Archive | startups RSS feed for this section

Munger, Money and Achieving Your Goals

11 Jan

From this transcription of a talk by Charlie Munger:

And the one thing that all those winning betters in the whole history of people who’ve beaten the pari-mutuel system have is quite simple. They bet very seldom.

It’s not given to human beings to have such talent that they can just know everything about everything all the time. But it is given to human beings who work hard at it—who look and sift the world for a mispriced bet—that they can occasionally find one.

And the wise ones bet heavily when the world offers them that opportunity. They bet big when they have the odds. And the rest of the time, they don’t. It’s just that simple.

That is a very simple concept. And to me it’s obviously right—based on experience not only from the pari-mutuel system, but everywhere else.

And yet, in investment management, practically nobody operates that way. We operate that way—I’m talking about Buffett and Munger. And we’re not alone in the world. But a huge majority of people have some other crazy construct in their heads. And instead of waiting for a near cinch and loading up, they apparently ascribe to the theory that if they work a little harder or hire more business school students, they’ll come to know everything about everything all the time.

To me, that’s totally insane. The way to win is to work, work, work, work and hope to have a few insights.

How many insights do you need? Well, I’d argue: that you don’t need many in a lifetime. If you look at Berkshire Hathaway and all of its accumulated billions, the top ten insights account for most of it. And that’s with a very brilliant man—Warren’s a lot more able than I am and very disciplined—devoting his lifetime to it. I don’t mean to say that he’s only had ten insights. I’m just saying, that most of the money came from ten insights.

So you can get very remarkable investment results if you think more like a winning pari-mutuel player. Just think of it as a heavy odds against game full of craziness with an occasional mispriced something or other. And you’re probably not going to be smart enough to find thousands in a lifetime. And when you get a few, you really load up. It’s just that simple.

When Warren lectures at business schools, he says, “I could improve your ultimate financial welfare by giving you a ticket with only 20 slots in it so that you had 20 punches—representing all the investments that you got to make in a lifetime. And once you’d punched through the card, you couldn’t make any more investments at all.”

He says, “Under those rules, you’d really think carefully about what you did and you’d be forced to load up on what you’d really thought about. So you’d do so much better.”

I’ve been thinking about this a lot lately. If you take a look at my 2013 goals, I essentially did the exact opposite. I planned on doing multiple, unrelated things in areas where I didn’t have any sort of insight or advantage (starting a charity, a TV show, start another company, 5x traffic and subscribers to this blog). That was stupid.

I’m changing my goals drastically this year. I have 1 major goal I’m focusing on, and 3 habits I want to build in the areas of health, fitness and sociability. Charlie Munger’s words of wisdom were one of the main reasons I decided to take this approach in 2014. We’ll see how it pans out.

What are some of your goals for 2014? Do they cluster around 1-2 themes or areas in which you’re excited to focus? Or are they a bit all over the place (like mine were last year)? Would love to hear your thoughts via email or in the comments.

Replaceability vs. Impact, or Deciding What To Do With Your Life

17 Dec

For anyone,  choosing what to do with your life is a stressful guessing game. With hard work and some luck comes no shortage of great opportunities. And, with opportunity, many tough choices.

By way of example, let’s take a standard tough decision: what to do after graduating college. Let’s say you have two job offers, Job A and Job B. Job A is for a position at a large firm where you’ll be doing work that doesn’t interest you, but will pay 30% more than Job B. The second job is at a smaller company where you’ll be paid less, but it will expose you to greater learning opportunities and responsibility. What do you choose?

This answer will depend on the mental models you use to weigh different factors. Whether you realize it or not, your mental models determine how you think about the world. One set of people will be optimizing for money over just about anything else – maybe they want to save up for a special purchase, or have a lot of debt to pay off. Others will focus on learning and hope that it pays off in the future.

These types of “which job” questions are relatively straightforward. The really tough questions come when choosing your work. You only have one life, and where you choose to focus your energy will determine a lot about your future – your happiness, well-being and long-term impact on the world.

The most useful framework I’ve found for making such decisions was introduced to me 2 years ago by the brilliant Nick Pinkston. Essentially, if you’re aiming for impact as opposed to personal happiness, your approach will be far different than someone who’s optimizing for personal freedom.

Nick’s framework is essentially this. If you care about moving humanity forward, focus on areas where you can have a large impact and be irreplaceable. Take a look at the matrix below for an idea of how this breaks out:

impact vs replaceability impact vs replaceability

Let’s take doctors as an example. Doctors clearly have a large impact in that they help people achieve a much higher quality of life than they would otherwise. They help the sick recover and generally keep people healthy. They do a lot of good.

However, as an individual focusing on making an impact, becoming a doctor probably isn’t the best path. Though relatively high on the impact scale, doctors are also highly replaceable. There are hundreds of thousands of them in the US, and 25,000 new doctors enter the market every year. If you choose not to become a doctor, someone will easily fill your stethoscope.

A similar dynamic exists among teachers. Hundreds of thousands of new teachers flood the market each year, leading to a glut of teachers. Though replaceable, they clearly have a tremendous impact on their students. Thus their position in the bottom right of the above matrix.

Contrast this with someone like a cancer researcher or entrepreneur like Elon Musk. Each of these people, if they succeed, will have an enormous impact on humanity. Additionally, few people are cut out for highly technical research or starting futuristic companies – each of these individuals is extremely difficult to replace. Without Elon Musk, we don’t have Tesla, SpaceX and the Hyperloop. We have a void.

On the other side are those who are difficult to replace (athletes, actors and the like) but who have a relatively low impact on humanity. Though famous and hard to replace, the existence of someone like Cameron Diaz doesn’t add to human progress. Then, you have those who’s work is both low-impact and easily replaceable. No matter what your values, you probably don’t want to be in this quadrant.

Now, I want to be clear – doing things that are not high impact and hard to replace is not wrong. Those who work in low-impact and highly replaceable jobs are not doing anything wrong – every option in the matrix is totally valid for individuals with different goals. This is just a framework I’ve found useful in giving me clarity around some major life decisions.

Choosing a career path based on the above framework can lead to a lot of misunderstandings. In college, I dated a girl who’s mental models and values were traditional – “do well in school and then get the best job you can.” Mine was a little different: I was optimizing more for learning and being around smart people as much as possible. This led to quite a few arguments: I saw skipping some class to take a meeting with someone as the correct decision. I was getting to know smart people and learning faster! She saw the opposite: to her, I was hurting my chances of getting a good job after college and jeopardizing a good career in finance (my college major).

Thinking through your mental models can be extremely useful as you think about careers and what you want to do with your life. In the end, it’s a highly personal thing – deciding what you care about and how best to get there is a process that only you can begin.

