Elements of a Successful Start-up

FosburyThis weekend has seen an eruption of emotion in part of the blogosphere. It all started with Jason Calacanis posting some of his thoughts on how to run a start-up company here. This has resulted in many articles on the topic, including Duncan Riley from TechCrunch, and there was another follow-up article by Michael Arrington at TechCrunch.

All of these discussed various aspects of ‘how’ to run a start-up or a start-up business. Arrington says that the two most important aspects of a company are hiring the right people and managing your cash extremely well. I think these two aspects are important, but they are not everything.

For what it is worth, I believe there are three fundamental aspects that will determine the success of a company. They are what the company does, how it does it, and who actually does the work. The diagram below shows what I mean with this.

strategy

In my view, the founders of a company, and at a later stage the hired senior managers as well as the board, will determine the strategy of a company, its operational structures and processes as well as some of the tactical details on how things are done. They will also hire new staff into the company.

Let’s have a brief look at these three aspects.

Strategy -“The next bounce of the ball”

There are obviously many aspects of strategy, but this is a short blog post. If I had to pick one thought on strategy, it would be “the next bounce of the ball”.

I have borrowed this phrase from Ronald Cohen and his book: “The second bounce of the ball”. The concept behind this thought is very simple. Cohen explains this phrase using his personal history of founding Apax Partners, the private equity firm. He started out doing corporate finance work, managed to transition into venture capital when that became ‘hot’, then transitioned into buy-ins and then into leveraged buy-outs. Basically, Apax rode the subsequent waves of the European private equity industry and managed to grow very substantially with each of them. The point here is this: you need to be able to ride markets as they appear and expand; it is the easiest and fastest way to achieve substantial business growth. For Apax, that was the transitioning through the various phases of the private equity industry. For example, let’s say you create the best video-sharing site in the US right now, you would have a hard time to grow to a substantial size: you would be too late. If you set up the same company six years ago, you wouldn’t have been able to achieve growth either, Internet access was probably too slow and digital cameras not widely enough spread by then.

So, if you can predict the next bounce of the ball in a significant market and focus your company on that bounce, you will probably do well, provided you can execute.

Operations & Tactics – Execution: How to get it done

With operations, I mean both organizational design and the processes that flow along that design. For example, you will create different operational divisions in your company. These divisions will have different objectives and there will be ways in which they communicate with each other.
It is very easy to get this wrong. For example, should the marketing function be aligned with product management? Or with sales? Who manages customer support? How do does the sales staff interact with engineers? How do engineers interact with customers?

I have embedded a good podcast (audio only) where Andrew Frame, founder of Ooma describes, amongst other things, his thoughts on organizational design.

Overall, I find that there is very little good literature on organizational design out there. Each company will have different requirements, too. In my mind there are two important aspects here: Think it through and keep it very simple. As a start-up, don’t do the fancy stuff like matrix structures. They will slow you down and add little value at an early stage.

When Jason Calacanis talks about buying cheap tables and expensive chairs, he is describing tactical elements of how to run a company. Other such examples are going staff flexible working hours, buying them free coffee, etc. you could call these the tricks of the trade. Tactics essentially describe how small groups of people interact with each other and use their resource to achieve very specific goals. These tactics are useful for those ones that will make it happen, the people in your organization.

People – “Making it happen”

I fully agree with both Arrington and Calacanis on this point. People are the ones who will make it happen. Taken from Arrington’s post:

“The most important part of hiring correctly is to not hire the wrong people. The second most important part of hiring correctly is to hire the right people. What that means is that it is better to not hire anyone at all if you can’t find the right person. And if your startup fails, all the perks, time off and general coddling that many outraged commentators called for isn’t all that useful.

So who are the right people and who are the wrong people? It’s not that hard to tell. The right people are the ones that really, really want to work with you. You can tell they’re excited to be a part of the team. They actively look for problems to solve, and then solve them. This is a personality type that is very easy to spot once you know what to look for – they have fire in their eyes. They’re warriors.

