notes-business-startups

note: i have little experience with startups, this is just a placeholder for me to write up some of my notes as i learn:

Introduction

The target audience of these notes is someone like me: a nerd who one day had an idea and figured that in order to make that idea a reality, it would be best to work on it full-time. After examining the feasibility of this a bit and deciding to go ahead for now. But i knew that i didn't know anything about business; i knew that i had to learn about what kinds of things companies do and what kinds of people usually do them, what the steps are to get started with these things, how much money each of these things cost, and whatever else businesspeople are expected to know about that i didn't know yet. These notes (will) cover what i learned.

My idea was software-related, so at times i'll cover software-business-specific stuff. These sections will be clearly marked, so you can just skip those if you are not interested in that.

Should you start a startup?

the short answer

No, you should not start a startup.

where i'm coming from

work full-time on it, and eventually recruit some other people to help out, too. While working on this idea, i'd have to pay the rent, therefore i'd have to find some way to get paid. I thought of some ways to get people to pay for the idea, and decided that they had a high enough probability of working to justify continuing with the project for now.

the good news

The good news is that almost anyone could be successful in a startup. It's mostly just a matter of putting in the hours (I'm NOT saying that putting in the hours guarantees success, in fact even if you work hard, you'll still most likely fail; i'm just saying that putting in the hours is more important than having novel ideas, having a winning personality, etc).

you'll learn a lot by

the bad news

failure rate

no, our culture does not encourage risk-taking (but maybe more than others)

survivorship bias

the Kelly criterion

life

note: before the idea of 'progress', that is, that as time goes on the human species can improve its condition, was the idea that history was more or less cyclical, like the seasons, with better and worse times. Spending your whole life working in hopes that later generations can have a better future only makes sense if they get to enjoy this future more than you would have enjoyed taking it easy -- but who knows if human history is destined to improve, or to rise and fall cyclically, or just to lurch from crisis to crisis or even to go from bad to worse?

conclusion

bear in mind, however, that deciding whether to start a startup is not a single decision that precedes working on the startup. If you decide to go ahead now, you should still continue to re-evaluate this decision as you go, because you will be gaining more information. You aren't committed until you quit the day job (and even then, you aren't really committed until you hire someone, sign a contract or take money from a client, or take someone's money to invest).


summary priorities

1) work hard 2) work smart 3) improve; mostly character issues; know yourself 4) patience/perseverance/relentlessness (but also pivot?) 5) network 6) customer first 7) do the simplest, quickest thing first; you need cash


The anatomy of a startup

The functional anatomy of a company

The anatomy of an investment (capital structure)

startup lifecycle

mosquito

startup roles and ppl and ecosystem

Kelly criterion and portfolios of high risk, high return investments

scalable business models and investors


psychological issues

Note that as a former cognitive science researcher, i can say that much of this section is pop-psych balderdash which may be true or false but which is not here supported by empirical evidence. So it could be wrong.

taking advice

business strategy and management fads

calmness

(put unrustled jimmies picture https://web.archive.org/web/20131023022302/http://theonceandfuturecoffeeaddict.files.wordpress.com/2012/05/562.jpeg here)

it's no big deal if you're not always calm, so don't stress about being stressed. but try to be calm frequently, because it's in these periods of calm that you realize when you have been freaking out over something stupid, which is necessary to allow you to change course.


some strategic choices

B2C or B2B

cofounders

seeking investment

the message you get if you browse the other startup self-help literature is "don't seek outside investment, the probability of getting funded is low, slow and steady and sustainable is better than flashy and fast and rich, investors have different goals than you, investors will take your time, if you are unlucky investors might destroy your vision".

the implict message you get engaging with the startup ecosystem, going to incubators etc, is quite different. Early-stage companies that are neither funded nor profitable are seen as newbies/students/pretend. Funded companies, even if unprofitable, are seen as regulars/teachers/having arrived. Founders of old companies that are profitable or have cashed out are seen as masters, but the perceived gap between them and the young funded companies is less than between the young funded companies and the young unfunded ones. Businesses whose plans don't include improbably rapid expansion to improbably large market sizes are derided/dismissed as 'lifestyle businesses'.

