Category Archives: Starting a Business

Reality Check on Startup Dreams and Clichés

My Friday video for today is another TED talk, one of the best from 2015, targeting entrepreneurs, dreams, and getting things done. I call it a reality check on startup dreams, and she (Bel Pesce, from Brazil, successful entrepreneur) calls it 5 way to kill your dreams. How to kill dreams? Expect overnight success. Believe the fault is someone else’s. She reminds us about work, steps, and the journey.  Nicely done talk, only six minutes.

The link directly to the talk on the TED site is: 5 Ways to Kill Your Dreams.

How Startups Estimate Market Size

It’s a common question. How do I know market size?

Of course what one does for that depends on the type of business. What works for a web app won’t work for a restaurant. The kinds of information available in one market differs from another. Local demographics might be quite enough for a retail business, but irrelevant for a web business.

Know Your Market or Prove Market Size

What you do, how much research you do, also depends very much on your real business need. Do you want to feel comfortable taking a risk, for yourself; or are you looking to prove a market to the satisfaction of outsiders (such as investors)? Knowing the market is one thing, proving it quite another. Many entrepreneurs will skimp on market research when they are comfortable with their feel for their market. And why not? Business information is worth the decisions it causes, and if you are going to take the risk anyhow, and market research is difficult and expensive, then it’s not good business. But you really do need to know your market. If you don’t know, for sure, find out. Market Segments

Crossword Puzzle

Think of it as like a crossword puzzle. You search for clues. You put clues together to fill gaps. And with that in mind, figure out how many customers are potentially in the market as a whole, and how many of them you can reach. Use available demographics, industry-by-industry data, web searches, financials of existing companies, whatever sources are available.

Here are some additional tips, from Market Information: Needles and Haystacks, part of my book  Lean Business Planning:

Try to divide the market into meaningful groups, called segments. That will help you guess how much potential there is by segment. As an example, a computer manufacturer might segment the market by usage, as in homes, schools, small business, enterprise, and government.

Avoid Tunnel Vision

Don’t get tunnel vision about data and research. Way too often I see people struggling to find information to fit their preconceived notions of what’s needed instead of accommodating what’s available. For example, I dealt with a person who was going crazy trying to divide businesses into categories of annual revenue, which is impossible, instead of just defining categories by numbers of employees, which is easy to find. Take what information is available, if it works and takes you to meaningful business decisions; not what information you thought you wanted.

For example:

  • If you want to divide U.S. businesses into segments according to size, use the numbers of employees data the government offers; don’t insist on some other size factor such as revenues or office space.
  • If you want to divide businesses into size using employee numbers, use the government classifications. The U.S. economic census divides employee numbers into the classifications shown below. It obviously makes no sense to decide to break the sizes into 1-15 and 16-20 when the government already uses a different classification.
  • As you look for market information you’ll often find classifications established by somebody else, before you started looking. Be flexible. Use what’s available.

The point? Do what you have to, to make your business decisions. If you have to prove your market, watch sources and validators.


Entrepreneurship and Leadership with Mark Maples

My Friday video for this week is on entrepreneurship and leadership from the Stanford Ecorner. If you haven’t been there for a while, check it out. There is a new interface, and it’s a great collection of speakers on entrepreneurship, startups, business, and investment.

Here’s the intro from the site:

Silicon Valley veteran Mike Maples Jr. shares heartfelt advice urging aspiring entrepreneurs to “only do things that you think have a chance to be legendary.” By committing to always doing exceptional work and being around inspiring people, Maples says you will reap the cumulative benefits of a lifetime of excellence, and be able to enjoy it again whenever you look back.

This is a two-minute excerpt from a longer talk.

Self-Assessment: Will Your Startup Get Angel Investment?

