J CURVE: NEW START-UP WAY
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THE VALUE OF A MAP Start-ups are hot.
We’re seeing not only more entrepreneurial businesses emerge in the twenty-first century
but also a more diverse group of start-ups.
Besides the college students, recent graduates, and serial entrepreneurs who have always occupied this space, a variety of other participants are becoming more numerous:
corporate executives fleeing the world of big business to create something on their own;
brilliant young people whose first or second jobs may be with start-ups; refugees from nonprofit, government, and other sectors who are attracted to the entrepreneurial adventure.
Additionally, start-up fever is spreading geographically throughout the US and also the world. It’s not limited to Silicon Valley, Austin, and Seattle.
Now startups, incubators, and accelerators are popping up in Pittsburgh, Chicago,
Barcelona, and Shanghai.
Tel Aviv, San Paulo, Sydney, and Bangalore now rank among the world’s top twenty start-up ecosystems, according to the Startup Genome Project.
In addition, entrepreneurs are launching these new businesses at a time of great volatility and unpredictability.
In our increasingly global, digital universe, nothing stays the same for long.
Trends come and go with lightning speed; new, dominant companies emerge seemingly out of nowhere; and what’s state-of-the-art today becomes hopelessly outmoded tomorrow.
Start-ups are hard. Very, very hard.
They will likely test your creativity, perseverance, courage, and intelligence.
Your relationships will also be tested—both within your company and with your family and friends.
More than once, you are likely to be spent physically, emotionally, mentally, and financially.
This book will provide you with guidance, in bad times as well as good.
It will give you a clear road map that will help you navigate the treacherous start-up terrain and make the journey to success as smooth and efficient as possible.
This book will help you know with some level of certainty exactly where you are
and what you need to be focusing on.
I’ll also try to expose the many myths that are associated with start-ups, and I’ll try to point out the areas where you may need to alter your ingrained beliefs and patterns of thinking to increase the odds of both you and your start-up being successful.
More so than ever before, start-ups require a map to chart a course through innumerable and significant obstacles. As you’ll discover, a map is exactly what this book will provide.
KNOW WHERE YOU’VE BEEN, WHERE YOU ARE, WHERE YOU’RE GOING
Start-ups aren’t as random and chaotic as they might appear.
If I’ve learned nothing else after thirty-five years of doing startups, it’s that they begin, progress, and end in predictable ways.
On a granular level, of course, the unexpected often happens: a funding source suddenly dries up, and a new customer appears seemingly out of nowhere.
If you take the long view, however, you can see patterns to start-ups—patterns that can prove invaluable to entrepreneurs, providing perspective and assisting in decision making.
These patterns provide a map that entrepreneurs can follow, and this map can make the difference between failure and success, between making a small and a large profit,
and between having a flash-in-the-pan business and a sustainable one.
The value of this book is that it will help you become familiar with the start-up path.
It will show you the markers along the way that will identify your particular point in the process and the best actions to take at this point.
You’ll learn, for instance, what to do when your initial product falters—a common start-up occurrence.
You will also learn when to use the knowledge gleaned from the failing product to introduce iterative—and eventually, more successful—versions of the original.
Once you know where you are on the start-up path, you are much better able to know what your next steps should be—as well as the common (but avoidable) mistakes often made
at a particular point on the path.
This knowledge is hugely valuable tactically, but it’s equally important psychologically.
Too often, entrepreneurs give up prematurely when faced with surmountable obstacles, and they move forward aggressively when they should stop, reflect, and re-create.
Psychologically speaking, some entrepreneurs fold their businesses
because it seems all is lost.
When they are aware of the reality—they’ve just hit a speed bump—they can process the predicament, see it in context, and move forward rather than calling it quits.
Similarly, some entrepreneurs take enormous and often unnecessary risks because they are caught up in the start-up mentality; they believe they must be overly aggressive if they’re going to be successful.
In fact, there are times to be aggressive and times to be conservative, and if they know where they are on the start-up map, they can respond appropriately.
Consider, too, that in the start-up universe, you always have more tasks to accomplish than time or resources to do them.
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The scarcity of resources is often extreme given the enormity of the mission, so efficiency becomes a critical discipline.
Therefore, allocating the right amount of money and energy to the right tasks at the right moment is crucial.
With a map in hand, this allocation is much easier to do than when you’re flying
by the seat of your pants and potentially flailing in too many directions.
As I noted in the introduction, I call this map the J Curve, and I’ll help you become more familiar with its components shortly.
First, though, I’d like to tell you about a start-up journey that helped open my eyes to the concept of the J Curve.
NO STRAIGHT LINE FROM START TO FINISH In 2007,
my business partner, David Hehman, and I helped Sara Sutton Fell launch a company that focused on connecting people who wanted to work from home with employers
who supported remote workers.
Since my own company, LoveToKnow, was a virtual organization, I knew from firsthand experience the value of working from home and that a huge untapped pool of talent preferred this option to an on-site office job.
We were all incredibly excited.
I knew Sara was the perfect one to lead the company because she is smart, effective, tenacious, and a hard worker—I’d witnessed these qualities when she did some marketing consulting for me at LoveToKnow.
She also cofounded another start-up called JobsDirect, so she knew the jobs space.
Sara was a multitool player who could cover wide swaths of responsibility.
Perhaps more importantly, she is a wonderful human being whom any savvy angel investor would trust.
We teamed her up with an incredibly talented local engineer and another skilled engineer from India who helped with the original coding.
With great optimism, we released our first product,
a curated selection of work-from-home jobs.
Our proposed business model resembled that of other online companies featuring job sites: we charged prospective employers to post jobs and obtain access to our pool of job seekers. Soon after the launch, however, we discovered that HR departments were tough
They didn’t have much money, and they were not inclined to try new things.
Generally, they were also suspicious of and resistant to the work-at-home market.
Despite our best efforts, we weren’t having much success.
While Sara maintained her optimism and persevered, the company was rapidly running out of money and not showing enough traction to justify investing more money.
We plodded on for a few more months but were becoming more and more dejected,
and then we discussed ending the venture.
Before doing so, though, we asked a simple question: Is there anything we are doing that
is working? Sara pointed out that we had a huge number of job seekers who had created accounts and that they liked our site.
