the contents of their bags into a Facebook album. The project generated thousands of likes and comments as readers looked at the contents of other bags (which included Moleskine notebooks, naturally), and shared photos with their friends.
Inspiring fans to create and spread images, customize their notebooks, organize online competitions, and otherwise engage with the brand on a creative level has set Moleskine apart in its highly specialized market.
Search engines now rank content based on social conversations and sharing, not just websites alone. Brands can use visual content on their social media to increase engagement and inspire sharing and viral marketing. The rise of platforms like Pinterest and Instagram, and Facebook's multimillion-dollar acquisition of the latter, shows how visual content is becoming an increasingly important force for communication online.
Brands that can rock visual media will find themselves market leaders.
But let's be honest is it really for ALL brands? It seems from the above and the known demographics for Pinterest (at present around 90% women) that certain things and sectors will work well with visiual marketing and perhaps others would not.
The other thing that worries me a little with this obbession with the visual means is marketing truly to become all style over substance? It is going to become that you ONLY judge a book by it's cover, a brand from it's Pinterest board, a company from their meta narrative on Facebook Timeline etc.
We all feel like we are too busy to investigate more, to read more, to slow down more, to make better less superficial decisions (which is surely what giving something less than a second to sum it up is doing...) but time is a feeling.
Ask how much TV people watch and hope much time do they feel they have.
I suppose the above comment is NOT about marketing at all. Maybe it's just a race to the bottom - the quickest - and the prettiest. All of which might give the people what they want in a way they want it. This used to be a maxim of mine.
But as a got older and really looked at marketing - perhaps we should give the people the very best of what's out there - not just a one second picture flash.
Just some thoughts. And mainly from - Ekaterina Walter who is Intel's social media strategist. Follow her if you would like to on @ekaterina on twitter.
As for me I am going to think about how this makes mobile marketing either better or worse and blog about it here...
Wednesday, 12 September 2012
Some well read wisdom about start ups
This is SOOOOOO good I feel a little ashamed that I have no input into it - ok a little bit later on. So I mainly pop it here so I will not forget it.
Those of you who are launching a business...............
................. especially a techie business, will love this.
Life in the “Trough of Sorrow” all works credited to Andrew Chen as he wrote it.
In the life of a startup you get to a place called the Trough of Sorrows. See below.
Ok not a bad thought. But the real Question is that whilst you’re in the Trough of Sorrow, what do you do? How do you beat it?
This is something we sadly failed to do with goAugmented even after winning awards - so we lost our developers and lost our way. And lost the company in the end...
Traditional business literature won’t help you solve it- most of that stuff is focused on life after product/market fit, after the Trough of Sorrow. A lot of startup stuff is focused on the initial phases, when you don’t have a team, idea, or investors.
What happens when you have a team, an idea, and investors, but it’s not quite working yet? What do you do there?
I have some notes from my personal experience, and from others who have beat the Trough of Sorrow, and wanted to share them. First off, there’s both an emotional component as well as an analytical one.
Dealing with the emotions
Let’s start with the emotional first. First, a couple important things to remember:
Getting to product/market fit is hard, and even though you feel like you’re uniquely failing, you’re actually not. Turns out every startup has to go through this, but not every startup survives it. Entrepreneurs will blame themselves for failing, but it’s OK, this is hard and we all start the journey by failing a lot.
A corollary to the above is, expect to face the Trough of Sorrow. It’s hard to avoid. Quitting, starting over, executing a “too big” pivot, and other avoidance strategies won’t keep you from hitting a difficult point again, it’ll just delay the inevitable. Instead, just figure out how to work through it.
Expect to fight with your cofounders. When things are going great, cofounders tend to go along since the focus will be on keeping the momentum up. When things are mixed or going badly, there will be meaningful disagreements about what to do next!
Quitting is your decision. There’s a huge spectrum of tools you can use to fix up a broken thing. You can change the product, switch customer segments. You can recapitalize the company, reset the team, and fire your cofounders. You can (usually) find a way to keep going if you want to. Whether or not you want to quit, that’s up to you, but don’t think that quitting and starting a new thing will let you start something up without passing through this difficult phase.
Churning customers, employees, and cofounders isn’t failing. While you’re going from one iteration to the next, people will fall off the wagon. It just happens. That’s OK! That’s part of what happens, and even though it’ll feel like it’s a failure, don’t let it discourage you. The question is, does the new strategy make more sense than the old one? You only fail when you fail.
An additional thought on quitting: It’s ultimately the entrepreneur’s personal decision to quit, because there’s always some alternative scenario, as unpleasant as it might be. You can always dilute yourself more, raise more capital, or reduce the burn rate. It can add more time to the clock, which might be unpleasant, yet it might save the company. Is it always logical to do that? Maybe, and maybe not! But it’s worth considering that there’s always another move, and an entrepreneur shouldn’t ever feel like they’re somehow “forced” to quit.
