Tag: Entrepreneurs

On Taking Risk

As part of any entrepreneurial pursuit, founders and VCs engage in various mating rituals that are as much about judging risk as they are about judging opportunity.

Over the weeks and months of pitching, founders and VCs manage to assign some subjective meaning to various parts of the risk stack.

Risk stack for startups

During most of this process, your pitch is that each of these is either

  • solved,
  • understood, or
  • will be managed so as not to hurt your chances of success.

However, your reality is that risk along each of these axis, if not taken earliest possibly opportunity will GROW exponentially. Risk is good when quantified early and taken early. Unknown risk equals infinite risk for startups.

The risk stack is contained only by explicitly addressing each component of it as early as possible – before or at least at the first financing.

Another danger is that risk not taken turns toxic in startups. What I mean is the effects of that risk will start to influence other areas. For example, if user related risk is the highest risk not taken, lack of knowledge about how users perceive your product or interact with your product will quickly seep in to other decision-making. In this instance, not knowing the user’s ability to understand the value will invariably lead to sub-optimal decisions across design, features, and operations.

If there is anything I have learnt in the past few years in my experiments in small investments and working with early stage teams, it is that I am learning how to help founders figure out risk and perhaps help them take more risk as soon as possible.

My mission statement as an individual investor is that “Hello, my name is rohit. How may I  help you take more risk.”

p.s. Business model intentionally not part of the risk stack. That is a composite risk which merits more thought before I can say anything meaningful about it.

 

Picking Advisors for Your Startup

Somewhere in the entrepreneurial journey from an idea to a startup, founders will often meet friends and colleagues to brainstorm and develop their ideas. In some of these conversations “Oh I think you should meet XYZ person who’d be great for feedback” event happens multiple times. Some of these people are potential advisors for your startup. Here are some thoughts on how to think about advisors at various stages of the idea-to-company odyssey.

Remember your Advisor’s job is to help you make non-obvious choices in the face of imperfect and sometimes non-existent data. Recruit accordingly.

The Six Cardinal Directions of Effective Advisors

1. The most important skill an advisor can bring to you and your idea is a way to improve your idea by asking you the right and often ‘hard’ questions. People who want to replicate the success they had even if in the same area as your startup by repeating the same approach/execution/recipe are not the right ones for you. Beyond the usual “Oh Its nice” or “Its great” responses, listen for something that signals that your idea made them think. If they then come back with questions you haven’t yet asked yourself, they may be a good match as an advisor.

2. Don’t confuse mentor with advisor. Mentors are a rare breed of individuals. They are good at asking questions and making you learn regardless of what they or you are working on. Conflating the two may not necessarily be good for you or your  startup.

3. How do they talk about failure and what they’ve learnt from the failure matters as much as what they’re successful at. Ask them what they have learnt in the last three years as a result of a failure that has now changed their thinking or behavior in a meaningful way.

4. Make sure you ask them if they have played the role (paid in equity usually) with at least one other startup. You want to ensure that they are not going to play ‘Product Manager’ for you with good intentions and potentially disastrous results. Advisors are not going to invent your product or your market or your product-features. They can be invaluable in pointing out the voids in your product strategy or feature-list or competitive dynamics. Advisors who are good at pointing out what doesn’t exist are often far more helpful than the ones who suggest a specific feature or two.

5. Ask them for a specific commitment of time, effort, and introductions you expect from them over the first year of your collaboration. Introduce them to your other advisors and create some opportunities for them to collaborate – enabling them to think beyond their usual domain is effectively delightful compensation for them beyond the equity you will give them.

6. Your advisors are not your investors. Keep these two roles separate. While there may be some overlap, they have distinct responsibilities for you and your startup.

The Entourage Approach

For certain startups and founders, an ‘entourage’ may be more appropriate which functions as early adopters and influencers in your marketplace. Perhaps the best example of this approach was about.me where @tonysphere and other founders were well connected and signed up 26 advisors to help them push to a million users within a year and an acquisition by AOL. If you’re not as well connected as the fine folks at about.me, this may not be the way to go. A weak entourage is baggage, not balloons.

Advisor Compensation

I will write about Advisor compensation in a future post but here are some guidelines for silicon valley startups:
for early stage (between idea stage and funding) formal advisors, expect to share about 1% equity which goes down to approx 0.25% for seed-funded startups and often between 0.1 and 0.25% for developing stage startups. Typically the equity vests monthly over a year without any cliff and there is no other compensation (e.g. cash).

Facebook Lessons for Startups & Founders

Facebook filed their S-1 with SEC on February 1, 2012 and triggered yet another round of discussions in the valley digirati and digirazzi alike.  From computations of founder stakes to opinions on investment, tech and popular media made sure no one missed any aspects of the filing.

