Monday, October 30, 2006

Lesson #8 - Money comes First

This may be the most important lesson of all - Money comes First. I think a sign should be hanging above the garage door for every entrepreneur to look at when they come into work and when they leave to go home. For some reason, Money has taken a back seat in most of the business plans that come across my desk. Don't get me wrong - I am a sucker for a "cool idea" or a "disruptive technology" - but I think that innovation (or call it intellectual property) is a far second to what matters most - having people pull out their wallet and pay to play. Much like a hitchiker needs to start walking down the road with their thumb out - heading the direction they want to go until they get a ride - it is critical to be out in the market and communicating with customers. So many entrepreneurs are wearing blinders, never asking the market what they really want.

So what is "not so obvious" about this lesson. Let me start with the more radical ideas I have, and then dive into my more basic principals. First, I think companies should strive to show revenue on Day One of the business. No more statements like "we should have our first customer in month 12" or "First revenue should hit, once we hit 10,000 users and we begin to monetize traffic". These are statements only a few people can make and be taken seriously in my book. I want to hear the entrepreneur say "Our goal is drive our primary revenue from X, but right now we believe we can sell Y until we are ready". To summarize - find a way to make money NOW! If you are a software company building a new product - try to find a customer willing to pay you to develop the product for them - or better yet - find a company with a similar product and resell their product until you are ready to sell yours. If you are a web-based business - think of creative ways to monetize users - and not depend on long-term traffic to drive revenue. By thinking "Money comes first" it will not only get you customers and pay the rent - but it will fine tune your business plan and ultimately may open your eyes to a a better idea.

Here are some other reasons why you need to change your business plan to focus on money first.

1.) Investors - if you want to raise money - the single most important thing an investor looks for is a proven business model. Which means you sold a service or product and someone paid for it. It is that simple. Investors who say "management team is number one" are either full of shit or are investing in people who sold their businesses to Google or Microsoft and are launching a new venture. When you are an above average entrepreneur - you need to focus on revenue.

2.) Customers - there is nothing more obvious - but I need to state the obvious - customers are the best way to turn your business "idea" into reality. Not because they give you money - but because they tell you what they want, and the allow you to focus on what is important, and forget the rest. It is shocking to me how many entrepreneurs launch a product or service without doing basic market research, like sending out a survey, or even talking to customers about the product. Research and Development should start with the customer, not end with the customer.

3.) Employees - we all know that the driving force in a startup are the few people that show up (usually underpaid or not paid at all) and rally around the vision of the company. For the first 12 months of any new venture - it lives and dies on the momentum and excitement that spawns from the employees. In my opinion, there is nothing more exciting then landing a customer. It is the fuel that will give employees the energy to work that much harder, and gives them a sense of security in what they are building.

4.) Entrepreneur - Lets be honest - every entrepreneur (no matter how much they believe in their idea) has some level of doubt. There is always one "IF" statement when describing a great idea. For the sake of sanity, and more importantly for the sake of not wasting 2 years of your life - make sure there is a market for your vision, and go get a customer to confirm your beliefs. It is hard enough being an entrepreneur - let alone a mind reader. Pick up the phone, call a customer and ask the questions. Don't be afraid of the answer.

Wednesday, September 27, 2006

Lesson #7 - Shoot First and then Plan

For years we have been trained to follow a certain process before we take action. The classic direction "Ready, Aim, Fire" is how we were all taught how to live life. The problem is that when starting a business, especially a technology startup where you are building products the world has not seen yet - it is almost suicidal to follow the process of ready, aim and fire.

Here are some reasons:

1. One of the classic problems an entrepreneur faces is "analysis paralysis" - where they get stuck in a rut while developing the product (that is, aiming at the target for too long but never pulling the trigger). I have seen more companies stuck in perpetual R&D then I have companies driving revenue and customer innovation. The most critical step in the life of an early startup is building customer relationships. Customers not only drive revenue, but they drive innovation. Stop aiming, and start firing - (if you miss - atleast you learned why, and you can fix it).

2. The second biggest problem with the "Ready, Aim, Fire" mentality is choosing the target. Unfortunately in an early-stage company - the target is not always a large circle painted in red and white. An entrepreneur may have a vision, and may even have a product - but very few have a clear idea on how to go to market (e.g. the target). So if there is no target, what are we aiming at? The more practical approach, is to fire as many bullets as you can, see which ones hit something, and then by deduction choose the optimal target.

