Recently in Startups Category

After encouraging feedback about WatrCoolr on Hacker News and Proggit, I created Hacker WatrCoolr, which is a hacker oriented version of the original site.

What does that mean?  A lot of little tweaks to make the site more amenable to hackers.  And one big change: the general interest feeds are replaced with hacker interest feeds on Hacker WatrCoolr.  Here are the current ones:

• Hacker News of course (stories that reach the top)
• Techmeme (stories that reach the top)
• RSSmeme, English 12 hours (stories that reach the top)
• reddit, programming (stories that reach the top)
• Digg popular: software, programming, design, tech news & gadgets, aggregated
• Slashdot: developers, books, ask, bsd & it, aggregated
• Yahoo! Technology News Most Emailed (stories that reach the top)
• del.icio.us popular: programming, webdesign, startups, design, tools, software, web2.0, css, reference & development, aggregated
• ReadBurner (stories that reach the top)
  

(And no xkcd.)

These feeds are subject to change based on their continued usefulness and your feedback.  I've been tweaking them for a week or so (as you may guess from reading them).

The current debate on Hacker News seems a little too black and white to me.  In my opinion, there is no right way to start a startup (or a business).  How you should start your startup depends on your definition of startup success.  In particular, I believe you should:

1. Define what startup success means to you right now.
2. Make decisions that have the highest probability of achieving that success.
3. Every so often, GOTO 1.

Different people will have different definitions of startup success depending on a number of highly personal attributes, including current monetary wealth, desired monetary wealth, desired lifestyle, what one wants to work on, how much one wants to manage people, how much one wants to impact the world, etc, etc.

Consider the following (knowingly grossly simplified) personal situations:

• An independently wealthy person doing what they love with an indefinite (5Y+) time horizon.
• Someone at a high salaried consulting job who wants to quit to start a startup, but not change his/her lifestyle.
  
• Someone living in a developing country who just wants enough money to not work.
• Someone who wants to quit their job to do a startup, but has a family and so needs $x/month relatively soon to do so.

I posit that these people will (probably) have vastly different definitions of startup success, and thus should be starting their startups in different manners. 

A poll I created the other day I believe exemplifies this point.  I was surprised how many people would sell their startup for under $100K (the highest answer).  Clearly this poll has issues--for one, it would be better statistically if it were worded slightly differently and then given to startup founders right when they are starting out.  But I think the core exemplification still shines through.  If your monetary end goal is $5M vs. $100K, you should probably be doing things a bit differently.

Btw, this comment inspired me to write this post...so thanks for that hugh.

Recently, Paul Graham wrote that there is a gap in the venture capital landscape, which he thinks explains why there aren't more "Googles" out there.  I have my own issues with his essay, but I take his word from the "front lines" that he is seeing innovative startups (potential Googles) not being able to get the funding they need.

So naturally, why not fill this gap himself (or at least part of it)?   It seems to make perfect sense.  If he doesn't have the money already, I can't imagine it would be that hard for him to raise a fund.  He is presumably already seeing potential Googles via Y Combinator, so he wouldn't have to do much work to get quality deal flow.  And of course, he would make a ton of money if his theory about why there aren't more Googles is correct.  After all his essay says:

...there is a big opportunity here, and one way or the other it's going to get filled. Either VCs will evolve down into this gap or, more likely, new investors will appear to fill it. That will be a good thing when it happens...[and] will get us a lot more Googles.

Am I missing something?  Perhaps this is already in the works...

Update: additional comments can be found here.

Recently Paul Graham wrote about why there aren't more Googles.  While I agree with Paul that there appears to be a gap in the venture capital landscape at the moment, some things about his essay have been bothering me.

• Where are all the Googles really getting lost?  The central thesis of Paul's essay seems to be (correct me please if I'm wrong) is that there aren't more "Googles" because VCs aren't funding them at the earliest stage.
  

If a Google is a big, independent innovative startup (more on that below), there are at least three ways a Google can be killed.

