Hitting the road
One of my favorite quotes from Charlie Munger is:
“All I want to know is where I’m going to die, so I’ll never go there.”
Charlie is a big believer of inversion. With inversion, rather than focusing on what you should do to achieve a goal, you think about what you should avoid doing to prevent failure. It’s a powerful technique.
Starting a startup for the first time is difficult for most people. The key reason is probably related to the uncertainty of the outcome. While there is always a risk of failure, some startups do succeed, which is why taking the chance might actually be a great idea.
You might ask yourself “How do I start?”. Rather than jumping to conclusions immediately, let's invert the question and ask: “How not to start?” or even better “How to start a startup that fails?”.
Finding reasons for startup failures should be much easier, since most fail anyway. Avoiding common mistakes can be a good starting point on what to watch out for. From my perspective, the most frequent reasons for startup failures include:
Making a product which no-one wants
Running out of money
Working with a bad team
Let’s have a look on how each of these objectives could be achieved. It’s actually a pretty fun exercise to go through.
Making a product which no-one wants
A good way to achieve this would be to start with a shallow understanding of customer needs. A long development without customer iterations would help. In some cases, a product might not even get released - that would actually ensure the failure!
The mindset of this kind of founder would typically be theoretical and intuitive, based on unverified assumptions.
Running out of money
Generally, a startup receives funding from three main sources: the founders themselves, investors, or customers. While the founders themselves may serve as an initial source of funds, this is typically a short-term solution as it only lasts for as long as the founders are able to self-fund. Alternatively, customers can provide funding through the purchase of the product or service, but this is dependent on the need for the product. Finally, investors can provide capital if they believe that the startup has the potential to effectively solve an important problem for many people.
So, solving a problem which people don’t care about or not being able to deliver a solution often leads to running out of money.
Significant expenditure can also increase chances of running out of money.
A bad team
Building a team that is destined to fail is quite simple. First, you need to work with people who lack the necessary skills to do the job and are not willing to learn. Additionally, these people should not be hardworking and should lack passion for what they do. They should have a 9-5 mindset, tend to procrastinate, and possess a "can't do" attitude. To ensure that failure is certain, communication within the team should be poor.
Isn’t it amazing how simple it is to provide a recipe for a startup failure? On a related note, just imagine running a startup while following the above guidelines and achieving success. That would be remarkable!
I assume that no one who begins a startup plans to run it in the way I described above. At the same time, however, so many people keep repeating similar mistakes. Perhaps the most common one is the long development of a complex first version of the product. Challenges coming from this approach are:
Most importantly, it makes everything “theoretical”. It’s not clear if what is built is necessary, as there is no customer feedback. Often you might end up with a product which people don’t want to use.
It’s expensive and it takes a long time.
It’s hard to keep focus, excitement and momentum.
Since it’s such a common mistake, I started thinking what causes it? I realized it relates to the inherent difference between the nature of a startup and regular business. By ‘regular business’ I mean companies which are well understood.
Let’s consider the bakery business. To run a bakery, you need to find the right location, rent a space, purchase baking equipment, recruit staff, develop a menu, source ingredients, and set prices. Fortunately, most people have a good sense of what good bread tastes like, which makes it easier to meet those needs. In order to open a bakery, setting up everything before the launch is the best approach. It might actually be the only approach.
With startups, it’s different. The fundamental distinction is that you try to solve a problem which hasn’t been solved before. If it was solved, and the solution was good, why start a startup in the first place? So the nature of how one approaches a problem needs to be different from how one would approach building a well-understood business.
So how to start a startup then?
A good starting point, as a guiding principle, is to avoid building a product no one wants, running out of money, and working with unqualified people. It does not guarantee success, the same time, it can certainly increase the likelihood of making progress.
What then, is a good way to start, or rather how are successful startups typically built? A blueprint may look something like this:
Building a product which is loved by a small group of people
Being frugal
Working with right people
Let’s dig deeper.
Building a product which is loved by a small group of people
As a founder you observe an inefficiency in the world and come up with an idea of how to fix it. The best way to observe an inefficiency is to either experience it yourself or witness it among people you spend a lot of time with.
So getting an idea for a startup is much more practical than people might think.
As soon as you come up with an idea, the quickest way to validate it is by building and launching a simple version of your product, commonly referred to as an MVP or Minimal Viable Product. While it may seem counterintuitive, receiving customer feedback on your first product release is the only way to truly validate the idea. Furthermore, launching a product quickly can only happen if the scope is small.
To get customer feedback, the founder needs to find and convince customers to give the product a shot. In the beginning, having only a few people trying a product is enough. However, bringing them together is critical.
Here are the steps again:
Noticing a problem people experience.
Launching an MVP quickly, which addresses the problem.
Getting the product into the hands of customers.
Learning from their feedback.
Improving the product.
Repeating steps 3 to 5.
The beauty of an approach like this is that it can be done quickly and it follows all aspects of running a company. It also makes it difficult to build a product which no-one wants.
