Startups 101

March 1, 2021
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Tech
  • What is a startup?
  • ”A startup is a temporary organization used to search for a repeatable and scalable business model.” - [[Steve Case]]
  • " human institution designed to deliver a new product or service under conditions of extreme uncertainty”. - [[Eric Ries]]
  • "Startup" often refers to software startups, because they have low-to-zero marginal costs and therefore can scale supply quickly and easily if there is demand.
  • This is in contrast to a local business/SME (small/medium enterprise), most of which expect to stay small. Their customers are local, and only occasionally will they expand geographically. Think grocery store, bookstore, restaurant, gas station. Conversely, startups rarely have a local focus, and plan to expand quickly, independent on geography.
  • How are startups funded?
  • Equity: Sell a chunk of the business to raise cash up front. No immediate liquidity. Assumption is the investor will get paid back via their share of the company's future cash flows, or as part of a future fundraising round, an acquisition, or IPO'ing. Equity is good for founders who don't want to be responsible for regular payments in the near-term (debt), or who don't yet have significant revenue or profit on which to raise rev share/profit share financing. Gets paid back last.
  • Debt: Borrowing a chunk of money from an investor and pay them back on regular intervals, with interest. Gets paid back above equity.
  • Why do startups predominantly raise equity?
  • Startups exist to make something new that people want. There are a few important points here.
  • First, people must want what you're making. Large companies can sometimes get away with foisting things on their customers that aren't wanted. Small startups can't do that.
  • Second, it's quite hard to make something new that people want in a market economy. If people both want/need something and it's relatively easy to satisfy that need, some company will already be making it.
  • So, this means that you're either satisfying a new need, satisfying an existing need in a new way, or maybe finding a novel distribution channel.
  • Finally, there's usually a lot of uncertainty about the need. If there was certainty, you'd already have growing revenues and wouldn't need equity financing. [[Paul Graham]]
  • What questions are startup investors trying to answer? What are heuristics for success?
  • Have you identified a real need, and will you be a able to meet it?
  • Will a lot of people eventually want this? In the end there needs to be a huge market.
  • Are you on the leading edge of some change, and are you building something you yourself want? If so you are yourself early proof of product-market fit (which means being in a good market with a product that can satisfy that market - [[Marc Andreessen]])
  • How do you know people want this? Who are your first users going to be?
  • Put another way - is there an initial market? This might seem obvious but many startup ideas simply lack any real market. There have to be some people willing to use your first version of the product, bugs and all.
  • A good answer is, "because we want it and our friends want it."
  • Best follow up: "We already have a prototype, and our friends are already using it." This shifts the investor's answer from default No to default Yes.
  • This is harder than it sounds! Airbnb didn't meet this criteria at first. The founders wanted it, but their friends weren't into it initially.
  • Do you have a deep understanding of your users' needs? If yes, it's less important that the investor may not be themselves excited about the product.
  • The best thing you can do in a pitch is teach the investor about your users.
  • This means that you should be talking to your users All The Time.
  • Investors don't need to be domain experts. There are too many domains. They just need to believe that 1) you know what you're talking about, and 2) you're trustworthy.
  • Because of this, you should think of meetings with investors as interviews, not pitches. The investor is just trying to answer 1) and 2) above. This means they need to ask lots of questions, not listen to a canned presentation. Do not focus on making sure you deliver the message you want to. You need to flex to the questions - could be about the founders, the idea, the users, a very specific feature, etc, In practice 10 minutes is enough to figure out whether 1) you know what you're talking about, and 2) you're trustworthy.
  • Are you answering questions candidly? This is important. You don't need to know everything. Don't bullshit. The idea by definition is risky. Small change of success with huge potential payout is fine. Just be thoughtful and honest.
  • Saying you don't have competitors is a bad answer. Competitors don't kill startups, bad execution does. But, you should be aware of your competition, and not minimize their impact.
  • Assuming there's a path to the big market, will you be able to find it? This depends on:
  • The qualities of the founders.
  • Their specific domain expertise
  • The relationship between the founders.
  • How determined are you? Are you good at building things? Are you resilient? Is your relationship strong? Have you found a good idea that you care about and just can't let go? Is there nothing else you'd rather do?
  • I was at a fireside chat with [[Ben Horowitz]] and the Lyft founders [[John Zimmer]] and [[Logan Green]]. At one point Ben said, "You know why I invested in Lyft? Can you imagine John and Logan doing anything else besides running Lyft? No. They'll be two old geezers running Lyft. It's all they care about. That's why."
  • There are a few core reasons to start a startup: make money, seem cool, interesting problem, want to work for yourself. What are yours? #1 and #2 are less motivating long-term than #3 and #4.
  • Bottom line: Are you delighting your users? How do you know? This will always be The question no matter how big you get. Because if you stop delighting your users, eventually someone else will.