3. The third problem - time and money. With any early-stage venture there is never enough time and money - and thus, we should never waste it. Too much planning can kill a company. Too much deliberation can kill a company. Decisions need to be thought through, but need to be made quickly. If a company is raising capital, it is more impressive to an investor to talk about customer experiences and references, then it is about what cool product is in development. Get customers first, and then finish the product.

Wednesday, September 13, 2006

Lesson #6 - A Startup is not a Corporation

Now that you are heading down the highway, looking out the window - its easy to day dream about everything that can be done on the way to the destination. Staring into the green pastures, and watching the tress fly by can be intoxicating and make even the most focused lose sight of what is important.

The first thing you realize when you start a company, is that it is nothing like company. You can pretend that you are running a "corporation", and go through the cycles of buying name plates, letterhead and give everyone titles, but in reality, running a startup is more like running with the bulls in Pamplona.

When running a "corporation" - a person can hide between middle-management, delegate important tasks, and disappear in bureaucracy when everyone is too busy meeting about the new logo change. In a startup, you focus on the essentials or die. You run with the bulls, or they run over you.

Here are the essentials:

1. Run fast, and don't look back - When running with the bulls, you need to focus on what's ahead - you can't afford to slow down, or risk tripping on someone. When running a startup, you need to make decisions quick - and they need to be great decisions. This is probably the hardest part of being part of a fast moving startup - is trusting your instinct.

2. Protect your Ass - When you know a bull is behind you and it has foot-long horns ready to stab you from behind - you need to protect yourself. In a startup - this is probably the most important thing you do. Not only do you need to protect your interests (personal and business) - but you need to protect the company's interests. A Startup is extremely vulnerable to people looking to steal ideas, demand more than they are worth in pay and stock, and more importantly find a way to kick you out.

3. Don't get distracted - As you are running through the streets, certainly you will hear screams of people being thrown and rundown. You may see some easy way out - an alleyway that looks appealing to hide in and getaway from the rumbling noise of bulls trampling behind - but don't. There are many distractions when running a startup - and due to the long nights, exhausting days and constant pressure - it is easy to get distracted. By keeping focused, and executing what is critical, and not wasting time on minutiae is critical. People live off minutiae in corporations - in a startup - minutiae is a virus.

4. Embrace the pressure - In a high-pressure environment, sometimes it can build up and begin to trigger real angst in an office. In a corporate environment, due to "political correctness" - pressure, turns into frustration and it builds up inside everyone. There is no outlet. In a startup, its pandemonium - like Pamplona - people screaming, running over each other - forgetting peoples feelings. A startup needs to operate the same way - Pressure needs to be embraced, and a culture needs to be created to allow people to laugh about failure and laugh about the stress. Imaging running with the bulls, and everyone politely walking through the streets, saying excuse me, and sensitive to each persons feelings - I think the bulls would win.

Wednesday, August 16, 2006

Lesson #5 - The Driver - Does he know the way?

Like with any long road trip - you may have many drivers. Some get tired and fall asleep at the wheel, some simply don't know where they are going, and others drive too slow or too fast. Choosing the right driver at the right time is a key part of a successful trip. In the beginning of any venture it is less important to designate one person as the CEO, since you are focused on building a product and and everyone is working day and night and too busy to argue about roles and responsibilities. However, at some point a critical decision needs to be made on who is at the wheel.

Sometimes it is a difficult decision to make because everyone feels the title of CEO means "his way or the highway". But this is not the case. The role of CEO is to focus on execution and maximizing everyone's talent and capabilities. Sometimes a key decision needs to be made, and (yes) the CEO may need to make a tough call - but if the executive team is able to agree on a business plan - these decisions are far and few between. Much like a road trip - if everyone agrees on the destination - the driver has map to follow.

How do you know if you have the right CEO?

This is a tough question. If the company is a startup - the CEO needs to be a good communicator and evangelize the vision of the company. He doesn't have to be the visionary or the "idea" man - but he absolutely must be able to convince someone in 5 minutes or less that your company is the next big thing. Whether you are motivating partners to work late nights, or convincing a potential investor to write a check - the CEO needs to be a great sales person.

If the company is beyond the early years, driving revenue and in operational mode - then the CEO role expands. Some CEO's (rare) have the capability to sell the vision and execute the operational plan. Although "selling the vision" never loses importance, the ability to execute a plan and manage all aspects of a growing and dynamic organization is extremely challenging. Sometimes, a CEO balances their capabilities by hiring a good COO or CFO to help manage operations - but this only delays the inevitable - of having a CEO who can execute.

