WHAT’S YOUR WHY?

Knowing your Why doesn’t seem very important when everything is going wonderfully. When life is grand we are usually not asking the deep inconvenient questions, such as: What am I doing with my life and WHY am I doing it? Frankly who cares? Life is awesome, pass the champagne! However, when things get rough in life, as they invariably do, the WHY becomes the most important question of all. And if you don’t have a good why when you are in that ridiculously rough patch, you’re doubly screwed. Sometimes I think life throws us into tough situations just so we can directly confront our why and test it to see if it’s solid. If your Why is weak, then you need to upgrade it, and the sooner the better. Below is an excerpt from my book, The Start-Up J Curve, where I discuss the importance of having a solid Why as it relates to startups and their founders. My friend, former Navy SEAL Mark Divine, had great advice on this.

WHAT’S YOUR WHY?
Whether you are a missionary or a mercenary raises the fundamental question of why you are embarking on your start-up journey. My friend and former Navy SEAL Commander, Mark Divine, boils it down to this question: “What is your why?” Mark was ten years active on SEAL teams and ten years in the reserves. He then started a company called SEALFit that helps train prospective SEALs as well as civilian adventurers to test themselves. SEALFit’s ultimate test is called Kokoro Camp, and it’s a fifty-hour, nonstop crucible training event modeled after the Navy SEAL Hell Week. That is fifty hours straight of hard-core mental and physical exertion, with no sleep. Less than 50 percent of the class will finish the ordeal. At some point during the camp, Mark asks students to state their why for attending the camp. Mark can often get a strong sense of whether they will successfully complete the training based on their answers.

Here are some typical responses to the why question:

  • “I am here to prove that I am tough enough to be a Navy SEAL.” (This is not a strong why, and these guys often fail.)
  • “I want to prove to my two daughters that I am strong and will always be there for them.” (Lottery winner! This woman crushed it.)
  • “I want to meet my true self and push through my self-imposed limitations.” (This is a solid why.)
  • “My father enrolled me and I want to prove to him I am worthy of this program.” (This is another fail.)

According to Mark, “The key point here is that when the dark night of the soul moment comes, when your mind and body say they are done, and if the student can’t dig into a deep reservoir of inspiration to continue, then they won’t. The why is the tap to that reservoir, and having a powerful why that is intrinsic and deeply meaningful is required to stay the course through the most trying times.” The missionaries know their why, and it is something bigger than themselves. The mercenaries may not know their why because it’s all about them; they don’t have a larger purpose.

Navy SEAL Hell Week training is particularly relevant with respect to pushing through as opposed to quitting. The primary objective of Hell Week for the Navy is to smoke out the quitters. They need the quitters gone quickly for two reasons. The first is a simple investment issue: They don’t want to put time and money into training those who are going to eventually quit, since it’s a bad allocation of resources. Second, and perhaps more importantly, it’s a matter of life or death. The one thing that SEALs cannot have happen under any circumstances is for a team member to quit in the middle of a firefight. If that happens, there is a good chance that somebody may get killed. Needless to say there is nothing touchy feely about Hell Week, no kumbaya sessions; rather, the drill instructors are purposely trying to get you to quit. You better have a good why or you are going to be crawling over to ring the bell, thereby ringing out and joining the more than 75 percent who quit.

While start-ups may not be life or death literally, they are exactly that figuratively. In start-ups, you will be tested in many ways, and more than once, you’ll probably consider quitting. The strength of your why will determine whether you have the determination to push through the adversity to success. Be conscious about your own missionary and mercenary tendencies. Ask yourself what type of product or business will trigger your missionary impulse and help you build a start-up around it. If you choose something that you are passionate about and through which you have a chance to make a significant impact, you’re not only more likely to be successful financially, but you’re also more likely to have a fulfilling and meaningful start-up experience. Therefore:

  • pursue what really turns you on, what you’re super passionate about;
  • focus on products and services that are fun and have some social utility;
  • find people with whom you really enjoy working;
  • realize that you’re on a journey;
  • embrace the unknown; and
  • refuse to give up, unless you are out of ideas or your health is jeopardized.

So work on your why, have it nailed BEFORE you have your back against the wall.

Focus on the Product before the Business Model

It’s not unusual for entrepreneurs to get ahead of themselves. Entrepreneurs are aggressive and opportunistic, their pace accelerated by their hopes and dreams. Doing things in the wrong order, however, is one of the surest ways of sabotaging your start-up; and doing them in the right J Curve order (Create > Release > Morph > Model > Scale > Harvest) is one of the best ways of ensuring its success.

