Saturday, 7 January 2012

10 lessons for Web Tech Startups

//original piece first published in memeburn - some updates in this post// 

Having been involved in the web tech space for some time now (, IS Labs and recently QuirkLabs), I have been lucky enough to have worked with and around some of South Africa's best entrepreneurs.   Here are some lessons I have learnt:

1. The Boot: Almost every business can be bootstrapped to start.  And should be. Not even Google (server intensive) needed outside financing for its first couple of years.  Superstar entrepreneurs have an uncanny knack of making money go extremely far and this in itself forces creative solutions to problems that almost always spawn new opportunities. I strongly encourage entrepreneurs to seek financing later in the development of their business, ideally post prototype, and as close to product launch as possible. Too much capital makes a small businesses lazy. If you use finance as an excuse to start your business, you should be getting a job, not starting a business.

2. Capital Efficiency: I have never found a reason to pay founders what they are “worth” in the market. If you want to start a business and believe that venture finance should be paying you a professional salary, you should be a getting a job. In fact, I have always believed that founders should use venture finance only for stuff that relates directly to a cost of sale. The easiest thing for founders is to beg, borrow and steal (figuratively) from the 3 F’s (friends, family and fools).

3. Cash really is King: “Turnover is Vanity, Profit is Sanity and Cash is Reality”. There is nothing more important to a startup than cash-flow.  Nothing.  I advise all founders to build a real-time cash-flow model that works for them.  There is no need to get caught up in GAAP intricacies either.  Put simply, it is your total cash in the bank less bills (“burn-rate”) plus revenue.  Income statements are  mostly irrelevant for early startups and balance sheets only become useful if you want to sell your business or borrow money (assets as collateral).

4. Two-Minutes Noodles:  If the entrepreneur can eat Two-Minutes noodles and still be evangelical about their business, you know your founder has the right value system.  The truth is, successful entrepreneurs never do it for the money, they do it to change the world.  This is, of course, less about eating the noodles and more about seeing what type of person you are.

5. Product Paradox: The founders need to get a product out as soon as possible and then iterate through a fast customer feedback loop.  At the same time, the founders need to operate meticulously. Product development needs to be thoroughly thought-out and planned.  And I don’t just mean in the founders heads. I mean detailed planning.  Your planning will invariably look far different from actuality, of course, but that is fine.  Planning forces you to think of the roadblocks that could derail your business.

6. The Law of Two:  Successful startups (measured in terms of longevity) almost always have two co-founders.  One is usually more visionary and the stronger communicator, the other, highly technical and strong on the detail.  The best startups have founders with all the skills, just in varied strengths.  One thing is certain, their skills are invariably complimentary.

7. The Darwin Rule: As Darwin eruditely said: "It is not the strongest of the species that survives, nor the most intelligent that survives. It is the one that is the most adaptable to change."  Having the best product, while extremely powerful, is almost never the deciding factor of success in a startup.  Rather it is the business most able to respond to market shifts.  Gone are the days when product life cycles lasted decades.  People who are unable to adapt quickly and want the next day to resemble the previous should rather get a job.

8. Ideas are like Carbon Monoxide:  They are increasingly abundant and of little use.  Don’t be married to your idea and don’t think your idea is worth money - it almost never is.  Most ideas are worth nothing without execution.  Ensure you spend time unpacking your idea and formulating an action plan to assess viability and value.  The devil is always in the details.  Most great businesses started off with an idea that was, at best, only loosely-related to what made them successful in the end.  Such is the evolutionary nature of business.

9. Evangelical Rule:  Entrepreneurs need to believe so strongly in what they are doing, they believe they are saving the world through their product.  They believe, like Steve Jobs, that they are “putting a dent in the universe”.  They have evangelical zeal that on the surface is quite annoying.   It is hard to overstate the importance of this frame of mind in your founders.  It is the difference between people who do 8 hour and 16 hour days; between two-minute noodles and long lunches; between living your startup and seeing it as a “job”.

10. Ham-and-Egging:  Coined by Profs Bhide and Stevenson, it is the challenge entrepreneurs have of getting capital from investors to build product based on "imminent sales" and landing customers with the promise of "imminent delivery".  Typical chicken and egg scenario.  Start-up salespeople (one founder at least) need to be natural ham-and-eggers.  They have to make the case that their company is perfectly capable of providing their service without full knowledge of being able to do so.  This is often difficult because of the ethical issues, specifically, where do you draw the line on lying.  My take is, as long as you honestly believe you will deliver, do it.  Many of the successful startups I know of have had to do this in the early stages, so it is clear to me that this is one of the awkward necessities of a startup.

The ideal founder

So, if we take the above lessons and construct the ideal founder, they would look something like this: A zealot with an almost annoying passion for their business and who could talk about their startup up every day, all day, easily.  They are good at selling.  They believe living frugally is spiritual and necessary.  Understanding highly technical ideas as well as the bigger picture is something they are good at.  They are not usually analytical.  They don’t mind that each day is continually different, despite the chaotic nature of such.  They know that money matters, but don’t spend too much time worrying about their personal bank account – that doesn’t help sell the product.  Blind faith is often used to describe them.  So is naivetéy.  They are comfortable with these personifications, even reveling in them and the fact that it makes them an outsider and “strange”.  They deplore rules, even when the rules make sense.  Nothing is ever accepted knowledge until they have put it to the test.  They are almost impossible to manage and are often deemed self-centered.  The latter is just zeal misunderstood.  Consideration is for people with jobs and they, after all, are changing the world for the better, so you need to get out the way.
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