Despite the growing knowledge-base around the methodology popularized under the names "Lean Startup” , “Pretotyping” and several others, many new founding teams continue to underestimate the level of self-reliance that they're going to need. In my observations, about 80% of the teams that pitch to a prospectiveTechnical Cofounder or Advisor are still operating under the following old methodology:
- Draft a believable Business Plan with safe assumptions borrowed from large companies
- Spend time and money to execute enough of that plan to look credible to investors
- Raise anywhere from a $500K angel round to $2MM in a VC seed round
- “?" (We'll figure out step 4 if we ever make it that far)
This pattern of execution demonstrates a lack of intimate experience with past failure. Only a minority of new founders, despite having failed at least once to the mediocrity of customer indifference in step four, choose to persevere. These more resilient learners quickly realize that the Venture Capitalists, prospective advisors, new hires, and most importantly customers, are too prudent to confuse “market risk" with "feasibility”.
The trouble is that half-built products feel like tangible assets, whereas half-tested ideas don't.
For a VC, educated in the predictable world of finance instead of the chaotic world of entrepreneurship, there is safety in betting on an inefficient business as long as it's large enough to attract attention. The main weakness of a VC is that he has too much money to know how to invest efficiently, and very little time to have a seat on too many Boards of Directors. How do you invest $70MM without having to attend more than seven board meetings per period? Write seven big checks worth $10MM each. And what happens if efficient startups don't need that much money? Invest in big but inefficient ones that do; then budget some of the money for PR firms that will revise history and make the latter look like the big overnight success.
Welcome to Silicon Valley.
That “execution trumps ideas” is a poorly understood notion in the minds of those who blindly repeat it. The true spirit of this statement speaks to the passive arm-chair speculator who jumps up at hearing the new story of each notable success, announcing “That was my idea! Only if you had taken me seriously when I talked about it, we'd both be millionaires!”. But that spirit of the advice is lost in this decade.
Today, entrepreneurs take “execution” to mean “building things”, and “ideas” to mean “not building things”. They hear the wise words, but interpret them as “building things trump not building things.” And that’s how mediocrity becomes currency.
In contrast, in The Hobbit, Gandalf says "It does not do to leave a live dragon out of your calculations, if you live near him.”. The live dragon near which all founders live is called the Indifferent Customer. And the calculations are all done in the idea phase, not execution. Ideas, when validated, indeed trump execution.
For the enlightened founders, the startup life starts on step four and ends in step five; often to the exclusion of all the previous steps. This is not conventional wisdom. But truly successful startups are not started by the convention-minded.
Pioneers get slaughtered, and settlers prosper.
Daymond John, Entrepreneur and Investor
Founders should spend 80% of their time determining which 20% of their concept is desirable to target customers, using the cheapest means possible. Contrary to the myth, this does not necessarily equal prototyping a working model. It means going out there and selling your best case scenario on paper (or a landing page), then measuring the conversion of your prospect to paid customer.
Henry Ford, the legend ushering in the industrial age, ignored this lesson at first and almost drove himself bankrupt. If you're Ford, about to build a "Model A" assembly line of automobiles for the masses, first go out there and test the desirability for it. Ford failed several times, very expensively, before landing on the right model. Most of today's startups would be permanently financially crippled by the time they've made so many expensive "build stage" mistakes, simply because cheaper methods exist and smarter founders are taking advantage of these methods:
The Henry Ford of today is Elon Musk, the founder of Tesla Motors. Most of us celebrate entrepreneurs like Elon for taking bold risks. But you may now recall that Tesla Motors sold the idea of an Electric Car on paper to prospective customers for a $5,000.00 deposit per customer when it first started. Tesla actually had both (1) customer-funded working capital and (2) a validated market before they started making Model S feasible. It's amazing that when I argue this with friends, their internalized fallacies about how innovation works makes them fail to see facts before their eyes, so I will quote a 2010 historic article directly, titled "Crazy for Teslas":
(In 2010, led by Steve Jurvetson (VC) ) ... More than 2,200 people - starting with Musk in the No. 2 spot - have lined up behind him, laying down deposits ($5,000 for a regular Model S that will go for $49,000, or $40,000 for an as-yet-unpriced super-loaded Signature Edition), and settling in for the long wait until the cars come out in 2012.
Crazy for Teslas , By Patrick May, San Jose Mercury News, July 29 2010
Observers continue to be surprised by the courage behind imaginary ideas that successful entrepreneurs publish on paper: The California Hyperloop that Elon proposed; The Space Elevator; and Google's Star Trek Computer obsession. What they don't realize is that entrepreneurs become successful by using publishing as a means to test the market demand for these ideas.
It's certainly much cheaper to publish an article about Hyperloop than to prototype it. You get feedback, criticism and perhaps at some point even State support (or at least social narrative) immediately without spending more than a few days on the entire academic idea.
Those very assumptions that come to light during the desirability-testing process are the hypotheses that kill the majority of startups: those that jump into prototype implementation right away.
The best of the breed of entrepreneurs are not pioneers or risk-takers. They are risk-mitigators, settling into the roadways pioneered by those who paid the price of enduring indifference. Nikola Tesla, after whom the company is named, was a pioneer, not an entrepreneur. In January 1943, almost 70 years before a company in his name shook the world, he died alone in his hotel room impoverished and in debt, despite all the unimaginable products that he had made feasible.