A lot of entrepreneurs quit when they hit the Trough of Sorrow, struggle for 12-24 months, and face up to the reality that they’ll have to raise another dilutive round. Is this a good time to quit? Maybe. But given that the majority of startups go through this kind of stage, I’d actually argue that it’s just part of struggle to being successful. Sometimes it just takes 3 years to get through the Trough of Sorrow, but on the other side is something that might really be worth the pain. Maybe :)
I find that when I spend time with startups as an investor/advisor, a lot of my time ends up being about the above issues. Probably 80%, actually. If you can minimize the emotionality of feeling like you’re failing, you can try to keep the team together and get to the problem solving part.
Dealing with the problems
If you can hold everything together, and keep the team productive enough and the runway long enough to try to make a run at the problem, then here’s a few wild unfounded generalities on how to proceed. It’s super hard to generalize here but here’s an attempt.
Identify the root problem. Is the product working? Does the onboarding suck? Or is execution on growth lacking? You can figure out the main bottleneck by trying to understand where it’s working and where it’s not. If the problem is high retention and high engagement, but not a lot of people are showing up, just focus on marketing. If the product is low retention and low engagement, you probably have to work on the product. More marketing and optimizing your notifications won’t help there.
I find that much of the time, startups take too much product risk, and that’s why they aren’t working. Most of the new products I run into aren’t at the phase of “we’re product/market fit, just add more users!” Instead, most of the time, the products are just fundamentally broken. They are asking users to do new things, they exist in new markets with no competitors, and as a result, it’s unclear if the customer behavior is there to support their product. Instead, try to take a known working category and try to invent 20% of it, rather than 90%. Apple didn’t invent the smartphone, the MP3 player, or the computer, and yet they are super innovative and successful. You don’t have to invent a new product category either, and it’s easier to get to product/market fit when you have a baseline competitor to compete against.
Resist the urge to start over. There’s always a feeling that if you just rebooted, you’ll somehow avoid the Trough of Sorrow. Not true. Trust your initial instincts in your market and in your product, and figure out how to guide it into a similar place. If smart people invested in you and in the market, there’s probably something there, but you have to find it.
Get your product to be stripped down, focused, and so easy to understand that it’s boring. Look, you’re not in this to impress your designery friends, you’re in this to communicate your product’s value prop in simple and focused terms. The closer you are to that, the more boring your product will sound- that’s a good thing!
Money buys time, and time buys product iterations. This is why there’s a school of thought that says, raise as much money as you can at every point- before product/market fit, raise the max amount so that you have as many iterations as possible to ensure you get to P/M fit. After P/M fit, raise as much money to maximize the upside. Something a few steps back from that extreme is probably the right one :)
Pick up small tactical wins. Even if you do something in the product that doesn’t scale at first, it can be worth it- like prepopulating content, inviting all your friends, doing PR, etc. These small wins build momentum, raise team morale, gets you incremental amounts of capital, and makes it so that you can keep going. Over time, to scale, you can figure out how to systematize these processes or they can end up bootstrapping bigger and more scalable ideas.
Small teams are great. They move faster, way faster. If you plan to do lots of product iterations, you don’t need to communicate all the changes and get buy-in from everyone. Conversely big teams have lots of chaos every time there’s a bit pivot. Build out the team afterwards to create the complete featureset, but until then, consumer product teams can just be a few engineers/designers and the product leader. That’s <6 people. As you can see this is quite brilliant and just what I wanted to read before we start Entermobile - a new platform for brand your own mobile games and apps.
Think of wordpress but for mobile games and customer engagement rather than for blogging and websites. It could be really rather cool for mobile marketing and the like. But already we are looking into the worry of the trough of sorrow.
Which if you think about it is very much like the Trough of Disillusionment which features in Gartners the Hype Cycle. Also worth a look or two.
Those of you who are launching a business...............
................. especially a techie business, will love this.
Life in the “Trough of Sorrow” all works credited to Andrew Chen as he wrote it.
In the life of a startup you get to a place called the Trough of Sorrows. See below.
Ok not a bad thought. But the real Question is that whilst you’re in the Trough of Sorrow, what do you do? How do you beat it?
This is something we sadly failed to do with goAugmented even after winning awards - so we lost our developers and lost our way. And lost the company in the end...
Traditional business literature won’t help you solve it- most of that stuff is focused on life after product/market fit, after the Trough of Sorrow. A lot of startup stuff is focused on the initial phases, when you don’t have a team, idea, or investors.
What happens when you have a team, an idea, and investors, but it’s not quite working yet? What do you do there?
I have some notes from my personal experience, and from others who have beat the Trough of Sorrow, and wanted to share them. First off, there’s both an emotional component as well as an analytical one.
Dealing with the emotions
Let’s start with the emotional first. First, a couple important things to remember:
Getting to product/market fit is hard, and even though you feel like you’re uniquely failing, you’re actually not. Turns out every startup has to go through this, but not every startup survives it. Entrepreneurs will blame themselves for failing, but it’s OK, this is hard and we all start the journey by failing a lot.
A corollary to the above is, expect to face the Trough of Sorrow. It’s hard to avoid. Quitting, starting over, executing a “too big” pivot, and other avoidance strategies won’t keep you from hitting a difficult point again, it’ll just delay the inevitable. Instead, just figure out how to work through it.