As we reflected and discussed the situation, we recognized that we had proven at least one of our hypotheses: There was a huge untapped work-from-home labor market.
They wanted and needed good jobs.
Many competitive sites offering these remote jobs were often outright scams; in order to “work at home and make $xxx per day” you had to first buy the course or kit.
No doubt, once these sites sold the kit, customers were disappointed with their
subsequent “job” results.
Stay-at-home moms and others in our target market wanted real jobs, and we were one of the only sites that had them all in one place.
So we decided to turn the model completely upside down, and instead of charging the prospective employers for job listings, we would charge the job seekers a monthly subscription.
Because we made our service free to these employers, we began receiving great access to all of their remote jobs.
Sara and her team quickly put up a test where we charged a nominal fee of fifteen
dollars per month for job seekers to use our site.
We obtained sign-ups immediately, and after a week, we became convinced that we could make real revenue.
Today, FlexJobs is going gangbusters under Sara’s adept leadership and the technical prowess of the incredibly talented CTO, Peter Handsman.
And perhaps most importantly, we have helped over a million job seekers in their search
for remote and flexible work.
We experienced a similar pattern with other companies in which we invested.
Before FlexJobs, I had assumed that most successful companies developed their business plan and went with it until it passed or failed.
What I came to realize, however, is that the entire journey is a process.
The product and associated business model is really simply a hypothesis (not a hard-and-fast product launch), and the results are not pass/fail or black and white, but instead produce feedback, providing essential information that increases the odds of success.
I had an epiphany: Iterations count more than the original idea, feedback counts more than the sales numbers, and flexibility and agility are more important than commitment
to the original idea.
The straight line from start-up to sustainable success is largely a myth (though of course there are exceptions to this rule).
Instead, start-ups usually follow a path that resembles the letter J.
THE SIX PHASES OF THE J CURVE
The shape of this six-phase curve suggests what differentiates it from other start-up models. As you can see, the base of the J represents the dip that occurs shortly
after a company is launched.
At first, the power of the business idea captures everyone’s imagination, and it garners money, team members, and other forms of support.
Then, reality sets in, products take longer to develop than expected, customers don’t embrace the initial offering the way that was anticipated, the business model doesn’t quite work, and eventually money starts drying up.
These are all tough hits to take, especially if you’re not prepared for them.
Therefore, the dip is represented by the base of the J, and it’s where startups figure it out or they die. I call it the long, cold winter or, if I’m feeling more morose, the valley of death.
Much of this book is dedicated to giving you strategies and tactics to get you and your start-up through that difficult period.
Because once you are through it, you are into the steep upward slope of the J, and that is where the bulk of the value creation happens.
This curve is a reflection of start-up reality rather than an idealized progression.
Each of the phases, listed in chronological order, reflect the challenges and opportunities that arise for all types of start-ups as they evolve.
With this curve as your guide, you’ll be able to put your start-up’s experiences in context and have a better sense of what to do in response to these challenges and opportunities.
In chapters 2 through 7, I’ll look at each phase in depth.
For our purposes here, though, I’d like to provide you with a snapshot of each phase.
Phase 1—Create This first phase of a start-up may seem self-evident, but numerous nuances exist that, if addressed, can get you off to a great rather than a fatally flawed start.
In the Create phase, the three key elements are the idea, the team, and the money.
Not all entrepreneurial ideas are created equal.
Some are much better than others, and entrepreneurs need to recognize that the best ideas aren’t manufactured, that superior technology does not automatically produce superior products, and that products succeed because they solve real problems
or provide real new opportunities.
So in this phase, start-ups must identify an idea that is going to be worthy of the entrepreneur investing their life’s energy, not to mention their savings.
Similarly, they must raise money like the dickens; underestimating the amount of funds needed is a common failing.
Contrary to what some entrepreneurs may believe, this is one of the best times to raise money from various sources.
I like to characterize this initial phase as “dreams unburdened by reality.”
It can often be easier to raise funds while the excitement runs high and the story is virginal,
as opposed to trying to do so when confronted by often-unforeseen challenges
later in the process.
The team, too, can be a tricky proposition.
Rugged individualism is a philosophy many entrepreneurs embrace, yet it can be counterproductive to start-up success.
Putting together the strongest possible team with complementary skills and character
traits is critical.
Mistakes here will be hard to undo.
Having a strong team of cofounders often serves start-ups better than solo entrepreneurs. Getting it right will make the endeavor both more successful and a lot more fun.
Once the team, idea, and money are in place, it’s time to get the initial product out there.
In this phase, some entrepreneurs suffer from procrastination and/or perfectionism.
These are the enemies.
You have to push products into the market even when your impulse is to do more research, tinker with their formulation, or build more features.
After the product release, the most successful start-ups are the ones who listen the hardest.
They pay close attention to what customers are telling them—both positive and negative feedback—and use it in the next phase.
During release, entrepreneurs can’t get too low or too high—they can’t throw in the towel because of a negative response or expand frantically because of a positive one.
Phase 3—Morph In most endeavors, people generally don’t hit home runs their first time at bat. Generally, they don’t get it right until they’ve had sufficient experiences—including failures—and learned from them.
The same is true for start-ups, and that’s why the Morph phase is so essential.
In certain ways, it is the most important phase.
This is where entrepreneurs take the feedback they’ve received after launching their initial product and make improvements, iterate, and/or pivot.
The goal here is to be flexible enough to move beyond the original idea and either make
it better or use it as a stepping stone to something related but different.
Admittedly, this can be difficult. Entrepreneurs tend to fall in love with their original ideas, and in this phase, they may need to alter or even largely abandon them.
The keys to moving effectively through this phase are to listen and respond to customer feedback (it may be harsh, but it’s true) and produce one or more fundamental changes, which I refer to as morphs, as fast as you can.
By adapting in this manner, you increase the odds of finding a product that thrills your customers—and your investors.
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Phase 4—Model In this phase, you’ll focus on nailing the business model.
Your goal is to reach the point where if you put more investment money into the business, more cash will be generated.
You need to get to the point where it’s obvious that this company will generate cash flow at some certain point.
You do this by knowing and driving down all your costs—customer acquisition, engineering, and so on—and at the same time maximizing your revenue.
