GOODREADS: THE ART OF THE START 2.0

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The Art of Starting Up
The most exciting phrase to hear in science, the one that heralds new discoveries,
is not “Eureka!” (I found it!) but “That’s funny . . .”

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—Isaac Asimov GIST
(Great Ideas for Starting Things)
It’s much easier to do things right from the start than to fix them later.

At this stage, you are forming the DNA of your startup, and this genetic code is permanent. By paying attention to a few important issues, you can build the right foundation and free yourself to concentrate on the big challenges.

This chapter explains how to start a startup.
Answer Simple Questions There is a myth that successful companies begin with grandiose ambitions.

The implication is that entrepreneurs should start with megalomaniacal goals in
order to succeed.

To the contrary, my observation is that great companies began by asking simple questions: THEREFORE, WHAT ?*
This question arises when you spot or predict a trend and wonder about its consequences.

It works like this: “Everyone will have a smartphone with a camera and Internet access.” Therefore, what ?
“They will be able to take pictures and share them.”

Therefore, what ?
“We should create an app that lets people upload their photos, rate the photos of others, and post comments.”

And, voila, there’s Instagram.

ISN’T THIS INTERESTING ?
Intellectual curiosity and accidental discovery power this
Method. Spencer Silver was trying to make glue but created a substance that barely
holds paper together.
This oddity led to Post-it Notes.
Ray Kroc was an appliance salesman who noticed that a small restaurant in the middle of nowhere ordered eight mixers.

He visited the restaurant out of curiosity, and it impressed him with its success.
He pitched the idea of similar restaurants to Dick and Mac McDonald,
and the rest is history.

IS THERE A BETTER WAY ?
Frustration with the current state of the art is the hallmark of this path.

Ferdinand Porsche once said, “In the beginning I looked around and, not finding the automobile of my dreams, decided to build it myself.”*

Steve Wozniak built the Apple I because he believed there was a better way to access computers than having to work for the government, a university, or a large company.

Larry Page and Sergey Brin thought measuring inbound links was a better way to prioritize search results and started Google.

WHY DOESN’T OUR COMPANY DO THIS ?
Frustration with your current employer is the catalyzing force in this case.
You’re familiar with the customers in a market and their needs.

You tell your management that the company should create a product because customers need it, but management doesn’t listen to you.
Finally, you give up and do it yourself.

IT’S POSSIBLE, SO WHY DON’T WE MAKE IT ?
Markets for big innovations are seldom proven in advance, so a what-the-hell attitude characterizes this path.

For example, back in the 1970s a portable phone was incomprehensible to most people when Motorola invented it. At the time, phones were linked to places, not people.

However, Martin Cooper and the engineers at Motorola went ahead and made it, and the rest is history. Don’t let anyone tell you that the “If we build it, they will come” theory doesn’t work. “The genesis of great companies is answering simple questions that change the world, not the desire to become rich.”

WHERE IS THE MARKET LEADER WEAK ?
Three conditions make a market leader vulnerable: First, when the leader is committed
to a way of doing business.

For example, IBM distributed computers through resellers, so Dell could innovate by selling direct. Second, when the customers of the leader are dissatisfied.

For example, the necessity to drive to Blockbuster stores to pick up and return videos opened the door for Netflix.

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Third, when the market leader is milking a cash cow and stops innovating.
This is what made Microsoft Office susceptible to Google Docs. “How can we make a boatload of money ?”
is not one of the questions. Call me idealistic, but the genesis of great companies is answering simple questions that change the world, not the desire to become rich.

EXERCISE Complete this sentence:

If your startup never existed, the world would be worse off because __________. Find Your Sweet Spot If you have the answer to a simple question, the next step is to find a viable sweet spot in the market.

Mark Coopersmith, coauthor of The Other “F” Word: Failure—Wise Lessons for Breakthrough Innovation and Growth, and senior fellow at the Haas School of Business, helps entrepreneurs do this by using a Venn diagram with three factors: EXPERTISE.
This is the sum total of what you and your founders can do.

Though you won’t yet have a complete team, you must have a core of fundamental knowledge and ability to create something in order for a startup to start up.

OPPORTUNITY.
There are two kinds of opportunities: an existing market and a potential one. Either is okay, but do a reality check of the size of the market in the next few years.
There’s a reason people rob banks, not thrift stores.