1. Never funded so never gets off the ground.
2. Underfunded so runs into the ground.
3. Acquired so ceases to be independent and thus is no longer a Google.
   

Paul's argument is that the bulk of potential Googles are getting killed via route #1.  But let us suppose for a second that is not the case, i.e. potential Googles are raising money as needed, which by definition ends #2 as a source as well.

So then you are left with #3.  Now, additionally suppose that most of the time M&A departments are getting it right on offer price.  Then there aren't more Googles (big, independent innovative startups) because they were all acquired at the right price.  This seems to be a sub-argument of the original post by Umair Haque that Paul answered.

...Myspace, Skype, Last.fm, del.icio.us, Right Media...all sold out to behemoths who are destroying , with Kafkaesque precision, every ounce of radical innovation with them.

Perhaps this crop of acquired potential googles were all (or at least most of) the potential Googles, but just got the right price offered to them, and corporate M&A isn't so bad after all.  If there was a secondary market for private equity as Umair and others have suggest, perhaps these startups wouldn't have accepted the offers, and there would be more Googles today.

In other words, I don't see a compelling argument or compelling evidence that explains where exactly the potential Googles are getting killed.  Is the essay suggesting that we just take Pauls word for it that it is all on #1, or am I missing something?  I am not saying he is wrong, but just that I don't really see a backed up argument (with evidence or otherwise) for why he is right.

• What is the actual evidence?

From the evidence I've seen so far, startups that turn down acquisition offers usually end up doing better.

I take Paul at his word that he has evidence on this point.  I simply want to know the details.  Is this just what you casually recall?  Or did you talk to lots of corporate M&A departments about the specific situation of startups turning down offers, and then you tracked down what happened to them?  If so, does it break down differently by size of offer?  Industry?  Market?  Or was it some entirely different kind of evidence?

• What does "Googles" mean exactly?  The essay doesn't define this term explicitly, and it is one of those things that seems obvious until you try to put a definition on it (at least to me).  Btw, I understand and appreciate Paul was replying to Umair Haque's post, which originally used the term.  However, I still think it should be defined explicitly so we know what we are talking about exactly.  Anyway, the essay hints at the definition this way:

...the reason Google survived to become a big, independent company...

...it's the same reason Google and Facebook have remained independent: money guys undervalue the most innovative startups.

The reason there aren't more Googles is not that investors encourage innovative startups to sell out, but that they won't even fund them.

So, is a Google just a big, independent company?  It can't be just that or Microsoft and Exxon Mobil would be Googles.  Is a Google one of the most innovative startups" or just a regular innovative startup?  Or do you have to be both independent AND some form of innovative startup to be a Google?

This exercise strikes me as more than mere semantics.  If you have to be one of the most innovative startups, that is by definition a limited number.  Not all innovative startups can be the most innovative.  So if you do have to be one of the most, it then seems odd to ask why there aren't more Googles since they are then (by definition) the very limited number of most innovative startups at the time.

I gather, therefore, that Paul means a Google is a big, independent innovative startup.  You need big in there because his central thesis is that to create Googles you need to fund small companies, so a small startup can't be a Google yet.  That leaves independent and innovative. 

So does a Google cease being one upon any acquisition?  Was MySQL a Google before it was acquired?  Or does the market matter and they were too niche (despite a $1B acquisition)?  Is Salesforce.com a Google? Was Flickr one before they were acquired?  What about Reddit?

Does a Google have to be a software startup?  What about a life sciences or medical device company?  An innovative construction company?  Enough on this issue--hopefully someone will pick this up and attempt to answer these questions.

• There is probably a gap in the VC landscape at the moment, but is it just an expected catchup lag?  Despite the above, and like I said at the beginning, I agree with Paul that there seems to be a gap in the VC landscape at the moment.  I have two additional thoughts on that.
  
