GrubHubMike

Howdy Partner

2012-05-10T12:42:00-05:00

Recently, I spoke at an event that highlighted working as part of a founding team. Check out the video here. Starting a business solo is OK, but I’m a big believer in having a business partner. (Exactly one business partner; teams of three or more are a disaster.) Here’s why:

A good partner increases the likelihood of a positive exit for a company. This increased chance of an exit more than offsets the 50% dilution. Getting paid a million bucks is sweet for the founder. Getting paid two million is even better, but the lifestyle change that comes with that first big win is a lot more significant than the 2^nd million. This becomes the biggest conflict between investors and entrepreneurs. The entrepreneur wants an exit. The investor wants a BIG exit.

So, I’ll take it on faith that everyone now agrees with my assertion that dilution is no big deal. Ok, so then what are the benefits of having a partner?

Differentiated Responsibilities

Matt & I started out with very similar skill sets. We both had technical background and had minimal understanding of marketing, sales, finance, etc. So, we had to learn. We each gravitated towards the things that interested us more. I liked doing sales and operations. Matt was more involved in marketing and product stuff.

As the business continued to grow we differentiated further. He pursued an MBA to get a deeper understanding of investor relations and finance. I spent a lot of time pouring over academic operations textbooks and thinking about how to engineer economies of scale.

Eventually, we looked around and realized that we couldn’t do each other’s jobs. However, we hadn’t differentiated to the point of exclusion; in fact, our responsibilities to this day still overlap about 80%. But what did happen was that we both mastered certain areas. I recognize that Matt is just better than me at certain things now and vice versa.

Another point worth mentioning: Downtime! Our 80% overlap of responsibilities means that we are able to cover for each other. That means that we get to enjoy a rare vacation. Every once in a while I can even take a luxurious sick day.

Decreased Risk

I’m a cocky bastard. It’s true. Generally, this trait serves me better than one might think. Most entrepreneurs are pretty cocky. Several reporters/friends/family/employees have asked me, ‘Did you ever think GrubHub would get this big?’ My answer: ‘Yes. Absolutely. I had no doubts. ‘ This is a pretty common attitude among entrepreneurs. I have the distinction of having, thankfully, been correct with the help of skill, luck, and serendipity all working together.

But, the reality of my success is closely tied to having a partner. In particular, I had (and have) a ton of blind spots. Matt could see those blind spots. He also had the … ahem…. assertiveness to point those things out to me.

One of the things that Matt was able to coach me on was how I interact with people. I had a really rough edge to me. Over time, and through Matt consistently pushing me to be better, I came to realize that I probably didn’t value other people’s perspective enough, which would be fine if I always knew the best answer…but, I didn’t. My partner’s insightful observations inspired me to face both the businessman I was and the businessman I had the potential to be.

The most important instance of this was as we started exploring acquisitions of other companies. In 2009 we had a meeting with Campusfood.com. At the time, the writing was on the wall that GrubHub was cleaning up, and we had a ton of leverage going into an acquisition conversation. But Matt & I were pompous and overbearing and as a result we almost tanked the whole deal. As we hopped on a flight home I mentioned to Matt, “Man, we were assholes today”. We recognized that we should show a lot more respect for a competitor that is about to turn partner. Fortunately, the founder of Campusfood was gracious enough to give us a pass and we were able to salvage that bad experience. This change of heart wouldn’t have happened if Matt & I hadn’t been pushing each other to be better people.

Increased Upside

Early on, the number of hands to get the work done doubled when I wrangled a cofounder. Instantly having twice as many ideas, twice as many sales, and twice as many hands to hand out magnets at the Fullerton El stop was nothing short of pure magic.

As we’ve gotten larger, the extra hands of a cofounder mean less. The amount of work that Matt & I can get done is only a small % of the total productivity of the company. So, it has really been the big ideas that pay off now. We have big hairy audacious goals. We also build on each other’s concepts. In one afternoon, we can come up with pretty thoroughly thought out innovations that are leaps and bounds better than if either of us were to try it solo.

Finally, 9:07 AM Monday morning. I never get an email from Matt at 9:07 AM on Monday. Why? Because, if I sent him an email on Saturday at 8PM, I got a response by 9PM. We are both always on. It makes all the difference in the world to have a partner that works as hard as I do. Matt and I are completely aligned from an interest and motivation perspective. It makes the building of a business a lot less lonely.

A Big Caveat

Trust is important. Early on, we started writing a partnership agreement that would take into account any contingencies that might make for a poor working relationship. At one point I tore it up. No lawyer can ever word a legal agreement perfectly enough to replace trust. While I’m not saying that legal agreements aren’t ever needed, I am saying that a legal agreement is never going to be the key element to a healthy partnership.

Same & Different

2012-03-27T11:01:53-05:00

In our first seven years, GrubHub went from 2 employees to over 70. During that time, we raised a total of 3.1 million in venture capital and launched our service in 13 cities. However, in 2011 alone, we raised 84 million dollars, tripled our headcount, acquired a major competitor, and managed to catapult into 300 cities.

I intentionally scaled back my business related posts on my personal blog during this time. Not because I’ve been too busy or too lazy, but because of the inherent risk that would come with added exposure during this busy year. There is a lot of potential downside to blabbing about our business, but not a lot of upside. So, I’ve had to be much more careful about what I say and write. And I gotta say, for a blabbermouth like me, that sucks.

Well, it’s high time I share some of what I’ve learned over the last year, 81 million million dollars, and 200ish additional employees. And here it is: some things are different; some things are the same.

Some things are different

Scale: the size of problems and the resources to fix them

We’re coming up on 15,000 restaurants in our network. Any small change we make now has the potential to impact a significant percentage of the restaurant industry. This means that as we hold true to our company’s core value of effectiveness, we have the potential for being a strong force for economic growth in our restaurant network. And we also have the resources to turn that potential into a reality.

This plays out most obviously in our products. The old way of doing things was to take an idea, toss it on the wall, and see what sticks. The new way takes longer, but the innovations scale over a larger set of customers. Now we frame changes in a long term scope, do significant research to understand the issues our restaurants and diners are facing, prototype our ideas, test our prototypes, build a roll out plan, and then intentionally go through a warranty and issue resolution period to make sure it all works.

All that stuff sounds really ponderous. But, solid design and execution iteration can still be done in an agile style. Sure, any single project may take longer from idea to execution these days, but we have a lot more of them in the pipeline. We also have made fewer missteps from a strategic perspective as we’ve taken more time to understand our customers’ needs before we start coding.

Communication is harder

While the difference between 70 and 280 employees is an increase of 300%,the number of possible interpersonal connections goes up exponentially… like a million percent. Simple ideas can morph into a corporate version of the child’s game “telephone” that is astounding to behold. Complex ideas have no chance of being communicated en masse.

In addition to being harder to communicate among such a large group, the frequency of good ideas generated by that group also increased. I credit that with hiring competent and effective people. But it is almost too much of a good thing. Everybody has good ideas, and the number of interesting and valuable projects is still ballooning past my wildest expectations. Focus has gotten even harder than it was before.

Our saving grace was that we managed to hold onto our culture. The core values and goals we stood for at 25 people continued to be prevalent all the way to the present day. This surprised me. Let me illustrate by paraphrasing a heated argument with an entrepreneur at another company about mission statements:

Him: Yeah, that stuff is important so that when the company gets so big that you can’t control everything people still have a context to make decisions without your input.

Me: No! That is absolutely not the point! Values for a business are not a means to an end, but an end in themselves.

Turns out we were both right.

Expertise in specific domains

Back in the day, we were all generalists. Now, we have individuals who are masters of the specific. As a result, we’ve gotten really good at a whole pile of things. Combining a steady commitment to learning with a talent for hiring really smart people has resulted in a group that really gets it.

The GrubHub team has gotten pretty awesome at the following things: the mechanics of customer service execution, a robust ability to prototype new products, the ability to setup facilities and programs to serve our employees, the ability to work on 4-5 major technical products simultaneously, proficiency at sales at volume, data operations, brand marketing, ROI marketing, and partner relations.

By getting very good at a clear set of things, it frees us up to intentionally disengage on the things that are not in our wheelhouse. It took us seven years before we finally got good at using partners for the things that didn’t build long term enterprise value. Sometimes we even pay more for these things, because it isn’t about saving cost. It’s about choosing what we want to be good at, and finding other smart companies to help us with the rest.

Employees are paying more attention to potential for exit

One of the things that has been historically frustrating about hiring people for a startup based in Chicago is the generally low level of understanding about stock options. As a company, we’ve always had a commitment to issuing options to employees, but we were often chagrined that our newest folks didn’t understand why they were valuable.

Well, that changed in a hurry as our company really hit our growth stride. Suddenly everybody was interested in understanding the mechanics of the options, tax strategy, risk/benefit of exercising, and all that good stuff.

Honestly, it can be a big distraction. We’ve had to work hard to make sure that everybody continues providing value to our diners and restaurants first, as our shareholder value derives from that. In other words, focus on the business and don’t stress about fluctuations in stock price. I think it is as valuable a lesson to learn for a private company as it is for a public company.

Some things are the same

Excellence keeps getting tougher to hit

Growing at 100%ish per year has meant that the bar for excellence and execution is always rising. And fast. Every single position in the company has evolved as the scale has increased. Thinking about details is no longer enough for anyone. Strategic thinking is necessary because nobody wants to work twice as hard for the same pay every 12 months!

We’ve had a ton of promotions,dozens of employees have gone to conferences and seminars,and Learning Lunches have helped keep people informed. Sometimes we’ve needed to make tough decisions about hiring new employees with expertise we can learn from instead of doing promotions and learning on the job.

But none of this is any different. We’re pretty used to this level of challenge. All of this change makes innovation necessary and also blatantly exposes stagnation. I’m pretty sure that the day that complacency goes unnoticed is my signal that we turned into a “big” company.

The importance of (mostly) ignoring competition

Every year there is some new kid on the block that is our big time competitor. Sometimes it isn’t a new company, but rather an old company that we passed up in scale and now sees us as a threat.

Blah blah blah. Whatever. The appropriate response is to (mostly) ignore them. We focus on what we do well, innovate to do it better, and then measure the results. How does the activity of another company have any influence on our own commitment to excellently serving our restaurants and diners? It doesn’t.

I say “mostly” only because completely ignoring competition is like sticking our head in the ground. Of course we understand the strategies they have, and the execution they implement. We learn from them and adopt their good ideas. We understand how we are similar and different. But we don’t worry about it. All we can do is the best we can do.