There are times, however, when there’s no way to prove that an opportunity exists and you just have to believe.

PASSION. This one is tricky because it’s not clear whether passion causes success or success causes passion.

Everyone assumes the former is true, but let’s be honest: it’s easy to get excited about
a business that takes off, so the latter may be true too.

Still, success may take a long time, so you’d better at least not hate what you’re doing.
Don’t get the impression that all three factors are necessary or even obvious at the start.

If you have at least two of the factors, you can often develop the third if you try hard enough. Find Soul Mates The next step is to find some soul mates to go on your adventure—think Bilbo Baggins in The Fellowship of the Ring.

However, people love the notion of the sole innovator:
Thomas Edison (lightbulb), Steve Jobs (Macintosh), Henry Ford (Model T), Anita Roddick (The Body Shop), and Richard Branson (Virgin Airlines). It’s wrong.

Successful companies are usually started, and become successful, with the contributions of at least two soul mates. After the fact, people may recognize one founder as the innovator, but it takes a team to make a new venture work.

The first follower is what transforms the lone nut into a leader.”

To illustrate this concept, Derek Sivers, the founder of CD Baby, showed a video at the TED2010 conference that starts with one person dancing alone in a field.

A second person joins in, and then a third, and the crowd “tips” into a full-scale dance festival. According to Sivers, the first follower plays an important role because he brings credibility to the leader.
Subsequent followers emulate the first follower, not only the leader.

In his words, “The first follower is what transforms the lone nut into a leader,” and in a startup, that first follower is usually a cofounder.
Cofounding soul mates need to have both similarities and differences.

The key desirable similarities are:
VISION. Although this has become an overused word uttered by wannabe visionaries, in the context of soul mates, it means that founders share a similar intuition for how the startup and market will evolve.

For example, if one founder believes that computers will remain a business tool for large organizations, and the other believes the future is small, cheap, and easy-to-use personal computers for everyone, they aren’t a good match.
SIZE. Not everyone wants to build an empire.

Not everyone wants a lifestyle business.
There aren’t right and wrong expectations; there are only expectations that match or don’t match. This doesn’t mean founders can know what they want at the start, but it’s nice if they’re at least on the same page.

COMMITMENT. Founders should share the same level of commitment.

Does the startup, family, or a balanced life come first ?
It’s hard to make a startup work when the founders have different priorities.

One founder wanting to work for two years and flipping the startup for a quick sale and the other wanting to create a company that will endure for decades will create problems.

Ideally, founders agree that they’re in it for at least ten years.
The differences that are desirable include: EXPERTISE.

At a minimum, a startup needs at least one person to make the product (Steve Wozniak)
and one person to sell it (Steve Jobs). Founders need to complement each other to build a great organization.

ORIENTATION.
Some people like to sweat the details. Others like to ignore the details and
worry about the big issues.

A successful startup needs both types of founders to succeed.
PERSPECTIVE. The more perspectives, the merrier.

These can include young versus old, rich versus poor, male versus female, urban versus country, engineering versus sales, techie versus touchy, Muslim versus Christian ,and straight versus gay.

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Finally, a few words of wisdom about cofounders: DO NOT RUSH.
Founders may have to work together for decades, so add them like you would pick a spouse—assuming you’re not a serial divorcee.

It’s better to have too few founders than too many. Breaking up with founders, like spouses, is hard to do.

DO NOT ADD FOUNDERS TO ENHANCE FUNDABILITY.
The reason to bring in additional founders—and any other employee but especially founders—is to make your startup stronger and more likely to succeed.

Ask yourself, “Would I hire this guy if we didn’t need funding?” If your answer is no, you’d be insane to hire him.

ASSUME THE BEST, BUT PLAN FOR THE WORST.
Founding teams blow up all the time.

Your startup may be the exception, but just in case, make everyone (including yourself) vest his stock over time to prevent people who leave in less than four years from owning large amounts of equity.

Make Meaning Now take your answer to the simple question, sweet spot, and soul mates and assume that you do succeed.

Then subject yourself to one more test: Does your startup make meaning ?
Meaning is not money, power, or prestige.

Meaning is not creating a cool place to work with free food, Ping-Pong, volleyball, and dogs. Meaning is making the world a better place.
“If you make meaning, you’ll probably also make money.”