  First, Paul chides VC firms for "still operat[ing] as if they were investing in hardware startups in 1985."  I just don't by that there has been no change in the VC landscape since 1985.  Startups have been gradually becoming cheaper to start, and the venture capital world has been gradually answering.  Granted, maybe the same firms aren't changing as fast as they should be.  But there is more Angel investing.  There are specialty funds like the new Facebook and iPhone funds.  (Yes, I know those probably won't generate "Googles," but it's a start).  There are funds like Union Square Ventures.  And of course there is Paul's own Y Combinator and other recent additions.
  
  My first point here is that, one should expect a response lag.  Perhaps Paul is saying the lag is too long?  But, sooner or later, someone will execute a fund like Paul suggests.  (There are plenty of Angel funds that operate like this already (200-500K range), so maybe it is here already?)  Anyway, if those funds make awesome returns, it won't be long until that model is repeated.
  
  Or will it?  Why has it taken so long as it stands?  Is the supposed gap more than just a lag?  I think it might be, which brings me to my second and final point.  Hank Williams and others have pointed out that a lot of the answer may be explained behaviorally.  And I agree.  But I have a slightly different, or perhaps just complementary, point.
  
  VCs (and angels for that matter) are really investing in people.  The earlier you go to the beginning of the startup, the more the people matter because the more likelihood the idea is going to change. Paul has acknowledged this behavior several times in noting that they really concentrate on the founders when making funding decisions at his fund.
  
  At the same time, venture funds have been getting bigger.  When you have a big fund and are making small investments, you have to fund a lot of people.  Paul addresses this problem this way:

Would that mean sitting on too many boards? Don't sit on their boards. Would that mean too much due diligence? Do less. If you're investing at a tenth the valuation, you only have to be a tenth as sure.

This makes sense to me.  However, I suspect that VCs have a major psychological hurdle with doing less diligence in this space where people are the main component of the due diligence.  If you give away $15K to a team, and the team spends all your money and gets nothing substantive done, fine.  But if you give them $400K and that turns into just salary for them with no substantive results, I can see people having a psychological barrier there.  It is like people are just stealing your money.  So you hesitate, and have lots of meetings, give bad terms, or whatever.  Are there ways around this?  Absolutely.  Probably, VCs should just get over it.

My eccentric approach to entrepreneurship currently boils down to the following principles. 

• Spread risk through multiple projects and multiple partners.  I have my own little VC portfolio going, except that I am a principal in all the startups.  I have more work to do, but also have more equity.  Needless to say, I have to work smart and efficiently for this principle to even be executable.
  
  Why multiple partners?  When I have the same partner on multiple projects, we tend to let all our projects except one fall by the wayside.  And different partners bring different skills that are useful for particular projects.
  
  
• Do as much as possible, myself.  I believe this principle is the primary source of my sustainable competitive advantage on competitors.  The more I do myself, the more about my startups is in my mind.  When disparate things are in my mind, it naturally makes connections between them.  (I'm pretty sure yours does too.) 
  
  In most companies (yes, even most startups), work gets cut up various ways and assigned to distinct people, or even outsourced.  Not so with my projects.  I want to be tailing multiple server logs while writing code and thinking about design and marketing, for example.  My best ideas have come this way: with lots of seemingly different (but actually related) things in my mind at once.  No silos.  No black boxes.  Even if a partner is primarily responsible for something, I want to know about every detail, so I can feed it into this coalescence engine.
  
  
• Question everything, all the time.  Nothing is off limits from my questioning.  All decisions are considered as temporary as they can be.  This principle keeps the ideas flowing for me.  And in practice, it means a lot of thinking, reading and research in conjunction with endless experiments, revisions and tweaks.  I believe this principle is a secondary source of sustainable competitive advantage simply because most people, and in turn, their companies, tend to follow "standard practice" and to freeze decisions once made.
  
  
• Only trust data.  Just because something is plausible, doesn't make it true or optimal.  Additionally, tweaking with no data is just a random walk.  Sometimes that is all you can do, however.  But as soon as there is data, I analyze it and trust it over non-data or unverifiable data.  This process can yield some non-intuitive results, and I believe it is another source of secondary sustainable competitive advantage.  It shouldn't be, but the hard truth is most people, and in turn, their companies, trust more than data.
  