The reason for this pro-investment feeling is clear. Businesses are expensive. To employ even a small team for a few years can easily cost more than half a million dollars (this is counting all business expenses, e.g. office rent and travel and lawyers etc, not just payroll). Do you have half a million dollars? Didn't think so. Did you want everyone to work full-time on this? Thought so. Do you think you can do all the work yourself without anyone else helping for the first few years? Didn't think so.

Upon seeing this, it becomes clear that all that "beware of taking outside investment" stuff you see in the literature is a reaction, attempting to moderate the pro-investment feeling on the ground. So what's the conclusion? I don't know.

some classes of software business models

free/ad-supported

needs large scale to amortize fixed costs -> needs investors

basic accounting


legal and accounting and hr


the financial anatomy of a startup

the scale of money

e.g. how much is a mall worth, how much is Oracle worth, ycombinator's grant, 'seed round', 'A round', etc

term sheets and terms

http://www.fenwick.com/publications/pages/explanation-of-certain-terms-used-in-venture-financing-terms-survey.aspx

http://avc.com/2010/05/an-evolved-view-of-the-participating-preferred/


Key Metrics

(and typical values)

What you want to do is get 'results' and increase the probability/amount of 'success', but you can't quantify or measure 'results' and 'success' directly.

Good characteristics of a KPI (key performance indicator) metric:

In addition, a metric should be something that you'd like to adopt as a goal. Like any goal, it should:

People recommend focusing on 3-5 metrics.

There are some financial metrics (such as revenue and profit) which are important across industries. Beyond these, different industries and business models have different metrics which are most important. It's worth trying to find out what metrics other companies in your industry, or who have your business model, use.

Basic financial metrics

SAAS metrics (software-business-specific)

Links:

Consulting metrics

I hear that consulting often uses revenue, rather than profit, as a metric for partners. I'm not positive why this is revenue and not profit, but presumably it's because, as consulting is not a scalable business model, the partner can't do much about costs; the consulting firm is billing by the hour, and the primary cost to the firm is people's time, and a given person assigned to a project will have a set rate that they are paid.


Basic startup law (America only)

Note on legal expenses: interacting with the legal system is so expensive that really only big companies can afford to do so. This is ironic because one of the goals of the law is to protect 'the little guy', but it's true. Unless you have access to a lot of capitol, try to stay out of situations where you will have to hire lots of lawyer-hours (such as suing someone else, or engaging in an industry that is highly regulated).

You may also want to avoid things like filing patents, because it costs a lot of money and because like anything, interacting with a system now increases the chance that you will interact with it more later.

You may even want to settle if you are sued and you think you are in the right, to avoid having the pay for lawyers (lawsuits have sometimes been referred to as 'the sport of kings' because small companies cannot really afford to participate in them).

I'm not saying that you shouldn't have a lawyer, you should, because talking to a lawyer early may prevent you from having to talk to one more later, e.g. it may be a net reduction in legal interaction.

An exception to this is things like registering a company which reduce your potential liability. These cost a little bit of money but you should do them.

Four things you can do to reduce your liability (i am not a lawyer and this is not legal advice):


Internet infrastructure (software-business-specific)


Your business plan


Pitching

not just for investors

similar to selling (you are selling an idea)

practice but you don't have to memorize every word. be concise. keep them interested; in many situations you are in an elevator, etc, so if you don't interest them early you won't be given time to continue. focus on the other person's interests and needs. confidence. do sweat the presentation details; if you have slides, align things on them, etc, if there are questions you are likely to be asked, know the answers cold. prepare early and get enough sleep if possible.

be bold. if you believe your thing will be big, say so.

a little intensity in your manner of delivery is also okay.

pitch to everyone you meet whenever you can (within reason), even if they are not people who can help you. This gives you practice. There is even a saying for this: "always be pitching".

if your audience is considering investing in you, and they aren't experts in your domain (tip: even your family and friends are in this position), they probably need to be assured that they aren't doing something stupid if they support you. Show them that others besides you are doing the same thing, that it's not just your weird idea, it's a trend. Show them that other high-profile experts who they may have heard of and/or trust believe in similar things. If possible, show them that their peers/competitors are already on board and they don't want to miss the boat/bandwagon.