Is your startup a good candidate for angel investment? If you can’t answer “yes” to the four questions here, then it probably isn’t.

cash_pile_iStock_000003690791XSmallAngel investors are as hard to predict as any other group of individuals, all operating in their own self interest. There are about a quarter of a million angel investors in the U.S., according to most estimates. But they are not an organized group, and not a public entity. They invest their own money and they normally want a return on their investment.  They tend to invest in startups close to where they live, and in industries they know.

Still, there are some predictable factors that will make some startups good candidates for angel investors, and others not. There are many special cases, but in general, you need to be able to say yes to the four questions or you are not likely to get angel investment.

Question 1: Does it Have Attractive Potential Sales Growth? 

Do you have a credible growth story? Given about 60 seconds to do it, could you convince a seasoned investor that your startup can grow its sales from where it is now to $5 million, $10 million, or $20 or more millions per year in 3-5 years?

Numbers aren’t enough; you need the story. The story starts with a problem potential investors can understand, one shared by enough people to make an interesting market. It then describes the solution your startup offers, along with details to make that credible such as your startup’s qualifications and background. Investors won’t care about your numbers unless they already see market potential in your problem and solution. They’ll take your story and build their own guess about potential. At that point, numbers – market analysis, demographics, research – are useful if the story rings true. And if your numbers don’t match what investors see in their imaginations, then you’ll have to work hard to prove you’re right. If the story works, then numbers are a welcome addition.

Question 2: Is It Scalable? 

Scalable means that a business can increase unit sales very fast without having a proportionate increase in fixed costs, headcount, and marketing expenses. Most product businesses are scalable because it’s relatively easy to add capacity to a product manufacturing process. Most web businesses are scalable because it’s relatively easy to add hosting bandwidth to increase users of the same site or application. Most service businesses are not scalable because services are provided by humans, not machines, so it’s not easy to increase capacity without increasing fixed costs and payroll.

One way around this is franchising, which supposedly duplicates a service formula to offer the equivalent of scalability. However, franchising isn’t credible, in angel investor terms, until you have a very successful working first location (or two or three).

Question 3: Is it Defensible?

Defensible means a startup can protect itself from a competitor jumping into its market and spending more resources faster than your startup, taking a market over. Intellectual property including copyright, patents, and trade secrets make a business defensible. This is often called the secret sauce.

Some otherwise great ideas fall flat with investors because they are something that will invite competition and involves no secret sauce to keep larger companies away.

The legend is that the so-called “first mover advantage” makes an idea defensible if the first mover grows fast and builds its market very quickly. That works sometimes, but not always. Investors will use their own judgment on that one, not necessarily what you tell them.

Question 4: Is Your Startup Team Credible? 

Angel investors are not likely to invest in any startup that doesn’t have at least one founder who has already been involved in a startup. This frustrates many of my email correspondents who complain about the chicken-and-egg problem of having to have been funded before to get funded; they ask how anybody gets experience if angels won’t fund them. My answer is that you have to get experience by joining an existing team and spending time with a startup first, or by finding co-founders with experience, or by changing your startup to make it small and focused enough to survive without outside investment.

This is not a problem that angel investors feel compelled to solve. They are all just individuals, not foundations or government entities, so they don’t feel responsible for fairness to anonymous hypothetical startups. They just want investments.

Conclusion: Answer “Yes” to All 4 Questions or Forget It.

Yes, there are always special cases and exceptions. But the executive summary is that if your startup can’t meet these four essential conditions, you should be either scaling down your plan to cut expenses so low you don’t need investment; or looking for alternative sources, such as friends and family.

A Good Idea is Like A Beautiful Day. Everybody Owns It.

My answer to this question on Quora about ideas vs. execution  “ideas don’t matter, only execution matters”? – has been getting a lot of views. So I decided to repost it here.

Zihuatenejo MexicoThe answer to this is that millions of people – and I mean that, literally, millions of people – right now, as I write this, as you read this, believe they have great business ideas. And hundreds have already taken this question to Quora, how do I get money for my idea?