This reflection also allows you to contextualize the many things you’ll read about life choices. It changes how you react to someone espousing how they’ve quit their job to travel the world. Instead of feeling like you’re missing out, you can pause, reflect and realize that they’re operating under a different set of values. They’re optimizing for something else (variety of experiences?) than you are, and consequently have a very different path to achieve their goals.

The Benefits of Freemium that Nobody Talks About

11 Oct

There’s a war of opinions going on in the B2B software world, and one side is winning. The war is over one fundamental question – how should I price my product or service?

No doubt, pricing is an incredibly nuanced and complex topic. I wrote a rather simplistic piece as a thought experiment, and had redditors suggest I should go back to school and understand price elasticity. Thanks, guys.

I’ve read a lot about SaaS pricing, including some very convincing arguments against Freemium. They basically boil down to these points:

  1. Free-to-paid upgrade rates are incredibly low (true)
  2. Free customers are often your worst customers (also, often true)
  3. Free customers suck up support and engineering time while giving nothing back (true)
  4. You lose out on users that would have paid you but opted for the free plan instead (true, though hard to quantify)
  5. They cost you money if they come through any paid marketing channels (ads, affiliate, etc.)

The prevailing thinking among software startups (led by people like Jason Cohen and Patrick McKenzie) is that extended free trials, or software trials with money-back guarantees are the best way to convert prospects to real, paying customers. For the most part, I agree.

However, I think there are also benefits to the Freemium model that don’t get talked about besides the fact that you’ll likely have a higher visitor -> signup conversion rate. Some other ways Freemium is useful:

Allows for risk-free testing of product features. At any sort of scale, an effective Freemium program means you have hundreds or thousands of free users. This gives you a lot of flexibility in terms of features you can test with your audience. You can build a very basic version of a new feature and see if your free users like it – all without worrying about whether or not they’ll cancel if it doesn’t work exactly as expected. You can also run cheap tests where you message or email your free users, pitch a feature and see what excites them. What features do they use and what don’t they?

Test referral programs. Having a large group of free users can be beneficial in terms of testing referral programs and getting new users. For one, an effective referral program takes a while to get right. If you’re constantly running tests to get your paying users to share your product, there’s a risk that they’ll get angry and cancel their service. Small risk, but still something people worry about.

On the other hand, having free users gives you the opportunity to test many different variations of a referral program – both because you can run more tests and because there are (presumably) more free users than paid. All else being equal, if you have an effective referral program, and 5x as many free users as paid, referrals could be an effective marketing channel that comes at the marginal cost of supporting free users. For any company with a product that requires group communication or social interaction, a referral program that utilizes a large cohort of free users can be very effective.

Test upgrade levers. Having free users also gives you the opportunity to test what makes them want to upgrade. Does a certain feature drive lots of upgrades? How about hitting a certain number of users? Or a storage limit?

Whatever it is, you can measure the main reason why most of your free users upgrade to paid. Once you have that information, you can then design your product’s onboarding process to move them in a direction where they get to a “quick win” moment sooner. For example, if most customers upgrade after hitting a certain user limit, you could design your onboarding process and create triggers that cause them to invite more users as they naturally engage more with your application.

As a side note, Freemium can also be valuable if you have a whole suite of products you can cross-sell or upsell into your audience. In this case, Freemium becomes a cheap marketing channel that comes at the cost of supporting your free users.

Have a larger audience. Assuming that having a free product tier means you’ll have more signups, adding a free product tier means that you will have a larger audience than if you went paid-only. Having access to this larger audience – and an easy way to reach them – makes other marketing activities easier. Things like partnerships, co-marketing, joint webinars and referral programs are all easier to land if you can tell a prospective partner you have several thousand customers, rather than several hundred who are paying.

This makes sense. Partnerships and other co-marketing activities take a long time and are tough to get right. What makes them attractive is access to a large pool of potential new customers. The smaller this pool, the harder it is to get interest.

A more attractive acquisition target. Earlier I mentioned that a cohort of free users can be great if you have a suite of products to upsell into a captive customer base that isn’t paying you yet. Developing a suite of products (not to mention supporting, improving and marketing them) is really hard and takes time. But guess who does it well?

Big companies.

Big companies have tons of products they’re just itching to sell into new markets. When a large company looks at your company as a potential acquirer, you can bet they’re going to price the number of users into the acquisition. They’d much rather acquire a company doing $X per year with 5000 free users than one just doing $X per year – it gives them new segments to sell into and can be a competitive advantage.

 

I’d love to hear your feedback in the comments. Or, sign up to get irregular emails about marketing, SaaS and startups.

What the Non-Technical Need to Know About Tech

30 Sep

For 3 years I’ve been trying to learn programming. And every year, I’ve deepened my understanding of how the web works.

Learning the basics of software development and how the web works at a high level hasn’t been easy. The best learning experience has been to dive in. I’ve learned so much in the past year working for Airbrake (a developer tools company now a part of Rackspace), talking to customers, and becoming a part of the developer tools space.

Throughout my research, I never came across a single post that’d give a non-technical person a broad base of knowledge they could then use to specialize. I’m hoping for many other non-technical people, this is that post.

 

How the Web Works

At a high level, the components of the web look like this:

webstack

Ok. If I had seen this 2 years ago, I wouldn’t know where to start. Let’s roll through some definitions here.

The App Layer

For complex websites the app layer encompasses your actual application: a web app, mobile app or basic WordPress blog. A website’s application is what you think probably of as the actual site. It is everything you click, see and interact with.

Let’s take Facebook. Their application includes the interface where you can see friend’s photos, upload pictures, post stuff, like other things, comment, add friends… you get the picture. The application is everything you interact with.

A website is like an iceberg. You know how 80% of an iceberg’s mass is below the water? A website (or application) is similar – most of the action occurs under the surface. How you interact with an application is determined by…

The Stack

As a tech company, your stack refers to the list of tools, languages, frameworks and databases you use to build your application. These languages can generally be separated into two buckets: front-end and back-end languages. These buckets interact to provide the overall experience of using an application.

The front-end  determines how your application looks when pulling it up via a web browser like Chrome or Firefox. A web browser does one thing: it reads and displays the front-end languages that a page is made of.

Front-end languages include HTML, which makes up the text on a page, CSS to style that text and other page elements, and JavaScript to make things on a page interactive. For example, if you hit the “Follow @jwmares” link on the upper right of this page – which you  should – clicking that link runs a JavaScript command that fetches your Twitter information from cookies in your browser and sends a command to Twitter that says “add @jwmares to the list of people I follow.”

Cool, huh?