So what does it mean (If anything) for current and future founders of tech startups? Success at this scale – adoption, financial success, and pioneering a new segment of communications is rare and deserves much praise. The founders in this case – from Zuckerberg to Parker, Moskovitz, and even the Winklevii deserve all the praise they get for playing a role in the success.

Your first few employee matter a lot more than you think

I would also like to point out the critical role played by the first tens of engineers (hackers if you will) in building Facebook. Less heralded and often ignored all together by the media, this corps of engineers in my opinion deserves as much praise as the ones grabbing headlines in the press. Without the efforts of this group, Facebook could not have made it – founder foresight/passion/skills notwithstanding. Referred to as ’employees’ this group is as much of a co-founder as ‘the founder’ himself. They took nearly the same risks, likely contributed as much to product, platform, and technology, and helped it get from its early success to a product whose expansion beyond .edu domain was one of the most eagerly awaited consumer product introductions ever.

For founders, the aspects worth emulating aren’t the ones highlighted by blogs and media today – try and focus on the early parts of the arc of Facebook’s success. You will find many of the traits espoused by Eric Ries and Steve Blank when you examine the first year or so at Facebook (2004-2006). Some of the ones that stood out for me:

Build fast, release early, Find your Market-fit.

Famous for putting out the first iteration of the kernel of ‘TheFacebook’ in a week, this is a great example of lean development and testing market-fit. It wasn’t the first iteration either – Facemash which was a hot-or-not style site/application that Zuckerberg built prior to Facebook at Harvard and saw immediate adoption. Remember that hot-or-not was a circa 2000 phenomenon and Facebook’s first iteration was in 2004.

Focus on Users; user-adoption, user-experience.

In 2005, the valley was hearing whispers about Facebook and how Accel “went and got the deal” at an unheard of valuation (remember we were just coming off the dark years of 2002-2003), no one talked about Facebook’s technology or its platform or how it may one day be the dominant social-connector and app-platform.  But the first line one heard about Facebook was how many users they had, how much time these users were spending on Facebook, and the rapid growth rate that was easily the highest for any consumer app. This was a dramatic contrast with Google where the talk was about the outstanding infrastructure and how that gives them a unique advantage vs. everyone else in search and advertising. Unless you are building an application that needs to invent new systems and infrastructure, stay focused on users. Adoption will enable you to invent a platform and plenty of technology once you’re successful.

Surround yourself with people smarter than you

Graduating from a Harvard dorm room to University Avenue in Palo Alto, Facebook continued to find and learn from some of the best in their domain – whether it was Zuckerberg learning from Don Graham (Washington Post) or the stellar list of its board members and investors, it didn’t just happen by accident. I am not saying Zuckerberg is not smart, I am saying one of his smartest moves was to find people smarter than him at that point in time about an aspect of his startup. For founders, the clear lesson is find and pitch the smartest people you can find. I suggest a simple approach to accomplishing it:

When you meet prospective VCs (Partners or Associates) or Advisors, ask them to introduce you to two other people that they think are the smartest in the business.  Be persistent and chase down these introductions, turn them in to meetings, and ask them to introduce you to two more in turn.  In a few months you should be able to meet with enough people to learn from and who can be potential investors, advisors, or informal-advisors to your startup.

Think long term

This one is the easiest point to state and the hardest to follow. I believe there is a fair value at every step for a startup  if they have taken angel/venture money. And  they must be responsible in considering any offers that come their way. I also believe there is much (realizable) value in finding a way not to take that offer. Each such situation is unique but do consider that if you can find a way to build more value, you will have a chance to deliver life-changing rewards for yourself, your team, and your investors.

You know what’s cool? A Billion users. 

Building a startup that delivers a Billion+ in profits eight years after starting is Cool. But do you know what’s really cool – that Zuckerberg’s efforts changed and enriched the lives of thousands of employees and millions of users. A founder’s measure isn’t the capital they return or create, it is the number of lives they touch, improve, and change.

If all you wanted to make was money, there are easier paths to realize that goal. Be a founder if you want to make a difference. Money will follow.

On Startup Values

In Silicon Valley, ‘startup’ is one of the most common and the most valuable word one hears about town. Freely bandied about by those who were once in a startup, are currently in a startup or want to start one, the word is a badge of pride for those who have experienced it.

Less understood is what goes in to creating, sustaining, and growing a startup.  Founders, money, employees, investors, technology and products are necessary but not sufficient ingredients for startup success. One of the crucial ingredients one rarely hears about and is usually not understood by most is Startup Values.

Values is not capital you can raise from VCs. Values are reflected by a few critical qualities founders and startup employees must either have or recognize and cultivate. Values are not transplantable a few months or years in to the journey. More than a few (very smart) founders I know dismiss it by saying “We will focus on values once we’re successful”. Wrong! Startup values are like a seed you plant on day one alongside your ideas and it needs the same care and nurture as your technology and products.

integration symbol

I have always felt that the key startup values are:

Honesty

Honesty in a startup primarily means interpersonal honesty between all the employees. Honesty is also the fabric that links objective measurement of a startup’s progress along chosen metrics and the startup’s stated goals.  In between founders and employees and between multiple founders in the case of cofounders, honesty is the only way to sustain a working relationship.