don't pitch something you don't believe in! unless you are a smooth operator, your audience may be able to tell. But more to the point, if you don't even believe it, why the heck are you investing your life in it? Quit and do something else with your time! I doubt anyone reading this is actually considering pitching something they don't believe in, but the next paragraph is more likely:

If you do believe in your core idea, but you are not pitching the reasoning that convinced you because you think it is too far out to communicate to your audience, and so instead you are trying to argue for it based on something else that you don't believe is true, but that if it were true, would be persuasive... then stop doing that! You have to find a way to communicate the true part, the good part, to your audience. Yes, that's hard, but you have to do it. Sleep on it, think about it in the shower, you can do it; i've had a few big ideas that were at first seemed very abstract and 'ahead of its time' but that after going back to it many times i managed to find another way to explain it that was concisely and understandable.

advanced topic: reframe/reconceptualize (e.g. don't just accept the conventional paradigm and argue for your idea within it, introduce a paradigm from which your idea is the obvious next step; this is tricky because if you just jump into your paradigm you will sound crazy, you have to start with something the audience knows and bring them along).

some methods of reframing (this section is just random ideas, i dunno if i'm any good at reframing so they might even be counterproductive, bad ideas):

Getting investment

Almost full-time job

investors like hot things


Marketing

"everything you do is marketing"

marketing is not only advertising

market research

positioning

advertising

brand awareness vs. lead generation (note: as a startup you can't afford brand awareness campaigns)

a brand as a cognitive shortcut

lead generation is conventionally thought of as part of marketing, but we'll discuss it in section 'the sales funnel'

emotional over rational

how does it make the customer feel about their social role? does it make the customer look good?

sales

the sales funnel

leads, opportunities, warm and cold leads, conversion rate, goals

funnel thinking can be applied for broadly

e.g. worse is better essay

B2C vs B2B

the sleazy high-pressure 'sales tricks' you hear about mostly work only when getting the sale is an on-the-spot decision by consumers, as opposed to when it's a lengthly decision process by businesses. (cite)

in general, listen to your customers. they will tell you what they are looking for.

B2B: learn the decison-making structure of the company you are selling to


hiring


networking

the example of David Rubenstein (regardless of whether you agree with the politics of the Carlyle group, the point here is just time allocation).

hang out with people on the cutting edge

i'm not saying to force yourself to hang with people that you otherwise wouldn't enjoy hanging out with, but i am saying that if you would enjoy hanging out with them anyways, and they are on the cutting edge, then you can justify hanging out with them in your 'networking' time budget instead of just counting it as 'fun time'.

hang out with your peers and competitors

similar to the above


Deals

deals fall through

defer. don't spell out all your intentions before you need to, because it's possible that the other side has other ideas that are even better for you than what you were thinking about.

negotiation

know everything you can about your position, about your alternatives to this deal, and about the boundaries between when the deal is bad enough that it would be better for you to walk away.

know everything you can about their position (know, or try to make informed guesses about the same things that the previous sentence said to know about your position)

know everything you can about the subject of negotiation.

don't give information when you don't have to. when you make an offer, as you make the offer, reference some information that supports why this is a good deal for them and possibly why you can't do any better. after making an offer, wait for a counteroffer; try not to make an offer, have the other side say "nope, my offer is the same as before", and then just get nervous and raise your offer. don't seem desperate (which also implies, try not to place yourself in a situation where you are desperate, and then must negotiate).

it's good if you let the other party make the first offer, but on the other hand, don't be afraid to initiate discussion, and if you do, say something more substantial than "so, do you have any offers to make for me? i'm listening".

the best way to have a great outcome is to have a good alternative to the deal under discussion, and for that alternative to be credible i.e. you can prove to the other party that you have this alternative and that it's a good one (the canonical example is when you are buying a car, if you have a written quote from another dealer that is low). this way, you are willing to walk away and the other party knows it. This does not mean that the other party will agree every time, but it does mean that if you walk away you will still be happy.

do go ahead and try to be friendly and build a rapport with your counterparty. do be open to creative, non-zero-sum ways of improving outcomes for both of you. but otoh do listen if a little voice inside you says that the other party has something up their sleeve. do watch out for deals that are too good to be true, and try to think about what would have to be true for the other party to selfishly benefit from a seemingly unbelievable offer. do take the other party's offer home and consider it rather than negotiating on the spot. do allow time for negotiating to drag on; if you are more eager to close the deal quickly than the other side, you are at a disadvantage.


