Startup Playbook

A great point, that I haven't seen in too many places. I sometimes feel like we're seeing too many people who "want to have a startup" for the supposed fame and fortune, and not enough who are truly passionate about an idea. Believing in an idea will get you through, not dreams of gold coins.

Sam, I noticed you didn't mention watching cash burn or unit economics. Is that a later section you might add? Too many founders don't realize the importance of that until it's too late (speaking from personal experience)

Awesome thesis, hidden in the middle of the text. In some ways, this is a great single sentence answer to the question, "What is a startup, really?"

It's true that career risk is low, but opportunity cost could be high. If you're well into your career, taking a few years off to work at a startup that might fail could really be a million dollar tradeoff.

So you really gotta believe in your startup.

(Note: I left my comfortable high paying job earlier this year to start a startup)

I know a lot of people attempting this and they mostly seem to be flying under the radar, or at least have nowhere near the cachet of a startup. They are often bootstrapped, frequently for lack of other options.

For those of us who don't want to be in the pressure cooker or are turned off by the hype machine, these businesses are a viable alternative route toward independence and possibly achieving a significant impact. The fact that they have become as attainable as they are is I think also something quite remarkable.

https://www.cbinsights.com/research-unicorn-companies

There is the list of current Unicorns. I can't think of one of them that doesn't have very, very substantial competition or is a genuinely novel product. All of them ventured into highly competitive, well-worn fields and what set them apart was quality of service, ease of use, and responsivity. Very few of them made conceptual leaps in the underlying product - they mostly made leaps in lowering activity energy to use products or solving associated logistical problems.

Sorry Sam, I have to politely disagree with you on this one. Lord knows you are the one with the resume and authority on this, but I am a startup lawyer and work with clients on this stuff all day, so I am not totally unqualified. I do defer to your judgment, obviously, on companies that you want to fund, and your track record more than speaks for itself. However, what I want to know is if there isn't some disconnect between the companies you do fund and the attitude that is expressed in this post. I would love to hear your insights or opinions on whether you feel that I have this wrong, and if you think that the next generation of unicorns are going to be novel monopolies, or that maybe I am misreading the characteristics of current successful startups.

I've always found that even the best teams still need to constantly explore and add new tools in the toolbox in order to execute effectively and achieve success.

(In fact, it's not that even the best teams need to still do this, the best teams actively go out and do this, which likely contributes to them being a high-performing team.)

^ this group + @sama... wow. Terrific advice from an amazing list of credible people.

It's also a more attractive and credible way to introduce fast-growing technology startups* to the uninitiated than just saying, "oh, just read this bunch of blog posts by this guy called 'pg' who you've never heard of, no, no, trust me, it's reaaally good, he founded YC, which you've also never heard of, but trust me, they're like, the real deal".

*YC-style/SV-type, even if some of the advice is more general, and the definition of 'YC-style' is quickly expanding and loosing meaning.

All of them failed."

I was under the impression Reddit fell within this category. I recall a PG quote that went something like "we [Y combinator] hate your idea, but we like you [Alexis and Steve]" in reference to reddit's initial YC funding.

I know Reddit isn't considered a smashing success by VC standards (originally sold for roughly 15-20 MM), but I certainly wouldn't call it a failure.

I would love to see more content and discussion around this. I understand clearly why it is important to pitch who you will be not who you are when recruiting and raising money but when it comes to day to day, doesn't this contradict what you had said earlier about sharing all of the good and bad with your employees? Replacing your water jugs with Kool-Aid at the office just seems evil to me. I'm not sure if that is really what you are saying or not but it seems synonymous with unicorn culture. I see a lot of positives to creating a culture masked with illusion, but in my head, all of the value seems short-term.

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Any mirrors?

>One important counterintuitive reason for this is that it’s easier to do something new and hard than something derivative and easy. People will want to help you and join you if it’s the former; they will not if it’s the latter.

In every single instance where I actually get a response, there's a consistent chorus of "this doesn't fit the model of what we support" and, basically, I chalk it up to an investment environment that actually, truly targets the derivative and easy moreso than the unique and difficult.

That's why I'm still slogging along in the self-directed patent process. Nobody is interested in helping (beyond some constructive comments I've received here from community members - thank you!), and certainly not in contributing financial backing. It is what it is...but that claim? I don't really buy it.