Need for focus

Do one thing and do it well. That never changes. I recently read an article that NASA has 16 top priorities…which means they have none. We help get food from restaurants to hungry diners. That’s it.

And, we have almost 300 employees constantly thinking up crazy ambitious ideas about how to do this better. Frankly, I think delivery is still broken. We fixed discovery and ordering, but there is still lots of room for improvement on the service, fulfillment and follow-up of orders. I think this idea has a good 10-15 years worth of innovation left in it before we’ve really optimized everything.

Opportunity vs Focus

2011-09-14T12:18:04-05:00

Much has been said about the importance of staying focused in a business. This has been one of the elements of success at GrubHub. But I’ve always been a little bit uncomfortable with explaining this concept to colleagues. Occasionally, someone will propose a great concept of a flanking product at our business with solid metrics and unit case analysis. Often my response to the idea is “well, sounds good, but isn’t in our sweet spot”. Yet it feels intellectually dishonest to dismiss a potential cash cow on a weak philosophical position. On the other hand, we can’t evaluate every single idea, so where is the balance?

Guilty until proven Innocent

Every new business concept is by default seen as a distraction… until the case exists to overturn that bias. There are lots of data points supporting the principle of focus: learned journals, sage advice, personal experience. These things consistently reinforce the idea that less is more. Tangential ideas are distractions rather than opportunities.

In practical terms this means that at some point an idea must be dismissed because it smells of distractions. Even before the concept is fully understood and examined, it must be discarded. Such a waste…. Some other startup will probably make a killing on it, but we can’t divert the resources. Stick it on a post-it and move on.

Explore the closest idea that is still NOT in scope

For every business there is are ideas that is so close and so tempting that it doesn’t seem distracting, but brilliantly accretive. This idea has a siren song… tempting us to abandon the principles of focus and steady execution. Words like opportunity cost, synergy, accretive, outside the box, and aggressive taunt us to take the risk and make the concept a core piece of the business.

So what makes the cut, and what doesn’t? Where is the line? The best way to find that line is to thoroughly explore the closest idea that doesn’t cut the mustard. I’m talking about identifying a real opportunity, that is so close to the current business that it would take only minimal effort to attain, but is just a hair’s breadth too distracting to embrace. This exercise brings into clear focus the critical line between focus and distraction. It gives us a ruebrick by which to judge new concepts as being sufficiently relevant to explore.

Execution over Innovation

When I was 6 years old my grandfather said to me “I had the idea for rear windshield wipers before anybody… if I had just done something with it, I’d be a rich man” A lot of people have this concept that the path to riches is an idea. However the path to success is execution, not ingenuity.

Simplicity is necessary for excellent execution. Excellent execution is necessary for bringing a product to market. The flash of insight that starts the ball rolling is the critical big bang, but that same insight adds complexity, which is anathema to excellent execution.

How does an entrepreneur embrace the execution of bringing a new concept to life, but reject the temptation to endlessly add features and new product lines. Frankly, most don’t. This mix of expansive creativity and restrictive focus are in direct opposition, and therefore rare to find.

A counterbalance is nice

My business partner Matt often holds the opposing view to me on this. He tends to lean towards opportunity and expansion where I naturally fit into focus and execution. The tension is helpful because it leads to spirited debate on a case by case basis.

It also leads to a lot of eye rolling on both sides as we both present our respective positions, which both of us have made and heard ad nasuem.

(Over)compensating with equity

2011-03-01T14:44:18-06:00

I've been asked recently about how to compensate non founder employees at the beginning of a venture. But there is a lot of confusion on whether to make everybody involved on day 1 a founder. Most folks agree there is an upper limit on the ideal number of founders. So taking that for granted, how do you motivate non founders with equity before you have cash?

The usual method is to just give them a big chunk of equity But that can get real hairy because you don't always know how to differentiate quality people vs total hacks. So don't "give" equity to anyone. Everyone should earn equity over time. If you grant it all up front and then find out somebody is a lazy bum the company gets bogged down by a cap table with dead weight.

A more sophisticated approach is to use some kind of vesting mechanism. Over the last few years I've come up with the following idea. I don't really have any legal background, so unless you get a good startup lawyer to look at it, consider this a handshake deal.

Give each non-founder an above market hourly equivalent rate. Say $90 per hour for a software developer. Agree that the amount will be paid out at a future date in equity. That future date could be either a funding round or a number of months at a pre-determined valuation. For practical and motivational reasons, it would be even better to compensate cash & equity 20%/80% .

An Example

Agree to $90/hour with Bill to be paid in 20% cash 80% equity. The equity portion will be granted in fully vested stock when the first of a)a funding occurs or b)at $1,000,000 valuation in 18 months.

In case A where Bill works 200 hours and a funding occurs at a $3Million post valuation in 6 months Bill would get:$90 * 200 * .2 = $3600 in cash over the course of the 6 months$90 * 200 * .8 = $14,400 in equity which equals 0.48% equity at $3MM valuation in fully vested stock on the date of the close. Presumably at this point you and Bill will work out a long term employment agreement with additional cash and options. Employees who are with the company before the first funding should get a generous option package going forward.

In case B where Bill works 600 hours and no funding occurs in 18 months$90 * 600 * .2 = $10,800 in cash over the course of the 18 months$90 * 600 * .8 = $43,200 in equity which equals 4.32% equity at 1MM valuation in fully vested stock on 18 month anniversary. The larger equity percentage in this case is commensurate with the larger risk and timeframe involved in the 2nd scenario.

Equity ain't for everybody

Equity should be reserved for those folks who will continue to provide future value. After sending this analysis to a buddy, I got this response: If you issue Bob equity what is your response when he says, "I'm doing all this grunt work for you, I'd like to participate in the strategic vision of the company, and you're taking that away from me. I'm a highly skilled and dependable and you'd be paying a lot of cash to find someone reliable in NY to do what I'm doing."

My response: The short answer to your question is you've got the wrong person doing grunt work. Why would you have a richly compensated highly strategic MBA doing that for you? My college roomate helped me pick up menus when I went out to SF, and he never got anything in return...though I try to take him out to dinner whenever I'm in SF nowadays. If you don't have cash, you can do consulting at an hourly rate and use the arbitrage between that consulting rate and the 5 or 6 craigslisters doing grunt work with no equity at all.

So what about Founders?

I remember being in rowing in college on an 8 man team. It totally sucked. The worst part is that you were either frustrated because half the team was worse than you, or you were frustrated because you were struggling to keep up all the time.

A fact of startup life is that some folks pull more weight than others. In extreme cases this leads to a group of founders turning on one of their brethren and excommunicating them. The process does not generally evoke images of flowers and happy thoughts. So why not take the model above and adopt it for founders. Issue some stock for every week of work for each of the founders. If somebody flakes out and goes to Costa Rica for a month, they aren't earning equity. The biases the ownership of the business towards those folks that continue to provide the most value over time

GrubHub closes an $11 million round, and we learned something

2010-11-12T09:01:02-06:00

GrubHub recently closed an $11 million funding round. Check out our official post here. This is the third VC financing we’ve gone through, but it was the first time I’ve done the Sand Hill road show. The process of seeking investment is incredibly valuable for a growing business. It forces the executive team to take a step back and evaluate their business, progress and future plans. Then you take those things and expose them to the scrutiny of very intelligent, engaged and motivated skeptics. It's the best consulting money can't buy! During the course of talking to some of the sharpest minds in Silicon Valley, Chicago and Boston, a number of themes came up repeatedly:

Mobile is the future king

The growth in the late 90s and early 00s in web adoption is happening in a compressed 2-3 year time scale right now. If you’ve got an investment pitch that doesn’t mention mobile before the 4th slide, you’ll walk away empty handed. This goes both ways; investors that showed no interest in mobile were filtered out of the process very quickly.

One of the strong indicators for GrubHub is that our mobile traffic will go from 0% to 10% of our order volume in 9 months. That’s $7 million in takeout orders placed on iPhone, Android and HTML5 mobile browsers from NOTHING in 9 months!

Another strong indicator for mobile is that repeat purchase use occasions are higher on a mobile phone than on a consumer facing website. This makes sense intuitively: there are more opportunities to transact on a phone because it is always in your pocket. The investors we spoke to backed up this intuition with anecdotal evidence. Unfortunately, I don’t have sufficient sample set of actual data across multiple industries to support this. But hey, it passes the gut check, so I’ll play along!

Know your cohort analysis

Every single investor. Every one. They all asked us to see our cohort analysis. By investor number 3, we had figured out not to say “what’s a cohort analysis?” By investor number 4 it had become a slide in our pitch. Thanks to our great marketing analysts. So what is a cohort analysis?

Basically, take all the people who engaged in your website (or mobile app!) in a given month. Then look how they behave in the next month as a group, and then the next month, etc. You’ll end up with a graph that shows how engaged a group of people stays over time. For strong businesses, this starts out high, drops dramatically over the first 1-3 months and then stays steady for a very long time. Think 2-5 years, which is an eternity for a startup.

The cohort analysis shows several actionable things. First, it is a legitimate mechanism for estimating lifetime value of a customer. Second, it shows the impact of product decisions over time and suppresses the impact of initial marketing. Third it shows the impact of long term engagement tactics (such as loyalty programs and remarketing) Check out Fred Wilson’s post. Lightspeed ventures also has a more how-to article.

Superior customer service is a great strategy (and Zappos hasn’t filed a patent)

“We’re going to be differentiated by giving great customer service just like Zappo’s” That is pretty much a losing strategy. However, “We’re going to be differentiated by giving our own style of great customer service” is a winning strategy. Customer service is our central strategy now, and we expect to improve it over time. We did hear some folks say “Zappos already did that”. Well, so did Nordstrom, and about 100 other fantastic companies since about 1825. It’s still a good strategy. Few companies do it well.

We have been and will continue to be successful because we take care of our customers. Hungry people want to make sure they have great choices and they get fed. So, leave all the analysis and business speak on the side for a moment and go with some olde-timey advice: Take care of your customers first. Everything else will work itself out.

SEM is not a long term competitive advantage

SEM is hard. Doing it well is a crucial part of any businesses tactics. Having said that, it isn’t long term defensible simply because your competitors can potentially also hire a great SEM team. Furthermore, there is always the chance that your competitors just have more money. Zynga does this. They crush everybody with SEM and facebook ads and don’t leave an inch for competitors.

Digging deeper, we got a lot of anecdotal evidence that users who discover a website from SEM exhibit the worst loyalty among all acquisition channels. Say what! That doesn’t even make any sense! Why would people who click on the right side of Google have less loyalty over time? Well, honestly, I don’t know. Four investors said it, so there is probably some element of truth to this.

