Category: Strategy

Earlier today I got into a conversation with a colleague about the relative importance of a startup idea vs a startup team. Naturally, both the concept and the people are critically important, but if you had to pick one, which would be most important?

My general feeling is that the idea is more important than the team. Some arguments for and against it are as follows:

• Strong ideas, especially pain killers over vitamins, are harder to come by since most ideas are vitamins (or candy!)
• If it’s a good idea, or at least a good sandbox to play in, the chance of zigging and zagging to achieve success is much greater
• Strong teams are hard to find but are more easily upgraded as the startup makes progress as opposed to pivoting and trying a new idea
• Talented teams are more likely to figure out how to make something work, even if it is only a modest success
• Investors bet on the jockey more than the horse, but it my anecdotal experience, investors bet on the idea more than the team for first-time entrepreneurs and then the team more than the idea for successful serial entrepreneurs

Startups ideas and startup teams are extremely important to the success of a new venture. In the end, I’d take a great idea with a good team over a good idea with a great team.

What else? What are your thoughts on the importance of idea vs team?

Recently I was talking to an entrepreneur and he was sharing his new idea. Now, the idea was sound and made sense but it immediately struck me as too small a market. There’s no perfect method to determining the size of a market opportunity but there’s plenty of information available.

Here’s how I like to think through if a market is large enough to go after:

• Do a bottom-up sales forecast
• Do a top-down opportunity evaluation (e.g. 100,000 potential customers and we’ll capture 5% of the market)
• Evaluate the likelihood of achieving $1 million in recurring gross margin by the fourth year (part of the definition of a successful business)
• Consider the market timing and risks of being too late as well as too early (ideally it’s small and fast growing)

So, it doesn’t need to be a billion dollar business but it does need to be large enough to build a sustainable, successful business in a reasonable amount of time.

What else? How big does a startup’s market need to be to make sense?

A couple days ago I wrote about the Top 7 Entrepreneurial Lessons from Pardot. After the post, several people asked me to expand on the seven items with more detail.

Here are the top 7 entrepreneurial lessons learned from Pardot expanded:

7. Market timing matters: we started in March 2007, just before the Great Recession, and Software-as-a-Service went from hot to cold, along with most technology sectors. Our timing to start the business was perfect because we were forced to make things work in a difficult recession, and by 2010 we had a solid product, customer base, and team just in time for the market to explode. Several of the second tier competitors that had been in business for 7-10 years faded away as too much fatigue had set in for their founders and management teams.

6. Startups with the most money don’t always win: we didn’t raise money and we competed against a group of companies that had raised more than one quarter of a billion dollars, and we won the majority of our competitive deals. A couple of our competitors had raised more than $20MM in venture capital and virtually went away after 2-3 years. Internally, we constantly debated about raising money but in the end decided it didn’t make sense based on how fast we were already growing and our desire to control our own destiny.

5. Find the differentiators and deliver: early on we differentiated based on ease of use, no contracts, and a pricing model based on email volume with unlimited database size. We had the catalytic mechanism in place whereby we had to deliver value month in and month out since our customers could leave at any time. This forced us to be great at customer on boarding, support, and client advocacy.

4. Sell pain killers and not vitamins: after a customer successfully rolled the software out to their sales and marketing teams, we’d routinely hear feedback like “we don’t know how we functioned without the software” and “the sales guys absolutely love the data and insight.” Once it was clear the software was a must-have, we knew we had a pain killer and not a nice-to-have vitamin.

3. Embrace your constraints: not having a deep war chest of VC money forced us to be scrappier and efficient. One model we took to heart was how Toyota developed the Prius from the ground-up focused on middle class buyers that wanted a high MPG hybrid with four doors at a $22,000 price point. With the $22,000 price point as a fixed constraint that couldn’t budge, the business model and everything else had to be built around that. In a similar manner, we focused on the $1,000/month price point and built the whole business around that — from the inside sales process, on boarding, support, etc.

2. Focus, focus, focus: we said ‘no’ 100x more than we said ‘yes’ to requests for features, partnerships, white labeling the product, etc. As for customers, for years we were laser-focused on B2B companies or divisions with 20 – 200 total employees of which 5-50 were in sales and marketing as well as one full-time in-house marketing manager. By focusing on a narrow part of the market and saying ‘no’ most of the time, we were able to achieve significantly greater results.

1. Corporate culture wins: our maniacal desire to be the best place to work and the best place to be a customer combined with team members that were positive, self-starting, and supportive created an unbelievably strong corporate culture. At the end of the day, corporate culture is the only sustainable competitive advantage completely within the control of the entrepreneurs.

Pardot was an amazing experience and these seven entrepreneurial lessons from Pardot were invaluable.

What else? What are your thoughts on these entrepreneurial lessons and others?

Recently I was talking to an entrepreneur that was recounting the challenges he had with his mobile-first consumer startup. Like many ideas, there was a chicken and egg problem whereby there wasn’t much reason to use his app if there weren’t already a good number of people using it, and he didn’t have many users.

With that introduction he then told me that he was trying to figure out how to bribe the chicken. Not having heard that phrase before I probed more: what’s an example? Quickly, he told me the example of Half.com, co-founded by Josh Kopelman. In the story, Half.com was like eBay only for fixed-priced goods (e.g. a used book for half price). Clearly, it’s a chicken and egg problem where users aren’t going to browse the site if there aren’t any books and no one is going to list books if there aren’t any users.

