Startup Lessons I Learned the Hard Way

I also like to advise entrepreneurs to take advantage of the financing environment that is available to them during the hopes and dreams phase. It is a strange situation. Your company will be worth more to investors during the hopes and dreams phase than it will be worth while you are crossing the chasm. So you should raise enough capital at hopes and dreams valuations to get across. If you don't, a down round is waiting for you as yet another challenge while you are crossing the chasm.

Companies with no revenues but big potential are worth whatever the market will bear. But once you have revenues and are heading towards earnings, the market will be able to better assess what you are worth. Revenues and earnings multiples will enter the valuation discussions. And most of the time, revenues and earnings multiples will result in a lower number than hopes and dreams, at least for a while.

Haha, true. Although I read publications because they have interesting ideas, sometimes its hard to recognize advice in perspective; ie. a VC will say something completely different from an entrepreneur. Frankly, even entrepreneurs in different industries will say things that contradict one another. The problem is when everything is rational AND the entrepreneur has credibility. And then theres the case of people blogging advice when they shouldn't, ie. startup guys giving advice about hiring and building culture before they've even left their own garage.

Sometimes you just gotta put your head down, forget all the "lessons learned" blogs and and go with your gut.

Maybe not, but there are definitely repeatable patterns that lead to startup failure. Time familiarizing yourself with them can be time well-spent.

Sure you may not need detailed 3 year financial projections or spreadsheets coming out your ears, but if you don't have at least a basic plan then you run the risk of having to handle issues you should have seen coming if only you had a basic plan. Writing a plan is as much for the Founder as it is for any investors and only fairly experienced businessfolk can really get away with skipping it.

It's so true, yet such a bitch to put into practice. Cognitive biases conspire against you--especially the sunk cost fallacy, because forgetting your idea often involves throwing away finished work.

My hope is that by getting burned by this enough times, I'll sharpen my spider sense about when I'm not focusing on solving a real problem.

You can watch the video here: http://www.youtube.com/startupbootcamp#p/c/A978F0F30D190EF9/...

"what you think would be cool to build"?

What the heck does "cool" have to do with anything important?

This "cool" stuff is from what, some view that hacker entrepreneurs are prone to ignoring reality in favor of some oblivious intellectual self-abuse and a desire to insult and denigrate them?

Let's f'get about "cool".

You wrote:

"Your idea doesn't matter."

and

"Focus all your energy on solving a critical problem. Forget your idea."

You have some undefined but clearly confused, obscure, and highly negative conception or definition of an "idea". Such an "idea" is irrelevant, so let's set it aside.

The definition of a relevant 'idea' is one that enables, permits, or says how to solve "a critical problem". Or curing some deadly variety of cancer is "a critical problem", and an important "idea" would be how to do that.

Or, much of the REASON a "critical problem" still needs to be solved is that finding an idea good enough to solve the problem is too hard.

So, if we are attacking what is clearly "a critical problem", then the "idea" DOES "matter" and is crucial -- the idea needs to be GOOD, and finding it will likely be hard.

In denigrating an "idea", you appear to have bought into some common nonsense, especially spread by Guy Kawasaki, that "ideas are easy; execution is hard". Wrong, wrong, way WRONG, Guy.

Here Guy likes to insult, denigrate, and run down entrepreneurs, and that is common on his side of the table. Or, that side of the table likes to claim that much of what the other side of the table has is worthless.

Actually, GOOD ideas are HARD, and, then, execution is routine. BELIEVE ME, if you have a GOOD idea for curing some deadly variety of cancer, then the idea was hard, hard enough that so far some thousands of well funded, very serious biomedical researchers have missed it for some decades, and execution is routine, or many patients and their families and physicians will be knocking your door down as the last chance not to die yet.

Yes, with an easy idea, execution will likely be hard.

A charitable explanation for saying

"Your idea doesn't matter."

or

"ideas are easy; execution is hard"

is that someone really just has not even a weak little hollow hint of a tiny clue about what constitutes a GOOD idea or how to find one and to know that it is good; but there are ways to do these things: The work is essentially 'research', and the education for it is called the Ph.D. The all-time, unique world-class, grand champion for such ideas is the US DoD, and the NIH is not far behind. So, thankfully for US national security, the US DoD, and thankfully for US health care, the NIH, have for decades identified GOOD ideas and pursued them with high effectiveness.

A good DoD example is GPS. Yes it started as 'just an idea', but it was backed by some quite solid mathematical physics that permitted evaluating the idea. The 'idea', and actually nearly every good idea pursued by the DoD, is presented and evaluated first just on paper. So, in such work, the concepts of 'traction', prototypes, 'product-market fit', pivoting, etc. are all just silly; instead, the project gets evaluated just on paper long before 'traction', etc.