SEO is getting harder

First, SEO is getting harder because there are proportionally more companies focused on this over time. There are just more people doing aggressive and intelligent things competing for the same eyeballs every year. Compounding this problem is that the search algorithms change at a pretty quick pace. This puts the natural advantage for SEO to the newest and most innovative companies and biases away from companies that are entering the growth stage of their business.

Second, organic search Google results are taking up less and less of the page. In most searches, the first web result is actually below the fold now. Several things have replaced it. The “7 pack” local search and search results personalization have been putting pressure on the location of organic results for some time now. The introduction of Google places just compounds the issue.

Lean Startup Economics

2010-10-01T12:42:45-05:00

Creating a startup is best done by jumping in with both feet. Building a minimal product and finding customers early in the process is a great way to create a company from scratch. The idea of WRITING A BUSINESS PLAN is such a daunting task that most reasonable people aren’t going to go tackle it head on.

But there is an alternative, take it out one piece at a time. The central piece of the business plan is the financial model. The central piece of the financial model is the unit model: a fancy term for the expenses and revenues associated with producing and selling a single item.

Here are four steps for building a unit economics model in parallel with starting the business. This makes the model a living document rather than a dusty academic exercise. So, here are the four steps:

Step 1: ?
Step 2: Make $1
Step 3: Make $2
Step 4: Make $1,000,000

Fortunately, these steps are inherently in order of decreasing difficulty. I’ll get to step 1 last.

Step 2: Make $1

Make a product. Go sell it. Don't wait till it is perfect. It won't get perfect until you've tried to sell it, so that's a waste of time anyway! It’s a long journey from the idea to the first $1. This involves solving a real problem well enough that somebody will pay for it. As soon as you sell something, you've got customers. And once you've got customers, you have the most valuable data available about how to make your product better.

Try to quantify how much it costs to make that product, market it, and close the sale. The dominant factor in building and selling this first product is the founder’s time. So, to build a reasonable model, put a dollar amount on that time. Not only is it the dominant factor, founder’s time is also the scarcest resource. The business only gets 90 hours of it every week, and can’t manufacture more. Now you’ve got a unit model!

Step 3: Make $2

There is a catch here. This second dollar comes from a repeat customer. To get a customer to repeat, the product you sell needs to be of such high value that they couldn’t go without it. The odds of hitting this mark on your first product are very low. Refinement over time to improves a product to this level, rather than a single shot in the dark.

Now, update your unit model. Instead of having revenue for a sale of a product, include the lifetime value of a single customer. Include all of the incremental cost to provide that product a 2nd time. Also, figure out how much it cost to get that customer to repeat purchase. Here is a hint, it should be about 10% of the original cost.

A word of caution at this point: If you don’t have the possibility of repeat customers in your business, just stop right now, the business isn’t very good.

Step 4: Make $1,000,000

Now that you’ve got customers and a product that they can’t live without, figure out how to sell many customers and produce many products and collect lots of dollars. At some point around this time frame get a business license. This becomes an operations and scaling issue, and there are great people who love doing this who can help grow the business. Don’t try to do it yourself.

For the financial model, this means understanding headcount numbers and benefits, attrition rates for customers, conversion rates on the product, etc, etc. The best way to figure out how to build a financial model is to look for investment. They will tear up your crappy documents again and again. Think of this as free consulting.

Step 1: Quit your job

All those other steps are at worst an academic exercise and at best a hobby until you quit your job. A lot of stuff has been written about making great entrepreneurs, but one element that comes up repeatedly is hunger. I take this literally, not metaphorically. Make the sale, or eat ramen noodles. Great motivational stuff, ramen noodles.

This makes the financial model real too. Don’t think of the hourly rate for the founder’s time as a theoretical concept. Actually pay it. This also puts a time limit on everything. The business bank account and the personal bank account are in a race to hit zero. The only thing that helps either one is sales.

This post in video

Here is a video of me giving a talk on this same subject to Chicago's Lean Startup Circle

This post in alternate video

This is also a pretty close approximation of the talk too. But a lot funnier. Big Props to Edward Domain of flyovergeeks for pointing this out in his post

A Practical Guide to Writing Your First Business Plan

2010-06-28T10:16:37-05:00

So you want to start a business. You’ve heard that you should have a business plan. You’ve got a vague idea that you should get started on that sometime. That vague idea has been sitting in the corner getting grumpy as you’ve neglected it. And now the idea is a mean looking little monster with big pointy teeth. The best way to get that sucker is to take a step by step approach that breaks down this big “MAKE A BUSINESS PLAN” task into a bunch of smaller pieces.

Before we jump into the nitty gritty of how to write this plan, let’s define what we are looking for in the end. The audience for the business plan is you. The value of the plan is primarily to focus the efforts of the entrepreneur. As an added bonus, it is a tool to attract investment. Generally a plan includes:

Strategic Section

Simple definition of a problem and the businesses unique solution (the elevator pitch)
Definition of the client base for the business
Analysis of the completion and the business’ differentiation
Management team of the business

Execution Section

Brief marketing plan
Brief sales plan

Financial Appendix

Spreadsheet with the financial projections for the next few years
Clear description of all assumptions made in the financial projection

Step 1: What’s the point?

Answer this question for yourself: What type of business do I want this to be and in what timeframe. A few examples might be:

I’d like this business to generate $5,000 a month after 5 years with about 20 hours a week of ongoing effort
I’d like to start a business and build it over 15 years to support myself and 5-10 employees
I’d like to create a high risk, high reward startup venture with venture backing and sell it for a bajillion dollars.

Generally those first 2 businesses are referred to as lifestyle businesses. They start and then continue for a long period under the same ownership. The third is a typical venture business. Generally these are characterized by a drive towards “exit.” There are lots of other types as well; yours might not fall into these categories.

Step 2: What’s the business?

Write down a few quick sentences about each of the following:

Define the problem. Describe the solution
Describe the demographic of the client base.
Who is the competition? Competition is: “the place where my clients are currently spending money.” Competition is not: “The businesses that are most similar to mine”
How am I different from the competition?

Take some time to brainstorm about all of this stuff and how the business is going to serve the needs of clients. Be creative.

Now, take a hard look at your ideas and ruthlessly cut them all out except the one key shining idea that defines this business. The essence of strategy is choosing what not to do.

Step 3: Describe a single client experience.

This is known as the “unit case”. It is the experience of typical client once the business is up and going. Think about how the client found out about the business. What were they thinking as they considered purchasing. How did they purchase? What was their method of payment? What communication did they receive from the business? When and how were the services and products delivered? How did the transaction or relationship end? Can the client repeat the purchase? Can they refer other potential clients?

Resist the temptation to think about 100 clients right away. Stick with just this one person. A lot of stuff naturally falls out of the answers to these questions: a marketing plan, a sales plan, the assumptions behind the financial model.

Step 4: Build a unit model

Take all the answers to the questions above and build out a financial model for the single client. The real key to this exercise is getting a list of all your assumptions. These assumptions are dollar amounts and you need to start thinking in terms of the cost and revenue associated with different activities around a client.

The spreadsheet has three sections: assumptions, revenue and expenses. The assumptions section should be completely separate and easily editable. The revenue and expense sections should primarily be formulas that reference the assumptions section. This gets the analytical side of the model down on paper, and lets you do a gut check: does this business make money for a single client? If not, don't try to make it up with volume! At the end of the model, you must be able to list each of these assumptions:

The cost of acquiring one client
The lifetime revenue value of the client
The cost of materials, goods and time required to service the client
The collection timeframe for the client paying for services
The amount of time it takes to recoup the cost of a client in revenue
A dollar value associated with management’s time, or a salary for the management team.
The referral rate of a happy client
The repeat purchase rate and timeframe of a happy client

Step 5: Take a breath. Walk away.

Before going any further, take a week and leave the thing alone. Take some time to reflect on the plan, but don’t edit it. Take your dog for a walk. Enjoy time with friends. Talk about the plan, but don’t edit it. This process is creative, and therefore takes time. The end goal is a well considered plan, not just a paper document.

Step 6: Build a 50,000 foot view

Now that you understand the unit model, build a full scale model. Take the assumptions you had before, scale it to the number of clients over time that meet your goals. This is largely a spreadsheet exercise where you are balancing three things: the amount of initial working capital, the time resources of the founding team, and the assumptions in the unit model.

You’ll find that small changes to certain assumptions have huge impacts on the overall revenue and cost dollars. Don’t worry, this is typical. The value of this part of the process is that you become accustomed to adjusting the financial model of the plan as base assumptions change. Since the assumptions never survive their first encounter with real clients, this is a very important skill to develop.

You’ll have a final salary number for the management team. Or you’ll have a dollar profit after 5 years. Barring that, you’ll have some important metric that sums up the point of the whole thing. Check that number against your expectations. Is it right on? No? Consider changing aspects of your strategy that might result in different economics.

Step 7: Expose the plan to scrutiny

Shop the plan around to different people who can look at it critically and constructively. This constructive criticism is essential data for improving your business. Evolve the plan considering this data in your decisions. Use the data in your decisions, but don’t let it dominate your strategy.

Keep in mind that a good plan generates lots of resistance. An engaged adviser will poke holes in assumptions, argue against strategy, and suggest additional revenue models. A poor plan will exhibit blank stares and lots of compliments. Be gracious in receiving all of this stuff. It doesn’t help to argue with somebody to you are blue in the face, but instead drive towards getting the essential reasons behind criticism(or lack thereof).

Step 8: Rinse and Repeat

This business plan is a living document. Make sure to refer to it every few months. You may find that your strategy has diverged significantly from the original plan. Has this happened intentionally? If not, is the divergence a good thing anyway? What impact do the changes have on the economics of the model?

A Final Note

A lot of folks will give you advice. Some of it will be solicited, most of it won't. As the business plan matures, this advice will be less novel than it was at first. You don't necessarily need to act on every piece of advice you get. But you do need to listen graciously. In the final analysis, you'll know your business plan is solid when you get lots of engagement and criticism, but you confidently know that your ideas are accurate and why your detractors are incorrect.

Thanks

Thanks to Cindy Kuzma for help editing this essay.

Top 6 boneheaded misconceptions of first time entrepreneurs

2010-06-15T11:05:23-05:00

I’ve had some pretty boneheaded ideas since I started grubhub.com. As I’ve shepherded my idea to a hobby and then to a real business I’ve had the fortune of being able to recognize some of those mistakes. Actually, I’ve had the fortune of being surrounded by folks who can point out misconceptions and who have been upfront with me. This process of learning from bumbling mistakes investors like to call seasoning.

