Category: Entrepreneurship

When meeting with entrepreneurs they often have a slide that shows their amazing projected growth. Most of the time it shows projected revenue amount for the current year (e.g. $200,000) and then goes out four years with a projected revenue amount in the 4th year that’s 100x this year (e.g. $20,000,000). Now, that might be doable, and entrepreneurs are an optimistic bunch, but they always have a corresponding profits bar to go along with the revenue bar and it typically shows losses in the first year (from the funding cash they’ll burn) and then massive profits in year four (e.g. $10,000,000 in profits on $20,000,000 in revenue).

What’s always missing: massive losses and the funding rounds necessary to hit those growth numbers.

Starting a startup is cheap. Scaling a startup is expensive. Entrepreneurs would do well to provide projections that show they’ve thought through the costs of scaling their business.

What else? What are some more thoughts on startup projections not recognizing the costs to scale?

Mid-way through the book Tools of Titans: The Tactics, Routines, and Habits of Billionaires, Icons, and World-Class Performers, the author Tim Ferriss interviews Phil Libin, the founder of Evernote. Phil shares a lesson he learned from Hiroshi Mikitani, the founder of Rakuten, the largest online marketplace in Japan, on “the rule of 3 and 10” where everything breaks when tripling in company size.

From the book:

He was the first employee at Rakuten, now they’ve got 10,000 or more. He said when you’re just one person, everything kind of works. You sort of figure it out. And then, at some point, you have three people, and now, things are kind of different. Making decisions and everything with three people is different. But you adjust to that. Then, you’re fine for a while. You get to 10 people, and everything kind of breaks again. You figure that out, and then you get to 30 people and everything is different, and then 100 and then 300 and then 1,000.

The idea is that things break in the company at these multiples of 3 and powers of 10. Startups figure it out when smaller but then struggle as they grow without realizing they hit the next 3 and 10 milestone and haven’t adjusted.

Entrepreneurs should think about the rule of 3 and 10 and be cognizant of what needs to be reinvented as the startup grows.

What else? What are some more thoughts on the idea that things break at company sizes that are multiples of 3 and powers of 10?

After yesterday’s post on Raising Money as Forcing Function to Drive Towards an Exit, an entrepreneur brought up another point to me: raising money also starts the track towards the founders no longer owning the majority of the business, and, often, losing control. Many entrepreneurs start companies to be their own boss as they have a high internal locus of control. Only, after two, sometimes even one, round(s) of financing, the founders no longer have control.

Here’s how the math might look:

• Start – Founders own 90% with a 10% employee option pool
• Series Seed – Sell 15% of the company and add another 10% to the option pool for 25% dilution taking the 90% for the founders down to 67.5%
• Series A – Sell 25% of the company and add another 10% to the option pool for 35% dilution taking the 67.5% for the founders down to 43.9%

So, in a “normal” scenario, after the second round of funding, the entrepreneurs no longer own the majority of the business. But, now the startup has the desired capital to execute against the plan and hopefully build a large, successful business.

Entrepreneurs need to understand the trade-offs and determine how far they can go on their own vs going faster with outside capital. The long-time question investors like to offer up to entrepreneurs: would you rather own a slice of a big watermelon or the entirety of a small grape.

What else? What are some more thoughts on the founders reaching the stage where they no longer own the business?

Over the years I’ve hired dozens of interns with much success. In fact, the first summer at Pardot we had 11 full-time interns and only three employees. Interns are great in that they’re excited to learn, eager to prove themselves, and want to be there. But, there’s absolutely one trait that’s required for the employer to have a great experience: the intern needs to be self-starting.

Self-starting is the most important trait when hiring an intern.

Think about it. An internship schedule is one where there’s little time to ramp up and be productive before the internship is over. During that time, the employer has a number of existing day-to-day tasks that have to get done outside of coaching and training the intern. Interns who are self-starting are more resourceful, more likely to figure things out on their own, and more likely to have the right balance of productivity to management effort.

Finally, interns are a great way to build a talent pipeline. Finding smart people that get things done is hard. By investing in interns there’s a continuous opportunity to find strong candidates for full-time positions as the startup grows. We’ve hired many interns into full-time roles.

Entrepreneurs would do well to develop a program for interns, especially in the scaling phase of the startup.

What else? What are some more thoughts on interns in startups?

One of the harder challenges in a startup is figuring out how long to stay the course. Traction almost always doesn’t happen overnight. Pinterest took four years before the media started noticing it. Incremental progress is often evident but it’s not clear that success is inevitable.

Here are a few questions when the startup path is unclear:

• Problem – How well is the problem defined? How many people have the problem? How painful is the problem?
• Feedback – What type of feedback do prospects and users provide? How strong is the feedback? How consistent is the feedback?
• Metrics – What are the weekly metrics? What’s the week-over-week growth? At this rate, when will the metrics look “good?”
• Next Steps – How clear are the next steps? Are there several OK options or one or two excellent options?

Staying the course or pivoting is a regular question for entrepreneurs when success is elusive. Often, there’s no obvious answer but asking these questions helps.

What else? What are some more questions to think through when the startup path is unclear?

For the video of the week watch How To Gain 1000 True Fans – Kevin Kelly on London Real. Enjoy!

From YouTube: Kevin Kelly discusses his famous article ‘1000 true fans’.
Kevin Kelly is the founding executive editor of Wired magazine, and a former editor/publisher of the Whole Earth Review. He has also been a writer, photographer, conservationist, and student of Asian and digital culture.