On (i) it's like attacking someone for releasing a book of muffin recipes by saying "you think muffins are the best food in the world! I only bake cookies -- do you think you're better than me?!". In fact they just like muffins, they have a lot of experience in baking muffins, and instead of keeping their recipes secret they want to help other people bake the best muffins in the world.

On (ii), again my personal reaction, I don't care if it's self-serving. It also happens to be very helpful to me.

Small businesses, large businesses, "lifestyle" businesses, unicorns -- they all take a lot of effort, not to speak of other life commitments. In fact there is a maximum amount of time they can take (24 hours minus a few hours for sleep per day) and depending on your personality you will likely dedicate more or less of this time regardless of the scale of the venture.

I don't think whether it's a $10m business or $100m business or more is a choice based on personal preference, it's based on the nature of the idea you find yourself compelled to pursue.

For example, I used to be an antitrust lawyer. I was often in the office until 5am, and that was as an employee. I worked HARD. I thought I wanted to work less so I quit my job to start a small business. But it turns out that the idea that I have been excited about for the last few years is not a small business, it could never be one even if I wanted it to be. It's the kind of idea that will either be huge or it will be nothing. When you are standing on the brink of that kind of endeavour a few helpful words, a playbook if you will, from someone who knows how it's done can be very helpful indeed.

Self-belief in a crazy idea is not enough. Obviously Sam wouldn't disagree with this sentiment, but many entrepreneurs seem to omit the step of proving to themselves that their idea is not crazy, or they suffer from confirmation bias.

Wow, thanks for the advice, why didn't I think of that.

Thanks!

and more precisely, from David Packard: "More organizations die of indigestion than starvation."

Honest question: does this model apply when your product can't at any point be, for lack of a better word, half-baked?

Say you're making a security product or working on control code for rocket thrusters.

Reconsider(https://medium.com/@dhh/reconsider-41adf356857f)

StepUp, Stand Out _E L E V /A\ T E D_

you 196 4.2% 1

your 74 1.6% 2

company 60 1.3% 3

it's 59 1.3% 3

great 56 1.2% 4

product 52 1.1% 5

people 51 1.1% 5

get 44 0.9% 6

founders 42 0.9% 6

good 40 0.9% 6

... if your product if your product is easy to sell.

Should be

... if your product is easy to sell.

Required reading.

Scope:

The essay seems aimed mostly at current Silicon Valley (SV) style, mostly consumer, information technology startups. Okay, but that's not all of business or even all of startups. Yes, YC is pursuing much more, e.g., some shoe company in Pakistan, still, the essay is SV style and there, mostly Web and mobile. Fine with me, because that's what I'm doing, be we should understand this point about scope. And, as below, we should understand this scope and style because IMHO it's time for SV style of consumer Internet to borrow from some of the rest of technology and business.

Broad Point:

As we all can see, all heard from Mark Andreessen, etc., and see from Sam,

" ... investors’ returns are dominated by the big successes, ... "

The Exceptional:

So, from this Broad Point, the goal is something exceptional. From that, we have to suspect that we won't always be following the common and ordinary, some extensive experience and observations from the past, or even "big successes" from the past, and, instead, should be willing to consider some exceptions in order to be exceptional.

Users' Love:

> "Your goal as a startup is to make something users love."

Yup.

Now, can we, please, have some more guidance on just how the heck to do that? And, please, don't ask me to draw from Snapchat or Homejoy. And I'm concerned about

http://koltai.co/notebook/the-risky-business-of-entrepreneur...

with:

"However, these statistics also reveal a grimmer reality: 93 percent of the 511 companies accepted by Y-Combinator have failed. Even more alarming, only 3 to 5 percent of the companies that apply to Y-Combinator are even accepted, meaning that only one in every 200 companies that applies to Y.C. eventually succeeds."

And, I'm concerned about the low ROI of venture capital as in

http://www.avc.com/a_vc/2013/02/venture-capital-returns.html...

and

http://www.kauffman.org/newsroom/2012/07/institutional-limit...

Instead, for history with some good examples, there have been many amazing projects, some astoundingly innovative, that worked the first time with high probability, e.g., for a picture:

http://iliketowastemytime.com/sites/default/files/sr71_black...

IMHO, here is a better approach:

(1) Find a problem that huge number of potential users/customers believe or can come to believe is really important to have solved. E.g., want, say, 1+ billion people with Internet access, if only from a smartphone.