This is a difficult question to answer when you’re two guys/gals in a garage who are writing software or hand-making gizmos, but it’s also difficult to comprehend how an acorn can grow into an oak tree.

If, in your wildest dreams, you cannot imagine that your startup will make the world a better place, then maybe you’re not starting a tilt-the-earth company.

This is okay; there aren’t many companies that tilt the earth.
And there are even fewer in that category that set out to do so.

But WTF, I want you to dream big. When today’s humongous companies were only one year old, few people predicted their ultimate success or the meaning they would make.

Trust me, if you make meaning, you’ll probably also make money.
Make Mantra The next step is to create a three- to four-word mantra that explains the meaning that your startup is seeking to make.

For startups, the definition of “mantra” from the American Heritage Dictionary of the English Language is perfect:

A sacred verbal formula repeated in prayer, meditation, or incantation, such as an invocation of a god, a magic spell, or a syllable or portion of scripture containing mystical potentialities.

Here are five examples (some hypothetical) that illustrate the power of a good mantra to communicate the meaning of organizations:

Authentic athletic performance (Nike)* Fun family entertainment (Disney)* Rewarding everyday moments (Starbucks)* Democratize commerce (eBay) Empower craftspeople (Etsy) These examples illustrate the three most important characteristics of a mantra: BREVITY.

Mantras are short, sweet, and memorable.
(The shortest mantra is the single Hindi word “Om.”) Mission statements are long, dull, and forgettable. From the CEO to the receptionist, everyone must know it.

Compare the effectiveness of Starbucks’s mantra, “Rewarding everyday moments,” to its mission statement, “Establish Starbucks as the premier purveyor of the finest coffee in the world while maintaining our uncompromising principles while we grow.”

I rest my case. “‘Authentic athletic performance’ is much better than ‘Sell lots of shoes
made in China.’” POSITIVITY.

Mantras are uplifting and explain how your startup does good things that make the world a better place. “Authentic athletic performance” is much better than “Sell lots of shoes made in China.” OUTWARD FOCUS.

Mantras express what you do for customers and society.

They are not selfish and self-serving. “Get rich” is the antithesis of a mantra.
Customers want you to “democratize commerce,” but they don’t care about making you and your shareholders rich.

EXERCISE Write your startup’s mantra in this space: ___________________ EXERCISE Think about how you serve your customers.

What kind of meaning does your startup make ?
EXERCISE If someone asks your parents or your receptionist what your startup does, what would they say ?
Pick a Business Model You’re likely to change your business model several times, so you don’t have to make the right decision at the beginning.

However, starting a discussion of this topic is important because it puts everyone in a moneymaking mind-set.
All employees should understand that a startup either makes money or dies.

A good business model forces you to answer two questions:
Who has your money in their pockets ?
How are you going to get it into your pocket ?
These questions may lack subtlety, but making money isn’t a subtle process.

More elegantly stated, the first question involves identifying your customer and the need that she feels.

The second question creates a sales mechanism to ensure that your revenues
exceed your costs.

The best list of business models that I’ve found is in a book called
The Art of Profitability by Adrian Slywotzky.

Here are my favorites from his book:
INDIVIDUALIZED SOLUTION.
This involves a deep dive into customers’ problems and doing what it takes
to make them happy.

Over time a startup can add deep relationships with other entities to reach significant total sales, but each new customer involves hand-to-hand combat.

(Slywotzsky calls this the customer solution.)
MULTICOMPONENT. Coca-Cola embodies this model, according to Slywotzsky.

Coca-Cola sells in supermarkets, convenience stores, restaurants, and vending machines. The same product is sold in different business settings and at different prices per ounce.

MARKET LEADER. Apple embodies the market-leader business model.
A market leader creates the most innovative and coolest products.

Attaining this position enables a startup to charge a premium for its products, but it must work brutally hard to achieve and then maintain this position.

“My daughter once bought $2,000 worth of ‘treasures’ for an iPhone game,
so I know this can work.”

VALUABLE COMPONENT.
Intel and Dolby don’t sell products directly to consumers, but their products are valuable components in the devices they use.

Intel supplies the computer chip for many hardware companies; Dolby provides audio-compression and noise-reduction technology for many audio and video manufacturers.