If this still isn’t making sense it might help to get an idea of what a web browser actually does. If you’re curious what a website looks like to your browser, right-click and hit “view page source” on this (or any) webpage. You’ll see what your web browser sees – HTML tags with their layout defined by CSS stylesheets and their interactions defined by JavaScript scripts.

The back-end includes everything that happens before stuff hits your browser. It might be simple (like a program that displays the date and time) or something more complex (like Facebook, Twitter, eBay or hundreds of other applications).

Let’s take eBay for example. Everything you do (product searches, rankings, price checks and payment) all happens on the back-end.  Typical back-end components include a program (written in a back-end programming language like Python, Java, Ruby or PHP) that determines what an application can do, and a database that stores any relevant data.

In the case of eBay, you have specific programs that determine how to display products – how to rank them for specific searches, how to display the prices, how to update given people bidding on different products, and thousands of other use cases. These programs fetch necessary information from a database that stores everything a website needs to hold.

In a lot of ways, this is analogous to Excel. Think of Excel as a massive database, holding every bit of information you need regarding your product. Actually, when you’re writing functions in Excel (things like “add this column, subtract this value from this value), you’re writing programs! Web programs do the same thing – return and manipulate information that’s stored in a database – just on a much larger, more complex level.

Some common languages often used for the back-end include:

  • Ruby
  • Python
  • PHP
  • Java (which, confusingly, is totally different than JavaScript)
  • Perl
  • ASP.NET
  • C
  • C++
  • Go
  • Erlang
  • Javascript (Node.js)

Each of these languages can accomplish roughly the same thing, though there are tradeoffs in terms of hiring, speed, performance, etc. that I won’t get into.

Common types of databases (also called data stores) are:

  • PostgreSQL
  • MySQL
  • MongoDB
  • CouchDB
  • Redis
  • Riak
  • NoSQL
  • Oracle
  • Microsoft Access

Phew. That’s a big (and confusing) list. As someone trying to familiarize yourself with tech, you don’t need to understand exactly what each of these programming languages or databases do. Instead, you should be able to understand the context in which someone has expertise. For example, if Redis or MongoDB comes up, you should understand that each is a tool used to store data.

Programming frameworks are the last thing I  want to touch on. Programming frameworks are tools that make it easier to build something quickly. Think of your typical web application. Most contain common elements: an account creation process, shopping cart, etc. Frameworks help abstract away many of the more repetitive components that need to be built for a website by giving developers pre-built “gems” (or libraries) with functionality already included. For example, if you want to build a shopping cart, Spree provides a framework that makes it easy to build one.

As an analogy, think of building a house. The frame of every house is similar – wooden boards nailed together to form a basic structure. All the customization that makes a house unique goes on top of this frame – the finish in the kitchen, the layout, paint on the walls, etc. What’s remarkably consistent across houses is the frame. If you wanted to build a stable house fast, it’d save you time to use a prebuilt framework.

That’s exactly what using a web framework does. It allows you to build faster by taking advantage of prebuilt units of code. Rather than rewriting a shopping cart, you can use code from other developers who’ve built shopping carts in the past.

A complete list of frameworks for each programming language can be found here, but many of the popular ones you’ll hear about are below:

  • Python – Django, Pyramid
  • Ruby – Ruby on Rails, Sinatra
  • PHP – CakePHP, Zend, Laravel, CodeIgnighter
  • Java – Grails, Play!
  • Javascript – jQuery, Backbone.js, Ember.js,

Each of these frameworks come with different software packages, known as libraries, plugins or gems (in the Rails community), that help developers accomplish specific things. For example, here’s a list of Python libraries and the different reasons developers may want to use them.

Together, these languages, databases and frameworks make up a product’s tech stack. Take a look at Instagram’s tech stack to get a general sense of how a tech stack looks to other engineers.

That was a lot to take in. The last two parts are somewhat simpler, and contain a LOT less jargon.

Platform

The platform an application runs on refers to any software platform they may be using to build their app. As you’ll see in the server section, buying or renting server hardware, managing those servers, provisioning them and scaling them can be a major time-suck. Many companies choose to instead focus on building their application, and build on top of a platform-as-a-service (also known as PaaS) like Heroku or OpenShift. Imagine if you were trying to work in Excel and had to download, install and set up a new version of Excel every time a worksheet filled up. That would take time and not help your efforts to build an amazing Excel model.

Basically, building on top of a platform like Heroku means you don’t have to worry as much about buying servers and scaling them. Instead, you can just push code to Heroku and let them deal with the inevitable provisioning, setup and scaling issues.

Not much else to say here, just that going this route is a lot easier than managing this yourself. However, it is more expensive so it may not make sense at a certain scale.

Server

Beneath the entire virtual world that is the internet lies something many don’t like to talk about. That something is actual hardware.

That’s right. Everything you see, do and interact with on the internet is a program running on top of a physical box. A server. That sits in a cooled room on a rack somewhere:

 

You don’t need to know a ton about servers to be honest, only that they have their own operating systems (usually Linux), and make up what people refer to as “the cloud”. If you’re using a cloud hosting provider like Rackspace, you’re paying them to manage your servers for you.

Cloud hosting is one of the major reasons it’s easier to start a web company now than it was 10 years ago. Rather than buying and setting up dozens or hundreds of your own servers, you can pay Rackspace to manage hundreds, even thousands of them for you.

 

How Software Actually Gets Built

First, there are different stages (known as environments) in which software gets built. There’s the dev environment where software engineers work on building new features. These are things that are being worked on but aren’t ready to go live just yet.

Developers will use tools like GitHub to manage and share versions of their code (and push code live); an IDE or text editor to write code, and a staging server to host the code they write. For managing and spinning up servers, they’ll use tools like Puppet or Chef to ensure servers are set up in a consistent way.

Once features are ready to go live, they get pushed (or deployed) to what’s known as a production environment. At this point, the code has likely run through a series of automated tests to make sure it won’t break anything once it’s live. There’s a whole subset of software development – DevOps – responsible for deploying code into a production environment, and making sure that the deploy process goes smoothly and is consistent. To get a better understanding of this process, check out an interview I did with a lead engineer at Stripe and another with Digg’s former lead architect, Joe Stump.

 

Why Is All This Important?

Understanding how the web works from a technical perspective – even at a high level – has been extremely valuable for me.

I’ve made bad hires because I didn’t understand the skill-sets of people I was interviewing. I’ve lost $14k (as a college student no less) because I didn’t grasp what I was hiring developers to build, or comprehend what goes into building an application. I was completely blind.