Enter bribe the chicken. The way they bribed the chicken was by going to used book stores and offering $2,000 in cash up-front as pre-payment for the store owner to list the books online. Any books that sold would be deducted from the pre-payment. Used book store owners are reliable types who will list their inventory and ship a book out when it sells. By bribing the chicken, Half.com was able to get thousands of used books listed quickly and solve part of their problem. Once the used books were online, users found the site through search engines and the business was a huge success.

What else? What are some other examples of bribing the chicken?

Personal estate planning isn’t something many first-time entrepreneurs spend time on, and rightly so. There’s a million different things that can be done, most overkill for the stage and circumstances of many entrepreneurs. With that said, there are a few items that are worth mentioning (note: this is not tax or legal advice and should not be construed as such).

Here are a couple personal estate planning ideas for entrepreneurs:

• If you are independently wealthy, or thoroughly convinced you’ll be wildly successful and are willing to pay the on going fees, consider gifting a portion of your seed stage co-founder equity (e.g. 10% – 30%) to a trust outside your estate since it has nearly no value for lifetime gift tax exemption purposes and can grow into something substantial to support your future generations (and will be outside the estate so it won’t have estate taxes when you die)
• If you are serious about selling your business, and/or are talking to potential acquirers before you’ve received a term sheet or letter of intent with a price (it’s key no price has been offered), consider getting a third party valuation that discounts the value for lack of marketability, and then donating a piece of the equity to a non-profit or private foundation, so that you don’t have to pay capital gains on it at time of sale and you get a tax deduction on the current value (you could donate the money after the sale but you’d pay full taxes on it before you can donate it, so the charity would receive less)

The second item is much more generally applicable, especially for entrepreneurs with a successful business that have some charitable intent. Personal estate planning is much more complicated than this but these are two ideas for entrepreneurs.

What else? What are some more personal estate planning ideas for entrepreneurs?

One of the most common refrains from people interested in being an entrepreneur, but haven’t taken the entrepreneurial plunge, is that they don’t have a good idea. My immediate response to the “I don’t have a good idea” statement is “what ideas do you have?” Almost always, an idea is presented followed by the fact that they looked around and someone else was already doing it, so they gave up on it.

Here a few things to keep in mind regarding startup ideas:

• A startup idea that is truly, completely unique is likely a bad idea
  
• Other companies working on the same or similar idea validates the idea (still might not be a great one but at least someone else thinks it’s a good one)
• Ideas are plentiful, it’s the execution of the idea that’s much more difficult
• Many times it takes the second or third generation startup with the same idea to be successful (being too early with an idea is a failure)

Ideas are important, but they shouldn’t be unique. Find an idea that has great founder fit and out execute the competitors.

What else? What are your thoughts on looking for startup ideas that aren’t unique?

Product/market fit is a common startup concept relating to how well a product meets the needs of the market. There’s another kind of fit that deserves more discussion: founder/idea. Founder/idea fit is taking into account the passions and strengths of the co-founders and maximizing them in the context of the business idea. A founder with little interest or zeal for an idea, even though it’s the best one he could come up with, is more likely to fail than a founder that truly believes in something, even if the idea isn’t as good.

Here are some ways to look at founder/idea fit:

• Take the concepts from Strengths Finder and apply those to the founder in regards to the startup idea
• Identify the things that you do for fun, regardless of getting paid, and see if the idea gets real value from them
• Imagine yourself five years from now running the startup at a successful, sustainable scale — how happy do you see yourself?

Founder/idea fit is a critical component of the startup equation and shouldn’t be underestimated. Some of the best advice I ever received was to figure out what I was good at, figure out what I truly enjoy, and figure out how to combine those to make a living — you’ll never work a day in your life.

What else? What are your thoughts on founder/idea fit for startups?

Recently an entrepreneur was asking me how detailed I like the standard financial planning spreadsheet for a new business idea. Immediately I replied that I don’t usually do spreadsheets for new software ideas. Instead of spreadsheets with detailed financials, which I really like once the business is operating, I prefer to think through the financials of the new idea with big round numbers. Big round numbers make it easy to see if the idea is financially feasible, knowing that there will always be variations with the numbers in the real world.

Here’s an example of thinking through an idea with big round numbers:

• Software-as-a-Service (SaaS) application that costs between $250/month and $2,000/month with an average of $1,000/month
• Year 1
  10 customers @ $12k/year = $120,000 revenue
• Year 2
  35 customers @ $12k/year  = $420,000 revenue
• Year 3
  83 customers @ $12k/year = $1,000,000 revenue
• Year 4
  166 customers @ $12k/year = $2,000,000 revenue

Assuming a SaaS company with 80%+ gross margins, typical hosting costs, and other normal metrics, if the product can be sold for $1,000/month, everything checks out as a viable business. Big round number aren’t as desirable for businesses with more complexity and sophistication but they work well for many tech companies starting out.

What else? What are your thoughts on spreadsheets vs big round numbers for startup financial planning?

One area that I don’t spend too much time worrying about is competitors. Most markets are not winner take all or winner take most such that there’s the opportunity for several successful companies to emerge. Email marketing is a great example of a market without winner take all/most (see email marketing companies with 100+ employees). Instead of worrying about competitors, I do think it’s worth tracking them for a few reasons:

• Having competitors is important to validate that other people believe in the idea
• Competitors provide a proxy for the level of market development (look on LinkedIn to see how many employees they have to get approximate company size)
• Investors in competitors show the venture firms that care about certain markets, and provide third-party validation
• Analysts that cover competitors can also provide reports and insight as well as segmentation

Competitors are a necessary part of the startup world but should not be obsessed over. The best thing to do is to stay close to your customers and provide a great solution.

What else? What are your thoughts on startups and competitors?