Tools (software-business-specific)

The Joel test

" 1. Do you use source control? 2. Can you make a build in one step? 3. Do you make daily builds? 4. Do you have a bug database? 5. Do you fix bugs before writing new code? 6. Do you have an up-to-date schedule? 7. Do you have a spec? 8. Do programmers have quiet working conditions? 9. Do you use the best tools money can buy? 10. Do you have testers? 11. Do new candidates write code during their interview? 12. Do you do hallway usability testing? "

-- http://www.joelonsoftware.com/articles/fog0000000043.html


Interpersonal interaction

Managing people

Managing vs. leading: various ppl have their own definitions of these things. I'll consider a 'manager' as the person to whom others report, and a 'leader' as a fuzzily defined position of trust that you cannot have by virtue of people reporting to you, but only by actually earning it. Note that my concept of 'leader' is slightly different from most people's; usually in business books the CEO at a company is defined to be a 'leader' regardless of how other people socially relate to the CEO. However, this difference is less meaningful than it seems, because usually the task at hand is not to perform sociology to discover who is playing the role of 'leader', but rather to try and learn and practice the skill of 'leadership', which is the skill of becoming a good leader.

communication

giving feedback: remember to praise

You should give praise as well as constructive criticism. In fact, you should praise more often than you constructively criticize, even during conflicts.

However, don't give insincere praise.

giving feedback: constructive criticism

However, you should also constructively criticize.

relationships

SMART

http://en.wikipedia.org/wiki/SMART_criteria

don't micromanage and don't do it all yourself

A common "gotcha" that is found in many sources of advice to new managers (e.g. http://www.quora.com/Management/What-are-common-mistakes-that-new-or-inexperienced-managers-make ) is not to micromanage and not to try to do the work yourself instead of delegating.

However, it should be noted that the advice not to do the work yourself may only apply once you have more than a couple of people to manage (one commentor in the previous link put the threshold at 5 people), which is almost never the case in an early-stage startup. For example, if there are only four people in the entire company, every one of those people had better be doing some work aside from just managing the others.

Leading people

initiative

you have to care about the project

you have to care about people

success

often swept under the rug in the self-help literature is that people respond to success. What i mean is that, if you have great leadership skills but you fail, the effect of the failure will be similar to if your leadership skills weren't as great as they are, and if you have terrible leadership skills but succeed, the effect of the success will be similar to if your leadership skills weren't so terrible as they are.

communicate a steady stream of wins.

listening to people

neither actually listening nor appearing to listen are good enough on their own, you must do both

think and say 'we'

caring about people

  neither actually listening nor appearing to listen are good enough on their own, you must do both

narrative (where are we, where are we going, and how are we getting there)

natural leadership

one version: at the end of the day, who do people pay attention to? there is a fast version of this; if you put a group of strangers together and ask them to make some decision, if you observe near the end of the discussion, one or a few leaders will say something and that will seem to determine the decision.

i'm not saying that this is the only attribute of natural leadership or that there can't be natural leaders who don't fulfill that criteria.

another version: if you call a meeting, do people come?

visions, mission, values

setting an example

optimism

  even most of pessimistic people respond better to optimism
  the CEO should never have a bad day
  i hear this kinda sucks because it means you have no one to support you when you have a bad day
  i hear this kinda sucks because it means you have the 'nobody knows the trouble i see' problem
    of course you need to point out the trouble you see so that everyone is trying to avoid it, but you can't make it seem unstoppable
  i hear this kinda sucks because it means, due to your optimistic projections, you must solely take the responsibility for determining if/when it's actually time to quit
  i hear these 'kinda sucks' are ameliorated by cofounders

Cofounders

i hear it can be poisonous when cofounders confide in non-cofounder employees about their issues with the other cofounders. i'm not necessarily proposing a ban on this, as this is hard to enforcably stop.

Rich vs. King

For some founders, the primary goal is to increase the value of the venture and the value of their equity stake. For others, the primary goal is to execute a vision. Most likely most founders have both motivations, but some are probably more one or the other.