Especially if you want to start a company, learning how technology actually works is imperative. As this article mentions, non-technical founders create successful startups by having these 4 traits:

  1. Technically literate
  2. Product oriented
  3. Have cash
  4. Are well-connected

As software seeps into every sector of the economy, it’s even more important for employees of all kinds to understand tech at a basic level. Your sales, support, marketing and community hires will all be better off if they have a basic understanding of how the web works, and how their software product fits into that landscape.

Early on at Airbrake, I had to turn a non-technical account management team into one that could talk and sell to developers. This process made me realize how few people understand how software is actually built, and how hard it was to explain. Hopefully, this post provides a jumping-off point for the many of you that want to improve their technical literacy.

What parts of this do you still have questions about? What have you struggled with in the past? Leave a comment below, and I’ll respond to every one.

How to Choose a Startup Idea

22 Aug

I’m tweaking this older post as part of Startup Edition, a community I recently joined. This week’s edition asks “how do you turn your idea into a company?”

After reading this fantastic post I started thinking about how startup will jump into an idea they’re excited about. The problem is, many of them make the leap without doing the necessary research.

I’ve seen quite a few people start a company thinking of the riches that will soon be theirs, only to realize that their idea isn’t going to work. I almost had the same thing happen, but instead went through a serious process of idea research, which I cover below. Instead 0f spending 3-4 years of my life working on something with a high likelihood of failure, I’ve been able to do some other cool stuff.

The basic idea was this. College tuition is ridiculously expensive, and different people receive different value from their educations: a computer science student from Harvard has vastly different earning/job prospects than an English major from the same school. However, these two students pay the same tuition and borrow money at the same rates, which are based on family income. In financial terms, a student with an engineering major from a top 50 university is a low risk for default, but priced as if they defaulted at the same rate as English or other majors. Thus, the idea was to give lower-interest student loans to engineering students – they’d receive a cheaper education, you’d receive a solid return from a low-risk asset.

Strong idea (I think), but I wanted to make sure that it was something that could work. I did all of this research to answer 3 simple questions:

1. Could I create something more valuable than what currently exists?

2. If yes, could I reach people to make them aware of my superior product/service?

3. Assuming things go well, could I make enough money to run an interesting business?

To answer whether or not your idea is better than the competition, you need to do some competitive research. Since most people start a company based on an idea (and not the size of the potential market), that’s where we’ll start.

Competitors

Your idea should have competition in some way, shape or form. Mine certainly did. If there’s no competition, it might be a sign that there’s no market for what you’re doing. In this step, you want to answer question 1: Can I create something more valuable than what currently exists?

The fastest way to find your competitors is to do a Google search for a relevant market keyword. For me, it was “private student loans”. Take a look at the Google AdWords that appear with your results. Any company with an ad budget (and thus an ad) means they’re likely a serious player – they have money to afford a marketing budget, and probably some idea of what it costs to buy a customer.

By clicking through each of your competitor’s Google ads, you can also see how they position themselves on their landing pages. What benefits are they selling? Are any of them claiming the same benefits you’d be bringing to the market?

This is a good sanity check – if some of these competitors do the same thing you’re planning to do, it doesn’t mean you have a bad idea. You could still out-execute, get better distribution or have a better product. After looking for competitors, I found that SoFi and Upstart were doing somewhat related things, in addition to the banks that do private student lending.

Once you know your competitors, it’s important to then get a feel for their company strategy. The way I usually do this is by looking at their jobs page. Depending on what positions they’re hiring for, you can figure out the direction they are heading over the next few months. For example, based on the campus ambassador job at SoFi, it looks like a key part of their growth plan is to have campus reps get fellow students to use SoFi. You can then think through the likelihood of that working as a channel, and if you’d be able to copy it if it worked.

I also checked out the Crunchbase for both companies, and saw that SoFi raised $77 million to roll out their lending program to other MBA programs. Based on this (and a careful reading of their company website), I figured that they are planning on giving out loans themselves, instead of just connecting alumni and students. This is a big deal, because it means that they were likely struggling to get alumni to fund students OR they realized that being a market intermediary wasn’t a profitable spot to be in. As you’ll see later, this was red flag #1 with the idea.

Although my idea wasn’t really web-driven, when doing competitive research on other web-based companies here are a few other things I look at:

  • Compete to see their traffic data, and which way it’s trending
  • Quantcast to get a rough feel for the demographics of their average customer
  • AppData (if they have a Facebook or mobile app) to see how engaged their users are

At the end of this stage, you should know three things: who your biggest competitors are, the basics of their company strategy, and how you are (or will be) different from what they’re doing. If you think your approach has more value, time to dive a bit deeper.

Distribution

Once you’re confident in your product compared to competitors, it’s time to research how you’ll reach your potential customers. Understanding how you will acquire customers (and how your competitors do) is rarely done. This is unfortunate, because it may just be the most valuable part of your research. Having a rough idea of how much it will cost you to acquire a user informs just about every major decision you’ll make - what you’ll charge, how much you need to raise, how much of your marketing spend should be on advertising, and what marketing channels you should test.

Luckily, with all the free tools available you can get a really good idea of how your major competitors are driving customers. First, you can use Google Trends to look at the popularity of your competitors in the space. Who has been mentioned more often over the last months? What blogs/media outlets have covered them?

Doing this will give you a good idea of the blogs or media outlets that would be receptive to running a story about what you’re doing. This type of information is really important. Early on, while you’re still figuring out what you’re doing, copying competitor’s distribution channels is a good way of getting some early traction.

Next, you want to look at your competitor’s (likely) two largest sources of traffic – paid advertising and organic search. One of my favorite tools is SEMrush, which you can use to get an estimate of your competitor’s search engine traffic, organic keywords that are working for them, and where their traffic is coming from. In the case of SoFi, I was able to see that they did no advertising, and most of their search traffic came from people specifically searching for “SoFi” or related terms.

This can be really helpful in web-based businesses. For example, take a look at the SEMrush data for Dropbox:

Screen Shot 2013-03-18 at 4.02.03 PM

From this, you can see that they have made SEO a focus of their strategy, and are working on expanding to other countries through paid search and organic SEO. That’s a good thing to know when figuring out how to attack the market. It means that you’ll have to do a really good job executing on SEO if you wanted to start a competitor, or choose a different vertical.

That most of Dropbox’s traffic is organic is further borne out by taking a look at Alexa‘s clickstream data. Here’s what that looks like:

Screen Shot 2013-03-18 at 5.12.12 PM

This information tells you that Dropbox is doing a good job of driving traffic via Facebook, that Youtube accounts for a surprisingly large percentage of their visitors, and that they have many people searching for them in Europe. Overall, if I was looking at starting a file-sharing competitor, I would write off SEO as a channel through which I could beat Dropbox. They’ve done a great job, and it’d be extremely difficult (and take a long time) to achieve the types of rankings and traffic they have through SEO.