The Holy Grail is a large positive operating margin and concomitant large positive cash flow. You may decide to invest all of that positive cash flow into growth, and that’s OK.
But you should be honestly convinced the business model can and will generate cash. Otherwise you don’t yet have a business.
The Scale phase is where much of the substantial value is typically created for investors. However, this can be a tricky stage for some entrepreneurs, in that they need to leave behind their small and insular mentality and build out the company.
More specifically, this is the phase where you assemble the people, processes, and money necessary to take the company to the next level.
You’ve morphed effectively. You’ve nailed the business model, and now it’s time to tell the world about it, blow it out in the marketplace, and make something big.
This is where your product and company can make its mark on the world, or as Steve Jobs liked to say, “put a dent in the universe.”
It also happens to be the best place to make real money.
Here, you must put in place the proper infrastructure to have a larger company; this requires new people, new processes, and usually new money.
The challenge may be that you like the people and processes that have gotten you this far, and you don’t like the notion of major change—a requirement of the Scale phase.
Another interesting challenge is receiving and accepting a lowball buyout offer.
Having experienced tough times and facing the challenge of rapidly growing your business, you may be tempted to sell at the beginning of this critical juncture, just before adding significant value to the world and substantial wealth to your bank account.
At this point in the life cycle, you are transitioning from start-up to a fully established business.
As the name of this phase suggests,
it’s often time for entrepreneurs to reap what they’ve sown.
This is a good thing, but it’s also a complex one.
This is a major transition point for the company, one where entrepreneurs need to think long and hard about short-term and long-term objectives.
Major financial questions arise in this phase, and how to invest in the brand, as well as additional products, is a crucial one.
At this point, the start-up is reaching maturity, and a lot of challenging decisions must be made: should you expand through acquisition or organically; should you take a great buyout offer; should you provide liquidity to investors through a buyback, IPO, or company sale ?
This is a major transition point for the company, one where entrepreneurs need to think
long and hard about short-term and long-term objectives.
Major financial questions arise in this phase, and how to invest in the brand, as well as additional products, is a crucial one.
In addition, this may be the time for entrepreneurs to cash out or step aside, while for others, it’s an opportunity for continued personal growth by diving into the challenge of taking the company into another sphere.
To make these tough decisions, recognize how your entrepreneurial vision is coloring
your decision making, and get
In addition, this may be the time for entrepreneurs to cash out or step aside, while for others, it’s an opportunity for continued personal growth by diving into the challenge of taking the company into another sphere.
To make these tough decisions, recognize how your entrepreneurial vision is coloring your decision making, and get past that biased perspective to determine what’s best for
the long-term interests of the company, including the investors, employees,
customers, and you personally.
Harvest should be a fun time no matter what you decide.
You’ve moved past the life-or-death choices and instead face “puffball” decisions—heads you win, tails you win more.
PUTTING THESE PHASES TO WORK
iSoccerPath is a start-up that offers high school athletes an education and evaluation
service to guide families and players through the process of becoming a student athlete.
The program is designed to facilitate Division I college acceptance and scholarships
for elite high school soccer players.
By offering everything from player portfolio assembly, training, and videos, iSoccerPath makes the brutally competitive and usually confusing process of becoming a college athlete easier to navigate.
The market of parents seeking an edge for their soccer-playing children is sizable
and receptive to the services offered by iSoccerPath.
Relatively early in the life of the start-up, iSoccerPath CEO Jeff Jaye came to see me to discuss global expansion, new products and services, and franchising possibilities.
Like many entrepreneurs during the early phases of the J Curve, he was flying on adrenaline, kept aloft by his dream of what the business could become.
Buoyed by iSoccerPath’s positive initial reception, Jeff was naturally excited.
But as I pointed out to him, he was putting the cart before the horse—or in start-up terms,
his thinking was phase 5 (Scale) when he was in phase 3 (Morph).
By showing Jeff the J Curve, I was able to help him recognize that he was in Morph but that his head was awash in scaling opportunities.
Further, I suggested that the phase-appropriate activities were continuing to iterate his service, refine his product offering, obtain more customer traction, and then focus on the business and revenue model.
Once he had accomplished these tasks successfully, he could move on and address
the scaling opportunities that were already coming his way, if they still made sense.
I helped him understand that being out of phase is bad for the business.
If he were to focus his attention on scaling opportunities at this point in time, he would not only neglect another crucial task such as creating new and better iterations, but he would also jump on opportunities before the company had matured sufficiently to take best
advantage of them.
Engaging in phase 5 and 6 activities when you are starting phase 3 is virtually certain to result in misery and likely to endanger the enterprise.
I also noted that being out of phase is bad for an entrepreneur’s health.
Running a start-up is an endurance test. It’s highly stressful physically,
financially, and emotionally.
Therefore, entrepreneurs need to pace themselves.
When they attempt to do the work of the wrong phases at the wrong time—or try and do multiple phase tasks simultaneously—they are doing too much.
Burnout is a real danger, and the J Curve helps entrepreneurs guard against it.
By working phase by phase, entrepreneurs keep their workload manageable and focused and thus are also able to manage their stress more effectively.
Jeff followed my advice (which is rare) and turned down all offers to partner or affiliate with all newcomers for at least twelve months.
They successfully completed a beta of twelve families in all age groups, and soon after their official launch, got nineteen clubs with over twelve thousand soccer players to become part of the education program.
iSoccerPath is now ramping up their sign-ups, and with the steady, more measured growth model, they are getting a lot of investor attention.
GETTING THE ORDER RIGHT (AFTER GETTING IT WRONG)
It’s not unusual for entrepreneurs to get ahead of themselves. Like Jeff from iSoccerPath, they are aggressive and opportunistic, their pace accelerated by their hopes and dreams.
Doing things in the wrong order, however, is one of the surest ways of sabotaging your
start-up; and doing them in the right J Curve order is one of the best ways of
ensuring its success.
Consider two of the most common chronology mistakes:
Focusing on the business model before figuring out the product Scaling before nailing the product or business model
You’re likely to make the first mistake because when you explain your new idea to people, you’ll be peppered with questions such as,
“How are you going to make money at that ?”
While you don’t want to ignore that question completely, the real questions to ask yourself
are “Can I make something people will really want?”
and “Can I get customers to actually use my product or service?”