Founders of successful companies start with customer desire.
At this very moment, many small teams of founders on working with customers who will make the founders millionaires. And you will never hear of them.
News is not produced by journalists these days. It is manipulated by media corporations for popular consumption, or bought by sales and PR consultancies as a customer acquisition strategy. What you read in the news about most startups has zero bearing on how you should start one.
The best of small businesses are too busy optimizing their cash-flow from hungry customers to worry about picking up the phone and fueling the media frenzy. The way you find these startups, which are ready for hyper-acceleration, is through very niche channels.
I've been asked numerous times by surprised friends how I find these amazing startups to work with. It's simple really. If you have a unique value proposition, they find you. Startups that I work with are usually bootstrapped, because the founding person happened to strike gold and find market desirability while focusing on some other main activity. The startup has almost always been an idea in their periphery until the customers proceeded to twist the arms of the founder and ask him to build something "better".
The product is almost always made of proverbial wires and cloth hangers. And the founder suddenly finds himself like a deer in the success headlight, unequipped to deal with its scale. The day I learned to put the "my idea not yours" ego aside and help marketing founders scale and grow as a partner, I realized my own optimal value proposition. It's especially satisfying because most other engineers run away from shoddy work. They like to extend brilliantly architected solutions. On the other hand, I evaluate startups for the level of desirability they command in the market-place.
VCs, advisors and talented individuals are just different flavors of the Investor persona: some invest money, some invest time. But all want a multiple times return on investment. When I invest my time as a CTO in a startup, the first questions I ask are:
- Have the marketing founders created value by measuring exact answers to questions about customer desirability?
- Are the early customers paying for a broken or promissory product?
- Is the created value offset by a lot of liability or dilution, as opposed to a few growth hacks with a tiny amount of bootstrapped investment?
- If I bring my technical expertise to the table at this point, will I make them 10X more valuable?
There’s a majority voice whose voice of criticism I frequently hear at this stage of my thought process: “You cannot be serious. Customers don’t flock behind a product that doesn’t exist. One must build a visible and usable product before early adopters sign on.
I’m lucky because I disagree. And I don’t need critics to approve of my way of thinking. As a technical entrepreneur, I maneuver from one startup gem to another with ease, simply because my competition dismisses the possibility that such gems exists out of pure lack of imagination.
I had just spent two years working on a couple of my own concepts, and another four months looking for my next venture. Our of the last ten startups that seriously approached me in the last month:
- Six had grand, conceptually well-analyzed, plans to dominate multi-billion dollar industries, with a credible business team. They wanted a tech co-founder to build the engine.
- three had built out the team and had products backed by top VCs. They wanted a VP of Engineering to take over execution so that they could focus on understanding the customer.
- one had a single founder bootstrapping a hacked-together product limping along, with multiple well-defined customers knocking on the door, check in hand. No funding, no team, no significant revenue.
Guess which I partnered up with to accelerate?
Let’s look at how a multi-disciplined person would evaluate these opportunities. Conventional investor wisdom says that the three indicators of future success are:
- a united team,
- an urgent need, and
- a unique product
Founders take this to mean the following: “I’ll check as many of those three boxes as I can. If I’m weak in one of the three, I’ll come off as strong in the other two.” Soon enough, the founder will realize that the team and product are the two of the three checkboxes that are in his control. You “build” a team, and you “build” a product. But you have to “discover” an urgent need.
The first nine of the ten startups above were too focused on building things:
The first six had a vague idea of who the customer was exactly. Your customers need to have names. You can’t solve a problem for an industry. Industries exist because they’re viable. Your solution will most likely change (i.e. annoy, disturb, or disrupt) those industries. If you’re lucky, you get to shove your well-analyzed plan down the industry’s throat, because they caught the right fever in time! If you’re unlucky, they keep behaving their merry way and you wake up having spent two years in a solitary room coding. Two years of your youth that you will never get back.
The next three seemed like unbelievably amazing deals to the recruiters who were pitching them. I tend to prefer cash-based consulting with VC-backed startups, which turns most recruiters off because they wouldn’t make commission on an independent engineer. The truth about VC-backed startups is that they’re more likely to fail. But you need to define failure for yourself. To me, failure is when the company exits, but all you get as a reward is a job at the acquiring (or IPO) company. Success is when your equity is worth something. From that perspective, joining most VC-backed startups leads to failure, unless you’re getting exactly the right value out for what you’re investing: liquidity for expertise. Nearly all VC-backed startups I have come across so far have been escalations of commitment: they had to work because they were the only funded game in their industry’s town: broken businesses that somehow get acquired because there is no better solution available.
Lastly, there is that 10% minority that has discovered a market. They need a team and a product. Technical founders are fortunate partners, in that they can supply both.
The Lean Startup is a label for a methodology that has existed in nature for billions of years:
Start with an analog that has been viable. Mutate it. Assume that the mutation will fail in nature, but test it anyway. Learn why it failed; mutate the original more intelligently and test again. Do this over and over, 50+ times, until failure becomes increasingly difficult.
It's hard to know who does a lean job of entrepreneurship. Certainly, you should plan for more than 50 experiments given your current runway and without counting on financial investors. But it's really easy to spot the "fat" ones who will fail:
They think the first Business Plan is the final one. Sadly, they're often right.