If I thought I could potentially do well with SEO, I’d use the following tools to dig deeper into this channel:

  • Open Site Explorer to see where they get their links from.
  • Sign up for a free trial of SEOmoz to see where the competitors rank for different terms, and determine how hard it would be to rank for certain keywords.
  • Take the free trial of HitTail to see if there were potential opportunities to rank for certain longer-tail SEO keywords.

Lastly, I’d use the Google Keyword tool to figure out how much it’d cost me to buy search advertising, and see how much my competitors are paying for certain search terms. If it’s a lot, I now know that advertising may be a difficult way to acquire customers, and start looking at other channels.

At the end of this process, you should know a few things: how much traffic your major competitors are getting, where that traffic is generally coming from, what sites have linked to them, and an idea of whether or not SEO and PPC could work for you as acquisition channels. If not, start thinking about others - viral, partnerships, PR, etc. Starting a company with some idea of how you’ll attract customers vastly increases your chances for success.

Market

Lastly, you want to know how large your potential market is. This involves a lot of googling to answer the following questions:

Who are the major players in the space, and what is their total revenue? What is their market cap (if public)?

  • Here, use the 10k’s of publicly traded companies to research total revenue, profits, expenses, and profitability history. Pay special attention to net income and expenses – where are they spending the most money? Are their profits growing or shrinking? Why?

What are people saying about the industry? What are some recent blog posts or press covering the market or its major players?

  • Use Google’s search tools to see most recent blog posts or press mentions over the last month. How often is the market covered? Who covers it, and what are they saying about the market and the companies in it?

Is it a growing market? What gaps exist that I can leverage, and how entrenched are the players in the market?

  • Here, look for industry reports and revenues of companies in the space. Also use Crunchbase to see if other companies raised money at increasing valuations in the past 6 months. That’s a strong indication that they’re seeing some kind of growth.

What do my potential customers care about?

  • Use Delicious to see what popular articles people have tagged as memorable. What do they care enough about to save? For example, if you are thinking of doing a web analytics startup, take a look at some of Kissmetric’s most popular posts to see what people are interested in and found valuable.

At this point, I also set up Google Alerts for certain key terms in a market. For example, with our hypothetical fire-sharing competitor, I’d create alerts for the top 3 competitors and a few key terms (e.g. “file sharing” + funding) I wanted to monitor.

I’d also subscribe to a few relevant blogs that covered the space, and follow relevant players (and reporters who cover them) on Twitter. In the case of a file-sharing company, I’d follow Aaron Levie, the CEO of Box, Dropbox’s CEO Drew Houston, and a few TechCrunch reporters that you can see often cover Dropbox and the file-sharing space - Josh ConstineSarah Perez, and Ingrid Lunden.

You can also do some basic market sizing by using Facebook ads to determine how many people are in your potential market. Noah Kagan talks about that in a great post here.

Lastly, get out of the building and talk to people. Having conversations with industry experts will expose you to problems and ideas that you can’t find on your own. Often, these people will be happy to talk to you – in my case, I even had one guy who wanted to invest after I did some of my research.

Why I Didn’t Do It

In the end, I passed on the idea for a few reasons. The largest one was the numbers didn’t make sense: starting a company that connects alumni or other institutions to engineers who need student loans is a great idea if you collect the 1-2% spread between private loans and what you could offer. If I had $50m+ I’d do this in a heartbeat. Otherwise, as a middleman, you’re only getting a small piece of the 1-2% differential between the loans you’d facilitate and the rates students could get elsewhere. You have to have a LOT of volume to make this a worthwhile business – even if you facilitated $500m in loans (about 16% of the total market), you’d still only make $5-10m annually.

So, the math didn’t make sense unless you were the one actually giving out the loans (the strategy SoFi seems to be taking). I thought about it, and given my status as a 23 year old recent grad, I didn’t want the potential success of the company hinging on whether or not I could raise $50m+ in capital to lend out to engineering students. When you account for regulatory and legal compliance issues that come with being a lender, and the idea just didn’t make sense for me to pursue at the time.

The last piece of this was a few conversations I had with people in the space. A few people I spoke with saw the opportunity, but didn’t think it could be a major business given the economics of the market. Additionally, SoFi has a mature and well-connected team of executives that I wouldn’t want to compete against in a market that will be rapidly changing over the next 5 years. If the price of college collapses, and the education bubble pops, SoFi is in a tough spot where they have to process more and more loans to reach the same volumes. Even if the cost of college drops 10%, that 10% has a big impact on the loan volume they can process.

In the end, it’s an idea I could have raised money for. I had a few people who said they were willing to invest, and a marketing plan that I’m confident would have worked. However, thanks to intensive market research lasting 2 months, I think I saved myself years working on an idea that likely wouldn’t have paid off.

I’d love your thoughts on this post. What ideas are you looking at? What concerns do you have before jumping in to start something?

Thoughts on Paul Graham’s “Scale”

29 Jul

Paul Graham’s latest essay is one of his best. Several of his recent essays have focused on traction (growth, scale), which leads me to believe it’s something at the top of his mind.

My guess is, the largest issue facing most YC companies is a lack of traction. Thus, PG writes about distribution, thinking through and trying to help future founders looking for their distribution “secret.” In his latest essay, he talks about doing things that don’t scale – personally recruiting users, taking manual photographs of AirBnB host’s apartments, etc.

This is one of the biggest problems with startup marketing advice today. It’s all tactical. There’s little strategy: few thoughts of “how does this apply to my situation?” PG’s advice makes a ton of sense to a newly-formed company, as he points out. For a company trying to prove traction in order to raise a Series A, such advice is less clear – will recruiting users manually really make a difference as you try to acquire your next 1000-10k users? In such cases, investing in more scalable traction channels makes more sense.

Without a framework to think about traction, the tactics you’ll hear about daily – cheap ways to drive clicks via StumbleUpon, how to lower the CPC on your Facebook ads, or hacks to get more followers on Twitter – will overwhelm you. This is why we introduce the Bullseye Framework - a systematic way of thinking through the many customer acquisition channels that a startup could use.

It’s hard predicting what traction channels will work for a given startup. What helps is thinking through channels that could work for you given your company stage. By thinking through the universe of marketing tactics and narrowing them down to what’s likely to work, you can have an educated and well thought-out approach to getting traction: real customers and real growth.

This framework allows you to read through (excellent) articles like these and apply relevant tactics to your startup. There’s some awesome stuff in there, but to any company with real revenue or growth, things like commenting on blogs probably doesn’t make sense. It isn’t a core action that will lead to growth.