The visionary motivation may sound more noble, but in order to execute a vision, a founder needs to have enough power over the company to get it to follow that vision. So, founders motivated by vision seek power and try to make themselves into Kings.

A Rich founder will more often compromise in order to pursue success. Better a smaller slice of a bigger pie. Whereas a King founder not only cannot compromise on the vision, and they also cannot compromise on their own power over the company.

Some empirical support for the idea that there is necessarily a tradeoff here: http://www.noamwasserman.com/2005/11/25/rich-versus-king-charts-and-impressions/

If you are a vision (King) founder, how much equity do you need to keep, and how far does this deviate from the average? For a case study, see http://www.noamwasserman.com/2012/04/19/fear-vs-greed-at-facebook-2/ . My conclusion: if you have a vision, don't take more cash than about 20% of your premoney valuation in the first 3 rounds (facebook did 10% but they're crazy lucky).

Due to Noam Wasserman.

labels for people

the title of this section is tongue-in-cheek because everyone knows that you should look at people wholistically rather than reducing them to labels. Still, i've found that reading about archetypal labeling schemes for people and for psychological concepts has sometimes led to insight about mistakes i've made or things i've missed about other people, so i'll present some here.

Myers-Briggs personality types

Sisney's four styles

Producer, Unifier, Innovator, Stabilizer

(note: another way of stating the producer style is: competitive, with concrete goals)

Goleman's six styles of leadership

A simplistic interpretation is that the Authoritative style is the best, the Affiliative, Democratic, and Coaching styles are good, and the Pacesetting and Coercive styles are bad. However, a major point is that Goleman found that effective leaders have mastered more than one of these styles, and switch between them as needed depending on the situation. The best leaders have mastered as least 4 styles.

Authoritative

Although Goleman recommends using multiple styles depending on situation, if you had to pick one, this is what he suggests is the 'best' single style.

Affiliative

Democratic

Could also be called 'consultative'.

Coaching

Pacesetting A surprise is that the 'pacesetting' leadership style is not very effective, except in some specific situations.

Coercive

todo

read more at http://www.haygroup.com/downloads/fi/Leadership_That_Gets_Results.pdf

another person's summary at http://www.fastcompany.com/1838481/6-leadership-styles-and-when-you-should-use-them

attributes of organizational climate

"First defined by psychologists George Litwin and Richard Stringer and later refined by McClelland? and his colleagues, it refers to six key factors that influence an organization’s working environment:

-- http://www.haygroup.com/downloads/fi/Leadership_That_Gets_Results.pdf (paraphrased)

Goleman's attributes of EQ

"Self-Awareness group:

Self-Management group:

Social Awareness group:

Social Skill group:

-- http://www.haygroup.com/downloads/fi/Leadership_That_Gets_Results.pdf

SCARF (de)motivators

Status, Certainty, Autonomy, Relatedness and Fairness

note: aversion stronger than attraction

http://www.davidrock.net/files/NLJ_SCARFUS.pdf

http://www.scarf360.com/about/

Batista/Pugliese's four dimensions of leadership

" Expert vs. Coach

The primary leader archetypes: the Expert with the answers, whose extensive domain experience is the basis for their authority, and the Coach with the questions, whose expertise lies in helping people discover the answers for themselves.

Evangelist vs. Motivator

Our word "evangelist" derives from the Greek "euangelistes," which means "bringer of good news." The Evangelist is on a mission to spread a message, and their goal is to rally others to their cause. The Motivator is agnostic, seeking to identify others' personal goals and help them move forward in their preferred direction, whatever it may be.

Trainer vs. Mentor

The Trainer is focused on the task at hand and shows others what is to be done (and how to do it better). The Mentor is focused on others' development, and immediate tactical performance is secondary to long-term strategic growth.

Mediator vs. Facilitator

The Mediator seeks to resolve conflict and maintain harmonious relationships in the service of group effectiveness. The Facilitator seeks to maximize learning and ensure that all voices are heard in the service of candor, integrity and authenticity. " -- http://www.edbatista.com/2013/10/leading-in-four-dimensions.html


institutional design

making decisions

decisions must get made, and if possible, made quickly. For motivation, having a command-and-control process that makes decisions quickly is preferably to an inclusive, consensus-building process that cannot come to a decision (this doesn't mean that i recommend decisions be made in a non-inclusive manner, it means that if you choose to make them in an inclusive manner you must still ensure that they are made).

meetings

meetings suck and if too much time is spent in meetings, it's the fault of the person who called/runs the meetings.

don't expect other people to hold back and not talk for long at the meeting just because they wish less time was spent in meetings. It's your job to enforce the agenda and time limits.

try to isolate big topics that could lead to long discussions (such as strategy) into their own meetings; you don't want these taking all the time and preventing other work from getting done.

