The Common Sense Web... An Entrepreneurs' Blog

The 10 Immutable Laws of the Startup - 1 through 5

I have given some thought lately to a key question for startups - how do you know that a new hire will succeed?  What behaviors and character traits should you seek when adding a few employees to an early stage startup?

Here's a quick summary of the behaviors that I regard as critical for early stage employees.  When someone doesn't do one of these things, he/she sticks out like a sore thumb.  Here goes.

1. Thou shalt work hard.

I think this one is a given -- you have to put in the time.  I am not a stickler on monitoring time or establishing formal office hours, but I certainly think that everyone on a team has to e willing and able to put in the time necessary for a business to maximize its opportunities.  In a practical sense, this means that you have to be accessible, willing to work odd hours and weekends, and you have to pull your share of the workload.

2. Thou shalt be hungry.

One of the main things motivating you has to be in line with the purpose of the startup.  Maybe you're a contrarian at heart.  Maybe you are out to convince the world that you can do something that people don't think you can do.  Maybe you're craving a success.  Maybe you're just greedy and you want to be rich.  I don't care what it is, but there has to be something deep down inside that turns the job in to a cause for an employee to be truly engaged.

3. Thou shalt become indispensable.

Arguably, this is the most important law.  Early stage employees must know or master something that either nobody else can do or nobody else wants to do.  Plain and simple.  Resources are too constrained in a startup to allow employees to hang around if they aren't doing something that is truly necessary for the growth of the business.  But this isn't necessarily the relationship of the Founder -- employees have to find something critical for their own self-preservation.

4. Thou shalt participate as eagerly in the pain as the reward.

New employees who buy in to the concept behind a new startup want to be part of the upside.  Of course -- who wouldn't want to make significant money by making the right bet on the right startup.  There are financial and career gains to be earned out of making an early stage startup successful.  But along with that comes a lot of hard work, long hours, and tasks that you just don't want to do.  Suck it up.  If you don't want to do things that are necessary to grow the business -- whatever they are -- then maybe you should get a cushy job where you aren't pushed out of your comfort zone.

5. Thou shalt not make unreasonable financial demands.

If you really want to be in an early-stage startup, you understand that resources are tight.  Compensation comes in the form of salary but also the ability to influence a business from its earliest stages, some flexibility in your work habits, and some upside via profit sharing or stock options.  These things help to serve as a proxy for a real market salary.  If you want to maximize your income short-term, go for the market salary in a corporate job somewhere.  But if you're willing to undertake the risk, tell your Founders what you are willing to do on the promise of a brighter day.

More to come... have a great Thanksgiving everyone!

How Consulting Helps our Startup, and vice versa

Had we launched a startup and a consulting business at the same time in 2006 or 2007, we may have taken a lot more criticism than we did.  But even in the middle of 2008 -- before the stock market crashed and many people realized that the salad days were over -- I heard a lot of good things about the model.  The "capital efficient" startup model was just starting to take hold and most people thought that we could effectively balance the needs of both businesses.  I mean, it's better than starving right?

It has worked a little better than I originally expected.  Here are a few points about our experience that we've learned over the last 18 months or so:

• Focus is great and perfect for an ideal situation where you are adequately funded and you know exactly what you're building.  Kudos to folks who have that luxury.
• Focus, however, may work against you if your team members need a dynamic work environment.  Our team works best in bursts of 2-3 weeks at a time.  If we worked on one thing all the time, we would be less productive.  I have seen us work hard on something for say a month at a time, and we tend to slow down towards the end.  We get stuck on things that we can't quite solve.  Variety helps us.
• So we aim to have a few software projects and a few consulting arrangements both at the same time.  It turns our startup into a cross-disciplinary group that takes lessons from one project and applies them to the others.  It's helpful far more often than you'd think -- and as a result, we have both better products and we provide better services to clients on the consulting side.

At some point in the not terribly distant future, we will have to focus our energy more directly.  The two businesses will likely divorce one another as the stakes get higher with world-class customers and possibly investors.  But I don't think I'd start a company any other way if I had to do it all over again.  Focus is great if you can afford it, but the serenditpity you get from doing a few things well pays off tremendously.