I have noticed that some of these ideas have come up repeatedly. Many of the other entrepreneurs and would-be CEOs I’ve met have struggled with these same ideas.

1. I have no competition

When I first thought about competition, I had a mental image of a rival gladiator. Somebody out to get me. This foe will stop at nothing to steal customers that should rightly be mine. They will woo investors with false tales of better products and superior talent. Jerks.

Back in reality, I couldn’t think of any individual companies that fit this description. Sure there were a few others out there, but the pool of customers we were selling to was large enough that it didn’t seem like we had any friction.

This is entirely the wrong view of competition. Superficial competition is “the other companies that do something similar to me.” Real competition is “the companies that earn dollars from customers that they might spend on our product.”

2. I’m going to succeed because I’m smarter than my competition

So now that I have identified my competition…how am I going to get clients to give me their cash instead of those other blockheads. Because I am smarter!

Wrong. Entrepreneurs are like drivers, every single one of them thinks they are better than average. The meat of most businesses doesn’t take huge mental power. Usually things like vision, organization, patience, discipline and humility are the factors that drive success.

I’d put my bets on folks who pursue the question “What are we best in the world at?”. In Good to Great author Jim Collins points this out as one of the critical factors for competitive defensibility.

3. My time is free.

I started my business as a web developer. So, I was able to write the website without hiring any help. Eventually I started selling, and keeping books and invoicing, being a lawyer and breaking kneecaps for collections (I live in Chicago, that’s how we do things.) I was probably putting in about 90 hours a week. Whenever something else needed doing, I’d just work harder and longer. No cost!

The cost isn’t in dollars, it is in opportunity. The essential question is “If I do X, what other thing Y will I not be able to do?” This leads very quickly to listing and prioritizing. One can’t determine the most important opportunity unless they can identify the non important tasks comprehensively. A list and prioritization of the top 10 todo items is extremely hard because it requires 9 hard choices.

Because it is so hard to get a comprehensive prioritization of tasks in a startup company, I usually ask a few short cut questions. If my time cost me $500 per hour, would I be doing this task? Can I get that hour back in profit?

4. Keep it secret, keep it safe

There is a pervasive fear in the entrepreneur’s mind that their concept is about to be stolen. This is especially in the idea stage, but it can be present in relatively mature growth stage companies. If the concept is good and the management team is worth its salt, relying on competitive differentiation is a much more stable policy than secrecy.

Furthermore, Ideas get better when they are exposed to scrutiny; especially if it comes from potential customers. They may not know what they want, but they will recognize it when they see it. So, it takes an excessive amount of trial and error to get products just right. That can’t be done in an air of secrecy.

In the rare case where an idea would be ruined by exposure, I’d sprint for the nearest exit. What are the odds that an inexperienced (or a veteran) entrepreneur is going to get the marketing, execution, sales and finance right for rapid adoption necessary once the cat is out of the bag?

5. Time is running out

It’s the wild west, and we gotta win the land grab! I’d like to say that I’ve conquered this fallacy, but it comes up repeatedly. Every time that a new opportunity is discussed, this need for speed subtly worms into the conversation. The premise is that once you get a customer you’ll keep them.

But the premise is false. Customer loyalty isn’t earned by speed, but by quality. First doesn’t win. Best wins. Companies that are able to create superior products that are tailored to their customers needs are more successful. They are built to grow for the long term instead of being a flash in the pan.

6. We just figured out the silver bullet

It seems like there are a lot of hot internet startups that went from zero to hero overnight. The superficial appearance is that they were plugging along in the basement for 6 months, and then figured out how to make their product explode and bam, they cornered the market, sold the company, and retired.

In recent years, these explosions have come about from viral awareness. A person tells five friends and then they tell five friends, etc. Add some fancy words in there like “tipping point” and “critical mass” and “influencers” and suddenly it seems more like sociological science instead of voodoo magic.

I often field the question, “How are you going to make this viral” I have a hard time answering the question nowadays because I don’t agree with the premise that viral is something worth chasing. Einstein didn’t say “The most powerful force in the universe is viral marketing.” Einstein said “The most powerful force in the universe is compound interest”

Figure out a business, any business, that grows profit annually at some acceptable percentage. Risk and reward come into play in determining that percentage. In the long run, compounding growth always has higher returns than a single step change.

A Quick Interview

2010-02-02T09:19:21-06:00

A student sent me some interview questions for his entrepreneurship class. I only had about 5 minutes to shoot off some answers. So, this is what popped off the top of my mind:

What ignited the spark in you to start a new business venture or to make significant changes in an existing business? How did the idea for your business come about?
-There was a push and a pull. The push:I didn’t want to work for somebody else anymore. The pull:I saw that no service existed to show hungry people all the restaurants that deliver to them.

What three pieces of advice would you give to college students who want to become entrepreneurs?
-The most important step to get started is to accept the risk of failure.
-Pick one thing. Do it well.
-Figure out how to generate revenue immediately

How do you generate new ideas?
-The creative problem solver naturally discovers solutions to problems. Therefore, the best way to get new ideas is to put oneself in a situation to observer real life business problems.

What is your greatest fear, and how do you manage fear?
-Commit to not acting on fear, but on possibilities. Maximize upside first. Minimize downside second

How do you define success?
-Success is a continuum and journey, not a destination. A successful journey is characterized by the continual maturation and evolution of my projects and myself.

What do you feel is the major difference between entrepreneurs and those who work for someone else?
-The ability to accept the risk of failure

What sacrifices have you had to make to be a successful entrepreneur?
-Stability

Where you see yourself and your business in 10 years? 20 years?
-I will be working on opportunities nos 2-4. This particular business will have taken a life of its own.

What is your favorite aspect of being an entrepreneur?
-The satisfaction of setting my own goals and measuring my success against them.

Do you believe there is some sort of pattern or formula to becoming a successful entrepreneur?
-Identify opportunity. Act to engage that opportunity. Measure. Rinse and Repeat.

9 tools for growing a startup from 1 to 50 employees

2010-01-19T13:19:38-06:00

Here is a roundup of 9 tools for growing a company from 1 to 50 employees:

Tool #1: Revenue. Apparently there are business models that are proponents of not making money right away, but I don't get them. Cash allows an entrepreneur to hire people and resources to get things done. At first it is all about increasing velocity on the sales -> product -> sales cycle. Successfully executing that cycle then requires supporting activities... billing,finance,IT infrastructure, etc

Tool #2: Options and Environment. Finding and motivating employee #2 can be very challenging. Options help (though less so in the midwest). The right person for this role will be very interested in equity. The right option plan will provide long term incentive when cash is hard to come by. More importantly, the startup environment will be very attractive to the right person. Meeting in coffee shops, lots of responsibility, and flexibility in direction should inspire rather than frighten early employees.

Tool #3.Throw away the partnership documents. Get a handshake you can trust. I swear we spent 100 hours arguing over the minutiae of our partnership document. This was largely based on several people I knew who had been screwed by their partners. The lesson to be learned is *not* about getting a long contract. In the end, you just need to pick the right partner. Because, if they want to screw you over, they'll find a way regardless of what papers have been signed.

Tool #4. Don't hire just good people, hire good startup people. A good startup employee has a few key attributes. Look for people that have a lot of adaptability. They take initiative. They are good with ambiguity and change. Look for these kinds of things in the interview process. Give a preference to candidates that follow up and ask (the right) questions.

Tool #5. Hire deliberately. Never, ever, ever hire the wrong person because of pressure to fill a role quickly. It is always, without exception, under every case imaginable better to wait on the right person than to rush into a bad decision on hiring. In the end, your company is only as strong as its people.

Tool #6 Rock Band. Ain't nothing like playing some classic rock and drinkin' a PBR to bring a group of people together. Sure, sure, we got a little carried away. In fact, we are still waiting for some other group to put up a decent challenge to our rock band supremacy. You can all go pound salt. We rock.

Tool #7 the monthly board/employee meeting. Using content that is as similar as possible, make sure that the board of directors and every employee at the company is informed. Each person knows the strategic plan of the business. Each person knows the historical performance of the business. Each person knows the projected growth of the business.

Tool#8: The bimonthly management team meeting. This is a meeting where I invite smart people to call bullshit on me. Actually, that only happens sometimes. Mostly, we just meet and talk about the priorities and work flow of the upcoming month. Doing this twice a month provides continuity and clarity. Its amazing how often the statement... "I thought we all agreed on this last month" comes up. Sure, we all agreed, but not on the same details. This regular meeting eliminates misconceptions and aligns expectations. "Muy Bueno" as they say in France.

Tool #9: Patience. Be slow to make judgments. Deliberate in actions. Patient in execution. These things are critical. Employees are trying their hardest to accomplish their goals. Trust them. Give them time.

The Third Office (50 employees)

2010-01-19T11:23:32-06:00

This is the eighth installment in my series on going from 1 to 50 employees.

We outgrew our 2nd office in 18 months when we went from 15 people to 50. Two things have changed about the nature of the business during this latest evolution. First, instead of being very scrappy with cash, we've loosened the purse strings. Second, vendor relationships have become much more important.

We used to be real cheap. We hated spending money. We worked so frickin hard to get the investments in the door that we wanted to squeeze every possible penny out of our investment. Unfortunately, its easy to save a dime and spend a dollar with that attitude. Maybe we should hire some movers for the office move... Maybe we should get a coffee service instead of running to whole foods every day... Maybe we should get a furnished office instead of worrying about starting from scratch with an empty space.

One of the ironies of getting larger is that we have identified more areas where we need external vendors to continue to grow. When there was only 10 of us, we did everything ourselves. Now, it is clear that we can be more efficient by sticking to our core competencies. Or, in Abe Lincoln's words "whatever you are, be a good one" All sorts of stuff... from doing the dishes, to hiring mobile application developers. We rely on "vendors" Sometimes those vendors are a single person that cleans up every night. Sometimes they are large consulting shops.

So now that we are at 50 employees. I have one more tool that is really critical...

Tool #9: Patience. Be slow to make judgments. Deliberate in actions. Patient in execution. These things are critical. Employees are trying their hardest to accomplish their goals. Trust them. Give them time.

Promoting People (35 employees)

2010-01-11T15:08:27-06:00

This is the seventh installment in my series on going from 1 to 50 employees.