If you are designing or architecting something, watch out for using meetings with more than a few people as a forum to bounce your own ideas off of others. How many is too many? 3 people, including you, is definitely not too many; i'm not sure how much is 'too many' but it's somewhere between 4 and 8 people. It's good to get feedback, but meetings are not the most efficient way to do this, because everyone must sit quietly while one person talks, so the more people there are, the more people are wasting their time sitting quietly waiting for others to finish. This is annoying to them. In addition, having too many people prevents deep discusssion. In addition, having too many people leads to 'design by committee', leading to bloated compromise designs instead of coherent, simple ones. Instead, consider having a series of one-on-ones or small meetings where you present your current ideas to others and hear their ideas.

top-down strategy, bottom-up priorities and tactics

One institutional design that is often recommended is for overall company vision and strategy to be set in a top-down manner, to clearly communicate to each team what the vision and strategy is and what their role is in this big picture, and then to let each team determine for itself what is important to do, and how to do it.

This fits in with Goleman's "authoritative" leadership style.

don't make effectiveness report to efficiency

"avoid placing efficiency-based functions such as operations or quality control over effectiveness-based functions such as R&D, strategy, and training" -- Sisney

don't make long-term report to short-term

"avoid giving short-range functions like Sales, Operations, and Engineering power over long-range functions like Marketing, R&D, and People Development" -- Sisney

Centralize compliance

Centralize any functions that cause a risk to the company as a whole if they fail; e.g. legal, accounting, HR, risk management.

Centralize standardization

Centralize functions that must be standardized to form a basis for managing the company.

For example, if there are key metrics that are supposed to be used to manage the company, but different parts of the company use procedures and/or software for computing these metrics, then their numbers may not be direcly comparable. Instead, the function of producing these numbers should be centralized.

Centralize for efficiency?

I get the sense that large companies often centralize additional functions for the sake of efficiency. This saves money but at the cost of reducing the autonomy of parts of the organization. This isn't recommended for startups because at a small scale, the dollar value of these efficiency gains isn't very much.

Have metrics

Have metrics for as many parts of the company as possible, e.g. revenue, costs, efficiency, etc.

To take this to the extreme, you could even give each 7-person team their own metric (Amazon apparently does this: see http://blog.jasoncrawford.org/two-pizza-teams ).

beware: people will try to meet the metrics rather than to do good

Divisional vs. functional

Consider a company with multiple products or even multiple product lines. One strategy is to decentralize as much as possible. This is called a 'divisional' strategy. Each division has every function within itself except for a few centralized functions. For example, each division does its own marketing and its own engineering. The key property of a divisional organization is that a meaningful P&L (profit-and-loss) metric is calculated for each division, and this metric is what the division is accountable for. In other words, the divisional strategy is to push P&L down as low as possible. You might say, this isn't the real P&L because what about those remaining central functions? My answer is, the costs of those central functions scale sub-linearly with revenue (i bet they are log-scaling). Just be sure that any costs that scale linearly with revenue are in the division.

Another strategy is called 'functional'. Each function is a separate organizational unit, and each product involves interactions between all of these units. This strategy is more centralized and dependent upon the executive leadership.


Optimizing yourself

Set priorities

Don't let them be set by others (except of course when your job is defined that way; but even then this only holds within sub-priorities of the personal priority of 'doing your job').

Focus attention

Know yourself

Making decisions

have 3 alternatives

sleep on it

Think/talk/act

Projects require all three of these things, but they require more acting than talking, and more talking than thinking. Make sure you don't neglect any of them.

Design

Akins laws

http://spacecraft.ssl.umd.edu/old_site/academics/akins_laws.html


Books to mb read

List of counterintuitive observations


Index

index of notes/business/startups


CategoryBookDraft