Death and the Startup

Sorry I haven't posted in awhile.  On October 23rd, my mother passed away from complications from breast cancer.  The original cancer diagnosis was good and the chemotherapy was to be as minor as it gets, which is why her sudden death came as such a shock to us.

My purpose with this post isn't to share the intimate details about her life, seek anyone's condolences, discuss the outpouring of support from hundreds of people my parents' community of Brandon, Mississippi, or share my feelings about my mother.  I've saved most of that with family and close friends -- which I've learned I have far more of than I thought.  Rather, the purpose of this post is to address an issue that is rarely discussed or even faced in a startup -- the death of a team member or the loved one of a team member.  And I'll talk a little about the lessons I've learned.

This is the fourth time I've encountered death in a startup.  It's never been even remotely easy -- not that unexpected death is something that is generally easy to deal with.  I think what's different about a startup is the fact that it's much more than just a company in many ways.  Early-stage startups are often more a hybrid of a family and a business.  Early you are usually confined in a small office or the same coffee shop every day.  There is shared struggle as a result of limited resources.  You're all in it together.  And you get to know each other really well -- probably too well.  Think "Little House on the Prairie", but with cell phones and without the strange diseases.

Because folks are so close, I think it's that much more tragic.  If you've lost a team member, you'll have a void that you just won't be able to replace.  Every person makes his/her mark on the business regardless of position, rank, or role -- and losing someone even if the startup has grown is devastating.  You lose a personality, a friend, a colleague, and likely some great stories and camaraderie.  If a team member loses a family member or loved one, it's as if you've lost an extended member of your family.

I've learned a few things from my mother's passing.  One, if your team members have lost a loved one and are grieving, they'll just need time to get back into the flow of work.  My colleagues at Notice Technologies were very understanding with me as I dealt with family issues.  They really stepped up in a big way and made things work with my occasional participation in our business for a week or two.  I was proud of that and I think our company grew up a bit in the process.  But my colleagues are all class and although I knew that, it's really good to KNOW that if you know what I mean.

The second thing I learned is something that has gradually sunk in with me over the last year or two -- a sense of perspective that perhaps comes with maturity or perhaps comes with personality traits my mother left me.  My mother couldn't be put down in any way.  You could give her the worst news ever and she always believed that everything would be OK as long as she was true to herself & did what she needed to do.  I've noticed this personality trait in me during this startup -- (not to be confused with catatonic relaxation, but) I've come to appreciate a good balance between intensity when it is needed and "not sweating the small stuff".  I guess you have to understand when to pull out what skill & how to use that skill effectively.

Finally, my mother treated people well and selflessly.  She didn't judge people based on who they were.  Instead, she saw each person for their values, their skills, their true intentions, and their potential.  In the startup world, we can often times get too caught up in what people have done instead of who they are as people.  We can all get perhaps too caught up in "pedigree" or brushing elbows with people who have been very successful at risk to our integrity.  But past success is all too often a lousy indicator of the quality of a person and/or a measure of a person's character.  I've never gotten too caught up in this particular phenomenon, but I have at times harshly criticized people who have tried but not yet found their huge entrepreneurial success.  At risk of sounding "soft", I do recognize that it's wrong and my mother certainly didn't raise me to be quite that judgmental.  Nor did she raise me to regard past success as the measure of a man or woman.  I know better than that.

So rest in peace, Mom.  You did a great job of raising me & my sisters.  You were a great wife and friend to a lot of people.  The best way I know to honor you is to occasionally consider how you'd deal with difficult situations.  And I'll take with me the confidence you instilled in me that I truly can do anything.  I buried my mother after all, and I can't fathom anything I'll face in the business world could be quite as difficult as that.

Capital Efficiency and where we are in the innovation cycle

Capital efficiency is a hot topic for Web entrepreneurs these days.  I've outlined a lot of the reasons we've gotten here in prior blog posts... it's a combination of a bad economy, a maturing yet healthy & evolving Web business from search to social media, the fallout of Sarbanes-Oxley and the resulting lack of IPO activity, a weak M&A market, and poor venture capital performance over the last decade.

