At the beginning of this year, I switched to the other side of the table. I was an entrepreneur for almost 24 years, and I recently took on a new role as a partner at btov, a European VC firm. It’s a rewarding and fascinating job. The part I like most is giving feedback to entrepreneurs, regardless of whether we make an investment or not. The best VCs I have pitched myself as an entrepreneur were always generous with detailed feedback, even if they didn’t particularly like my businesses. I always appreciated that.
Of course every startup is different, and feedback is best when it’s specific. But talking to so many young companies often reminds me of some of the key lessons I learned along the way that apply almost universally.
This post will try to summarize some of these lessons. Many will seem straightforward, but in my experience it’s all too easy to forget them. Some might be counterintuitive, and some might be hard to swallow, but I hope all of them are useful.
1. You need to truly understand why you’re in this.
There are many different reasons to start a company. Many entrepreneurs want to genuinely change the world, some are fascinated by a particular kind of hard problem, some are seeking independence, others have a monetary motivation. That’s all fine, but it’s essential to truly understand what your personal motivators are. Be honest with yourself. Understanding your reason(s) to be an entrepreneur will be crucial when the difficult decisions have to be made — for example, whether to keep your company alive when things are getting really tough, or what to focus on when your initial idea doesn’t work out. Your deepest motivations will determine what kind of company you will build.
2. If you don’t want to spend 10 years on it, don’t do it.
Building a startup is a long-term commitment. The time to exit is growing longer and longer. The era of getting to an IPO in 5 or 6 years is long gone. You should assume that you will spend at least 10 years building your company, and if that seems too long, ask yourself if you like your idea (and entrepreneurial life) enough to hang in there.
3. Most long-term trends in tech are fairly obvious. Timing is not.
It might seem surprising, but long-term trends are typically not that hard to see. In 2005 I was asked to give a speech about the next 10 years in the Internet industry, and in retrospect the trends I predicted (based not on my own intuition, but on expert consensus at the time) mostly came true. My next couple of startups capitalized on some of these trends, but they were quite a bit too early, leading to a failure in one case and a long ramp-up time to success in the other. Telling exactly when and exactly how future trends will manifest themselves in the market is simply impossible. In the end, you have to make a bet on timing and the right focus. Today, it’s for instance pretty clear that AR/VR is going to matter some day, that blockchains will be a thing and that AI will continue to transform industries. That’s obvious. But it’s not clear what the best bets in these sectors will be and when they are going to take off — that’s where entrepreneurial risk-taking really happens. So don’t define yourself as “We are an AI startup” — that’s trivial. Decide what specific problem you’re solving and why now is the right time.
4. If you’re young, disrupt things. If you’re experienced, improve something you know is broken.
Most people think that successful entrepreneurs start when they’re in their early twenties, but that’s statistically not correct. Well over half of really successful companies get built by middle-aged people. The reason superstars like Zuckerberg, Jobs or Gates were so young is because they chose a sector that allowed for fundamental disruption — something truly new that incumbents didn’t see coming. Young people with no preconceived notions often excel at this kind of groundbreaking innovation. Older founders tend to focus on something they understand deeply from an already accomplished career, maybe a hidden opportunity in the industry they’ve worked in. The result are startups that are somewhat more “boring” and often stay smaller, but also succeed at a much higher rate. Young people take crazier risks and fail much more often. The good news is that when you’re young you have still plenty of time to start over if things go wrong — something that is a bit harder later in life.
5. Avoid synthetic problems.
Every startup pitch deck has a “the problem we solve” section. Sometimes you see problems that are a synthetic fantasy, not something out of the real world. The difference can be subtle, and it’s a trap that’s not easy to avoid. It’s often fairly easy to discover inefficiencies in any given market, but it’s an entirely different question if customers actually see these shortcomings as a problem worth solving. If they don’t, you will have a hard time selling even the most brilliant solution. Founders often convince themselves that customers should have a particular problem, but often people simply don’t or don’t see it that way. Market education from scratch is one of the most expensive things a startup can do, and it’s rarely successful.
6. Don’t bet against the market (too much).
Sometimes the market you chose develops differently from what you would like. Maybe customers won’t accept a particular pricing model, or they prefer a different type of solution than the one you’re trying to sell (as an example: Maybe they want a more services-heavy approach, not an automated self-service one). Betting against this reality is typically a bad idea, and in my career, these misplaced bets were the main cause for failures or mediocre outcomes. Customers are not always right in an abstract sense — sometimes they behave irrationally or in a short-sighted way — but their opinion is the only thing that matters for your startup’s success. Accommodating real customer needs is the only way to go. The market might develop into a more favorable direction later, but you need to survive until then.