My view on management hierarchy underwent a 180 degree flip at around 35 employees. For a long time I had been a big proponent of "We don't need managers and hierarchy, a flat organization works a lot better." All well and good, but when you get above 15 people asking you for direction, you become pretty much useless to all of them.

There are hundreds of books on management structure. They address a lot of important issues: should we use a matrix structure? how many direct reports should a manager have? How closely should a manager supervise their direct reports? I don't have a clue how to answer these questions. I've instead relied on two principles: Promote from within; Hire rock star VPs.

Promote From Within. The folks who created and learned their jobs from scratch are the first candidates to be managers of others in those positions. Keep in mind I'm talking about a group of people with a lot of potential, drive and intelligence. These are exactly the right employees to challenge with tougher positions. The benefits of seeing a person meet these challenges far outweigh the risks of putting a junior person in a more senior role.

Hire Rock Star VPs. I keep hearing of this mythical manager who is threatened by hiring people more talented or smarter than themselves. I don't get it. Sure, I once managed the technology team and priorities, but why would I want to hold on to that with tight fists. I'd rather have somebody who has done that for 15 years take over. Giddy up. Of course, once you get a pile of VPs, it becomes even more important to communicate. Which brings me to...

Tool#8: The bimonthly management team meeting. This is a meeting where I invite smart people to call bullshit on me. Actually, that only happens sometimes. Mostly, we just meet and talk about the priorities and work flow of the upcoming month. Doing this twice a month provides continuity and clarity. Its amazing how often the statement... "I thought we all agreed on this last month" comes up. Sure, we all agreed, but not on the same details. This regular meeting eliminates misconceptions and aligns expectations. "Muy Bueno" as they say in France.

The Far Flung Sales Team (25 employees)

2009-12-28T14:04:09-06:00

This is the sixth installment in my series on going from 1 to 50 employees.

Most of the growth in our employee ranks came from a national sales team. Once we got to 25 employees, 9 of them were out in different markets signing up customers. The work experience for these valuable folks is very different from those of us in the office. They work from home.They have minimal contact with their supervisor. Their compensation is very clear cut and based on performance. How do you extend company culture to them? Is that culture relevant?

Consistent transparent communication is the most important way to connect off site employees. For communication, we share the monthly board meeting content with the entire company and make sure the sales folks get a two way video and audio feed of the meeting. Every month we lay it all out there for the whole company to see: our mission, financial information, goals and objectives, challenges and windfalls. This level of transparency served us particularly well during an economic downturn. Everybody is nervous but accurate information dispels fear.

Is culture relevant for commission based off site sales people? Absolutely. These folks are the face of our company to our paying customers. There is a world of difference between just getting the sale no matter what, and approaching each client with a desire to improve their business. I'm no sales manager, but for the life of me, I'm not sure how you would build this value into a compensation package. Its got to be part of the company ecosystem.

Tool #7 the monthly board/employee meeting. Using content that is as similar as possible, make sure that the board of directors and every employee at the company is informed. Each person knows the strategic plan of the business. Each person knows the historical performance of the business. Each person knows the projected growth of the business.

The Second Office (15 employees)

2009-12-16T08:46:51-06:00

This is the fifth installment in my series on going from 1 to 50 employees.

Once we hit 15 employees, a lot of stuff that happened automatically before wasn't so automatic. We moved into a larger office and communication started to get confused. Seemingly simple sales and marketing messages all went through a disastrous game of phone tag. Lots of simple things were added to help communication: cross department meetings, monthly strategy sessions, public calendar scheduling, etc. All routine things for most businesses. But they weren't routine for us, they were revolutionary.

As we start getting a little more corporate how do we make sure to stay true to our roots? More importantly, how do we make sure we all know what our roots are when we can't even get our simple signals straight? So, we created a mission statement and core values. It can be really hard to make decisions of a moral nature in a company because each person in the company has a different value system. But the process of talking through our common beliefs in the context of a profit generating business actually helped us gel together as a team.

Of course, there are other ways to keep the team tight. My next tool for managing a high growth team:

Tool #6 Rock Band. Ain't nothing like playing some classic rock and drinkin' a PBR to bring a group of people together. Sure, sure, we got a little carried away. In fact, we are still waiting for some other group to put up a decent challenge to our rock band supremacy. You can all go pound salt. We rock.

The Office (7 employees)

2009-12-07T10:36:19-06:00

Getting our first office was really exciting! This is a continuation of my series on going from 1 to 50 employees.

One of my original claims to investors was "we operate efficiently without any need for an office". At some point having an office stopped looking like a liability and started looking like an asset. An office makes communication easier. Best practices get shared. Policies are easier to keep consistent. At 7 employees, the cost of the office is very small relative to the cost of payroll,but the benefit to each employee is very large. So go ahead and get those swanky new digs.

The other big change was that with the 7th employee, it becomes very clear that the founder needs to stop doing 100% of direct effort and start putting a lot more effort towards managing employees. This is a big stumbling block for most entrepreneurs. We want to do everything ourselves. What a waste. Entrepreneurs have lots of drive and understanding of the business. This resource shouldn't be squandered on one individuals work, but shared across the organization.

At this point in a company's life cycle, there are 2 key tools for hiring:

Tool #4. Don't hire just good people, hire good startup people. A good startup employee has a few key attributes. Look for people that have a lot of adaptability. They take initiative. They are good with ambiguity and change. Look for these kinds of things in the interview process. Give a preference to candidates that follow up and ask (the right) questions.

Tool #5. Hire deliberately. Never, ever, ever hire the wrong person because of pressure to fill a role quickly. It is always, without exception, under every case imaginable better to wait on the right person than to rush into a bad decision on hiring. In the end, your company is only as strong as its people.

The Other Founder (4 employees)

2009-12-04T11:31:08-06:00

The third installment in my series on going from 1 to 50 employees. After I had things up and running and did all the hard work, the other founder waltzed in. Actually, that isn't accurate at all, but I like to give him a hard time about it. Back when it was just a hobby, we spent a lot of time thinking about how to run the business. As you can see by our detailed business plan to the right.

The nice thing about having a partner is perfect alignment of interests. Shareholders have a different risk profile. Employees have their own personal interests in mind. Customers only want what befits them. A partner provides a lot of peace of mind because you can discuss any issue knowing that you have the same goals and interest in mind. There are a lot of things coming at you as an entrepreneur. Its nice to know somebody's got your back.

Divide and Conquer. Most early hires made my job harder. I had to do a lot more work. More sales means more product enhancements and data entry. More people is more management. Additional folks add complexity and scope. A partner, on the other hand, actually helps decrease workload. Tasks can be divided. Competency and expertise in specific areas can develop. Of course, you've got to trust their competency and integrity. Which leads us to tool #3 in getting more employees:

Tool #3.Throw away the partnership documents. Get a handshake you can trust. I swear we spent 100 hours arguing over the minutiae of our partnership document. This was largely based on several people I knew who had been screwed by their partners. The lesson to be learned is *not* about getting a long contract. In the end, you just need to pick the right partner. Because, if they want to screw you over, they'll find a way regardless of what papers have been signed.

2 is company (2 employees)

2009-12-02T09:55:55-06:00

The second installment in my series on going from 1 to 50 employees. I used this first tool of getting to revenue as fast as possible, and now I have some extra cash to hire employee number 2. What role should I hire?

The first role should be based on increasing revenue and product value, not on decreasing work for the founder. In fact, this trend should continue through the first 5 or 6 employees. Hire more people, generate more revenue. Rinse and repeat until the pressure for ancillary tasks becomes great enough that they can no longer legitimately be called ancillary tasks.

Our first employee was a sales representative. But really she was more than that, she was another entrepreneurial oriented person who was ready to wear a lot of hats. She was ready to help refine our product and sales materials. But be aware, salespeople by definition change the product. So much so that I've got my own pithy saying about it:

"No product ever survives unscathed first contact with a person trying to sell it"

But how did I attract good talent without a lot of cash for compansation? Well, that brings us to our second tool in going from 1 to 50 employees:

Its Just Me (1 employee)

2009-12-01T11:53:38-06:00

The first installment in my series on going from 1 to 50 employees. You've got to start hiring somewhere. So, start by hiring yourself.

Before GrubHub was a business, it was just a hobby. I played around with a website, got some information about restaurants, put together a business plan, had an advisory board did some advertising. All of these activities certainly look like a business, but really they are just a hobby. A great adviser told me... This thing will never get off the ground unless you really commit to it. He was right. The mental difference between doing something cool and running a business to pay the bills is night and day.

Once I jumped on full time I found out quick that there was a profoundly large amount of work. By necessity I resolved to do exactly 2 things: Sell the product by day. Improve the product by night. Sure, there were a million other things to do... SEM/SEO optimization, business licenses, scalability, etc. But I put all that on hold and went into a relentless, sell -> improve -> sell -> improve cycle for about 6 months.

Another important step was to commit to paying myself from day 1. This isn't going to be a hobby, I'm not going to do this for free for 2 years. If I can't support myself within the first 2 months, I was going to quit. Which really just focused me to do the important stuff... make some money... which leads us to the first tool in the bootstrapped businesses toolbox: revenue

Tool #1: Revenue. Apparently there are business models that are proponents of not making money right away, but I don't get them. Cash allows an entrepreneur to hire people and resources to get things done. At first it is all about increasing velocity on the sales -> product -> sales cycle. Successfully executing that cycle then requires supporting activities... billing,finance,IT infrastructure, etc

Blog Series: From 1 to 50 employees

2009-11-30T09:41:25-06:00

Bootstrapping my business from 1 to 50 employees has been a wild ride. The nature of the business has changed a lot. As it has, I've had to stay on my toes to adapt to the new realities. There have been shifts in the nature of my work as I've needed to raise my own game and continue to be the right person to move the business forward.

I think the next time I do this it might be easier. I've got a toolbox now. A set of principles and techniques to apply as the business expands. They will need to be adapted, for sure. But it will be easier than starting from scratch.

Overall there have been 2 trends: The changing nature of my own work, and the changing nature of leading. When it was just me, I did 100% of all work. Now we've got 50 people. I'm not going to move the needle more than 2% by burning the midnight oil to get that last sale, or piece of software written.

I'll chat a little bit about each of the following milestones:

Bonus Post:

9 tools for growing your business from 1 to 50 employees

Creativity and Focus in the Planning Process

2009-11-20T11:08:03-06:00

So, we just finished our 2010 budget. As an organization, it was an incredibly productive experience. One of the really great things was the process we used: A period of creativity and possibilities followed by a period of focus and tough choices

Start with divergence. What should we do next year? Increase our breadth? Increase or depth? Launch a new product line? Improve the current product line? Focus on customer loyalty? Focus on new customers? Fund some R&D cases? Engage with some expert consultants on new ideas? Expand our development group? Expand our customer service? Move towards inside sales? Move towards outside sales?