Base was started in a similar way. I’m not sure if our approach was intentional, however, we all felt that we needed to launch something quickly and see how it goes.
There were a total of five founders - Uzi, who was running a web agency in Israel, and Agata, Ela, Pawel, and myself, who were running a web agency in Krakow. Agency work was good, but after a while, it became repetitive. Our clients were typically startups, and our primary role was to build a minimum viable product (MVP) for them and launch it. Once the idea had proven successful, our clients would usually build an internal team to take the development further, leaving us out of the exciting phase. Over time, we all felt a growing desire to transition from agency work to creating our own product company.
Conversation about Base started at the end of 2008. Uzi’s key observation was that there was no sales management software that was simple, intuitive and affordable. Back in 2009, cloud software and SaaS were not as popular as they are today. We all thought that it would change.
We launched the MVP in April 2009 after 3-4 months of development, while simultaneously working on agency businesses. The product was released and available for use, but initially, it didn't receive much attention. However, we only needed feedback from a few people to understand what needed to be improved.
The initial version of Base was simplistic. The scope of the first release and even the product one or two years later were so much different. Initially we released an interface with one sales pipeline. People could add deals and move them between stages. One could only add a note or a task to a deal. We also started with 3 simple reports. That was it. The first version didn’t include search, deals were denominated only in USD, and there was no filtering. There were no contacts, leads, permissions, emails or appointments. Functionalities like that today seem to be a fundamental part of a sales tracking tool.
When I look back it amazes me that people decided to use Base so early. Obviously, we learned quickly that managing sales without search or filtering is hardly possible.
Another non-intuitive realization was that I would have never thought that multiple currencies and filtering would become main pain points to continue using the product. Thankfully our customers told us that.
Being frugal
The immediate reason for many startup failures is running out of money. One day, founders may no longer afford to run their business, and it's game over. So even potentially good ideas may not succeed if founders can’t work on them long enough.
When starting a startup one of the best pieces of advice you can follow is to spend as little money as possible, specifically before your product is launched and is wanted by users.
It might sound somewhat unintuitive, as some determine the success of a startup by how much money it raises. However, I don’t think getting external funding should be treated like that. Ideally, startup founders would not need to raise external funds and could grow the business organically.
Launching an MVP is best achieved with either self-funding or a small investment from individuals who can provide valuable assistance to the founders.
Base was bootstrapped. As I mentioned earlier at the beginning, all founders worked full time on agency businesses while building an MVP. A couple of months after the launch, Uzi, Pawel, and I focused solely on Base. Our first round of financing - $1.1 million USD - happened in the beginning of 2011, so almost 2 years after the launch. By the time we sought investment, the product was much more robust. We already had a small customer base. This made it easier to pitch to investors.
Bootstrapping may not be a viable option for every business. In our case it allowed us to focus on the most important things. We couldn't afford hiring many people, spending too much money on marketing or sales. Our main focus was perfecting the product and growing the customer base. So cash constraints turned out to be useful and liberating.
It also created the right mindset and culture in terms of spending. After the investment, we could afford to hire people and to spend money on marketing, but the financial discipline largely stayed the same.
If founders can launch a startup on their own, I always recommend doing so. Taking money from friends, family or people who can help early on might also work well.
In both cases being financially disciplined and focusing on a quick MVP launch followed by product iterations makes a good foundation of a startup.
Additionally, a product that is used by people significantly increases the chances of raising capital.
Working with right people
As mentioned before, the main difference between building a regular business and a startup is the uncertainty of the outcome. Because of that it's not common for people to take on this type of venture.
From my personal experience, people who start startups tend to share certain common characteristics. They have a can-do attitude, are motivated to help their customers, are proactive doers, thoughtful learners, and value authenticity. I describe these in detail in the article "Learning the hard way part 1". If you haven't yet read it, I highly recommend you do.
Focusing on building a product which is loved by a small group of people, being frugal and working with the right people is definitely a great starting point when building a startup. Many successful ones were built that way.
At the same time, even following good practices can’t guarantee success. There are other things which need to play out. Maybe the problem you are trying to address is just not a good one, or maybe not many people care about it, or there are too many competitors, or market conditions go to dust. The list goes on. At the end there are more startups which don’t make it than those which end up being successful.
At the same time good practices improve the chances of success. If you build something people don’t want at first, by being close to them you might pivot quickly and adjust the course. It's better to spend less and have more time to figure out what works. Having a good team helps in moving quickly, focusing on the important stuff, and finding the best solutions.
If you have an idea and wish to start a startup, I hope this article provides you with some helpful tips. Even if you're not sure if starting one is for you, the only way to learn is to give it a shot. By following these steps, you can quickly figure out if your idea is any good and if starting a business is the right thing for you.
Additionally, I’m open to invest and/or help your startup grow. If you have any questions or thoughts don’t hesitate to reach out at bart@founderspond.com or DM me at @kiszal on Twitter.