How to get it right: Communications is a key component of honesty. Founders and CEOs must ensure everyone understands where they are, where they are going, and how they are going to get there. You can never communicate enough and email is perhaps the poorest mode of such communication. In a small team, a 5 minute sync meeting every day or 15 minutes every week should suffice.

How do you know its not working: When you find yourself ‘marketing’ or spinning the truth to your coworkers, you must have the courage to admit you’re not being honest. In a startup context, some typical phrases that should serve as warning signs include “It will be easy to raise money”, “Hockey stick growth is just a couple of features away” or “We can always acquire users through advertising” or “There will be lots of buyers for the company if you get to X number of users”. When employees hear such things from their CEO or founders, ask questions. If startups hear such words from their investors, take a long hard look at their track record and at your balance sheet.

Flexibility

In a startup, you often recruit friends, referrals from friends, and those you respect to the mission at hand. Flexibility doesn’t just apply to founders/CEOs but to everyone. Venturing in to areas adjacent to your area-of-comfort as far as your skills go will be often required. A good startup team at work is like an ongoing game of 3D twister. Flexibility, once it becomes part of your startup’s DNA, makes it better at evolution as well as adapting to challenges.

How to get it right: Be open when CEOs/founders ask you to do something beyond your area of expertise or experience. Voice your fears openly, express your challenges clearly. Ask for help when you need it, offer help when you see someone needing it.

How do you know its not working: When you hear CEOs/founders/employees express “Thats not what I was hired for”, it should serve as an early warning sign. If your startup is not good at handling failure (see below), it will be hard to build a culture of flexibility.

Creativity

A startup is (most of the time) an irrational pursuit with a high probability of not following its initial trajectory. Creativity, exercised at all levels from infrastructure/technology to design & delivery, is the most powerful value you can have to combat existing products you compete with or to highlight the one thing you excel at versus all others. It is an essential part that improves flexibility and helps a startup to navigate competition that may be better capitalized or entrenched. At a personal level, creativity is an everyday expression of how things get done in a startup with limited resources and money.

How to get it right: If a startup, prior to success (users or revenue) can point to something unique that they do that others do not, it is likely creativity that is at work.

How do you know its not working: If your coworkers, founders or CEOs talk too much about “This is how I did things at company XYZ” when it comes to talking technology, products, or your market, you should fear that your startup lacks creativity. More than any other area, past work is really not a good indicator of the future in startup.

Failure with grace

This is perhaps the most talked about ‘lean‘ (e.g. smart) aspect of a startup’s journey from idea to success and may be the most misunderstood. No one likes to fail even though fail-fast, fail-often, fail-early is an easy set of words to say. I believe failure with grace is not just for complex systems. Seemingly trivial interactions between team members are often predicated on success, not failure and unless everyone in the team in a startup can freely (and honestly) express failure, re-calibrate, and have a chance of re-delivering, each failure will be costly in an interpersonal sense.

How to get it right: All employees must be comfortable in saying “I failed at XYZ and here’s how I am going to get it right”. When there is no interpersonal unease or ‘cost’ to saying/hearing it, you will know your team is on the right path to integrate failure as a navigational mechanism to find the right direction.

How do you know its not working: When someone in the team fails ‘silently’ at a task or two and begins to find excuses vs. ‘claiming the failure’ is a dependable sign of lack of this startup value. Silent failures are deadly in all kinds of systems, and deadlier in a startup.  A failure not owned at the first sign of it is a toxic seed that will threaten startup success.

Measurable heuristics

Every startup is based on a few early ideas about how their world ought to be. Startups must be honest with themselves to figure out the right measurements for their heuristics about how their product will evolve.  Measurement and heuristics are the yin and yang of startup ideas.  One cannot exist without the other or has no meaning without the other.  A right balance between these two is often the hardest value to get right in a startup.  Too much heuristics to guide you may mean unconstrained wander before you find your market while too much measurement will surely constrain good thinking with possible false positives and negatives. Measurement confirms innovation, but rarely initiates it.

How to get it right: Teams must have the discipline to listen to measurements for determining growth and listen to heuristic thinking to set the first vectors for experimentation.

How do you know its not working: Each discussion of a new feature, product, or change must be accompanied by “how will we know its working” discussion. Success is not pornography that you will know it when you see it. If you cannot measure success, it is likely you do not yet know how to go to there.

I hope you found something worth thinking about in this post and I’d love to hear from you (comments below or tweet  @rohit_x_).

In a related future post, I will be writing about working with VCs that share these values and help your startup enhance them.

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