Paul Graham is absolutely right. Founders make their companies succeed by pushing through the early phases and doing things that don’t scale. Often, by narrowing their focus to just a few traction channels that make sense given their stage. Then, by later focusing on more scalable channels (in AirBnB’s case, referral loops, Craigslist distribution hacks, word of mouth, paid advertisements and Facebook integrations), they build them into billion-dollar companies.

Why Real Businesses Don’t Charge $5/month: Part 2

8 Apr

In my earlier blog post on pricing, I talked about how there are two ways to increase profits as a B2B company: increase LTV (which I covered) or decrease CAC (cost of acquiring a customer). Let’s take a look at increasing profits by decreasing your CAC.

Your access to (and the efficiency of) distribution channels has a larger impact on your CAC than just about anything else. The more it costs you to acquire a customer, and the longer it takes to receive a return on that CAC investment, the slower your company will grow if you’re plowing profits back into growth. CAC relative to LTV is the single most important determinant of a successful company in a B2B setting, as it directly determines how fast you can grow. (Note: this is why in competitive, new markets like payments, a well-funded startup has a large advantage. PayPal raised nearly $200m, and paid a $10 referral for every new user. If they had to wait a year to make a profit from that new customer, there’s no way they would have grown as rapidly. To companies like that, CAC is almost irrelevant).

This is a hard lesson I learned with the first iteration of Roommatefit. When I started the company, the idea was to sell a personality-based matching solution to colleges and universities. After looking at the data behind roommate conflicts and student retention (basically, if you have a crappy roommate you’re far more likely to drop out or transfer), I thought there was enough of an opportunity to create matching software and sell it to colleges and universities. I went through the customer development process, got some great feedback, built a product, sold it to a few early customers and raised a small round of funding.

Only one problem – I was totally ignorant of my CAC.

The biggest problem was that there was no way to reach these university decision-makers at a scale that worked. Really, my potential customer base was about 3000 people. This group is extremely small, highly targeted, and not very active online: all of which made it near impossible to reach a sizable portion of them via Adwords, SEO or other traditional online ads. After unsuccessfully testing partnerships, trade shows, email marketing, content, and magazine advertising strategies, the last viable marketing channel was field sales.

Field sales didn’t make sense either… which I figured out after a year doing them. Given the university market’s incredibly long sales cycles, our mid-four-figure pricing, and the cost of making a sale (multiple phone calls, emails, whitepapers and demos), the cost of our time was thousands more than what we’d bring in for every marginal sale. And, as much as I tried, I couldn’t see that changing in the future.

People much smarter than me – people like David Sacks – get this concept. In fact, one of the main reasons David started Yammer was because of the distribution opportunity he saw in applying viral marketing to an enterprise channel. He realized that no other companies (at the time) were applying viral mechanics – which have a near-zero CAC – to reach enterprise adoption at scale. Successfully executing on this distribution channel allowed them to get acquired within 4 years for $1.2 billion dollars. All because Yammer was able to acquire customers basically for free.

The two major ways B2B businesses are drastically decreasing their CAC are through content and email marketing. This growing popularity is largely due to the rising cost of other channels. Now that other platforms are mature, it’s much harder to buy a customer via Adwords or Facebook ads at very low cost. The channels are just too crowded and competitive.

This is why it’s important to test other traction channels: if you start using one early enough, before it inevitably becomes crowded, you can benefit from a low CAC and little competition.

A Startup Guide to Competitive Research

19 Mar

After reading this fantastic post last week, I started thinking about how startup founders will sometimes jump into an idea they’re excited about. The problem is, many of them have no idea how to research it properly.

I’ve seen quite a few people start a company thinking of the riches that will soon be theirs, only to realize that their idea isn’t going to work. I almost had the same thing happen, but instead went through a serious process of idea research, which I cover below. Instead 0f spending 3-4 years of my life working on something with a high likelihood of failure, I’ve been able to do some other cool stuff.

The basic idea was this. College tuition is ridiculously expensive, and different people receive different value from their educations: a computer science student from Harvard has vastly different earning/job prospects than an English major from the same school. However, these two students pay the same tuition and borrow money at the same rates, which are based on family income. In financial terms, a student with an engineering major from a top 50 university is a low risk for default, but priced as if they defaulted at the same rate as English or other majors. Thus, the idea was to give lower-interest student loans to engineering students – they’d receive a cheaper education, you’d receive a solid return from a low-risk asset.

Strong idea (I think), but I wanted to make sure that it was something that could work. I did all of this research to answer 3 simple questions:

1. Could I create something more valuable than what currently exists?

2. If yes, could I reach people to make them aware of my superior product/service?

3. Assuming things go well, could I make enough money to run an interesting business?

To answer whether or not your idea is better than the competition, you need to do some competitive research. Since most people start a company based on an idea (and not the size of the potential market), that’s where we’ll start.

Competitors

Your idea should have competition in some way, shape or form. Mine certainly did. If there’s no competition, it might be a sign that there’s no market for what you’re doing. In this step, you want to answer question 1: Can I create something more valuable than what currently exists?

The fastest way to find your competitors is to do a Google search for a relevant market keyword. For me, it was “private student loans”. Take a look at the Google AdWords that appear with your results. Any company with an ad budget (and thus an ad) means they’re likely a serious player – they have money to afford a marketing budget, and probably some idea of what it costs to buy a customer.

By clicking through each of your competitor’s Google ads, you can also see how they position themselves on their landing pages. What benefits are they selling? Are any of them claiming the same benefits you’d be bringing to the market?

This is a good sanity check – if some of these competitors do the same thing you’re planning to do, it doesn’t mean you have a bad idea. You could still out-execute them on distribution, or have a better product. After looking for competitors, I found that SoFi and Upstart were doing somewhat related things, on top of the many banks that do private student lending.

Once you know your competitors, it’s important to then get a feel for their company strategy. The way I usually do this is by looking at their jobs page. Depending on what positions they’re hiring for, you can figure out the direction they are heading over the next few months. For example, based on the campus ambassador job at SoFi, it looks like a key part of their growth plan is to have campus reps get fellow students to use SoFi.

I also checked out the Crunchbase for both companies, and saw that SoFi raised $77 million to roll out their lending program to other MBA programs. Based on this (and a careful reading of their company website), I figured that they are planning on giving out loans themselves, instead of just connecting alumni and students. This is a big deal, because it means that they were likely struggling to get alumni to fund students OR they realized that being a market intermediary wasn’t a good spot to be in. As you’ll see later, this was red flag #1 with the idea.