Expect to fight with your cofounders. When things are going great, cofounders tend to go along since the focus will be on keeping the momentum up. When things are mixed or going badly, there will be meaningful disagreements about what to do next!
Quitting is your decision. There’s a huge spectrum of tools you can use to fix up a broken thing. You can change the product, switch customer segments. You can recapitalize the company, reset the team, and fire your cofounders. You can (usually) find a way to keep going if you want to. Whether or not you want to quit, that’s up to you, but don’t think that quitting and starting a new thing will let you start something up without passing through this difficult phase.
Churning customers, employees, and cofounders isn’t failing. While you’re going from one iteration to the next, people will fall off the wagon. It just happens. That’s OK! That’s part of what happens, and even though it’ll feel like it’s a failure, don’t let it discourage you. The question is, does the new strategy make more sense than the old one? You only fail when you fail.
An additional thought on quitting: It’s ultimately the entrepreneur’s personal decision to quit, because there’s always some alternative scenario, as unpleasant as it might be. You can always dilute yourself more, raise more capital, or reduce the burn rate. It can add more time to the clock, which might be unpleasant, yet it might save the company. Is it always logical to do that? Maybe, and maybe not! But it’s worth considering that there’s always another move, and an entrepreneur shouldn’t ever feel like they’re somehow “forced” to quit.
A lot of entrepreneurs quit when they hit the Trough of Sorrow, struggle for 12-24 months, and face up to the reality that they’ll have to raise another dilutive round. Is this a good time to quit? Maybe. But given that the majority of startups go through this kind of stage, I’d actually argue that it’s just part of struggle to being successful. Sometimes it just takes 3 years to get through the Trough of Sorrow, but on the other side is something that might really be worth the pain. Maybe :)
I find that when I spend time with startups as an investor/advisor, a lot of my time ends up being about the above issues. Probably 80%, actually. If you can minimize the emotionality of feeling like you’re failing, you can try to keep the team together and get to the problem solving part.
Dealing with the problems
If you can hold everything together, and keep the team productive enough and the runway long enough to try to make a run at the problem, then here’s a few wild unfounded generalities on how to proceed. It’s super hard to generalize here but here’s an attempt.
Identify the root problem. Is the product working? Does the onboarding suck? Or is execution on growth lacking? You can figure out the main bottleneck by trying to understand where it’s working and where it’s not. If the problem is high retention and high engagement, but not a lot of people are showing up, just focus on marketing. If the product is low retention and low engagement, you probably have to work on the product. More marketing and optimizing your notifications won’t help there.
I find that much of the time, startups take too much product risk, and that’s why they aren’t working. Most of the new products I run into aren’t at the phase of “we’re product/market fit, just add more users!” Instead, most of the time, the products are just fundamentally broken. They are asking users to do new things, they exist in new markets with no competitors, and as a result, it’s unclear if the customer behavior is there to support their product. Instead, try to take a known working category and try to invent 20% of it, rather than 90%. Apple didn’t invent the smartphone, the MP3 player, or the computer, and yet they are super innovative and successful. You don’t have to invent a new product category either, and it’s easier to get to product/market fit when you have a baseline competitor to compete against.
Resist the urge to start over. There’s always a feeling that if you just rebooted, you’ll somehow avoid the Trough of Sorrow. Not true. Trust your initial instincts in your market and in your product, and figure out how to guide it into a similar place. If smart people invested in you and in the market, there’s probably something there, but you have to find it.
Get your product to be stripped down, focused, and so easy to understand that it’s boring. Look, you’re not in this to impress your designery friends, you’re in this to communicate your product’s value prop in simple and focused terms. The closer you are to that, the more boring your product will sound- that’s a good thing!
Money buys time, and time buys product iterations. This is why there’s a school of thought that says, raise as much money as you can at every point- before product/market fit, raise the max amount so that you have as many iterations as possible to ensure you get to P/M fit. After P/M fit, raise as much money to maximize the upside. Something a few steps back from that extreme is probably the right one :)
Pick up small tactical wins. Even if you do something in the product that doesn’t scale at first, it can be worth it- like prepopulating content, inviting all your friends, doing PR, etc. These small wins build momentum, raise team morale, gets you incremental amounts of capital, and makes it so that you can keep going. Over time, to scale, you can figure out how to systematize these processes or they can end up bootstrapping bigger and more scalable ideas.
Small teams are great. They move faster, way faster. If you plan to do lots of product iterations, you don’t need to communicate all the changes and get buy-in from everyone. Conversely big teams have lots of chaos every time there’s a bit pivot. Build out the team afterwards to create the complete featureset, but until then, consumer product teams can just be a few engineers/designers and the product leader. That’s <6 people. As you can see this is quite brilliant and just what I wanted to read before we start Entermobile - a new platform for brand your own mobile games and apps.
Think of wordpress but for mobile games and customer engagement rather than for blogging and websites. It could be really rather cool for mobile marketing and the like. But already we are looking into the worry of the trough of sorrow.
Which if you think about it is very much like the Trough of Disillusionment which features in Gartners the Hype Cycle. Also worth a look or two.
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