Time marches on and despite the broader macroeconomic climate, entrepreneurs continue to innovate.  I think it's an important distinction to keep in mind at all times -- entrepreneurship and innovation are (relatively speaking) a constant.  The economy, investment activity, and valuations are comparatively not.

After living through a few of these cycles now, I'm beginning to think that our business follows three distinct and separate timelines that together create the environment for entrepreneurs.

Platform Development -- major tech players create/invent new platforms that promise tremendous benefits for businesses and/or customers.  Examples:  Windows (ca. 1994), Web (1996), Google/Search (1999), Facebook (2006), iPhone (2007), Twitter (2008).

Innovation via Applications -- entrepreneurs build products (mostly old ideas) on new platforms because of the advantages the new platforms provide.  This is an experimental phase that begins with a lot of ideas and not a lot of proof, so valuations are relatively low but entrepreneurs and investors are optimistic.

Hype/Mainstreaming -- after a few applications succeed & begin to unlock the value of each new platform, the hype machine kicks into high gear.  Valuations go up because people have discovered ways to make significant money from the new platforms.

For my money, we're in a fairly mature phase in platform development.  People have optimism today about Web entrepreneurship because quite frankly, not a lot happened post-Google.  Now entrepreneurs can target social media or the iPhone as two major platforms currently in their early years.  We've already seen a few success stories with these platforms -- Zynga being one of the most prominent -- but there will be more. 

We're starting to see a wealth of new applications come about to take advantage of social media as consumers and corporations deal with the shift from search to social.  These applications come in a variety of forms -- some are games that you can play with your friends, others codify the time consuming process of monitoring, measuring, and succeeding with social media, others are innovations in existing businesses with the overlay of social and/or mobile context.

As people succeed with new ways of doing business, the hype machine will kick into force.  I am not sure we'll see ridiculous valuations again like we did in the late 1990s, but we will see more companies and products come to market.  The difference between now and the 1990s is that we've seen what a bursting bubble can do -- so everyone is a lot smarter and more rational.  Successful businesses will be built not out of hype, but out of free cash flow.  The ones based largely on hype that emerge late in the game will again be the ones to fail.

So in closing, capital efficiency is all about building a business the old-fashioned way -- one profitable customer at a time and on a shoestring.  If all the hype is indeed about capital efficient businesses, we won't see a big bursting bubble but rather healthy businesses that can live and prosper for a long time.  We're all better for it.

An Alternative Startup Approach

A lot of people have commented on how the economy and lack of "exits" changes the game for entrepreneurs seeking funding for early stage idea.  You need one heck of a personal connection or paying customers to even think about getting funded at a decent valuation today.  The bar is higher than ever to justify an early-stage investment, and for the effort you'll get a modern (i.e. low) valuation to boot.

Rob Adams (former venture capitalist and now professor at the UT Business School) said at a recent Texchange event here in Austin that it is "easier for a startup to sell a major customer than it is to raise funding."  That's probably true, especially for companies that haven't gotten a lot of customer traction.

Then today at an Austin Technology Incubator "Lunch and Learn" event, we heard Jim Nolen and Matthew Lyons talk about term sheets and fundraising in 2009.  The news was similarly bleak for entrepreneurs seeking early stage investment to validate an idea.  Venture capital returns for the decade ending in 2009 look OK, but not nearly as good for the decade ending in 2010.  VCs are having a hard time raising new funds, and they're keeping dry powder for portfolio businesses that were hot years ago but may have actually missed their opportunity to shine.  Even angel investors are seeking safe investments -- investors everywhere are reluctant to part with any money without a reasonable assurance they're going to get it back at decent returns.  There isn't much appetite for risk today -- too many people have been burned in the past and there isn't obvious reward lurking around the corner.

So where does this leave us?