Consider two of the most common chronology mistakes:

  • Focusing on the business model before figuring out the product
  • Scaling before nailing the product or business model

You’re likely to make the first mistake because when you explain your new idea to people, you’ll be peppered with questions such as, “How are you going to make money at that?” While you don’t want to ignore that question completely, the real questions to ask yourself are “Can I make something people will really want?” and “Can I get customers to actually use my product or service?” Because if you can’t get people to use your product or service, then you are not going to make any money at it anyway. What history generally has proven is that if you can get customer traction, you can find a way to make money. By focusing too much on the revenue model, you may be creating a myopic view of what your idea should be and blocking yourself from considering some important paths for evolving your initial idea. However, it might be one of those alternate paths or a later iteration that brings you the most customer traction. In addition, you waste valuable time being overly focused on the business model early on because you don’t yet know what the actual product will be. You may go through two, three, or more iterations of the product, and by the nth iteration, the model you created for the first iteration will be hopelessly inappropriate. Paradoxically, emphasizing a business model prematurely, you may block yourself from the best money-making opportunities. You’ve structured the company in a certain way and hired people with certain types of experience
to capitalize on the first product. Most organizations aren’t sufficiently agile to shift as their product shifts, so they may have the right product but the wrong business model.

It’s only when you gain significant customer traction with a product iteration and you are through the Morph phase that you should spend significant time on the business model.
Avoiding this mistake requires patience, a virtue that some entrepreneurs find is in short supply. Following the proper order will allow you to focus all your resources and attention on the phase you are in, so you can nail it and move your startup to the next phase.

The Benefits of (Potentially) Looking Like an Idiot

Just like playing golf, investing in public markets is full of paradoxes and to do well at either, you need to often do things that are counter-intuitive. When I look back on my investments over the years, my best ones tended to be ones where had they not worked out, I would have looked like an idiot. Because at the time of the investment, the flaws were obvious and very widely accepted. Most important, this also meant that all the bad news was already baked into the stock price and that anyone who was going to sell had probably already done so.  So when I made the investment, I felt very exposed and the last thing I would want to do at that time was to explain to someone that I had made that investment and why. By contrast, my worst investments, would have received wide approbation had I told anyone at the time about them. An example today of an investment where everyone would nod approval (which, again is a generally bad sign) could be exclaiming that you just loaded up on an index fund. Because today, the market is at an all-time high and everyone loves index funds.  Indeed, an investment in index funds (or also bonds) are often mentioned as “prudent;” though at this point in time, I consider them pretty risky.

I remember buying Amazon when everyone was saying that it was going bankrupt. I certainly didn’t talk much about that one. I recall buying Facebook after their “botched” IPO occurred and the news was all negative and it was assumed they were being left behind in mobile.  Silence.  I recall buying Bitcoin, when it had “collapsed” from its first run-up and the news was all about one of the account holders being hacked and that it was all drug money, etc. I certainly didn’t tell anyone about that one and, in fact, I didn’t buy much because I didn’t really understand it. Even today when I explain Bitcoin to people they roll their eyes and say “crazy.”  I never bought Tesla, because starting another domestic car company just seemed so far fetched, I couldn’t get there. Whoops. Of course, just because a stock is widely derided doesn’t mean it’s going to rebound or take off and do well.  I bought Twitter under the same pretenses and it has been a loser that can’t seem to get going.  But I like this tactic and this morning, I’m buying a widely-derided tech stock that is considered “busted” and pretty much f-ed up no matter who you ask, except the users who I talk to who say they use it all the time. Of course, I don’t know if it will work and it may not, but I like the asymmetric profile of the risk where it seems like there is way more upside than downside.  I’m not going to mention the name, because I’ll feel like an idiot if it doesn’t work out, and I am well aware that it may not.

As I mention in my book, The Start-Up J Curve, investing in startups has been a similar experience in that my best investments have often been pretty gut-wrenching and not obvious. They are ones I’m embarrassed to explain to friends and family, because if they bomb, I’d look pretty dumb. By contrast, the ones that were “no-brainers” have usually turned out to be struggles, not always, but usually. Investing is a hard business in part because winning habits run counter to natural inclinations. Nobody wants to look like an idiot, but if you are looking for a great investment, you may need to risk it.

The Dark Side of Index Investing

While I have been a fan of investing in index funds and ETF’s for some time, I always start to get wary when some form of investment becomes all the rage.  At the moment, “Index investing” is widely touted to solve all manner of investment challenges and 16 of the 25 largest mutual funds are index funds.  History has taught me that when there is a widespread and cheery group consensus about a particular investment, it’s highly likely to soon go into decline.  So I’ve been looking for what could go wrong with investing in index funds.  What I found surprised me; so I thought it worth sharing.

