There is no giant step that does it; it takes a lot of little steps. Every big and successful business starts from a lot of little steps. And there is no magically difficult step that requires brilliance to solve.
There are three things to consider in creating a successful startup: to start with good people, to make something customers actually want, and to spend as little money as possible.
Most startups that fail to do it because they fail at one of these. A startup that does all three will probably succeed. And that’s kind of exciting, because all three are doable. Hard, but doable. And since a startup that succeeds ordinarily makes its founders rich, that implies getting rich is doable too. Hard, but doable.
It all started with an “idea”. And the way to get a startup idea is not to try to think of startup ideas. It’s to look for problems, preferably problems we have ourselves. The very best startup ideas tend to have three things in common: they’re something the founders themselves want, that they themselves can build, and that few others realize are worth doing. Microsoft, Apple, Yahoo, Google, and Facebook all began this way.
Ideas don’t need to be brilliant to startup a business. The way a startup makes money is to offer people better technology than they have now. But what people have now is often so bad that it doesn’t take brilliance to do better.
Google’s plan, for example, was simply to create a search site that didn’t suck. They had three new ideas: index more of the Web, use links to rank search results, and have clean, simple web pages with unintrusive keyword-based ads. Above all, they were determined to make a site that was good to use. No doubt there are great technical tricks within Google, but the overall plan was straightforward. And while they probably have bigger ambitions now, this alone brings them a billion dollars a year.
An idea for a startup, however, is only a beginning. A lot of would-be startup founders think the key to the whole process is the initial idea, and from that point all you have to do is execute. Another sign of how little the initial idea is worth is the number of startups that change their plan en route. Microsoft’s original plan was to make money by selling programming languages, of all things. Their current business model didn’t occur to them until IBM dropped it in their lap five years later.
Ideas for startups are worth something, certainly, but the trouble is, they’re not transferrable. They’re not something you could hand to someone else to execute. Their value is mainly as starting points: as questions for the people who had them to continue thinking about.
What matters are not ideas, but the people who have them. Good people can fix bad ideas, but good ideas can’t save bad people.
Good people means someone who takes their work a little too seriously; someone who does what they do so well that they pass right through professional and cross over into obsessive.
Ideally in starting a business we want between two and four founders. It would be hard to start with just one. One person would find the moral weight of starting a company hard to bear. Even Bill Gates, who seems to be able to bear a good deal of moral weight, had to have a co-founder. But you don’t want so many founders that the company starts to look like a group photo. Partly because you don’t need a lot of people at first, but mainly because the more founders you have, the worse disagreements you’ll have. When there are just two or three founders, you know you have to resolve disputes immediately or perish. If there are seven or eight, disagreements can linger and harden into factions. You don’t want mere voting; you need unanimity. Don’t force things; just work on stuff you like with people you like.
Founders for the startup don’t mean to always include business people. Business was no great mystery. It’s not something like physics or medicine that requires extensive study. You just try to get people to pay you for stuff. There are esoteric areas of business that are quite hard, like tax law or the pricing of derivatives, but you don’t need to know about those in a startup.
There is one reason you might want to include business people in a startup, though: because you have to have at least one person willing and able to focus on what customers want. There’s nothing about knowing how to program that prevents hackers from understanding users, or about not knowing how to program that magically enables business people to understand them.
If you can’t understand users, however, you should either learn how or find a co-founder who can. That is the single most important issue for technology startups, and the rock that sinks more of them than anything else.
Next is to understand what the customers want. It’s not just startups that have to worry about this. Most businesses that fail to do it because they don’t give customers what they want. Look at restaurants. A large percentage fails, about a quarter in the first year. Restaurants with great food seem to prosper no matter what. A restaurant with great food can be expensive, crowded, noisy, dingy, out of the way, and even have bad service, and people will keep coming. It’s true that a restaurant with mediocre food can sometimes attract customers through gimmicks. But that approach is very risky. It’s more straightforward just to make the food good.