End with convergence. After about a month of brainstorming and fleshing out ideas, we ended up with maybe 8 or 9 really great ways to grow the business. Now the hard part began. Discussing and refining and collecting data and sifting options and arguing and the entire team coming to agreement on the plans. Then putting funding numbers behind things and further discussing and refining and sifting options.

In the end, we have 2 or 3 really well thought out initiatives and enough resources to capitalize on. I'm stoked about 2010. We're gonna crush it.

The Entrepreneur's Boss: Being The Internal Referee

2009-11-13T15:24:44-06:00

In addition to being responsible to shareholders,employees,customers and the brand, the entrepreneur must be the internal referee to each of these groups. While I have a legal/fiduciary responsibility to the shareholders, that doesn't exist in a vacuum. In fact, a lot of effort must be applied to aligning those interests. But every once in a while a conflict exists that must be arbitrated.

Short Term vs Long Term. The easiest way to arbitrate conflicts is short term vs long term. Most conflicts are resolved by this simple rule: Always act to the benefit of customers and employees in the short term and long term; Always act to the benefit of shareholders in the long term. In practice this means: don't sacrifice your employees and customers for short term shareholder value. Of course, short vs long term is somewhat subjective. In VC backed companies, it is usually defined to some degree by deal terms as well as investor portfolio timelines.

When in doubt serve the customer. Good employees and good shareholders see the wisdom of this. In a global environment where the customer is treated so poorly by so many customers it makes sense they'll be on board with small sacrifices for the benefit of customers. Simply because in the end, happy plentiful customers cover over a lot of problems, thereby obviating the need for further sacrifices!

When still in doubt serve the employee. If the conflict is between the employee and the shareholder, it pays to benefit the employee if possible. Sure, sometimes its not possible. Sometimes budget constraints really suck. But... in general, shareholders will agree that the best way to increase enterprise value is to get and retain great people

The Entrepreneur's Boss: The Brand

2009-11-04T09:36:58-06:00

Entrepreneurs have responsibilities to a lot of groups of people. There are also some more abstract, but still critically important areas to be cultivated in a startup organization. Even while aligning and representing the interests of customers, employees and shareholders, an entrepreneur must maintain the quality and consistency of the brand. Not just the consumer facing brand, but the tone for communication throughout the entire organization.

Intentional Communication. Read: "Shut the hell up, Mike" At some point it became unacceptable for me to think out loud. "Holy crap, we spent $100 on coffee this month!" was a totally reasonable exclamation when I wasn't anybody's boss. Now, that comment might be the only feedback our office manager gets in a week. How demotivating! Even in brainstorming sessions, which have been specifically designed for this kind of exercise, I need to be careful not to make statements that curtail creativity. My statements have the weight of organizational authority. So I must be careful.

Consistency. It constantly amazes me how I can make a statement 1, 10, or 100 times, and still find out that someone in the organization is relating the exact opposite concept. Crazy! The problem gets exponentially worse as an organization gets larger. Ideas must be well thought out in advance, and then communicated concisely. Again. And Again. And yet again.

Responsible Transparency. There are a sickening number of blog posts and conversations around the idea of personal vs professional transparency. Basically, it comes down to a key principle: Be as transparent as possible without causing harm. I think of this in terms of concentric circles. In the most secure inner circle might be personal information and specific business strategy. In the most open outer circle might be company culture anecdotes and business principles.

The Entrepreneur's Boss: The Board

2009-10-30T09:29:08-05:00

The entrepreneur is bound by contract to represent the interests of the shareholders as represented by the board of directors. In most startups, where the entrepreneur is on the board, there is an additional legal and fiduciary responsibility to represent the shareholders interests. Ain't nothing wrong with that. When it works well, this is capitalism at its best. Now, just to be clear, this does not mean that the shareholders are represented to the exclusion of employees and customers. In fact, if such an exclusion exists, the company is already a failure. Usually, this means a few things:

Increasing enterprise value. Increase share price or pay out dividends. I ain't got no MBA, but I sure as heck can't figure out what else a shareholder would actually want. If you've started a high tech entrepreneurial VC funded business, don't try to pay out a dividend. Good way to lose your job. So, that pretty much leaves share price. Now, there are lots of externalities here, but the idea is to govern towards positive trends: higher revenue, lower expenses, a few key ratios that exhibit a healthy company

Minimizing risks. The shareholders trust management to be close enough to the business to objectively perceive and report risks. I suppose there are lots of ways to minimize risk, but the most effective one I can identify is staying focused on a clear strategic direction. Another key way to manage risk is to understand the absolutely essential expenses in the business and manage them to be lower than the overall revenue. If things get tight, management shouldn't be cutting into bone.

Aligning interests. I've said several times in this series that representing the interests of shareholders, customers and employees should never be mutually exclusive. This doesn't happen by accident, but by setting intentional direction for the company. The mission of the business should clearly benefit all of these groups.

Transparency. Accurate reporting and auditing, accountability, and non tolerance of dishonesty. These are absolutely critical in today's business environment. Hire only people you trust, and then setup controls that don't depend on that trust.

The Entrepreneur's Boss: The Customer

2009-10-29T09:58:47-05:00

The closest thing to a boss that an entrepreneur has isn't the shareholders or board or employees. The buck stops with the customer. When it comes down to it, all the gizmos and gadgets and patents and hard work won't keep the competitors at bay. At the risk of sounding quaint and old fashioned, the only real competitive edge is getting loyal customers by providing value with integrity. In practice, here are the principles I've followed:

Provide Value

The first boss is the customer, not the shareholders. If you make your customers happy (and have a solid monetization plan) the shareholders will probably be happy. That doesn't mean give away your product for free to please a customer. In fact, that would be a diservice, because you wouldn't have longevity. You couldn't continue to provide value.

What problem do you solve for your customer? When you have conversations about products you should be asking yourself two questions: Does this line up with our business goals? Does this help our customer? Certainly, you should find yourself asking about profitability and "What's in it for me" But the question can't be answered in a vacuum. "What's in it for our customer?" is just as critical in the long term.

Drive customer loyalty, not customer imprisonment. The language and nature of the contracts you have with your customer are a good indicator of the value you provide. In the best case, retention is achieved by providing continuing value to your customer. In the worst case, retention is achieved by long contractual obligations. Imagine a cell phone company with has a "cancel at anytime" policy on the basis that they are going to make their service so good that nobody will want to cancel. Would that drive loyalty? I'd wager it would! (of course, I don't have a billion dollars to make that wager, so that's easy for me to say)

Gather Feedback

The way a company handles feedback can be categorized into three ways: organic, passive, and proactive. Effectively incorporating feedback involves all three

Proactive feedback is incredibly important, and also pretty easy to check off of a todo list. Unfortunately, this usually gets bogged down in tactics. What focus group are we going to create? What surveys will we send out? How can we profile our customer demographic? Actually, the tactics are pretty well understood, and not very difficult to research. The real keys here are: what questions need answering? How am I going to use this information? There is no point in doing a survey unless you are asking clear, actionable questions.

Passive feedback is what you'll get through your customer service department. Don't have one? Well, you probably do, and its you. Customers will tell you what's wrong. In fact, some customers delight in nothing more than delivering a litany of faults. But, they are in the minority. Usually, this is where you'll get most of your positive feedback.

Organic feedback is how every person in your organization responds to conversational situations. They have more impact than most of us realize at the time. One should ALWAYS respond with respect, interest and gratitude. "I used your site last night, it sucked" said one of my closest friends. "Thanks for giving it a try. What could be improved?" is much more helpful than "Screw you buddy! I'm taking my hookah and going home." The key to effectively using this kind of feedback is a clear philosophy on how to turn negativity into conversations. Then take those gems of knowledge and communicate them to the right people.

So, it turns out you've got data coming at your from a lot of different places, and being gathered by a diverse group of people. How do you use feedback? Lets go with a top 5 list.

1. Gather the whole picture. Each event is a single data point. Weigh each comment within its context.

2. Incorporate positive feedback. When considering change based on negative feedback, consider what you are doing correctly first.

3. Don't have knee jerk reactions. Deliberate and composed is the order of the day.

4. Somebody in charge. Have a single person in charge of aggregating all the feedback data. Otherwise folks make changes on incomplete information.

5. Don't try to please everybody. If you've got a million customers, at least one of them is 1-in-a-million-crazy.

Stay Relevant

Staying relevant is a fine balance between innovation and focus. If you've got your feedback mechanism working efficiently, then you'll have discovered plenty of opportunities for innovation. And sure, you can do them all... but not well.

Product Innovation. There are always more opportunities to make additional revenue with a new product. A lot modern thinking points to the importance of staying very focused. Make sure your product is the best at what it does. On the flip side, there always seems to be obvious opportunities that seem to be just a bit outside the current product. How do you balance? Each additional product offering or improvement should reinforce the existing product. It should provide additional value to your current customers, instead of exclusively focusing on attracting new ones.

Focus in Segmentation. All of your customers can be further engaged. But should you engage them all? At some point you need to figure out which segment of customers you want to help. Maybe you release new products and features to 80% of your customer base to increase satisfaction or revenue, or retention or some other important aspect. Maybe you just cater to the top 20% by revenue. Keep in mind that as you offer customized products to segmented customer bases, the cost of ongoing support and operations goes up very quickly.

So what about when you screw things up completely? The next post will be on resolving problems memorably.

Provide Generous Service

"Make the resolution more memorable than the problem" One of our customers gave us that advice when we were putting together our customer service team. You can blow somebody away with generous and awesome service. They'll become your biggest advocates. The business case for generous service is hard to prove; mostly because it is hard to measure the value of goodwill from your customers.

Commit to rooting out the cause Wronged customers don't want to be bought off. They want to be fairly compensated for their trouble. But, what they really want is to know that the root cause will be addressed. If you've got good feedback mechanisms in place, you can fix these problems. The final step is to reach back to the customer after the solution has been applied and thank them for their help in the process.

Let your customers take advantage of you. Ok, not *all* your customers. But some of them. I've been in a lot of conversations that go something like... "Well, we can't do such and such, because somebody with a lot of time and expertise could take advantage of us. Think of that times a thousand!" Sure, if your company has generous service policies some number of people will take advantage of that. Don't let single instances of potential fraud be extrapolated into doomsday scenarios. Build controls and measures. Watch for problems and respond.