Because if you can’t get people to use your product or service, then you are not going to make any money at it anyway.
What history generally has proven is that if you can get customer traction,
you can find a way to make money.
By focusing too much on the revenue model, you may be creating a myopic
view of what your idea should be and blocking yourself from considering some important paths for evolving your initial idea.
However, it might be one of those alternate paths or a later iteration that brings you the
most customer traction.
In addition, you waste valuable time being overly focused on the business model early on because you don’t yet know what the actual product will be.
You may go through two, three, or more iterations of the product, and by the nth iteration,
the model you created for the first iteration will be hopelessly inappropriate.
Paradoxically, emphasizing a business model prematurely, you may block yourself from the best money-making opportunities.
You’ve structured the company in a certain way and hired people with certain types of experience to capitalize on the first product.
Most organizations aren’t sufficiently agile to shift as their product shifts, so they may have the right product but the wrong business model.
It’s only when you gain significant customer traction with a product iteration and you are through the Morph phase that you should spend significant time on the business model.
Avoiding this mistake requires patience,
a virtue that some entrepreneurs find is in short supply.
To develop this patience, take a lesson from Google. In 1997, when they launched Google, founders Sergey Brin and Larry Page were still Stanford University students.
The search engine market was quite crowded with myriad participants, but Brin and Page were convinced they could make a far better one that treated links coming into a site
(or page) as indications of what the site was about and its quality.
They devoted the vast majority of their time perfecting their search algorithm and were rewarded about a year later when PC Magazine named Google as the top search engine.
Four months after winning this award, they made their first nontech hire—Omid Kordestani, who became their head of sales and focused on revenue and the business model.
It wasn’t until September 1999, almost two years after they launched the product, that Google rolled out AdWords, which became the company’s primary revenue source and foundational to its business model.
No doubt, Brin and Page knew they had something special two years before they
focused on revenue, and they did have some rough idea that advertising
was a likely source of that revenue.
But they also thought that cobranded search, possibly through licensing their technology,
was a revenue source.
It must have been tempting to move ahead quickly and place large, ugly display ads before they perfected their product—that’s what Yahoo and the other dominant search engines were doing at the time.
Instead, Google demonstrated great patience, pursued the perfection of search, gained a huge loyal following, and only then focused on their business model and were rewarded in a way that start-up founders can only dream about.
Consciously or not, they understood that if they nailed search, they could wait until the time was right to create and focus on the business model.
The second mistake—“scaling before nailing” the product and business model—can devastate a start-up financially.
It’s common for a company that is in the Release or Morph phase to decide that they need to implement an ambitious growth plan
and the infrastructure that goes with it.
In fact, they often think if they can simply scale up marketing, customer acceptance will come. While it’s quite possible if they wait x number of months, they’ll be ready for the Scale phase and can implement this plan effectively, implementing it prematurely before all the pieces
are in place is highly perilous.
Whatever flaws still exists in the product and the business model can prove fatal when
scaling occurs prematurely.
Scaling a flawed business model that’s small turns it into a flawed business model that’s big. Instead of bleeding a little money, you’re now hemorrhaging major cash, and eventually,
you’ll slam into a wall.
In many instances, this mistake is made because a start-up has too much money early on.
If you recall the late nineties tech boom, you’ll remember how dot-coms scaled shortly after their inception because money was pouring into their coffers.
Even if the dot-com bust hadn’t happened, many of them would have gone under because they were scaling before they had nailed the business model, and in fact, a number of them had not even nailed the product.
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Unfortunately, an overabundance of funds encourages sloppy behavior and can create the illusion that anything is possible, including ill-timed hyperexpansion.
To avoid this mistake, follow the sequence of the phases with nearly religious devotion.
While valid exceptions to the sequencing may exist, they are atypical, so think long and hard before you try to skip a phase.
Scale when it’s time to scale and not before, no matter how much money you have or what the competition is doing.
From a financial perspective, you want to preserve your cash during the Create,
Release, Morph, and Model phases, since you’re going to need it,
no matter how well things go initially.
For startups, negative financial surprises are par for the course, so you want to be fiscally conservative at least until you reach the Scale phase.
“WE DON’T NEED NO STINKIN’ PLAN”
If you’re like many entrepreneurs, you may not place much value on plans and models.
The J Curve and its six phases may appear to be overly programmatic, restricting your ability to be spontaneous and instinctive.
This is not the point of the J Curve, and it provides plenty of room for entrepreneurial creativity. In fact, the J Curve makes it easier to act boldly, quickly, and innovatively because it lets you know where your focus should be at a given moment in time.
When you know what the key objectives are in the release phase, for instance, you’re not distracted by myriad unrelated issues that might otherwise seem pressing and overwhelming.
You can productively concentrate on a handful of key assignments rather than scores of them, giving yourself the opportunity to devote your full attention and creativity to them.
As important as business plans can be, the J Curve isn’t that type of highly structured,
Rather, I encourage you to look at your start-up as a journey.
The J Curve is a map to get you from start to success in the most efficient, efficacious,
and safe manner possible.
With it you’ll have higher odds of success, and you’ll get there sooner.
It offers you directions to get to your destination (ideally, great Google-like success), but you choose the route you take, set your speed, and determine the vehicle that will get you there.
Though you may be the most iconoclastic of entrepreneurs—you hate bureaucracy, meetings, strategies—you probably also hate what happens when you run into unexpected trouble.
Suddenly, you find yourself short of money, dealing with customer complaints,
or struggling with product acceptance.
Nothing prepared you for this crisis point, and you need guidance.
The J Curve provides it.
As the German Field Marshal, Helmuth von Moltke, once said,
“No plan survives contact with the enemy,” or, in this case, reality.
Significant problems and challenges hit every start-up, and when that happens, the J Curve allows you to view and address the problems within a reality-based context.
Whether your funding sources start drying up or you receive a lowball buyout offer, you will have the context of knowing what phase you are in and what the associated objectives are. Hence it will be far easier to analyze the problem and devise a solution.
VARIATIONS ON A THEME
The J Curve’s phases aren’t absolute; it’s possible that your start-up may not follow
each phase exactly.
As you are probably all too well aware, anarchy can reign during entrepreneurial ventures.
At times, so much craziness happens that you don’t know which way is up,
let alone which phase you’re in.