• Low M&A and IPO activity
• Stock market drop has eradicated some angel investor wealth, anxieties remain
• Venture capital undergoing transformation & reinvention

Yet, startups continue to innovate.  New technologies have dotted the landscape and have created new opportunities for entrepreneurs to create value.  Perhaps most importantly, costs of doing business have decreased dramatically between the recession and efficient Web 2.0 technologies that dramatically reduce some operating costs.  So it takes less money to create more value today, but investors are still skiddish.  It tells me that there is a market inefficiency in favor of the statup entrepreneurs right now -- as long as he/she can continue to build value and minimize investment.

From my vantage point, all of this indicates the emergence of a rarely discussed trend:  a temporary shift of power to the bootstrapping entrepreneur.  How does a startup executive pull this off?

• Commitment to a capital efficient model -- low burn rate with obsession over costs and as little outflow in salary as possible,
• Inclusive and fair distribution of equity -- options or other benefits for employees who contribute despite receiving lower than market salary,
• Extreme scrutiny of service providers -- reluctance to make large financial commitments or promises before the startup is ready,
• Surgical marketing/business development strategy --targeting of prospective customers or partners through personal engagement and 1:1 outreach,
• Little/no "buzz" before proving the business model --no significant PR, blogger, or press outreach announcing your great idea until it has been refined.

By going this route, an entrepreneur can build a business the old-fashioned way, by building value one customer at a time... and by translating feedback into product innovations that will drive success.  It's better to give yourself time to iterate a bit before going loud.  Once the company has achieved its first major success, it's time to set everything in motion -- marketing, PR, fundraising, etc.

As entrepreneurs, we are all driven a little by wanting to bring a new idea to the world.  We get excited and our reaction is to tell the world about it well before we've really figured it out.  If you aren't patient, you can look silly when your specific iteration isn't exactly right.  But if you can be patient, you'll give yourself precious time to figure out where you fit in and what specific value you provide.  Then you can tell the world what you've achieved knowing that you've helped to solve real problems in the marketplace.

Wordplay re: Incubators, Catalysts, Accelerators, Mentorship Programs, et al

Quick rant today on something that's been bugging me for awhile -- snobbery around terms used by different people who support entrepreneurs.  Some things I've heard lately:

"We are not an incubator <chuckle>, we're an accelerator!"
"Incubators stand the test of time."
"Our mentor program is different."

For the sake of simplicity, I ignore labels/names.  It isn't productive to get into a sophomoric debate over whether or not you "incubate", "accelerate", "catalyze", or "mentor."  And if folks are focusing on this, they're not differentiating themselves in an area that actually matters to you, the entrepreneur.

The only thing that really matters is if one of these people and/or groups can really help you.  What differentiated service or expertise can they provide that is better than anyone else you can choose?  Then it's a matter of the payment structure -- do you pay them in advance, do they fund you, or do you share some of the risk?  I think this actually changes the nature of the deal and the urgency of the people involved.

The more I sniff around, the more a lot of these groups feel the same to me.  The core value proposition group to group is the same.  If you want or need to work with one, you'll have to do some homework.  Get to know the people.  Check out their qualifications and their reputation.  Ask around.  And most importantly, make sure you are comfortable with them on either a personal or professional level, preferably both.

Finally, remember that no incubator, accelerator, catalyst, or mentor is going to do the job for you.  You have to earn your success.  The right one will make it a little easier, but you aren't going to have an easier time if you go with a "catalyst" over an "accelerator".  They're a lot more alike than they think, but subtle differences will make one the right fit for you.

ModernizeNewspapers.com

As we work more and more with local media companies and newspapers, I've decided to break out those posts into a separate blog at http://www.modernizenewspapers.com.  This will allow me to focus on our business on that blog while continuing to write occasionally about startup issues here.

Thanks for reading, and please check out the new blog!