Don't try to please everybody. Every once in a while, you'll get a customer that complains about every offering and every solution. No matter what you do, they don't like it. The solution is simple: go separate ways. Focus on the 90% of your customers that like your service.

Consistency is a hallmark of great service. Think of your favorite restaurant... Are half of the wait staff polite, while the other half are just so/so? Probably not. A company's message needs to be the same across every department and individual. Everyone understands the vision and methods that combine to create a great experience for your customers. Consistency gets more difficult when a business adds customers. Products and services need to be customized to a customer's individual needs. Policies need to be flexible enough to meet those needs while remaining consistent enough to be fair.

Longevity is also essential. Again, think of your favorite restaurant... The first time you went they provided a great meal with professionalism and pride. Then they did it again. And again. It isn't so hard to excel for a day or a week, but to do it consistently for months or years is incredibly challenging. It needs to be written into the DNA of the business. That kind of fundamental shared vision for service comes across to customers. Longevity begets loyalty.

The Entrepreneur's Boss: The Employee

2009-10-26T07:50:42-05:00

The entrepreneur doesn't have a boss, but they are responsible to others. Legally, the board and management have a fiduciary responsibility to the shareholders. But, in reality, the responsibility is wider than that, especially with regards to employees. A company where the shareholders interest and the employees interests are mutually exclusive has already failed both fiscally and morally. How does the entrepreneur serve their employees?

Ensuring stability. Startups are by their nature risky environments. Even so, an executive has the responsibility of providing as much stability and longevity as possible. Given the relative inexperience of most entrepreneurs, this means surrounding oneself with knowledgeable advisers. This advice allows an entrepreneur to intentionally balance growth and risk instead of being blindsided by emergencies.

Compensating fairly. Pay at a startup company is lower. That is perfectly fine as it attracts a set of self selecting coworkers that are looking for more than just the biggest paycheck at all costs. To balance out the lower short term compensation the ethical move is to share upside. Sharing upside needs to be done with integrity. The value of equity needs to be explained clearly along with all of the inherent risks. Sure the mechanics are complicated and the future is uncertain, but it would be the worst kind of management to use that uncertainty to cloud details in an option plan instead of ensuring the greatest chance for a positive outcome.

Challenging to growth. Compensation in today's economy is a threshold issue. Folks don't work 10% harder for 10% more salary. Instead employees are looking to make a fair wage and then gain skills and experiences that help them through jobs and challenges ahead. The greatest thing you can offer your employee is a better chance at their next great job.

Influence instead of Authority. I came to a shocking discovery early on in this "being the boss" adventure; a discovery I've learned repeatedly since. It is the great paradox of good management. Once one is in a position to command action by the authority of position alone, one must try to never use that power. Building consensus, getting buy-in, inspiring passion, aligning values... these are the ways to lead. Every time I've found myself resorting to the final lowest common denominator of "because I said so" I've recognized the event as a failure. Sure, it happens from time to time. But only when I've failed in my job as a leader.

The Entrepreneur's Boss

2009-10-20T22:20:25-05:00

One of the best things about starting your own business is not having a boss. It is also a horribly inaccurate lie. The reality is, one gets much more freedom, but a disproportionately more amount of responsibility. While its true I don't have a boss, I do have responsibilities to different groups of people.

The obvious one is the shareholders of the company. In fact, I have a fiduciary and legally binding responsibility to them. But, there are three other groups that I am responsible to as well: employees, customers, and the public (in the form of the brand)

So who is the boss? Well, there are several:

The Customer

The Employee

The Brand

The Board

The Internal Referee

Bootstrapping Effect #3: Attachment

2009-08-26T10:19:40-05:00

In addition to changing the economics and speed of early business growth, bootstrapping can have a very serious negative side effect: attachment.

I'm all for being passionate about a business and giving it 100%. In fact, it really should be an obsession. But attachment; safety blanket, clinging, totally irrational attachment, can really kill a business. It happens when you grow your baby from a fragile idea to a real business with robust revenues. Risks become subtly and imperceptibly more difficult to accept.

Attachment causes stagnation. Its hard to give proper credence to good ideas once you've put too much stock in the way things have always been done. The problem is further compounded by the tendency towards less oversight in a bootstrapped business. Somebody needs to be able to call bullshit on the founders.

Attachment blinds founders to exit opportunities. Mergers, investment, and acquisitions all involve a decrease in control. Its not so hard to convince yourself to go from 40% ownership to 20% ownership for the right deal. But it can be incredibly difficult to go from 100% to 80%. There are only 2 options: One, get used to running a lifestyle business for the rest of your life. Or two, get used to the idea of giving up a chunk of your business.

Bootstrapping Effect #2: Competition

2009-08-17T18:03:50-05:00

Last week I mentioned Valuation as a difference between a bootstrapped business and a seed stage funded business. Another is competition. Bootstrapped businesses are more vulnerable to it.

A bootstrappable business model has low barriers to entry. If you can start selling something within weeks of dreaming up an idea, somebody else can too. Traditional barriers to entry such as intellectual property, manufacturing capacity or exclusive enterprise contracts aren't feasible without up-front funding. Of course, competitive barriers are hogwash anyway: hard work is the best competitive barrier.

The ramp up runway for a bootstrapped business is longer. It is nearly impossible to capitalize on first mover advantage. It takes a lot of resources to spread out and build an ecosystem around a product. There is a constant sense of near panic that somebody else is going to come along and overtake your progress by getting funding for your idea. In the end there will probably be several competitors to battle it out with.

Competition isn't necessarily a bad thing, though. A venture capitalist friend of mine said to me last week. "Its great that you are seeing copycats. They are the market's validation of your business." Sales can actually be easier as well: competitors help adjust the markets expectations. Further, more energy and interest in a space creates more opportunities for mergers and acquisitions. Selling out to a competitor is a perfectly good way to get an exit. Of course, purchasing a competitor that you've mercilessly driven into the ground would satisfy a deeply rooted gladiatorial urge, so that's better.

Bootstrapping Effect #1: Investment and Valuation

2009-08-10T12:15:06-05:00

Bootstrapping a business has some effects on getting institutional investment. A disclaimer here: I'm working from a pretty small sample size: my own experience, and my conversations with other entrepreneurs. Having said that, I think it boils down to a pretty simple concept. If you bootstrap your business, you will increase the probability of getting investment while simultaneously decreasing your valuation.

Bootstrapping increases the probability you'll get investment. If you are a first time entrepreneur with no previous businesses or investment, it is incredibly hard to get funding. From the investors perspective, its very likely a more experienced, better funded executive could duplicate your idea and out-execute you. But, if you've bootstrapped, you've shown that you know a thing or two about business: resource management, initiative, strategic decision making, sales, marketing. All the things you need to get right just to make the payroll.

Early revenue does weird things to valuation. If you don't have any revenue at all, your valuation is based on the addressable market of your product and the executive team's experience and salesmanship. If you do have revenue, its easier to apply a formula. Since you are at the initial stages of an exponentially growing business, whatever historical formula you use is going to yield a pretty low valuation. Guess which ones the investors will use in valuing your company?

Overall, I highly recommend institutional investment. It has required me to learn new skills and improve myself. It has also given me the resources to implement the right strategy. It accelerates the growth of the business. I also highly recommend bootstrapping first. The goal of the first time entrepreneur is to maximize the probability of an exit. Bootstrapping -> Investment is a great track to take to get that first big exit. Even if that means it will be bigger for the investors than it will be for the entrepreneur.

Bootstrapping Series: Hire Slow

2009-08-07T11:39:02-05:00

I've been going on about getting the right people: partners, advisers, and first employees. But how do you actually figure out who the right people are? This is the most important thing a founder does in a company. The key principle is to be very demanding and deliberate in the hiring process.

Cast a wide net: Basic supply and demand dictates that the larger the number of applicants in the pool, the higher the quality of the final candidate.

Cast a quality net: Be intelligent about posting locations. If you post on craigslist, you are guaranteed to have applicants that can use a web browser. Posting on your own website's careers page gets candidates that are interested specifically in your company.

Present your company honestly: The best candidates are evaluating your business at the same time you are evaluating them. Make sure to have a clear description of the job and the nature of the engagement the candidate will have at work. Be prepared to show revenue projections and talk about the health of the business.

Setup Brutal Filters: Be objective about what qualities you want and don't want. Send an email interview that requires some work to respond to. Give preference to candidates that care about presentation of their answers. Consistent typography in email responses is a good sign of attention to detail and pride in work product. Be slow to respond to emails. Give preference to candidates with enough initiative to follow up.

3 or 4 interviews: Email, Phone, 1 or 2 office interviews. Make sure the candidates are really committed to getting the job.

Ask for 10 references: If the candidate can't find 10 people to vouch for them, its a bad sign. If they don't feel like putting in the work to dig up the contact info, its a death knell. Don't hire people who won't work for what they want.

Admit mistakes quickly: In the unfortunate situation where you've picked an inappropriate candidate, its best to go your separate ways quickly. Don't drag it out. This represents a failure of your job as an employer, not a failure on the employee's part. Any time you need to let somebody go, you should be outrageously mad at yourself for letting the situation happen.

Bootstrapping Series: Hiring First Employees

2009-08-05T11:53:02-05:00

We just explored surrounding yourself with good people. But how do you start? Hiring the right first employees is critical. The first few folks at a startup are entrepreneurs in their own right. As such, they are motivated by different things than employees at a big company.

First off, since you are bootstrapping your business , you aren't going to have a lot of cash. The implications are clear. You won't be able to pay market salary or benefits for the people you hire. First, get comfortable with that. Get comfortable that your idea is good enough that you are willing to ask another individual to incur an opportunity cost. Then figure out what you can offer them in exchange.

The most obvious value you can give an employee other than cash is equity. Its ethically important to give a substantial percentage here because if you take investment later, that percentage will be diluted. On the other hand, if you don't take investment, the path to exit is much longer, so a big percentage is still appropriate. Another thing to be aware of is vesting schedules. The options should vest over the period of time that you expect an employee to work. Finally, make sure that the employee values equity. There is no point in compensating somebody with something that they don't value!

In addition to options, work environment is very important. Flexible hours, beer at lunch, no dress code, a big say in the direction of the company, lots of responsibility. These are the things that really matter to a startup employee. Don't undervalue them. They don't last forever, and they are extremely valuable in the early stages of a bootstrapped company.