We CAN present and evaluate good ideas just on paper; learning how is much of why we go to school; that's part of what Ph.D. people do.

Uh, here's the little secret: It is human nature for people to run out of money.

Or, 'the story of America is rags to rags in three generations'.

Or, suppose tough, hard working, determined Joe from the wrong side of the tracks builds a company worth $800 million and then falls over dead from a heart attack and/or overwork. So, after the lawyers get their pieces, Joe's son Tom takes over the company. Too soon, via ignorance, simplistic thinking, lack of hard work and determination, high maintenance, fast women, slow horses, fast cars, nasty divorces, liquid pleasure, funny, smoky stuff, weekends in Vegas, Tom has the company losing money.

So, the other family members, seeing that they might have to go to work instead of just suck at the teat left by Joe, contact a private equity (PE) firm that agrees to buy 80% of the company for $40 million. Tom gets to 'pursue other interests'.

The PE firm brings just basic responsible business management, nothing more, cuts out the nonsense, gets the company worth $600 million, and sells it.

Why? Human nature. There are only a few people like Joe and a lot of people like Tom.

So, what about 'venture capital' (VC)? PE with a twist: Again much of the key is that commonly people run out of money. So, a VC firm can say that they are looking for passionate, visionary, etc. entrepreneurs. Why? Because the startup CEO is eager enough to see himself as passionate, visionary, etc. and because the VC firm wants the CEO to believe that VC firm is investing in the 'visionary', etc. CEO, his 'disruptive idea', 'secret sauce', etc.

The VC firm is just doing a routine manipulation; they are emphasizing the sizzle and not the steak. The VC firm is just looking at a way they can buy low and sell high, and their main way is that the CEO, as is human nature, ran short on money. It also helps if the CEO and his team are a bit naive, gullible, and easily manipulated.

Keeping money is hard. Building a valuable business, including finding the good idea, is hard, and keeping the business is also hard. There are lots of ways to throw money away that are not seen by poor people but make themselves known to rich people! Anyone who both made a lot of money and kept it avoided many opportunities to lose the money.

In particular the VC firm (I'm assuming information technology not biomedical technology) cares not at all about 'the idea', the 'secret sauce', etc. and will refuse (and, really, is nearly totally unable -- they are commonly just history majors, and only a tiny fraction of VC partners have any serious technical qualifications) even to evaluate it and, instead, just looks for some simple numbers: The main numbers are ComScore numbers and their rate of growth. That is, they look for 'traction'. Or, good traction and a good 'idea' are nearly as good as just good traction alone. Or the future value of the business and the idea are conditionally independent given the traction.

Why do the VCs do this? Because they, and their limited partners, understand and trust in human nature MUCH more than in technology or secret sauce.

It remains: For a successful business, the idea is just CRUCIAL. Yes, it is essentially true that the idea matters only to the founders and not to the VCs, but still the idea is crucial. That VCs ignore ideas is just that they have (or at least have had until the losses of the last 10 years, and still hope to have) a way to make money easier for them and that they and their limited partners do understand -- exploit human nature and take advantage of gullible CEOs.

Or, rule out everything else and what remains, however improbable, must be the truth!

For reading Tech Crunch, HN, blogs, Fred Wilson, etc., that is very thin and watery material, much of it very wrong, but a little of it is worth knowing.

For

"There is no secret to startup success."

of COURSE there is: Else success is all just blind luck (which we can't believe) or many more people would be rich.

For

"there are no repeatable patterns that lead to startup success. None."

yes there are, but, of course, they are difficult to see. The US DoD sees them, and so does nearly all of the applied research community, but nearly no one in information technology entrepreneurship does.

Yes, even though there are repeatable patterns, not all successes will fit any such patterns.

Actually, when looking for exceptional events, which, of course, successes are, empirical distributions and averages are not very important.

So, as is common, the more important 'intelligence' about such things is beyond empirical distributions. Or, that Langley fell into the Potomac and that many others had failed for many decades didn't mean that the Wright Brothers had to fail.

How did the Wright Brothers know? They designed and built a good wind tunnel, did good lift, drag, and thrust calculations, and made good progress on the crucial issues of three axis control. So their 'pattern' was to take advantage of some basic physics. Sadly they did not understand Reynolds number so had two thin wings instead of one thick one.

The pattern remains: There are ways to know.

For your

"just f*ing do it (#JFDI)."

no: You are proposing just blind, passionate irrationality. Instead, plan well enough to see your way fairly clear to success; then measure twice and saw once. Or have a carefully worked out flight plan WITH reserve fuel and alternate destinations. Charles Lindberg did. Of course, if you have no way to see your way clear to success, then you will have to proceed with just blind passion.

Even Fred Wilson will advise, quoting roughly, "If you don't need venture capital, then you shouldn't take it."