7. Initial ideas don’t matter that much. You’re probably going to do something different anyway.
The specifics of your idea are not that important because most likely you are going to pivot and/or expand your business concept anyway. Any experienced investor will tell you that almost no successful startup keeps doing what it set out to do at the very beginning. Microsoft originally sold development tools. Facebook was a network for students. Uber focused on expensive limo services. Twitter originally was a podcast company. And so on. So don’t worry too much about your initial idea, see it as a starting point to something greater and possibly quite different. But this doesn’t mean that you can get away without a clear plan and deep understanding of the market. Flexibility is not the same thing as superficiality.
8. Forget stealth mode. Market feedback is all that counts.
Many founders are afraid that somebody else will steal their idea, so they choose to stay in stealth mode for a long time and make people sign NDAs. I did this once, and it was a huge mistake. Here’s the truth: If your idea can be easily stolen and turned into a success by somebody else, your position was weak to begin with. Successful founders bring much more to the table than just an idea. They have deep insights into a customer problem, unique skills, a great network, or many other things that are impossible to copy. What you need more than anything else early in a startup’s development is feedback from the market. You can’t get that in stealth mode. Besides, professional investors will almost never sign an NDA because they see comparable ideas all the time. Again, it’s not the idea, it’s about everything else.
9. Think big, execute small.
Ineffective startup pitches either stay too small in their ambition or overextend to a “boil the ocean” plan. Neither works, not just for investors, but also for employees and even customers. The best pitches show an exciting long-term vision but also explain which concrete small-ish steps have to be taken to generate some initial success. The best teams focus relentlessly on getting these small things right in the beginning without losing sight of the grand ambition. That’s surprisingly hard in practice.
10. Obsess over customers, not competitors.
One of the many reasons Jeff Bezos is the richest man in the world is his relentless focus on customers while mostly ignoring competitors (and Wall Street). Learn from him. Startup management teams spend way too much time looking at their competitors’ actions and way too little interacting with customers to learn what people really want to buy. Once you’re in a mature market with few big players you will likely need to understand competitors in much detail, but most likely that’s not where you’re playing at the beginning.
11. Make customers, employees and investors happy, not startup competition judges.
Some founders like to bask in the glory of startup awards and business plan competition wins. Some of that is fine because it’s another form of feedback for you (and good PR on top), but if 80% of a startup’s achievement has been winning competitions, something is fundamentally wrong. Experienced investors will take customer traction over awards every time. You should also understand that winning startup competitions has a low correlation to success in the market. Judges often like spectacular ideas and colorful founder personalities, but that’s not necessarily what customers will buy. Feed your real-world success, not your ego.
12. Get the right kind of advice from people who actually know.
It’s not hard to get advice for your startup — people are happy to volunteer their opinions. But it’s very tough to get thoughtful advice that is based on real knowledge and truly relevant insights. Some of the worst advice I got in my entrepreneurial career came from the most famous advisors. They meant well, but sometimes success in one domain (and era) doesn’t translate to other circumstances. Follow Ray Dalio’s advice in his book “Principles” and think about the believability of your advisors. That’s not a function of a well-known name, wealth or general success. It depends on a proven track record in the very specific domain you’re operating in.
13. You need people outside of your company who will root for you. Network deeply, not widely.
Being a startup founder — even as a part of a founding team — can be a lonely job. It’s very hard work to convince the world every day of how wonderful your company is. Every person who can help you do this is going to be incredibly valuable. People outside of your organization can give you invaluable perspective, can open doors and help you find creative solutions to tough problems. That’s why developing deep relationships with people who believe in you and will support you through tough times is essential. It’s much better to have a few supporters who really care instead of a lot of acquaintances who are only superficially interested.
14. Diverse teams are more successful.
By now it’s a well-known fact that diverse teams beat homogeneous ones. That applies to many different dimensions: Age, gender, nationality, education, professional experience, skill sets, etc. More different perspectives might not always be easy to deal with, but they will lead to better outcomes — they definitely have for me. The least successful startups I’ve been involved with were those with a management teams that had the same backgrounds, interests and skill sets. A warning sign for a lack of diversity is when everybody keeps agreeing and there are no moments of mutual teaching. Some insights might seem obvious to one person, but will be unknown territory for others, and that’s one of the benefits of diversity.
15. Resourcefulness beats intelligence.
Raw intelligence never hurts. But it’s not a coincidence that the most successful startups rarely have all-PhD founding teams. Startups are all about improvisation, about smart shortcuts, about resource-efficient problem solving. They’re also about listening to customers and humbly accepting the realities of your market. People with outstanding intelligence sometimes can have a hard time doing these things because they’re used to being successful by virtue of being smarter. But startup-land is not academia. Nobody cares if you’re the smartest person in the room, and the sheer elegance and brilliance of your technology doesn’t matter much. Customers care about a product that solves their problem at an affordable price, nothing else.