  
• Don't seek funding unless there is a good reason for doing so.  This principle keeps my equity high and my focus on target. 
  

I think a lot of entrepreneurs follow these principles to some extent, at least some of the time.  But I take their adherence to the extreme.  And I think that is where the sustainable competitive advantage actually arises.

I did not approach entrepreneurship like this initially.  I've arrived here after many years.  Along the way, I've certainly made a lot of mistakes, as well as gained an appreciation for the potential usefulness and drawbacks of this approach.  My (surmised) potential usefulness of this approach is laid out above, albeit tersely.  I will attempt to summarize the approaches' drawbacks, lessons learned from past mistakes, and corollary principles in future posts.

Of course, I wholeheartedly realize the real usefulness of this eccentric approach is unclear.  I say I only trust real data, and yet I only have one data point.  And on that one data point (myself), I only have (at least in my opinion) one major success and one minor one.  Yes, that is encouraging, but hardly compelling. 

Consequently, I'm interested in more data.  Are you following this approach, or a related one?  What has your experience been?  (I realize it's not "clean" data--more anecdotal--but it's a start...)

Update: additional comments can be found here.

I think that building something that users want is a necessary, but not a sufficient condition, to building a successful business. 

Below are some cases where you can build something users want, but still not end up with a successful business.  And there are also some suggestions for getting around these pitfalls.  

• You build something users want, but there are just not enough high value users to reach profitability.  You can be very successful with very few users if the users are willing to pay a lot, e.g. big companies.  But sometimes you see entrepreneurs targeting really small niches where their user base is also not willing to pay a lot for their product.
  
  To escape this pitfall, you can broaden your user base by making your product useful to more potential users.  You can also try to make your product higher value, so that (at least some of) your users will pay you more, and hopefully enough to make a business out of it.
  
  

• You build something users want, maybe a lot of users, but reaching them is cost prohibitive.  This often happens with low cost or mostly free (ad-supported/freemium) products, but can happen with anything.  All that matters is your average user acquisition cost is higher than your average user revenue. 
  
  To escape this pitfall, either lower your average user acquisition cost or increase your average user revenue--it sounds so simple!  In practice, this can prove quite difficult.  This is where all that "guerrilla" and "viral" marketing comes into play.
  
  Ultimately, you hope that if you truly built something users wanted, your average user acquisition cost would go down naturally as your user base grew and word of mouth increased on that increasingly larger base.  And if that is the case, you might be able to spend your way out of this problem or otherwise do something creative to get over the hump.  But unfortunately, some products are more prone to word of mouth than others.  And your viral coefficient just may not be high enough.
  
  

• You build something users want, maybe a lot of users, but they just won't pay for it, won't upgrade, won't click on advertising, won't pay for support, etc.--nada. 
  
  To escape this pitfall, either build something complementary that people will pay for, or raise money and keep growing (unprofitably) until you get acquired. 
  
  
  
• You build something users want, but a lot of other companies built it too.  You see this all the time.  One company is successful, and then the copies start flooding in.  The copiers know it is something users want given the first success.
  
  To escape this pitfall, don't just copy--differentiate in a noticeably better way or go after a particularly unsaturated niche.  You might end up in one of the other pitfalls, but at least then you aren't in a lottery situation.

One simple response to all of this pitfall talk is to say I'm going to consciously ignore it all and just concentrate on my users, hoping it will all work out in the end.  And it might, but not always.  (More on this related topic in a future post.)

Anyway, if you think of more cases (or disagree with these), please put your thoughts in the comments, and I will do the same.  I think a list (as complete as possible) of potential pitfalls of this variety is quite useful for aspiring entrepreneurs.

Btw, I've been thinking about this topic for a while, but this post today finally got me to write something down...so thanks for that.

Update: additional comments can be found here.