Here is a simple way to determine if you have the right CEO to help build a new company:

1. Has he been a CEO of a startup before?
2. Has he successfully raised capital in a startup before?
3. Does he speak with conviction and passion?
4. Does he solicit feedback and opinion before making important decisions?
5. Does he roll up his sleeves and work with the team to execute?

When choosing a CEO, set your expectations high, and make sure he is someone you would want to grab a beer with after work, because no matter how inspirational or experienced a CEO is - he needs to be able to bring the team together. Otherwise, he will be driving alone - and at that point - the destination doesn't matter much anymore.

Monday, August 14, 2006

Lesson #4 - Gas Money : Everyone needs to chip in

When you start a new venture, it doesn't take long before you look around the room and ask "How are we going to pay for all this?". For some entrepreneurs (who have had success) they may be able to fund the first leg of the trip, but for most - they need to find a way to get "Gas Money".

Much like a road trip, it would make sense for everyone to chip in equal share for the gas. No free rides, right? Unfortunately, it rarely happens when starting a company. This is where I feel most entrepreneurs make their first critical mistake. The classis example, is three guys get together, form a company and split it three ways - 33% each. They work hard (sweat equity) for a month or two and build a nice business plan, perhaps even put together a rough prototype, and then realize they need some more money. At this point, they all should put out their wallets, and invest equally the seed capital to fund the next phase - but this rarely happens. Usually, it will be one of the guys who gets a second mortgage, or begs friends and family for cash.

Now I understand not everyone can write a check for $10,000 or afford to take the risk associated with a new business - and this is why we call them "employees" not "entrepreneurs". If an individual is not willing to invest real money into the company, then the terms of the relationship MUST change. He or she needs to earn their equity, and not be given 33% of the company, just because they happened to spend a few long nights searching for a domain name. Money is not just "gas" for the business, but it is one thing that keep people motivated and invested in the business.

Ofcourse, dividing up equity in a startup is not an easy task. Its like measuring the value of each person at the table. It can become very personal, and at some level insulting for some. However, this is what partnership is all about. This is the first big test in setting expectations and having everyone understand what they bring to the party.

My solution is simple. Give everyone fair share of the company. Make them earn the equity over time. For example if Jon is given 33%, make him work for 3 years to earn 11% per year. And if Jon invests cash, then set a price on the stock, and let his investment be treated like a venture capitalist investing in the company. This will dilute those shareholders who are not investing with Jon.

So next time, when you pick up a hitchhiker, and you pull over to get gas, and he looks at you and says "I ain't got any cash on me" - either kick him out, or make him wash the van and earn his ride.

Tuesday, August 08, 2006

Quote of the Day

"Business opportunities are like buses, there's always another one coming."

- Richard Branson, founder of Virgin Enterprises

Sunday, August 06, 2006

Lesson #3 - The Road Trip : Plan for rough weather and the occasional falling cow.

Now that you have your team pumped up and your destination plugged into the GPS - its time to start the road trip. Like any trip, there will be road blocks, detours and maybe falling cows - but as long as you keep driving towards the destination - you will never feel lost.

I want to share with you a great "Destination" story. It is a story about two hitchhikers who had their fair share of rough weather. The story begins - Two guys (ages 23 and 24) meet in college. At first they can't stand each other - always arguing - but eventually the mutual respect surfaces once they both realize they share similiar ambitions. They started working together on an ambitious project (nicknamed Backrub). Neither knew exactly how they were going to get to their destination, but there was no doubt in their minds where they were going.

Once that had a working product, they decided to call some potential customers. Each discussion ended the same - "Guys, that's interesting, but not interested right now." Unfortunately, with limited money and busy trying to finish college, both were faced with a big decision. Both decided to leave college and start the company - but they knew they needed cash to continue operations and reach their destination. (Everyone needs gas money).

They started talking to people they knew - looking for prospective investors. After months of searching and coming close to calling it quits, they got an inpromtu meeting with a colleague of their professor. As one of the guys tells the story - "We met him very early one morning on the porch of a faculty member's home in Palo Alto. We gave him a quick demo. He had to run off somewhere, so he said, 'Instead of us discussing all the details, why don't I just write you a check?' It was made out for $100,000."

The rest is history. Those two guys are Larry Page and Sergey Brin, the founders of Google,Inc.. Their company is worth over 100 Billion dollars. Their Destination was simple - create a more powerful search engine, and give users more relevant results. From day one, nothing went as planned, but they knew exactly where they were going.

So remember, despite the lightning storms, the flat tires and the occasional falling cow that hits the hood of the car - nothing that happens in the journey can change the Destination.