Finally, at all costs, avoid ongoing residuals as compensation. Paying salespeople on commissioned residuals seems like a good idea, but only for the first few months. These payments represent a huge liability. Any sort of ongoing commission should have an expiration. Anyone who has projected profits over a long time frame has seen how much this kind of compensation structure can limit a businesses growth.

Bootstrapping Series: Surround yourself with good people

2009-07-30T11:49:18-05:00

Since you've read my previous post you understand the delicate tension between do it yourself and having a big team around you. Since you are such an entrepreneurial rouge, though, you're thinking you can figure it all out yourself.

Even so, it helps to surround yourself with experienced advisors. These are the people who can tell you what parts of an income statement an investor looks at, why your financial model is completely harebrained, current market expectations for similar products, trends in your industry. Basically, you want a group of people who understands the strategic aspects of running a business

In addition, you need to network and surround yourself with peers. These are the folks who make the day to day stuff easier because they've all done what you are doing now. They can help with setting fair employee compensation, recommending good vendors, advising in HR disputes, the time of day to go get a business license. Basically your peers will help turn the dozens of projects you need to do in a week into a manageable set of work. Not to mention this is the group of people that you end up playing poker with. So get to work!

Bootstrapping Series: In a pack or lone wolf

2009-07-27T12:02:09-05:00

I'm continuing my series on bootstrapping an internet business. Growing a business is mostly about getting the right people and getting out of the way. But, before you go hiring a pile of people, you've got to figure out if you want business partners.

Two equal partners is a good idea. The fact is, employees, investors, customers, and founders each have a different set of interests in a business. Ideally, one spends a lot of effort aligning these interests. But the reality is, as a founder, it is extremely helpful to have one other person who has perfectly aligned interests. An equal partner has the same motivations when it comes to company valuation, employee compensation, customer offerings as I do. On the other hand, you'll never give away as big a chunk of your equity as you do the day you give 50% of the business to a partner.

You'll make mistakes by yourself. Making decisions alone is dangerous. The typical hierarchical structure in an organization has a single CEO on top. That isn't bad in itself, but its important not to be making unilateral decisions. Basically, the top guy needs somebody who can call "bullshit"

You'll make mistakes in committee. Too many folks in the room isn't going to help you make good decisions either. Having 3 equal partners is dangerous. Having more is going to fail. Its too difficult to align the interests of all those people. Some of whom won't work as hard, or be as committed, or have as much talent.

Bootstrapping Series: Perfection is the enemy of growth

2009-07-24T10:24:57-05:00

Last week I started the series bootstrapping your business. So if you are reading this, you probably have a business up and running and are wondering what to do next.

The thing to do next is improve. But don't be a perfectionist. Trying to get everything perfect can lead to two extremes: pointless frantic activity or analysis paralysis

Frantic activity comes from that voice in your head that tells you to add 10 more features by this weekend. Or to sell 3 more products. Or to write one more email. Or research one more product. The solution to this problem is to take a moment and intentionally slow down. Take a moment to think about where you are trying to get and what your goals are. Its much better to have a limited number of directed hours than a whole bunch of aimless ones.

Analysis Paralysis is the opposite problem. This comes about by second guessing every statistic. By thinking about the consequences of consequences of every possible contingency. If you have a team that you work with, you'll have lots of long pointless meetings. The solution to this is to just get 'er done. Don't worry about getting the most customers possible. Worry about getting just a few more.

Next week I'm going to talk about People!

Bootstrapping Series: Full Time vs Part Time

2009-07-23T10:13:50-05:00

I'm continuing the series bootstrapping your business. Its really important to run a business full time.

When I started thinking about my hobby as more of a business I was still doing it part time and doing a "real job" full time. I was very busy, but not overwhelmed. I distinctly felt that I could continue to work on the idea, make sales, and improve the product on about 20-30 hours a week.

I had a conversation with a pretty successful acquaintance who told me: "I'm not particularly smart. I haven't gotten very lucky. My idea isn't really brilliant or very unique. The only difference is that I decided to risk it all and jump in with both feet." He went on to point out that by putting all his energy towards his business meant that there were two critical facts:

1) There was a greater than zero chance that he would make money
2) His job every day was to improve that chance.

Not long after that I quit my very lucrative job and started selling my product like a madman. That first month I made $485. Very stressful. In addition to my friends points above, I'd add the third benefit to going full time:

3) You discover ways to improve your business that were previously unknown when you spend all your time working on it.

I've become a huge proponent of making the jump. My advice is this: Quit your job before it is wise. Before you are making a lot of money. Before the idea is finalized. Nothing special happens on the back burner.

Bootstrapping Series: Spend the Money

2009-07-21T08:24:00-05:00

Last week I started the series bootstrapping your business. First you create a product, then you sell it. Now, you gotta spend some money.

One of the most stressful parts of bootstrapping a business is the available cash. I was extremely aware of the bank account balances on an hourly basis. Over time I got comfortable with having the bank account approach (but never drop below) $0. Once we started doing well, it was really hard for me to spend the money. I developed sort of a scrooge mentality.

Disciplined spending is very important. Ongoing investment in advertising is much more effective than flash in the pan techniques. Its pretty easy to objectively identify the things that will benefit the business. So do it. And spend the money.

Most entrepreneurs (including myself) pay themselves too little too late. There are a lot of benefits to paying oneself an appropriate salary as early as possible. First, burnout happens faster on $0 salary! Second, the discipline of running a business at a profit is very important. Even if that profit is entirely the owner's salary. Third, the pressure to get investment is lower when you pay yourself a competitive salary.

Bootstrapping Series: Secrecy is for Sucks

2009-07-17T13:30:31-05:00

You're bootstrapping your business. You've got a great idea.

Keep it Secret! Keep it Safe!

Hell no! Shout it from the rooftops!

The very best thing you can do for your business idea is share it with smart people who will challenge you to make it better. Every entrepreneur and investor I know gets annoyed by the statement "I've got a great idea, but I can't share it with you" Who cares! How stupid. If the only thing your business has going for it is the fact that nobody knows what you are doing then how are you going to sell it?

Patents are extremely expensive and difficult to enforce, let alone get issued. Most patents being filed these days are by big companies trying to cover their ass, not by innovative entrepreneurs that are interested in creating a business. Ask yourself what you expect to get out of a patent? Does some fairy show up and say. "Good idea! Good Patent! Here's a pile of money!" Doesn't happen that way.

On the other hand, a wise entrepreneur seeks advice and expertise all around them. The things that will prevent your success will be a complete surprise. Besides, hard work is a better defensible position than secrecy. Fact is, nobody else cares about your idea as much as you do. Very few people are going to put the effort in to taking that idea to profitability.

Bootstrapping Series: Making a Bunch of Sales

2009-07-16T14:15:31-05:00

Once you've sold a few times, you come to the same realization that all those who have become before have had. Selling a product to a lot of people is the most important thing you can do for your business. Creating a product takes a certain fixed cost. Selling needs to happen again, and again, and again. Making customers happy and getting new customers quickly becomes the primary focus of almost all businesses.

There are 3 keys to selling something a bunch of times: Improve your sales skills, create a consistent message, refine your product

Improve your sales skills. Most of sales is about tailoring your message to the audience. Is this a relationship sale? Is it a hard sale? Is it a soft sale? Do you talk about ROI, or do you talk about being there for the customer. Does the product fix an immediate problem or are we looking at a long term relationship. Learn how to ask for the close boldly. Learn how to shut up once the sale is made. Sales for Dummies is the right book for this. It helped me make my first 100 sales. Read it!

Create a consistent message. Spend some time improving the materials and communications that you use to sell. They need to be consistent around a theme, and consistent over time. Ultimately, as a salesperson, your head needs to be on getting to the close. You can't spend a lot of time trying to remember your materials, or guessing at questions, or making excuses. The message needs to be tight, consistent, and convincing. It needs to support your efforts, not be the effort.

Refine your product. Over time, aggregate all the feedback you get during your sales pitches. Look for patterns. Identify opportunities. Then, refine the product. Strike a balance between having a knee jerk reaction to every piece of data and ignoring your prospects as uninformed overopinionated idiots. Internalize the feedback over time. Act deliberately on it.

Bootstrapping Series: Make the First Sale

2009-07-15T14:18:17-05:00

Yesterday I started my series Bootstrapping an Internet Business with the topic of Creating a Product.
Today I want to talk a little about making that first $1.

As soon as you've got a product that is barely worth selling go sell it to someone. Don't wait till its perfect. It won't get perfect until you've tried to sell it a few times, so that's a waste of time anyway! Its a long journey from the idea to the first $1. But, its very satisfying. And, as soon as you sell something, you've got customers. And once you've got customers, you have the most valuable data available about how to make your product better.

You'll soon realize why the sales department in every job you've ever been in over-promises your products. When you are sitting their with a prospective client, you'll find yourself promising away all your upcoming weekends and evenings with features that will "be available any day now"

Ironically, the first sale (unless its an enterprise sale) has very little do do with your business or your product. It has a lot more to do with having the guts to go ask for somebody's money. If its a B2B play, your first few sales will probably be from one entrepreneur to another; you'll get lucky with a few folks willing to take a risk on you. B2C sales have more to do with presentation and your apparent legitimacy than anything else.

So get out there and sell it!

Tomorrow, I'll write a little bit about growing from making that first sale to getting to the first 100 sales. Turns out it takes a little more than moxie.

Bootstrapping Series: Creating a Product Somebody is Willing to Pay For

2009-07-14T12:20:04-05:00

The first step of bootstrapping a business is creating a product somebody is willing to pay for. One needs a laser focus to get from an idea to that critical first $1.

Its easy to get distracted here. How do you know what is worth doing vs leaving for later? At this point, its all about creating future benefit and increasing upside. Later on, once you are making money, its more about reducing risk and downside. Patent applications, legal frameworks, employment handbooks, municipal registrations, etc are all about reducing risk. Do the absolute minimum necessary to stay legal. Don't get bogged down. Focus on the upside. Get a product worth selling. Everything else comes later.

When it comes down to it, you gotta spend cash, equity or your own time to get a product made. Your own time is by far the best. Engineers have a huge advantage: they don't need seed money and don't need to figure out a tricky equity distribution. If you can't do it yourself, get some seed money. No more than $25,000 (otherwise its not really bootstrapping). The worst option is to use equity. It can be really tricky to figure out a fair amount of equity to give up for product development. Its also really difficult to get a motivated engineer who is an employee instead of a partner. Of course, that is an option too, get a partner who can make the product. That's what my co-founder did. Tricky bastard :)

Tomorrow I'm going to write about Making the First Sale