16. Moderate success is skill, outsized success is skill + luck.
A lot of people think that luck is a huge part of entrepreneurial success — the famous “being at the right place at the right time”. There’s something to be said for that. But when you look at people who had the exact same background and opportunities as a famous founder — say, anybody able to code who was at Harvard when Mark Zuckerberg was there — it’s obvious that skill is an essential, but not sufficient ingredient. With pure skill you are probably able to create a pretty decent company, but not an outsized success. To create the next unicorn, things have to come together in an unusual way. That’s unpredictable and not in your hands, but it’s worth taking a shot at.
17. Investors like confident founders for two very different reasons.
Confident founders clearly have an advantage in fundraising. There are two reasons: The first is that we as humans are hard-wired to assume competence when we see confidence. Obviously that’s not always correct, so experienced investors train themselves to dig much deeper, going behind the curtains of that mind-blowing pitch. The second reason is related, but more subtle: As a founder, you constantly have to convince people — not only investors, but future employees, customers, partners. You will have to live with a lot of rejection. Confidence is essential to sell to people and to get over difficult situations, and that’s why it’s an essential trait for founders. Investors know this and will opt for more confident founders, all other things being equal. True confidence is very hard to fake, so make sure you work on something you love and understand, and invest a lot of hard work into preparation. That’s the source of natural, credible confidence.
18. Learning how to say no is hard but essential.
Apologies for a cliché that you will find in most self-help books, but this skill is maybe more essential for founders than anything else. When a young company is still trying to figure everything out, founders have a tendency to chase every shiny object that comes along. Should we work on a distribution deal with this huge company? Sure. Why don’t we port our code base to this new framework/language/environment to make it more scalable? Let’s do it. Our new sales guy says if we only implement this one new feature, he can easily sell twice as much. — Unfortunately, these are the kinds of distractions that can kill a company. A founder needs to say “no” much more often than “yes”. That is obviously incredibly hard. You never know if you’re looking at a distraction or an incredible opportunity. You will make mistakes in these decisions, but the biggest mistake is trying to do it all and be all things to all people.
19. Culture eats strategy for breakfast. But they’re more closely connected than you think.
Peter Drucker’s famous quote about the importance of culture was spot-on. Abstract strategies are great, but they pale in terms of impact compared to a strong culture. But the two are very closely interconnected. If you have a great strategy you will need a closely aligned culture to execute it. Culture drives everyday behavior on all levels of a company. And strategy (the executed one, not the theoretical one in your investor presentation) is at the end of the day just the sum of all your employee’s daily decisions. If your strategy says that you’ll win through superior customer service and your culture encourages your people to go the extra mile for customers, that’s what’s going to happen. If the two are disconnected, things will go horribly wrong. Measuring, shaping and changing a culture is hard work, but it’s probably the greatest lever for execution.
20. Every plan is going to be wrong, but planning is crucial to focus your thinking.
All pitch decks have the infamous “hockey stick” slide that typically shows that revenues will magically take off in year 3 and break-even will be reached in year 5. Of course this almost never happens, at least not to that exact extent. Financial plans (and other kinds of plans, such as product roadmaps) are almost always going to be wrong, but making them anyway is essential for several reasons — and not just to impress investors: They will force you to make specific and concrete assumptions about your company; they will let you define the level of your ambition; they will make you to think through the mechanics of your business, of your revenue model and your cost drivers. As a rule of thumb: Once you have built a solid model in a spreadsheet, the numbers will vary according to how reality shapes up, but the underlying formulas and ratios should stay very stable.
21. Expect 30% success, 40% mediocrity, 30% total failure.
Of course it’s well-known that most startups fail. The same applies to the many projects and initiatives that you get into while building a company. Your customers will only care about a fraction of your product features. Only a few of your marketing ideas and sales strategies will have an impact. Most of your employees will do an OK job, only some will truly stand out. In my experience, a good rule of thumb is that 30% of things will go really well, 40% will be somewhat mediocre and 30% will fail outright. Of course you never know in advance which ones will fall in each category, but having realistic expectations while still preserving your enthusiasm for trying new things will help you build resilience.
22. Stoicism is the best philosophy for entrepreneurs.
The ancient philosophy of stoicism has a somewhat poor reputation. Many people think that it is about burying your feelings and putting on a poker face at all times. But that’s far from the truth. Stoic principles are about resilience, about preparing for misfortune to get stronger for when bad times actually hit. A key concept in stoicism is to focus your energy on what you can control, not what you can’t. On the wild rollercoaster of startup life that’s an essential survival skill. Another important principle is to not worry too much about what others think or say about you. They don’t really know you and your situation, so who are they to judge? Entrepreneurs receive rejection and negative judgement for their wild ideas all the time, so keeping your distance from others’ opinion is essential. There are some good books about stoicism put in modern context that are very much worth reading for entrepreneurs. Occasionally raising your perspective above the daily grind of startup building is a worthwhile way to spend your time.
Originally published at https://innospective.net on April 26, 2019.
Photo by Ronaldo de Oliveira on Unsplash