Recognize, therefore, that you may be out of sync with the J Curve for a few different reasons. It’s possible that things are moving so fast and chaotically that the phases are blending together, and it’s difficult to see the borders dividing one phase from another.
It’s also possible that events are moving at a snail’s pace or slower and you’re stuck in a particular phase.
It may take months, even years, before you can extricate yourself from whatever morass you’re in and get back solidly on the J Curve path so you can start definitively moving through the phases in the proper sequential order.
I have also seen situations where a company got ahead of itself and then had to back
up to a previous phase and finish it properly before refocusing on growth.
But two additional factors may cause an apparent misalignment between
your start-up and the phases.
First, your company may have a de facto business model from its inception. Instead of waiting to create this model in a later phase, you know with a reasonable degree of certainty how the company will be structured because everyone in your field has the same basic model.
Let’s say you plan on launching a newspaper or magazine (a truly entrepreneurial endeavor in this digital day and age).
Given models used in the past, you’re likely going to have one of two revenue models—subscription based or advertising based.
While you’re going to have to make other decisions related to either of these models
later on (i.e., how many ads per page), you have a pretty good idea of your model earlier than the J Curve suggests.
Second, you may convince yourself that you have to harvest before you scale. In the heat of the entrepreneurial moment, this may seem to make sense.
Having slogged through the dip in the J Curve—the cold, dark winter of the entrepreneurial soul—you may be ready to take the first exit that presents itself
(though I will try to convince you otherwise).
If your finances are stretched to the max and you’re physically and emotionally exhausted from trying to get your company off the ground, you may take the first buyout offer regardless of whether it’s a good deal or whether it optimizes the return on the time and effort
that you’ve put in.
From your perspective, you lack the willingness and energy to go through the Scale phase and get to the Harvest phase.
It seems like it’s now or never (even though it probably isn’t).
Given all this, it’s best to treat the J Curve as a guide rather than as a bible.
Or, to use another analogy, it functions much like gravity.
Sooner or later, the line of the J Curve will pull a start-up toward it.
HOW YOU’LL BENEFIT
When I was contemplating writing this book, I researched the space to see what other literature was out there that could be useful to entrepreneurs and I was surprised by the paucity of it: It’s a pretty thin section at the bookstore.
To be sure, there are some good reads available.
Peter Thiel’s book Zero to One has, among other insights, accurate
(even if politically incorrect) comments on competition.
Ben Horowitz’s book
The Hard Thing About Hard Things has some great lessons about the difficulties of start-ups.
Other books on the subject, like Eric Ries’s Lean Startup and The Startup Playbook by David Kidder, provide useful insights.
The former stresses the importance of being fiscally conservative, learning from experience, and being sufficiently agile to respond to what’s learned.
The latter offers a range of entrepreneurial stories, each with its own lesson.
Geoffrey Moore’s book, Crossing the Chasm, is a start-up classic.
Paul Graham’s essays on start-ups are incredibly good, as is the Startup Playbook
blog by Sam Altman.
By all means, I encourage you to read all of these authors and more.
But what I have not seen available—and what this book provides—is a start-to-finish map and a series of succinct, ordered steps that will give you the best possible odds of success.
Entrepreneurs are like travelers in unexplored territory. It’s easy to lose your way or to
reach a crossroads and not be sure which way to go.
The J Curve helps you know the best course of action at a given moment in the life
of your start-up. As a result, you gain three key benefits: Speed.
Entrepreneurs spend hours, days, and weeks engaging in premature activities
(i.e., trying to grow the business before they’ve found the right iteration of their product).
By using the J Curve, you know what you’re supposed to be doing when.
This helps you focus on the tasks at hand and move quickly toward goals.
As you may have discovered, a huge amount of time is wasted on start-ups.
And time does indeed equal money, especially in start-ups.
People spend a great deal of time on unnecessary or secondary tasks.
They also get sidetracked by “opportunities” that turn out to be dead ends.
This is a huge problem in the resource-scarce environment of a start-up.
The J Curve helps you conserve time and energy, addressing mission-critical issues in every phase and ignoring what’s superfluous or what can be better addressed later.
Confidence. More than anything else, this six-phase model allows you to make moves that are appropriate for your start-up stage.
Even the most outwardly confident entrepreneurs can be plagued by doubt and uncertainty. Being in uncharted territory has that effect on people.
With a map in hand, however, you can move forward knowing that you’re doing
the right thing.
Before moving on to an in-depth look at the J Curve’s first phase,
I’d like you to consider a list of the most common mistakes entrepreneurs make as they launch, build, and sustain their start-ups.
Perhaps you’ve made some of these errors in the past.
Perhaps you weren’t even aware they were errors.
Whatever the case, start-ups are vulnerable to all of the following mistakes, and as you’ll discover, you can avoid or overcome them through an understanding of the J Curve:
Coming up with a great start-up idea and moving forward certain that the idea alone will make you rich Not choosing your cofounders wisely
Raising money from the wrong sources
Spending too much money too quickly after initial product success Underestimating
the amount of money you want to raise at the very beginning
Taking too long to release your product
Failing to listen closely to what the market is saying or doing relative to your product
Falling victim to love-is-blind syndrome—refusing to change anything about your beloved product despite negative data
Refusing to create a series of iterations based on customer feedback Keeping your initial success a secret out of fear that you’ll give competitors an edge
Accepting a lowball offer as your company begins to grow Scaling before nailing the business model Not getting the right people with the right skills into specialized roles required for scaling Being unable or unwilling to make the hard decisions about how to maximize the return on your start-up
CREATE: TEMPER DREAMS WITH IDEAS, MONEY, STRUCTURE,
AND TEAMS The Create phase is the time when everything seems possible to ambitious entrepreneurs.
In phase 1 of the J Curve, start-ups are in their infancy, but their founders are fueled by big dreams: They don’t know all the obstacles that lie ahead or how difficult the journey can be.
Most are a bit naive when they create their start-up, but this naïveté allows them to push forward despite the unknowns and tough odds that lie ahead.
Unbridled optimism is great, but don’t let it interfere with start-up realities.
Getting off on the right foot increases the odds of a start-up’s success.
Therefore, let’s look at the key activities in this first phase as well as mistakes and misconceptions that can stand in the way of a strong start.