In nearly every failed startup, the real problem was that customers didn’t want the product. For most, the cause of death is listed as “ran out of funding,” but that’s only the immediate cause. The only way to make something customers want is to get a prototype in front of them and refine it based on their reactions.
To figure out what customers want, you need to watch them. One of the best places to do this was at trade shows. Trade shows didn’t pay as a way of getting new customers, but they were worth it as market research. No matter what kind of startup you start, it will probably be a stretch for you, the founders, to understand what users want.
When most people think of startups, they think of companies like Apple or Google. Everyone knows these, because they’re big consumer brands. But for every startup like that, there are twenty more that operate in niche markets or live quietly down in the infrastructure. So if you start a successful startup, odds are you’ll start one of those. And if you try to start the kind of startup that has to be a big consumer brand, the odds against succeeding are steeper. The best odds are in niche markets. Since startups make money by offering people something better than they had before, the best opportunities are where things suck most. This imbalance equals opportunity.
They’re the more strategically valuable part of the market anyway. In technology, the low end always eats the high end. It’s easier to make an inexpensive product more powerful than to make a powerful product cheaper. So the products that start as cheap, simple options tend to gradually grow more powerful till, like water rising in a room, they squash the “high-end” products against the ceiling. Sun did this to mainframes, and Intel is doing it to Sun. Microsoft Word did it to desktop publishing software like Interleaf and Frame maker. Mass-market digital cameras are doing it to the expensive models made for professionals. Avid did it to the manufacturers of specialized video editing systems, and now Apple is doing it to Avid. Henry Ford did it to the car makers that preceded him. If you build the simple, inexpensive option, you’ll not only find it easier to sell at first, but you’ll also be in the best position to conquer the rest of the market.
It’s very dangerous to let anyone fly under you. If you have the cheapest, easiest product, you’ll own the low end. And if you don’t, you’re in the crosshairs of whoever does.
Another thing to consider for starting up a business is to raise funds. To make all this happen, you’re going to need money. Some startups have been self-funding– Microsoft for example– but most aren’t. It’s wise to take money from investors. To be self-funding, you have to start as a consulting company, and it’s hard to switch from that to a product company.
Financially, a startup is like a pass/fail course. The way to get rich from a startup is to maximize the company’s chances of succeeding, not to maximize the amount of stock you retain. So if you can trade stock for something that improves your odds, it’s probably a smart move.
The first thing you’ll need is a few tens of thousands of dollars to pay your expenses while you develop a prototype. This is called seed capital. Because so little money is involved, raising seed capital is comparatively easy– at least in the sense of getting a quick yes or no.
When you’re going to have some kind of company, incorporating yourselves isn’t hard. The problem is, for the company to exist, you have to decide who the founders are, and how much stock they each have. If there are two founders with the same qualifications who are both equally committed to the business, that’s easy. But if you have a number of people who are expected to contribute in varying degrees, arranging the proportions of stock can be hard. And once you’ve done it, it tends to be set in stone.
There are no tricks for dealing with this problem. You all have to try hard to do it right. But there is a rule of thumb for recognizing when you have, though. When everyone feels they’re getting a slightly bad deal, that they’re doing more than they should for the amount of stock they have, the stock is optimally apportioned.
There is more to setting up a company than incorporating it, of course: insurance, business license, unemployment compensation, etc. It turns out that no one comes and arrests you if you don’t do everything you’re supposed to when starting a company. And a good thing too, or a lot of startups would never get started.
It can be dangerous to delay turning yourself into a company, because one or more of the founders might decide to split off and start another company doing the same thing. This does happen. So when you set up the company, as well as apportioning the stock, you should get all the founders to sign something agreeing that everyone’s ideas belong to this company and that this company is going to be everyone’s only job. While you’re at it, you should ask what else they’ve signed. One of the worst things that can happen to a startup is to run into intellectual property problems.