I’ll take the fired up warrior any day over the more experienced but otherwise meek alternative. Skills can be learned quickly on the job (excluding certain specialized skills, which mostly means developers for a young [software] startup). But if you aren’t already the kind of person who’ll just get the job done no matter what, you’ll likely never be.”

A former boss and mentor of mine said to me that the people you want to hire in a start-up are the ones you would have wanted to have next to you in the trenches in Word War I. The ones you just trust to help you through this. I think that sums it up.

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Free is just free of charge

alarm clockIn 1995, there was a period of time when I was so broke that I couldn’t afford to pay anything for anything. In those three weeks, I was desperate to find all the things you could do for free. There was hardly anything. There was TV, radio, the public library, galleries, and museums. Obviously you could walk through the city and the countryside. I think that was pretty much it.

Fast forward to today. Thanks to the Internet, I now have access to a huge variety of free services. Actually, the variety is not just huge, it is incredibly huge. And most of it is totally free. The major reason for this is that the Internet has made product distribution so cheap that companies can afford to give products away for free. People like Josh Kopelman have pointed out before that there is a huge difference between getting somebody to use something that costs $0 and $0.01. This is true. In a sense, you could say that the vast majority of newly launched online products are free these days. Personally, I ignore those that aren’t.

However, I find that I am now so inundated with free stuff that I don’t even find the time to check all these things out anymore, even when they are free. What this means is that these things don’t compete for my money anymore, they compete for my time.

So what I have realized is that these products are not free. They are just free of charge. But they cost me something: my time.

Thinking about it, time is the most important thing I have. After all, this is my life we are talking about here. Money, well, if you have it, money is just money. I will happily pay a fair amount of money for things that save me a great deal of time.

I think this has two implications. First, free products these days are not just competing for attention, but they are competing for time, or face time if you will. This has some pretty important implications for web start-ups, by the way. Second, I think users are realizing that they can do a lot of useful stuff with all these products, but they really don’t have the time to do it. I think this is giving rise to a number of paid-for services that help people save time or make things far more convenient for them.

A great example of this is TiVo. You essentially pay for viewing recorded free programs at a time you choose and without having to waste your time on adverts. Another example is toll roads. You can take the free road, it will take you forever. You pay for the toll road, because it saves you time and hassle. A specific software example would be Carbonite, the automatic back-up service. You don’t need to worry about and spending time on backing up data anymore; it just does it for you. Another example is skype. I use it free – a lot. But sometimes it is just awfully convenient to be able to skype-out somebody into a conference call, happy to pay for that.

So, my view has shifted. The standard, I now expect free of charge. (Well, with software and online services at least) But I am more than happy to pay for things that will save me time and make my life easier by offering me things that I couldn’t do before.

So, today, being broke doesn’t mean being bored. It just means being stressed. Amazing.


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Market entry strategy

Startup ReviewThere is a very interesting blog that reviews the history of successful start-up companies. Unsurprisingly, the blog is called Start-up Review. The blog is edited by Nisan Gabbay and friends. So far they have reviewed some 30 start-ups, using a consistent format for describing the successful journey of these companies. They do some in-depth research, including interviews with founders, management and staff. Companies covered include both homeruns like Facebook and boot-strapped successes such as HOTorNOT.

When reading through these company case studies, I noticed that certain themes around marketing and market entry seemed to resurface consistently. The same elements, while not present in every company, appeared over and over again in different combinations. In other words: a pattern seemed to emerge.

I spend a short time categorising the marketing and market entry strategies of the companies. The resultant effort is shown below. Please note that my analysis is based on the case studies, I am convinced that it is incomplete and it may also be inaccurate. What is more interesting than the individual companies is the pattern itself.

Startup Analysis

Click on the picture for a larger version.

It is probably worth noting that the absence of a control group of unsuccessful companies limits the usefulness of this analysis. For example, it is possible that unsuccessful companies deployed the same marketing strategies at market entry and failed. Nonetheless, it is interesting to see that certain types of market entry and marketing strategies are used by several of the successful companies.


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