I’ve written this several times on Quora in answers to several questions very simple to this one. But here it goes again:

A good idea is like a beautiful day. Everybody owns it. You use it or you don’t. Other people may make better use of it than you do.

Go ahead, quote me. Make my day.

It’s not exactly that the idea doesn’t matter. It’s that you don’t own your ideas. You don’t know how many other people have the same idea at the same time. You don’t know how many fatal flaws there are in your ideas, fatal flaws that you wouldn’t know until you started executing. Until you do some work for the idea, you don’t own it, and you can’t sell it, so it doesn’t matter.

Execution, on the other hand, is what gives an idea value. Businesses have value, and execution turns an idea into a business. The hard part is that execution also takes work, money, and doesn’t mean success. Quite often, after the work and the money are spent, execution has merely shown that the idea wasn’t really an opportunity. It was just an idea.


Startups: The High of Creation, the Wizard of Oz

(Note: this is a rare guest post, the third in the right-year history of this blog. It was originally published in Medium as Why We Startup: the High of Creation and the Wonderful Wizard of Oz, written by Megan Berry, head of product @RebelMouse, my daughter. I’m reposting because it captures the thrill, and the work, of developing software.) 

Startup Magic

I first did magic when I was eleven. I made a lemon dance across a screen. It looked effortless but it took me countless hours. I debated the lemon’s smile; I finagled the dancing animation; I almost quit, but I did it. I put it on my site and watched it dance.

The (not currently) dancing lemon
The (not currently) dancing lemon

Just like the Wizard of Oz I had discovered the truth: magic requires a lot of hard work and a curtain. And there is no high like successfully pulling off magic.
So why do we throw our lives into startups, working long hours, fighting through daily failures and (mostly) not being paid enough? I don’t think it’s for some future payoff. Instead, we’re addicts seeking that next high.

You might think this high comes from having an idea. Certainly, there is joy in an idea. It can energize, inspire and push you to do great things. But it is fragile and could fall apart with one wrong word or bad day. The true startup addict knows that ideas are too fleeting for the high you’re really chasing.
The high comes from creating something out of nothing. Because, after all, what is more magic than that?

Magic in Programming

So, together, we work hard behind our curtain. We nurture our ideas into a plan. We start building, brick by brick. We change our plan. We build more. Halfway through we look at what we’re building and are sure everything is going wrong. We panic and then push harder. The last 10% seems to take as long as the previous 90%. Finally, we release. Our idea is live. It is all worth it.

All too soon the high is gone and we must start again. Looking for our next tweak, our next idea. Searching for our next creation high. Won’t you join us? We might even let you look behind the curtain.



Bogus Experts Give Bad Startup Advice

iStock_000000316874Small_thumbHow many self-styled startup experts have actually started a company? How many have gotten a startup to critical actually know what they are talking about? The online world of startup experts is infested with people who don’t know what they don’t know. I guess these people read the same tired clichés that sit in rich overabundance all over the web, and over time take on what they read as if it’s what they experienced. So clichés run around masked as expertise. Which makes for a lot of bad startup advice.

Bad startup advice

Here’s an example for you. The idea that passion alone can make a startup successful is absurd, but extremely common. It’s all over the web. Comments, blog posts, and updates are full of this illusion. We see it in angel investment pitches for the angel group I’m in. Watch a few episodes of Shark Tank and you’ll see it there, as entrepreneurs talk about how passionate they are and the sharks just roll their eyes. This again?  The truth of the matter is that passion, although it does help get through the long days and late nights, doesn’t make that much difference. What matters is giving value, offering something people will pay for, showing up every day, and doing the work. And I wonder how many of those people who advise others to “just follow your passion” have ever actually built a business. “Do what you’ll love and you’ll never work a day in your life” is a naive cliché. Ask anybody who actually did successfully start a business. There was a lot of work involved.