There is no rational way as to how do you decide what the value of the company should be. At this stage the company is just a bet. The next round of funding is the one in which you might deal with actual. But don’t wait till you’ve burned through your last round of funding to start approaching them.
Getting money from an actual financing firm is a bigger deal than getting money from investors. The amounts of money involved are larger, millions usually. So the deals take longer, dilute you more, and impose more onerous conditions.
When and if you get an infusion of real money from investors, do not spend it. In nearly every startup that fails, the proximate cause is running out of money. Usually there is something deeper wrong. But even a proximate cause of death is worth trying hard to avoid.
Of the two versions, the one where you get a lot of customers fast is of course preferable. But even that may be overrated. The idea is to get there first and get all the users, leaving none for competitors.
But I think in most businesses the advantages of being first to market are not so overwhelmingly great. Google is again a case in point. When they appeared it seemed as if search was a mature market, dominated by big players who’d spent millions to build their brands: Yahoo, Lycos, Excite, Infoseek, Altavista, Inktomi. But as the founders of Google knew, brand is worth next to nothing in the search business. You can come along at any point and make something better, and users will gradually seep over to you. As if to emphasize the point, Google never did any advertising. They’re like dealers; they sell the stuff, but they know better than to use it themselves.
The competitors Google buried would have done better to spend those millions improving their software. Future startups should learn from that mistake. Unless you’re in a market where products are as undifferentiated as cigarettes or vodka or laundry detergent, spending a lot on brand advertising is a sign of breakage. And few if any Web businesses are so undifferentiated.
We were compelled by circumstances to grow slowly, and in retrospect it was a good thing. The founders all learned to do every job in the company.
That’s the key to success as a startup. There is nothing more important than understanding your business. You might think that anyone in a business must, ex officio, understand it. Far from it.
“If the people lead, the leaders will follow.” Paraphrased for the Web, this becomes “get all the users, and the advertisers will follow.” More generally, design your product to please users first, and then think about how to make money from it. If you don’t put users first, you leave a gap for competitors who do.
To make something users love, you have to understand them. And the bigger you are, the harder that is. So it is advice to say “get big slow.” The slower you burn through your funding, the more time you have to learn.
The other reason to spend money slowly is to encourage a culture of cheapness. When you get a couple million dollars from a financing firm, you tend to feel rich. It’s important to realize you’re not. A rich company is one with large revenues. This money isn’t revenue. Its money investors have given you in the hope you’ll be able to generate revenues. So despite those millions in the bank, you’re still poor.
When you’re looking for space for a startup, don’t feel that it has to look professional. Professional means doing good work, not elevators and glass walls. It is advice that most startups to avoid corporate space at first and just rent an apartment. You want to live at the office in a startup, so why not have a place designed to be lived in as your office?
Besides being cheaper and better to work in, apartments tend to be in better locations than office buildings. And for a startup location is very important. The key to productivity is for people to come back to work after dinner. Those hours after the phone stops ringing are by far the best for getting work done. Great things happen when a group of employees go out to dinner together, talk over ideas, and then come back to their offices to implement them. So you want to be in a place where there are a lot of restaurants around, not some dreary office park that’s a wasteland after 6:00 PM. Once a company shifts over into the model where everyone drives home to the suburbs for dinner, however late, you’ve lost something extraordinarily valuable. God help you if you actually start in that mode.
The most important way to not spend money is by not hiring people. This may be an extremist, but hiring people is the worst thing a company can do. To start with, people are a recurring expense, which is the worst kind. They also tend to cause you to grow out of your space, and perhaps even move to the sort of uncool office building that will make your productivity worse. But worst of all, they slow you down: instead of sticking your head in someone’s office and checking out an idea with them, eight people have to have a meeting about it. So the fewer people you can hire, the better. Don’t hire people to fill the gaps in some a priori org chart. The only reason to hire someone is to do something you’d like to do but can’t.