We’ll examine how to create the right team, structure the enterprise properly, and raise money, but all of these actions will matter little without a good approach to your initial idea.
THE DIRTY LITTLE SECRET OF GREAT IDEAS Many people—especially many neophyte entrepreneurs—believe that the idea is everything.
The assumption is that if you possess a great idea, the world will beat a path to your door, your start-up will soar, and you will soon be on the sandy beach of your tropical island counting your cash.
Not necessarily. In fact, my partner, David, and I estimate that the initial idea’s value
to a start-up is approximately 5 percent—and that number may be high.
The value of the idea is low for two reasons:
(1) The vast majority of initial ideas don’t work out as originally envisioned, and
(2) no start-up succeeds without a massive amount of nuts-and-bolts, grind-it-out execution. With mediocre or poor execution, even the best ideas are bound to fail.
Misconception about the value of an idea begins when a great product hits it big and people say, “I had that same idea years ago; if I had done something about it, I would be rich.”
In reality, it’s not the idea that creates huge success as much as how that idea is executed. Here’s a dirty little secret about great ideas: Many of the ideas that spawned highly successful companies didn’t seem so great when these companies were in their infancy.
A case in point is Uber.
With hindsight, of course, the idea for an alternative, mobile phone–activated taxi company is brilliant. At its inception, however, it seemed flawed.
A friend of mine was asked to invest, and the Uber pitch was, “We are going to offer the ability to order black-car services via an app on your smartphone.” But as my friend correctly perceived, numerous problems existed with this idea.
First, black-car services had been around for a hundred years and had not been a particularly good business; no national company or brand ever evolved from this fragmented marketplace.
Second, traditional taxis were deeply entrenched in just about every market; it didn’t appear as if there was sufficient dissatisfaction with taxis to open the door for an alternative approach. Third, at the time, Uber had a relatively high valuation of ten million dollars.
So my friend declined to invest.
Within five years, Uber’s valuation rose to over fifty billion dollars.
What helped it become a sixty-seven-country, three-hundred-city behemoth, however,
wasn’t the idea itself, but the execution of the idea.
Uber was aggressive and creative in recruiting drivers, iterating its app, and fending off counterstrikes by entrenched taxi companies and government bureaucracies.
Uber has been accused of being “Uber-competitive,” but that accusation is a testament to their ability to aggressively execute their plan quickly, thoroughly, and astutely.
Another example of a product succeeding due to superior execution,
as opposed to the idea, is Dropbox.
If you were to look at the current success of this company and its valuation near ten billion dollars, you might say, “Wow, genius idea! I should have thought of that!”
But many people did think of it.
I recall brainstorming with my friend Chris Kruse years ago, when it seemed obvious that central, cloud-based storage held many benefits.
But numerous companies moved into that space before we could, and the clutter turned this type of a service into a commodity; few companies made much money.
The Dropbox idea was late to the party, but what its founders figured out was that an incredibly simple product combined with great execution was a differentiator.
Simplicity and execution were the keys to success, not the raw great idea. I said this in the previous chapter, and I’ll say it again here (and again later, since it’s so important):
The proper way to view an initial idea is as a hypothesis.
It may or may not work. If it doesn’t work, you will take what you learned and create something new that is more successful.
If you execute this process well, then your odds of success will greatly increase.
In the Create phase, therefore, you should not pursue the original great idea as
if it’s the Holy Grail.
On the other hand, pursuing potentially marketable ideas is essential.
You don’t need the next Uber to create a successful start-up, but you do need a building block to establish the foundation of your company.
You have three viable options for identifying building block ideas or products.
1. A Product or Service That Solves a Problem
There are always problems to be solved, and not all of the good problem-solving
ideas have been taken.
Not by a long, long, long shot. If you look creatively and perceptively at what people are concerned about in any sphere, you’ll find a host of problems begging for solutions.
Certainly, many tech start-ups recognize this truth—there seems to be a new, great problem-solving app born every day. But here’s a classic nontech example that demonstrates many problems still exist that are waiting for start-up solutions.
Growing up, my friends and I loved to jump on trampolines, but they were safety hazards; every so often, a kid would bounce off and over the side of a trampoline and break a leg or an arm. In 1997, after witnessing such an accident, Mark Publicover designed and built a safety net enclosure system.
Such a system has become standard on every trampoline sold, reducing accidents significantly, and more to the point, Publicover built a successful business based on his product’s ability to solve a problem.
Just as instructive, however, is that from 1936, when the first trampoline was built, to 1997, over sixty years passed.
The safety net enclosure solution required no new technology; it could have been invented at any point in the preceding sixty years.
It took a long time indeed for someone to recognize that people flying off trampolines was a preventable event and solve the problem
with a viable product.
It remains a complete mystery to me as to why this problem took so long to solve, but it’s illustrative of the innumerable problems that are latent in our world and just waiting for you to solve them. Make a conscious effort to attune yourself to recognize them.
2. A Visionary, Breakthrough Product Apple CEO
Tim Cook described this type of product as “something you didn’t know you wanted.
And then once you got it, you can’t imagine your life without it.
” This is a tougher path for an entrepreneur to forge, but if you manage to produce something that meets Cook’s definition, then you may have a big hit on your hands.
Cook knows what he’s talking about, since many of the Apple products fall into this category. The iPod, for instance, didn’t solve an immediate obvious problem because, at the time of its introduction, the market was flooded with relatively inexpensive MP3 players.
But Steve Jobs had a breakthrough vision—a series of hardware and software products linked together in the music delivery chain, where people could seamlessly buy music, download it onto their computer, and play it on their iPod.
At the time, people didn’t know they wanted an iPod and probably weren’t sure
they wanted to pay for music.
Even music industry executives were highly uncertain as to whether they wanted to participate in Jobs’s proposed scheme, and many initially refused.
But Jobs’s vision was accurate and soon became their reality.
Shortly after the iPod’s release, music lovers discovered they couldn’t do without the iPod.
Facebook is another example of a product that didn’t solve an obviously existing problem but was driven by a vision.
Beautiful Woman store
As many Facebook addicts will attest, they can’t imagine life without it. Being a visionary doesn’t come cheap.
If you’re contemplating a visionary product idea,
you often need a sizable investment—more than the typical problem-solving product.