Another example? The way-too-common assumption that startups have to get funded is just wrong. The latest available SBA statistics show about 450,000 new businesses start up in the U.S. every month. But in an average year, only 70,000 or so get angel investment, and fewer than 5,000 get venture capital. Real people start businesses using grit, savings, credit card debt, loans on house equity, and loans or investment from family. The normal process of a startup is not, not by a long shot, a process of going from idea to funding without a ton of hard work in between. Not does it take investment to make a startup. Some need it, and many others don’t. It depends on the business.

And a third example is a pet peeves for me, the idea that education doesn’t coexist with entrepreneurship. Why bother to get an education if you’re going to be an entrepreneur. I ranted about that one last month, in Young Entrepreneurs: They are Lying to You. For every Bill Gates, Steve Jobs, and Mark Zuckerberg there are 10 million normal people wishing they’d stuck it out and gotten their degree.

Not that expertise is bad

However, for the record, I don’t mind it when someone shares expertise and experience accumulated from being close to startups, as sometimes happens with attorneys, business school profs, small business development center (SBDC) counselors, and others. They can be legitimate helpers. And of course there are functional experts who  have expertise to share on marketing, writing, design, development, finance, and so on, without having started a business. But they should declare their expertise and stick to it. They should not reinforce the clichés.

But certainty is bad. These are startups

The level of certainty I see, way too often, is amazing. Having read a bunch of blog posts about Steve Jobs, Mark Zuckerberg, or Richard Branson doesn’t make anybody an expert – but so-o-o-o many people act like it does. There are people who draw from the enormous overabundance of startup advice available and repeat the common clichés, because they sound good. So they tweet, post, write, and comment. And they perpetuate the clichés with an air of certainty.

I think certainty itself, related to startups, is a sign of inexperience. There are no general rules that apply very well to startups. There is always room for “on the other hand.”


Young Entrepreneurs: They Are Lying to You

All over the web, on Q&A sites, blog posts, and so on, in panels and conferences, and in the occasional book, know-it-all alleged experts are lying to young entrepreneurs about the value of education. They sprout clichés that are unrealistic, impractical, and that when taken to an extreme, are even tragic.

Lie: A startup is better than an education.

orangutang_istock_000003420564xsmallIt is so not true, but sadly also so widely believed.

They say education is a waste of time. They say that a “real” entrepreneur skips school to do a startup now. You’re in high school and they tell you being an entrepreneur is a viable alternative to getting an education. You’re in college and they tell you to drop out. They’re tricking you.

That’s crap perpetuated by wishful thinking. Sure, starting a business sounds better to you than sitting in a classroom or doing homework. And, when studying bogs you down—as it does at some point for all of us—they tempt you with this lie you can turn to instead: “You don’t have to do this. You’ll just be an entrepreneur. Way more fun.”

Tragic? Yes. They throw you off track. Tragedy is what might have been, but isn’t because something—lies, maybe laziness (that’s what makes those lies work)—got in the way. I learned that in a classroom at college. They are like those beautiful sirens—mythological Greek ladies, sexy as hell, singing from the sidelines—who lured sailors off course and into the rocks.

But no, wait. You don’t have an education, so you have no idea what that reference is about. Unless you saw it in some low-grade movie.

[see-also]Should Entrepreneurs Attend Business School?[/see-also]

Truth: Get your education first.

Don’t kid yourself: You get the education when you’re young because it makes your life better.

First, it means doing something hard, something that takes a few years, and that builds you up. You do homework, you take tests, you write papers. You lose sleep turning work in on time. You grow. You face challenges and overcome them. The best path goes uphill sometimes. You can’t always take the easy route; you’ll end up nowhere.

Second, you learn to think, digest information, communicate, discuss ideas, evaluate options, and make decisions. You acquire skills and mindsets that make you better.

Third, it’s about options. Ten and 20 years will go by really fast. If you have a degree, then you have options. You have more choices. If you don’t get an education, someday there will be a thirty-something-year-old person living in your body, cursing you.