SWITCHBOARD. Slywotzsky applies this term to describe an organization like De Beers, when it controlled the supply of diamonds.

This business model involves several challenges: achieving control of supply and convincing people that that control is desirable and not subject to antitrust issues.

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PRINTER AND TONER.
This business model involves selling a product that needs refilling.

Whether it’s an HP printer, a Keurig coffee maker, or a SodaStream soda maker, a sale is not an event but a stream of revenue for the course of the product’s life.

This can also apply to a startup that sells software and then charges for upgrades, service, and support. Slywotzsky calls this the after-sale model.

There are a few other business models that are attractive too: FREEMIUM.
The freemium model involves giving away services, up to a point: when customers want more features or capacity or to remove advertising, then they have to pay.

For example, Evernote enables people to store information in the cloud for free.
However, if they want more storage space and more functionality, the fee is forty-five dollars
a year. EYEBALLS.

The eyeballs business model involves providing a platform to create or share content that attracts viewers.

The concept here is that certain brands would like to reach these same eyeballs, so companies can sell advertising and sponsorships on the platform.
Facebook and Huffington Post are examples of this business model.

VIRTUAL GOODS. Imagine selling digital codes for items that had near zero cost of
goods and inventory holding costs—stuff like virtual flowers, swords, and badges for members of a community.

That’s the digital-goods business. My daughter once bought $2,000 worth of “treasures”
for an iPhone game, so I know this can work.

CRAFTSMAN. Thomas Moser furniture is an example of the craftsman business model.
This is the kind of startup that places the highest priority on quality and craftsmanship.

It may never get large, but it’s the finest in its sector . . . although with a marketplace
like Etsy, you never know.

You’ll tweak your business model constantly—in fact, it’s scary if you don’t change
your model or do some major tweaking along the way.

Here are some additional tips to help you during the process:

TARGET A SPECIFIC NICHE.

The more precisely you can describe your customer, the better.
Many entrepreneurs are afraid of too narrow and specific a focus because it won’t
lead to worldwide dominance.

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However, most successful companies started off targeting a market or two and growing
(often unexpectedly) to a large size by addressing other markets.

KEEP IT SIMPLE. If you can’t describe your business model in ten words or fewer, you don’t have a business model.

Avoid whatever business jargon is hip (strategic, mission-critical, world-class, synergistic, first-mover, scalable, enterprise-class, etc.).*

Business language does not make a business model.
Think of eBay’s business model: charge a listing fee plus a commission.
End of discussion.

COPY OTHERS. Commerce has been around a long time, so by now people have pretty much invented every possible business model.

You can innovate in technology, marketing, and distribution, but attempting to come up with a new business model is a lousy bet.

Try to relate your business model to one that’s already successful and understood.
You have plenty of other battles to fight.

EXPANSIVE. Business models involving creating a bigger pie rather than grabbing more of the same pie work better for startups.

This is because customers expect to discover products that are innovative and cool and are less interested in me-too, better sameness from startups.

EXERCISE STEP 1: Calculate the monthly costs of operating your organization.
STEP 2: Calculate the gross profit of each unit of your product.
STEP 3: Divide the results of step 1 by the results of step 2.


Weave a MATT (Milestones, Assumptions, Tests, Tasks)
A mat is “a heavy woven net of rope or wire cable placed over a blasting site to keep debris from scattering,” according to the American Heritage Dictionary of the English Language.

Preventing scattering is what’s necessary for startups because entrepreneurs
need to do many things at once.

To stay in control, you need to weave a MATT, which stands for milestones, assumptions, tests, and tasks.*

• MILESTONES.
Accomplishing a large number of goals is a necessary objective for every startup.
However, some goals stand above the others because they mark significant progress along the road to success.

The five most important milestones are: Working prototype Initial capital Field-testable version Paying customer Cash-flow breakeven

There are other factors that affect the survival of the organization, but none are as important as these milestones.

Their timing will drive the timing of just about everything else, so you should spend 80 percent of your effort on them.

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• ASSUMPTIONS.
This is a list of the typical major assumptions that you might make about your business: Market size Gross margin Sales calls per salesperson.

Cost of customer acquisition Conversion rate of prospects to customers Length of sales cycle Return on investment for the customer Technical support calls per unit shipped Payment cycle for receivables and payables.
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