On the plus side, these types of ideas often have larger outcomes, and as such, they appeal to venture capital firms (VCs).
The VCs tend to gravitate toward businesses with boom-or-bust outcomes that either
work in a big way or fail.
They require a small number of big hits, and they are drawn to visions.
The bad news is that the failure rate is higher for this category than the previous one, so you need to have a tolerance for risk if you’re pursuing something in this area.
3. An Opportunistic Product While opportunistic product ideas may possess elements of the previous two groups, they are distinguished by timely events and circumstances that represent opportunities; these opportunities act as catalysts for entrepreneurial start-ups.
In the late nineties, people began to realize that a large swath of corporate software would stop working in the year 2000 because, in computer code, the year was often represented with two digits; the fear was that the year 2000 would be mistaken as 1900.
Referred to as the Y2K problem (for year 2000), it spawned an entire industry of consultants and products that helped companies find and fix this problem.
I would term most of these businesses opportunistic in that the problem
and demand were obvious.
If you started a company that focused on that problem, you probably did OK, at least until after Y2K, after which many of the firms either folded or morphed into consulting shops to leverage their client relationships.
This type of idea carries less risk than the previous two, since some pieces are often
in place before the entrepreneur becomes involved.
They frequently don’t require as much of an investment as some other start-ups, since some of the work has been done and the opportunity often revolves around a money-making concept. If there’s a drawback to this category, it’s that it’s easy to overestimate the opportunity and underestimate the difficulty of capitalizing on it.
These ideas tend not to be blockbusters and often end up as lifestyle businesses. You also shouldn’t expect venture capital money for this type of product, since they tend to like bigger, sexier ideas rather than targeted, opportunistic ones that may have limited upside and lack strong differentiation.
At this point, you might be thinking that I’ve forgotten a fourth product category—technological innovation.
A scientist or tech genius creates something in the lab that astonishes his colleagues.
It’s innovative, cutting edge, and brilliant in design. Invariably, it attracts a following, and a team comes together to market it.
Unfortunately, it’s technology in search of a market, and it often doesn’t find one.
Great technology is seductive, but it can also be illusory—it creates the illusion that tech brilliance translates directly into product sales.
On occasion, this translation can occur, especially if a savvy businessperson is involved who can pry the technology out of the research lab and find marketable applications.
But in most cases, it’s wise to heed the voice of the tech master Steve Jobs, who in a 1997 speech at the Worldwide Developers Conference said, “You’ve got to start with the customer experience and work back toward the technology—not the other way around.” One great method to help surface good ideas for the Create phase is to become problem sensitive.
This means training yourself to notice the problems all around you or, rather, overcoming your natural propensity to gloss over problems.
We mentally fast-forward through problems as a matter of survival; if we obsess over every minor obstacle that crosses our path, we’ll never accomplish anything,
and we might be miserable.
I’m not suggesting that you become so problem sensitive that you become incapacitated.
I am suggesting that increasing this sensitivity will facilitate your search
for a marketable product.
For instance, say you have to make a last-minute, inconvenient trip to the store because you’ve run out of razor blades.
So you drag yourself out of the house late on a Sunday night, arrive at the store, find your package of eight razor blades, and buy them for $32. Right there are two big problems: inconvenience and cost.
The guys who started the $1 Shave Club were probably sensitive to these problems,
and it led them to a solution:
Subscribe to the club for $1, and the club sends you razor blades monthly. It’s a simple but brilliant problem-solving idea, and it hooked me.
Their costs of manufacture and shipping are low, and they also upsell you to fancier blades, resulting in even more profit.
As the club’s motto goes, “Shave time, shave money.” By paying close attention to problems in your life—when you shop, at work, when you’re online—you can find potential ideas
On top of that, you can determine if a problem is significant and widespread (rather than minor and a result of your own idiosyncrasies) by talking to others.
Are your friends and colleagues as irritated as you are by a given problem?
If so, and if you think it’s a problem you can solve, you may want to move forward
on creating a solution.
And this is a much better approach than the typical brainstorming sessions that some start-up aspirants favor—in which people throw out all sorts of imaginative concepts that sound good in the conference room but lack a real-world foundation and customer resonance,
like having to go out to the store for an overpriced package of razor blades.
I recognize that looking for problems may sound simplistic from an idea-generation standpoint. Obviously, it takes more than the recognition that gasoline is too expensive to develop a marketable alternative fuel.
At the same time, don’t be daunted by big problems.
Elon Musk was determined to tackle our dependence on fossil fuels, and his boldness has led him to create Tesla and Solar City.
Training yourself to recognize the problems in life is a great start, but don’t stop there.
Be creative in coming up with solutions, and then figure out a way to make your solution
a reality and a viable business.
You also need to ask yourself if you’re passionate about the given problem and solution. Passion is a key ingredient and will help you overcome the many hurdles a start-up presents. Startups are incredibly hard, and if you aren’t fully engaged in what you’re doing, then you have a problem you can’t solve.
Numerous factors affect whether a start-up idea bears fruit, but the genesis is often some problem that bothers you or inspires you—a problem that an observant entrepreneur grasps and responds to before their potential competitors,
who are still in their conference rooms brainstorming.
BUT WHAT ABOUT THE MARKET?
Before moving on to the structure requirements of the Create phase, I should note that many advisers suggest that it’s crucial for entrepreneurs to determine their market size
as soon as possible.
In fact, though, many savvy entrepreneurs start with a narrow idea, but once they gain traction with customers, they expand their market.
Amazon started with the narrow market of book buyers, and many observers were aghast at its high stock price when it went public; it was only a bookseller, after all.
You could have almost gotten in a fistfight trying to defend Amazon’s market capitalization.
I kept hearing, “Amazon has a higher market cap than all of the booksellers combined!”
But after they gained traction in books, they soon expanded into CDs, then DVDs, and before long, they were selling washing machines.
I can’t think of much they don’t sell at this point, including cloud-based web services
that most of my companies use.
Great entrepreneurs and great companies will keep redefining themselves as they push into new markets.
Yes, venture capital firms want you to define the total addressable market (TAM), and they want that market to be big.
Yes, many start-up presentations include a slide that reads Really Big Opportunity.