And, by the way, study what you like doing. I majored in lit, then did journalism in grad school. Ten years later, I went to business school. I ended up a software entrepreneur, writing my own code in the beginning. Your business success—or lack of it—isn’t what you learned or didn’t learn in school. It’s who you are. Life is way better with an education, but it doesn’t have to be a business education. Your education is part of who you are. Business is fine if you want to study it, but if not, no sweat. You can still do your own business later.

Yes, there are an extremely rare few who have earned the right to scoff at education. Peter Thiel, for one; nobody can doubt his credentials. He’s not just another amateur expert reading what everybody else says. And yes, Steve Jobs, Bill Gates, Mark Zuckerberg, and a few other rare exceptions. Each of them is one in several million. And all three of them were dragged out of education by one of the biggest deals of the last 100 years. Rumor has it that Jobs actually got the education by auditing—without getting the paperwork—at Reed College. And you won’t find either Gates or Zuckerberg claiming others should drop out. And you aren’t them. They are exceptions, not the rule.

Don’t risk real life betting on yourself as that one in a million. Give yourself options. Look at the odds.

Give yourself time. Startups take seasoning.

In the real world—for the rest of us—actually starting a business takes seasoning first. You need some time. Work as an employee, keep your eyes open. The right time will come. It’s not one of those “now or never” situations until you pass 60 or so. Most of us need a decade or so in the work world, at least, before we’re ready to start our own business. I was 33 when I went out on my own, and 45 when it finally took off.

A few decades ago, before this craziness started, I took a course in entrepreneurship from Steve Brandt, at the Stanford Business School. Look him up on Amazon. It was a privilege I still appreciate.

Toward the end of the course, he paused, looked up at the lot of us, and said (something like): “Listen. I’m not saying you’re supposed to pass this class, graduate, and go start a business. That’s not realistic. You’re too young. You need more experience. So, if you’re serious about this, what you do now is choose the stream you want to swim in. Take a job in an area that interests you. Wait until you’re ready.”

A few decades later I was teaching entrepreneurship part-time, having built my own business, when one of my students asked me how he could set up a business in coffee roasting right out of school. He wasn’t the typical undergrad. He was married and in his middle twenties. I told him to work with a coffee roaster first. He did, for two or three years. Today, about 10 years later, he and his wife own a successful multi-location coffee roasting business called Back Porch Coffee in Bend, Oregon.

[see-also]10 Lessons Learned in 22 Years of Bootstrapping[/see-also]

Data? You want data?

Still, you want more?

If you do get that education, you’ll have a huge advantage over the uneducated in distinguishing data that matters from data that doesn’t. So you’ll realize I’m right. But for a quick data fix, check out what the Kauffman Foundation discovered when they analyzed 479 successful high-tech startups. Here’s what they say:

  • The average and median age of U.S.-born tech founders was thirty-nine when they started their companies. Twice as many were older than fifty as were younger than twenty-five.
  • The vast majority (92 percent) of U.S.-born tech founders held bachelor’s degrees. Additionally, 31 percent held master’s degrees, and 10 percent had completed PhDs. Nearly half of all these degrees were in science, technology, engineering, and mathematics (STEM) related disciplines. One third were in business, accounting, and finance.
  • U.S.-born tech founders holding MBA degrees established companies more quickly (in thirteen years) than others.
  • Those with PhDs typically waited twenty-one years to become tech entrepreneurs, and other master degree holders took less time to start companies than did those with bachelors degrees (14.7 years and 16.7 years, respectively).
  • U.S.-born tech founders holding computer science and information technology degrees founded companies sooner after graduating than engineering degree holders (14.3 years vs. 17.6 years). Applied science majors took the longest (twenty years) to create their startups.

Conclusion: They are lying to you.

Before you swallow entrepreneurial advice from anybody, ask first whether they’ve ever built a business. And even then, don’t believe them; think about it, and decide for yourself.

Don’t believe me either. Look around you.