Saturday, August 05, 2006

Lesson #2 - The Destination : Get everyone to agree on atleast one thing - the destination

"There are many paths to the top of the mountain, but only one view." -Harry Millner.

Building a company is a journey. Much like hitchhiking from one city to the next, there are many paths, many people along the way - but without a destination - there is no purpose. Everyone has a different opinion on the details of the trip - where to eat, sleep, stop, etc - but in order for the journey to have meaning - everyone needs to agree on the destination.

So many companies start with what is labeled as a "vision" or a "mission statement"... but most of the time the words they use make no sense, sound like something copied off a motivational poster or a weight-loss clinic brochure. A company needs to define a "Destination" before it can really build a plan, a team and achieve success.

The Destination is more than seeking fortune, power and glory - it is a bold statement of where you will be in 1,5 and 10 years.

Monday, July 31, 2006

Lesson #1: The Team : When Hitchhiking,Pick your Passengers Wisely

The first big lesson I learned in business, was beware of the passengers with you on your journey. In order to make it easy to remember, I have created stereotypes for the types of people you are bound to encounter. One of the most difficult aspects to any venture is knowing if you have a great team. (take a look at these losers on the left? Would you join their startup?)

The first type is the STONER. This one is easy to spot (most of the time), and can slow you down, and maybe even take 33% of your stuff. The Stoner is someone who has no passion or drive to create - they never bring original thought, never carry their weight, and always expect to share equally the bounties of the trip (especially the food). In my first business, one of my partners was a "STONER", and its was never a lack of intelligence, or inability to add value to the venture - it was simply his choice. One of the biggest challenges, is confronting the stoner, because they are usually very cool, and are great to work long hours with and grab a beer - but when the time comes to build the business - you will be alone. And when you sell the company - he will be first in line, motivated as hell to cash that check.

The second type is the BACKSEAT DRIVER. This is the guy who thinks your an idiot and questions every decision you make, even when you ask his opinion. Sometimes, a backseat driver is useful to have in a venture (especially if a stoner is driving). But in most cases, the person is too cowardly to lead, and the only passion he has is demonstrated when he is challenging your ideas. The best thing to do with a backseat driver is to put in the front seat and make them drive. This will either wreck the car, and humble him - or will allow him to prove to you that he can drive better than you - and then you may have found the perfect CEO (because lets face it - you are not a good CEO).

The third type is my personal favorite - the NAVIGATOR. This is the guy who is constantly looking at the map, trying to plan every mile of the journey. He is usually very anxious, nervous and anal. This is the last guy you would tell that you may not make payroll, or that you just sold a bunch of vaporware to a Fortune 500 company. I was generous with the name "Navigator" - it sounds important and very cool - because I actually think Navigators are great to have around. However, you need to make sure they have some level of entrepreneurship to handle the unexpected, and not drive you nuts answering stupid questions like "When are we going to close on the round of Investment?" and "How much money do we have in the bank?"

The fourth type is the DRIVER. This is the single most important person in the car. The Driver is making every decision on the direction of the car, including who gets picked up, and who gets kicked out. The Driver is also the one who gets blamed when the car drives off a cliff and explodes in a towering flame. There are different types of entrepreneurs - but the one type who really deserves the title - is the Driver.

As you are walking down the highway, with your thumb waving in the wind, and a rusty van pulls up aside you and honks - make sure you take a good look around at your fellow passengers before you throw everything you own in the trunk and buckle your seat belt.

Entrepreneur = Hitchhiker

When people ask me "What do you do?" - I usually pause and say "I am an entrepreneur". I never get a look of satisfaction with that answer - perhaps because it sounds like I am hiding something... or perhaps its because many people don't know what an entrepreneur does?

So, in order to rationalize in my own mind what I do... I looked for the best metaphor of what its like being an entrepreneur. What other occupation is filled with the risk, excitement, absence of order or predictability? And then it dawned on me - being an entrepreneur is like being a hitchhiker.

I borrowed the title of my blog from Roger Waters (Pink Floyds) album - so this is proof I am an entrepreneur - because I simply borrowed a brilliant idea from someone more brilliant then me. (but also in the entrepreneurial spirit - I want to return the favor - so here is the link to buy the album.)

I am not entirely sure what I am going to write about, or how often - but I felt it was time I started to share my experiences and stories for those about to become a hitchhiker.

Tuesday, July 11, 2006

Quote of the Day

"What's the quickest way to become a millionaire? Borrow fivers off everyone you meet." - Richard Branson.