But in the early stage of a start-up, it can be difficult to make a credible case for that really big market, and it may not be advisable because going after too large a market may
diffuse your focus.
So while it’s a worthy exercise to consider the total addressable market, I try not to get too caught up in it when I am hearing a start-up pitch.
STRUCTURE: BUILDING A BETTER START-UP
This is your opportunity to create the building blocks of your evolving company—blocks that should fit well with your idea. These foundational elements may change a bit as the start-up evolves through its other phases, but they provide a basis for moving forward,
so it’s wise to get them right.
These three elements are the following: corporation type, business plan or pitch deck, and team. The first one is the most prosaic, and I’m not going to go into great detail about all the implications of various legal corporate structures; I recommend that you consult with a good attorney to make these assessments.
But you should know the main structures you have to choose from—DBA, LLC,
S corporation, and C corporation.
Here is a snapshot of their pros and cons: DBA. This one is quick, easy, and inexpensive to set up, but it provides scant legal protection and doesn’t allow for outside investment.
This can be a good placeholder for the earliest stages, but if you want legal protection and are going to raise any money, this won’t work.
LLC and S Corporation. These are often overlooked, and I see people choose C corporations reflexively without considering these.
But in certain situations they can offer big advantages. I’m discussing these two together because they both offer tax advantages to start-ups with cash flow; excess cash isn’t taxed at the corporate level prior to being distributed.
They also allow you to deduct early losses on your personal income tax.
While they are more expensive than a DBA, they are often the optimal structure for start-ups that have good potential for generating cash, and David and I use them regularly.
Also, if you decide later on that a C corp will suit you better, it is usually possible to convert into one (consult a good attorney).
Venture capital firms require these structures for the start-ups they fund,
so they are best suited for companies that are raising significant funds.
They are also well suited for capitalizing on certain types of tax breaks, such as the qualified small business stock (QSBS), which make reduced capital gains rates possible in certain circumstances.
Again, I encourage you to spend time up front discussing these options thoroughly with your lawyer and accountant and considering all the facts and circumstances relative to you and your start-up.
Now, let’s move on to the second structural element:
business plans or pitch decks.
Up until the mid-nineties, you needed a detailed business plan if you wanted to raise money for your venture.
These plans were often gargantuan, as if the sheer volume of pages might convince an investor that a start-up concept was viable.
Fortunately, both entrepreneurs and financial backers recognized that they were counterproductive.
Too often, they locked start-ups into an inflexible business plan that was ill suited to the company’s evolution. Instead of being agile and stretching and growing as a product morphed, these companies stuck by their business plans and sometimes went
under because of them.
The simpler PowerPoint pitch deck presentations eventually took over, and they are a significant improvement on epic business plans.
Typically, each slide focuses on a business issue, ensuring a concise presentation.
Unlike the business plan approach, these presentations leave sufficient room to deviate from the core strategy if circumstances dictate changes.
While you can create these presentations in many different ways, you might consider the model established by venture firm Sequoia Capital, which suggests fifteen to twenty slides in the following sequence: company purpose, problem, solution, why now, market size, competition, product, business model, team, financials.
Kevin Hale from Y Combinator also has a good post about creating a more effective pitch deck, where he stresses the basics: Make it simple, make it legible, and make it obvious.
I agree completely; simplicity always trumps complexity—as my friend and master salesman Lance Black is fond of saying, “A confused mind always says no!” Legible means what it says, that you choose the right-sized fonts and contrasting colors.
I see decks all the time where I have to squint.
To see your funding prospect squinting at your deck is not a good thing.
Obvious means that the slide(s) can be understood at a glance.
Overall, having a great deck is not going to take you much more time, and it’s going to give you a lot of confidence when you make your presentations.
It’s also going to give you a much higher success rate on getting to the next stage of your funding discussions.
To give you a better sense of what an effective pitch looks like, here’s the template presentation I rcommend for my startups and anyone pitching me:
GENERAL DECK GUIDELINES KISS—Keep It Simple. No more than 3–4 points per slide.
Don’t have anything on a slide that forces middle-aged men and women to squint.
Skip fancy graphics.
Shoot for 15 slides total, no more than 20.
It’s OK to leave some of the finer details out.
You can elaborate in the ensuing discussion.
Don’t read off your slides.
Slides should illustrate the points you want to make, not serve as speaking notes.
Explain your unique value proposition in one, preferably short, sentence.
We make the best damn widgets money can buy.
Strong example: [Company name] makes widgets obsolete.
THE PROBLEM What is the problem that you are trying to solve for people ?
What is the pain of the customer ?
How does the customer handle this today ?
Personalize this if possible. › How did this problem affect you personally ?
THE SOLUTION What is your solution ?
Why is it so much better than the other available options ?
How will your product be used ?
Sample use cases.
WHY NOW ?
Put your current/proposed product in historical context.
Why wouldn’t it have worked before ?
Why will it work now ?
What recent technological trends and advances make it possible or more likely now ?
What is the profile of your target customer ?
What is the Total Addressable Market (TAM) and how do you define it ?
What is the projected market growth rate ?
What part of that market can you realistically obtain ?
Be reasonable! THE COMPETITION
What are your key competitive advantages
? Make a chart with the competitors in columns and features in rows.
Make a chart where the X and Y axis represent two key value propositions,
and position your company vs. the competitors.
THE PRODUCT Explain the product, including key features and functionality.
Technology and any intellectual property.
Explain the product development roadmap. Discuss any customer feedback to date.
CUSTOMER ACQUISITION What is the customer acquisition strategy ?
Define the acquisition channels.
What is the expected cost to acquire customers ?
Describe any customer traction to date and how you gained those customers.
BUSINESS MODEL What is the expected business model ? ›
How will the company earn revenue ?
Which financial and operational metrics are notable and what are they ? ›
Unit economics including product costs ›
Customer acquisition cost › What is the expected customer lifetime value (LTV) ›
Customer retention, engagement, and churn metrics ›
Overhead TEAM Specialties and key responsibilities of each team member List any previous industry experience Include any previous startup experience
Board of Directors/Advisors
Why does the team care about the problem ?
What motivated the founders to start the company ?
What do the founders hope to achieve ?
How long do the founders want to do this ?
List all key accomplishments to date.
To be continued as soon as I can