Although my idea wasn’t really web-driven, when doing competitive research on other web-based companies here are a few other things I look at:

  • Compete to see their traffic data, and which way it’s trending
  • Quantcast to get a rough feel for the demographics of their average customer
  • AppData (if they have a Facebook or mobile app) to see how engaged their users are

At the end of this stage, you should know three things: who your biggest competitors are, the basics of their company strategy, and how you are (or will be) different from what they’re doing. If you think your approach has more value, time to dive a bit deeper.

Distribution

Now that you know you’ll bring more value to the market than the competition, it’s time to figure out if you can reach your potential customers. Researching how you will acquire customers (and how your competitors do) is rarely done. This is unfortunate, because it may be the most valuable part of your research. Having a rough idea of how much it will cost you to acquire a user informs just about every major decision you’ll make – what you’ll charge, how much you need to raise, how much of your marketing spend should be on advertising, and what marketing channels you should test.

Luckily, with all the free tools available you can get a really good idea of how your major competitors are driving customers. First, you can use Google Trends to look at the popularity of your competitors in the space. Who has been mentioned more often over the last months? What blogs/media outlets have covered them?

Doing this will give you a good idea of the blogs or media outlets that would be receptive to running a story about what you’re doing. This type of information is really important. Early on, while you’re still figuring out what you’re doing, copying competitor’s distribution channels is a good way of getting some early traction.

Next, you want to look at your competitor’s (likely) two largest sources of traffic – paid advertising and organic search. One of my favorite tools is SEMrush, which you can use to get an estimate of your competitor’s search engine traffic, organic keywords that are working for them, and where their traffic is coming from. In the case of SoFi, I was able to see that they did no advertising, and most of their search traffic came from people specifically searching for “SoFi” or related terms.

This can be really helpful in web-based businesses. For example, take a look at the SEMrush data for Dropbox:

Screen Shot 2013-03-18 at 4.02.03 PM

From this, you can see that they have made SEO a focus of their strategy, and are working on expanding to other countries through paid search and organic SEO. That’s a good thing to know when figuring out how to attack the market. It means that you’ll have to do a really good job executing on SEO, or choose a different vertical.

That most of Dropbox’s traffic is organic is further borne out by taking a look at Alexa‘s clickstream data. Here’s what that looks like:

Screen Shot 2013-03-18 at 5.12.12 PM

This information tells you that Dropbox is doing a good job of driving traffic via Facebook, that Youtube accounts for a surprisingly large percentage of their visitors, and that they have many people searching for them in Europe. Overall, if I was looking at starting a file-sharing competitor, I would write off SEO as a channel through which I could beat Dropbox. They’ve done a great job, and it’d be extremely difficult (and take a long time) to achieve the types of rankings and traffic they have through SEO.

If I thought I could potentially do well with SEO, I’d use the following tools to dig deeper into this channel:

  • Open Site Explorer to see where they get their links from.
  • Sign up for a free trial of SEOmoz to see where the competitors rank for different terms, and determine how hard it would be to rank for certain keywords.
  • Take the free trial of HitTail to see if there were potential opportunities to rank for certain longer-tail SEO keywords.

Lastly, I’d use the Google Keyword tool to figure out how much it’d cost me to buy search advertising, and see how much my competitors are paying for certain search terms. If it’s a lot, I now know that advertising may be a difficult way to acquire customers, and start looking at other channels.

At the end of this process, you should know a few things: how much traffic your major competitors are getting, where that traffic is generally coming from, what sites have linked to them, and an idea of whether or not SEO and PPC could work for you as acquisition channels. If not, start thinking about others - viral, partnerships, PR, etc. Starting a company with some idea of how you’ll attract customers vastly increases your chances for success.

Market

Lastly, you want to know how large your potential market is. This involves a lot of googling to answer the following questions:

Who are the major players in the space, and what is their total revenue? What is their market cap (if public)?

  • Here, use the 10k’s of publicly traded companies to research total revenue, profits, expenses, and profitability history. Pay special attention to net income and expenses – where are they spending the most money? Are their profits growing or shrinking? Why?

What are people saying about the industry? What are some recent blog posts or press covering the market or its major players?

  • Use Google’s search tools to see most recent blog posts or press mentions over the last month. How often is the market covered? Who covers it, and what are they saying about the market and the companies in it?

Is it a growing market? What gaps exist that I can leverage, and how entrenched are the players in the market?

  • Here, look for industry reports and revenues of companies in the space. Also use Crunchbase to see if other companies raised money at increasing valuations in the past 6 months. That’s a strong indication that they’re seeing some kind of growth.

What do my potential customers care about?

  • Use Delicious to see what popular articles people have tagged as memorable. What do they care enough about to save? For example, if you are thinking of doing a web analytics startup, take a look at some of Kissmetric’s most popular posts to see what people are interested in and found valuable.

At this point, I also set up Google Alerts for certain key terms in a market. For example, with our hypothetical fire-sharing competitor, I’d create alerts for the top 3 competitors and a few key terms (e.g. “file sharing” + funding) I wanted to monitor.

I’d also subscribe to a few relevant blogs that covered the space, and follow relevant players (and reporters who cover them) on Twitter. In the case of a file-sharing company, I’d follow Aaron Levie, the CEO of Box, Dropbox’s CEO Drew Houston, and a few TechCrunch reporters that you can see often cover Dropbox and the file-sharing space - Josh ConstineSarah Perez, and Ingrid Lunden.

You can also do some basic market sizing by using Facebook ads to determine how many people are in your potential market. Noah Kagan talks about that in a great post here.

Lastly, get out of the building and talk to people. Having conversations with industry experts will expose you to problems and ideas that you can’t find on your own. Often, these people will be happy to talk to you – in my case, I even had one guy who wanted to invest after I did some of my research.

Why I Didn’t Do It

In the end, I passed on the idea for a few reasons. The largest one was the numbers didn’t make sense: starting a company that connects alumni or other institutions to engineers who need student loans is a great idea if you collect the 1-2% spread between private loans and what you could offer. If I had $50m+ I’d do this in a heartbeat. Otherwise, as a middleman, you’re only getting a small piece of the 1-2% differential between the loans you’d facilitate and the rates students could get elsewhere. You have to have a LOT of volume to make this a worthwhile business – even if you facilitated $500m in loans (about 16% of the total market), you’d still only make $5-10m annually.

So, the math didn’t make sense unless you were the one actually giving out the loans (the strategy SoFi seems to be taking). I thought about it, and given my status as a 23 year old recent grad, I didn’t want the potential success of the company hinging on whether or not I could raise $50m+ in capital to lend out to engineering students. When you account for regulatory and legal compliance issues that come with being a lender, and the idea just didn’t make sense for me to pursue at the time.