(2) Find a solution that is much better than anything else and difficult to duplicate or equal.

(3) Make sure that for the target customers right away or soon the solution will be seen as a must have and not just a nice to have. Want no doubts here; do not want to have to depend on gossip and fads from notoriously flighty teenage girls. One of the best examples would be a single pill, safe, effective, cheap, to cure any cancer.

(4) Deliver the product, easy to use at a very attractive price.

(5) Make sure the revenue covers all expenses and yields a fantastic margin, e.g., pre-tax margin 90%.

(6) For that solution, do some good original research with powerful, valuable results in the STEM fields.

(7) Offer the solution as a Web site, i.e., exploit software, Moore's law, and the Internet.

(8) Be a solo founder until at least $10 million a year in after tax earnings.

Difficulty:

> "A word of warning about choosing to start a startup: It sucks! One of the most consistent pieces of feedback we get from YC founders is it’s harder than they could have ever imagined, because they didn’t have a framework for the sort of work and intensity a startup entails."

There's something wrong here: All across the US, east to west, north to south, cross roads to the largest cities, millions of sole proprietors do startups and are successful enough to buy houses, support families, and get the children through college.

All the larger bodies of water in and around the US have boats and yachts, and nearly all the owners are just such entrepreneurs. Maybe they own 10 fast food restaurants, are big in asphalt paving, are a manufacturer's representative for some great lines, run five new car dealerships, own and manage 2000 units of rental property, have a private label line of industrial floor cleaning supplies in a mid-size Midwestern state, did a rollup of dry cleaning stores, are the main beer distributor for half of a state, are a leader in design and construction of custom tanks on truck frames for hauling liquids, etc.

But, a startup that exploits information technology, software, Moore's law, and the Internet should have some advantages and generally be less difficult.

Idea:

> "Remember that at least a thousand people have every great idea."

Maybe true with SV style, but more generally, no, and a thousand times no.

Instead, since so many startups fail, we want some advantages and definitely can get a lot of advantage from having a genuinely new idea. People who wrote a Ph.D. dissertation that was supposed to be "an original contribution to knowledge worthy of publication" and "new, correct, and significant" will quickly appreciate the importance of a unique idea and a lot about how to construct such. Here SV style is seriously lacking and, as above, needs to borrow from outside.

As in Sam's

> "Remember that at least a thousand people have every great idea."

I believe that SV style nearly trivializes the idea and, to raise the success rate, very much needs to go much deeper into the idea and associated considerations of user need, market size, meeting the user need, and new, proprietary technology to meet the user need especially well with a product difficult to duplicate or equal, and protected intellectual property that supplies a barrier to entry. In some places such unique intellectual property is taken very seriously, with laws, contracts, national security classification, etc. For higher success rates, SV style needs to do better with such intellectual property.

Several good examples of a such intellectual property and its power are in the picture

http://iliketowastemytime.com/sites/default/files/sr71_black...

This is another case of where SV style needs to borrow from outside.

Team:

Once again, over again, one more time, yet again, we come to the issue of team. Again we learn that it's tough to get a good co-founder; co-founder disputes are a major cause of startup failure; it's tough to hire good staff; it's difficult to keep the staff well involved; being a good leader and manager and learning to do so is a lot of work, and BoD members rarely know much about the details of the business, likely much less if some new, unique, powerful, valuable crucial, core technology is key to the business.

So, with all those clear dangers to the startup, we begin to conclude: Be a solo founder, get to earnings ASAP, grow organically, well into very good profitability hire no one, and from the start carefully plan never but never to accept equity funding or report to a BoD. Or, follow the example of Markus Frind and his romantic match making Web site Plenty of Fish, initially, just one guy, two old Dell servers, ads just from Google, $10 million a year in revenue, and recently sold for $575 million in cash.

Understand the Users:

> "... it’s critical you understand your users ..."

Right. And for making, say, really nice seat cushions for the driver's seats of Rolls Dropheads with owners in the Chablis and Brie set in the Hamptons, sure.

But in consumer Internet, for a big success, there will millions, maybe billions of users, and about all that can be said about those users is that they are a not very special cross section of humanity. So, really just have to understand the pair of the product and the ordinary man on the street.

Any ideas, including what I've asked?