If hiring unnecessary people is expensive and slows you down, why do nearly all companies do it? The main reason is that people like the idea of having a lot of people working for them. This weakness often extends right up to the CEO. If you ever end up running a company, you’ll find the most common question people ask is how many employees you have. This is their way of weighing you. It’s not just random people who ask this; even reporters do. And they’re going to be a lot more impressed if the answer is a thousand than if it’s ten. If two companies have the same revenues, it’s the one with fewer employees that’s more impressive.
As with office space, the number of your employees is a choice between seeming impressive, and being impressive. Any of you who were nerds in high school know about this choice. Keep doing it when you start a company.
More people are the right sort of person to start a startup than realize it. There could be ten times more startups than there are, and that would probably be a good thing.
It’s hard to tell whether you’re good, especially when you’re young. Fortunately the process of starting startups tends to select them automatically. What drives people to start startups is (or should be) looking at existing technology and thinking, don’t these guys realize they should be doing x, y, and z? And that’s also a sign that one is good.
Some people could probably start a company at 18 if they wanted to. Bill Gates was 19 when he and Paul Allen started Microsoft. (Paul Allen was 22, though, and that probably made a difference.) So if you’re thinking, we don’t care what he says, we’re going to start a company now, you may be the sort of person who could get away with it.
The final test may be the most restrictive. Do you actually want to start a startup? What it amounts to, economically, is compressing your working life into the smallest possible space. Instead of working at an ordinary rate for 40 years, you work like hell for four. And maybe end up with nothing– though in that case it probably won’t take four years.
So mainly what a startup buys you is time. That’s the way to think about it if you’re trying to decide whether to start one. If you’re the sort of person who would like to solve the money problem once and for all instead of working for a salary for 40 years, then a startup makes sense.
If you want to do it, do it. Starting a startup is not the great mystery it seems from outside. It’s not something you have to know about “business” to do. Build something users love, and spend less than you make. How hard is that?
And now that we’re about to open for business, here are five tips for starting out on the right foot:
1. Search for suppliers and subcontractors you can count on. Use these sources:
* Yellow Pages
* Research organizations
* Trade organizations/industry groups
* Specialty magazines in your industry
* Chambers of Commerce
* Connections and networks
2. Carefully evaluate each supplier’s quality, price, and service by checking references and using trial orders.
3. Establish good credit by paying your bills as quickly as possible.
4. Negotiate the best terms you can, using your start-up situation as leverage
5. Seek to build long4erm relationships with your best suppliers.
The following are the basic start-up principles, here are eight dos and don’ts:
1. Do create a written business plan. Don’t worry about its length (10 to 40 pages, depending on the type of presentation) as much as its strength (include 8 or 9 basic components; see page 10).
2. Don’t shortchange yourself in terms of staff, equipment, and space-but do think “lean.” During your early stages of growth, do strive to keep your business as simple as possible.
3. Do apply for credit in your start-up period, even if you don’t need it. It’s important to start building a credit rating and credit history as soon as possible so evidence of your creditworthiness grows as your financial needs grow.
4. Do establish a working relationship with more than one banker. Not only will this help keep your bankers competitive and protect you against unexpected changes in the banking community, but it will give you more options as your financial needs grow.
5. Don’t use short-term debt to finance long-term needs. Match loans and terms to your need and payment base. Since you are building equity in equipment and real estate from profits over a number of years, you should finance it the same way.
6. During your start-up period, do give your suppliers proof that there’s demand for your product or service. They want you to succeed. If you show them why you can, chances are they will not only extend credit, but also give you the attention you deserve.
7. Do ask customers for feedback regularly. Invite them to be candid and to tell you about your weaknesses as well as your strengths, and how you can serve them better.
8. Don’t rely solely on long-term goals (e.g., annual or quarterly). Do set daily and weekly objectives that will help you measure performance day-to-day and week to week.