The last piece of this was a few conversations I had with people in the space. A few people I spoke with saw the opportunity, but didn’t think it could be a major business given the economics of the market. Additionally, SoFi has a mature and well-connected team of executives that I wouldn’t want to compete against in a market that will be rapidly changing over the next 5 years. If the price of college collapses, and the education bubble pops, SoFi is in a tough spot where they have to process more and more loans to reach the same volumes. Even if the cost of college drops 10%, that 10% has a big impact on the loan volume they can process.

In the end, it’s an idea I could have raised money for. I had a few people who said they were willing to invest, and a marketing plan that I’m confident would have worked. However, thanks to intensive market research lasting 2 months, I think I saved myself years working on an idea that likely wouldn’t have paid off.

 

Want access to the competitive research spreadsheet I use to evaluate a startup opportunity? Sign up for my (very) infrequent email list. 

Why Real Businesses Don’t Charge $5/month

12 Feb

As a business that’s trying to make money, you live and die by this evaluation: LTV > CAC.

For those that don’t know what the above means (aka me 6 months ago), it’s a more complex way of saying that in a real business, you make more from your customers than you paid to get them. Their lifetime value (LTV) must be greater than your cost of acquisition (CAC).

Let that sink in for a moment. As someone who (presumably) wants to make more money, there are two clear ways to get you closer to that Ferrari/Thailand trip/guitar studio: lower your CAC, or increase your LTV. Lowering your CAC involves things like pursuing virality, building referral engines and testing new marketing channels (which we cover extensively in Traction Book). I’ll cover that more in future posts.

For now, let’s take a look at how you can increase your LTV. Here’s a thought experiment for a bootstrapper running a SaaS software business. You hate paying for software and figure others do too, soo… you are thinking of pricing your app at $10/month. Let’s say the nearest comparable product sells for around $29/month. Where should you price it?

Let’s take a look at something completely obvious:

Yes, charging (roughly) 3x more per month means you have (roughly) 3x more revenue at the end of the year with one customer. Now before you hit the back button, let’s take a look at how this impacts your CAC.

We’ll assume for the purposes of this thought experiment that you’re somewhat of an Adwords guru and can buy clicks at $0.50. Let’s also assume that of those lucky individuals who click on your ad, 15% of them are blown away by your landing page and the value you’re offering that they sign up for a trial. Of those, 20% are so amazed with your product that they sign up for a paid account. That leaves you with a CAC of $16.67.

Not bad! In this (admittedly optimistic) scenario, you’re looking at about 1.5 months to recoup your investment in acquiring a $10/month customer, and about 2 weeks to recoup with the $29/month plan. Again, pretty intuitive.

What’s not intuitive is just how large an impact this can have on your ability to acquire more customers. Let’s say you are running your SaaS business as a bootstrapper, and don’t have oodles of VC money. In this case, you’re only reinvesting revenues into acquiring more customers. Where would this put you after a year?

Nice! After a year of work, you’re pulling in $1420 a month. Depending on your expenses, this might be enough to quit your day job – just stay away from San Francisco or New York.

Now, let’s compare the above to where you’d be if you charged $29/month and reinvested revenues into user acquisition. You know about things like compounding (you’re smart), so you take a tentative guess that charging 3x would probably result in something like 10x revenues. Let’s see how the two approaches stack up:

Um. What? That’s not a super useful comparison. Let’s try again at 6 months:

3 months?

Finally, a useful graph! Who would have thought that after a year, charging 3x more would have resulted in 819x more monthly revenue than otherwise. That gets you to your financial goals a lot faster. After just 6 months, you’re pulling in nearly $36k per year!

Making real money as a business changes a lot of things. More revenue allows you to build a real business where you have the resources to invest in things like better support and new features. One of my mentors (a guy who’s built 5 successful software companies) told me that when a company would object to his prices being slightly higher, he’d respond along these lines:

“At $5/month I can’t build a real business. If I can build a real company, I can help you to blow up your business. I can provide support, product upgrades, and create more and more value for you. At $5/month, I can’t do anything real to help you build your business.”

Something to think about when pricing your next app.

 

Want access to the spreadsheet I used to calculate the above metrics (CAC, LTV, compounding revenue growth)? Sign up for my free mailing list – no spam, emails 1-2x per month, occasional goodies I don’t post to the blog.

***

Thanks to the guys at Lean Analytics for letting me get an early copy of their fantastic book, which inspired a lot of this post, as well as Kevin Espiritu and Nate Speller for edits.

Being Mentally Healthy

16 Jan

For two years now I’ve been drawn to starting companies. From my perspective it looks like there are few better ways you can have an impact on the world. Success (seemingly) requires hard work and smarts, less so connections and political savvy (though they help). Media, politics, large corporations all have billions of dollars of entrenched interests to keep the top dogs where they are. Startups less so.

Though there are good reasons to do do them, I’ve come to appreciate just how difficult the mental side of startups is. The experience of starting a company is the hardest thing I’ve done so far. There’s not much that can compare with the ups and downs, the emotional attachment you have to doing something that hasn’t been done before. And I’m not even tackling a problem like sending rockets into space, or changing payments on the web.

After meeting a lot of people in the space, I think that it is almost more important from a career standpoint than anything else. You can’t do well if you’re constantly focusing on negatives, if you have difficulty finding happiness in your day-to-day, and if you’re not in a good place emotionally. This stuff is hard, and being miserable throughout the process is a sure way to get out of startups altogether. I know too many talented, ambitious people who don’t have the mental makeup to stay involved in the game.

Gabe talks about this a bit with his Startup Career Path post, but I hear a lot of people talking about startups as if they are a one-shot deal. As if their current thing doesn’t work, they leave the game. Even if you don’t get out altogether, being miserable while being in startups is hard. It sucks, and it makes people less effective and productive, to posts like this.

The more people who can be happy and start companies, the better. If humanity is going to advance more quickly, we want more smart people starting companies to solve real problems. This means we need more people who can mentally cope with the ups and downs of striking out on their own. This is valuable even for those that fail, as starting a company leads to drastically accelerated learning.

There’s still a lot for me to figure out, but I’m starting to believe that personal development and growth should be a focus before (and during) the process of starting a company. Getting your head right should be as important as anything else. After all, if you succeed at the cost of being a happy, healthy, real human, I’m not sure that’s a positive. This is why I’m working hard to do things like the Daily Practice. To focus on the good things in life and try to take a long-term view of things.

There are so many things I want to improve: my writing, strategic thinking, productivity, health… things most people struggle with. What I don’t want to deal with is a life of work that makes me miserable and unhappy. And too many times I worry that’s where I’m headed.

 

Thanks to Nate Speller for reading drafts of this. I’d love to hear what you think of this type of post vs more marketing-related posts. Thoughts?