Chris

Quick Hits -- September 14, 2009 -- Twitter & Facebook Lite edition

We have spent a lot of time in Twitter the last few weeks... a lot.  A few quick observations of things we've noticed:

• Twitter is down all the time.  I'm not talking about the consumer front-end... I'm talking about the API.  Folks there who work on stability/network operations must be some of the most nervous and downtrodden people you'll ever meet.
• I'm sure the cause for this is the rampant proliferation of applications built atop Twitter.  It will be interesting to see if Twitter purchases some of these companies or if they make the API more robust to allow for bigger, better things.  My guess is that both will happen.
• Twitter API limitations are understandable, yet curious.  Biographical data each Twitter user requires a separate API call.  I presume this is both a technical limitation and a business advantage for Twitter -- as long as they know who Twitter users are in real-time and you don't, they can develop more interesting applications.  I know a lot of developers who are circumventing this in one way or another.
• Twitter has far more junk/spam users than people think.  Based on random observation, my guess is that it is at least a 2:1 ratio, maybe more.  eMarketer assumes there are currently 18 million legitimate Twitter users.  That's probably just a little high assuming a 2:1 ratio and Twitter's recent estimate of ~45 million users, but my guess is that it's in the ballpark.

Finally, a quick note about Facebook Lite.  I have looked extensively at Facebook Lite and I'm not terribly bullish about it.  Facebook users are different than Twitter users IMO, and they don't need a streamlined interface.  Facebook built Lite as a reaction to Twitter, not as a reaction to customer feedback.  I think they really should stick to their strength and not worry about Twitter.  More on that topic later.

Believers and Non-Believers

Since leaving Microsoft just under 18 months ago, I've worked with a number of incumbent organizations to help them modernize their businesses with Web 2.0 themes:  social media, real-time, self-serve, collaboration, etc. I've worked with government folks, people in local media companies, publishers, consulting firms, major technology companies, auto manufacturers, etc. on consulting projects, social media implementations, new workflows/company policy, new business opportunities, and initiatives to improve efficiency.  I've spoken at industry events as a presenter, a panelist, and a moderator.

All these experiences have led me to believe that in business today, there is a big and increasing gap between "believers" and "non-believers" in change/modernization.

I would be painting with a broad brush if I were to say it is a generational gap.  It isn't at all.  Nor is it just a social media or Web 2.0 thing.  It's bigger than that.  It's generally a gap between folks who see that now, more than ever, business moves too fast to not think critically and make quick adjustments to take advantage of trends that will ultimately impact both the top and bottom line.

Let's step back and look at what is happening broadly in the economy.  Despite the rosy predictions, the fact is consumers are revisiting their personal spending today.  If we are going to even remotely revert to mean levels of debt in society, it will be at least a 3-5 year trend -- not just a mere blip on the radar.  Mish Shedlock touches on this theme of the Age of Frugality repeatedly in his fantastic blog that I highly recommend.  Like it or not, America (and the World for that matter) is going on a diet.  Collectively, we mortgaged the future for the present... and the future is now.

With lower consumer spending, there are increasing pressures to do more with less inside the corporation and perhaps redefine business for the future.  In this sense, big institutions of all kinds really have a lot more in common than anyone really thinks.  I touched on this a few months ago when I said that Microsoft's problems and those faced by the newspaper industry are pretty much the same, but today I'd say that large incumbents in a variety of industries are all in the same situation.

I don't know what to make of it just yet, nor do I know exactly how to profit from it at this moment.  But I've never seen people so divided in large organizations as they seem to be today -- people who bring about change vs. people who want to maintain the status quo.  I see a new example of it almost every day.

We are indeed living in an unprecedented time when the business landscape will be shaken to its core... where businesses will be redefined... where new brands will thrive... where old ones will fizzle... and where a lot of companies that can't adapt intelligently with limited information will die.  Now if someone could just tell us all what "adapt intelligently" means, we'd all be OK. ;-)

But there are no answers and there is not enough data to tell you exactly what to do.  There won't be -- technology, innovation, and advancement are by definition impossible to project into the future.  You have to feel your way through the jungle.

TechDrawl

Howdy everyone!  I just wanted to take a quick moment to let you know that I am working with the great folks at TechDrawl to profile Austin startups now and then.

Check out the first post on the Austin Technology Incubator, where our company Notice Technologies currently resides.  Enjoy!