The primary weakness stems from the fact that almost all of the index funds are weighted according to the market capitalization of the underlying companies that comprise the index.  This means that the larger the market capitalization of a company, the more it influences the index.  So when an investor puts $100 into a S&P 500 Index fund that is comprised of 500 individual companies, it is mandated that Apple gets $3.85 of that, Google gets $2.80, Microsoft gets $2.60, Amazon gets $1.90 and so on. But the representation of the 500 companies varies substantially, with over half of the 500 companies in the index getting $.10 or less. News Corp, which is one of the smaller companies in the S&P Index, is allocated less than a penny.

The net result of this forced allocation is that it puts a disproportional percentage of the fund into an increasingly small number of stocks.  The larger the market cap these stocks get, the more investment funds they automatically garner.  Note that this allocation is not an investment decision reached by sanguine money managers.  Rather, it is mandated simply by the formula that defines the index, which is weighted according to the market capitalization.

How concentrated are these indexes now?  The top 5 companies in the S&P 500 index are 13% of that index and the top 25 stocks are 34%.  The top 5 companies in the Nasdaq 100 Index, which is represented by the QQQ ETF, comprise a whopping 42% of that index.  Even the so-called “total market indexes” from Vanguard and others have very high concentrations.  In the Vanguard Total Stock Market Index, 5 companies (Apple, Microsoft, Amazon, Facebook and Google) comprise 10% of the portfolio, and 25 companies are 28%.  This is hardly a “total stock market” representation.  What’s even more alarming is that the same 5 companies (all tech stocks) are the top holdings of pretty much ALL of the stock market index funds.

There are many potential problems with this type of high concentration.  The largest issue is what I believe is a severe mismatch between what the investors in index funds think they are buying and what they are actually getting.  I think that almost all investors in these funds think they are getting a broad and wide representation of companies across the economic spectrum. While there are technically a large number of companies in these index portfolios, because of the market-weighted formula, most of the companies have little representation and influence on the index.

While even Warren Buffett, whom I have the highest admiration for, has recommended index funds, I don’t think he would recommend that everyone go out and put 10-15% of their investments in the exact same 5 stocks.  If these index funds were normal mutual funds, there would be shock and disbelief from Barron’s and the Wall St Journal, complete with lengthy stories about how all the fund managers were “lemmings” whose herd instincts had gotten the best of them. The evidence would be that all of them own the same 5 stocks in roughly the same proportion.

Making things even more precarious is the current gushing optimism that market pundits are heaping upon those same five mega-cap stocks.  In one 5 minute viewing of CNBC the other day, the praise I heard about Amazon oscillated between licentious and lascivious.  My thought was, “my we’ve come quite some ways from the time 15 years ago when the consensus was that Amazon was going bankrupt.”  While these top 5 are fine companies at the moment, the market is a fickle mistress and, given time, her attentions wander.  That is a certainty.

As I mention in my book “The Start-Up J Curve,” the technology sector tends to follow a boom-bust cycle, at one moment in time things look incredible and just keep getting better, and the next moment disappointment reigns.  So the fact that the top 5 names are technology companies is a bit unnerving.

When most people buy a market index fund or exchange traded fund (ETF), such as the S&P 500 as represented by the SPDR S&P 500 or the Vanguard 500 Index fund, they believe that they are buying a single investment that is highly representative of the stock market.  While these funds do a fine job mirroring their various indexes, at some point I think it’s worth asking if the index itself is an ideal thing to own. 

There are over 6,000 stocks on the NYSE and the Nasdaq and I would hazard that 5,000 or over 80% of those are quickly becoming under-owned, especially small-cap stocks.  As more and more investment dollars are funneled away from smaller stocks towards the larger stocks, eventually this dynamic should present opportunity for stock picking among the smaller, low market cap stocks.  I do think that index funds have many strengths and I own a number of them. I also own many of the top 10 names individually.  This means I own the same names through multiple vehicles, resulting in a fairly concentrated portfolio.  On the surface, it looks like I am much more diversified than I really am.  I am fully aware that it is very hard indeed for the average mutual fund to beat a pure index on an after-tax basis over time.  But I suspect that going forward, “stock picking” may make some comeback.  There may be other options that can do better.  For example, an equal weighted index of 1,000 or so small-cap stocks may do well.  In fact, I’m considering just making my own “index” of sorts by buying equal amounts of 100-200 small cap stocks.

Index investing is so popular right now that it strikes me as approaching bubble proportions.  The thing about bubbles is that they almost always overshoot, lasting far longer than you would expect, so it’s really hard to figure out when the current investment fad ends.  But end it will, because everyone can’t be on the same side of a boat without it tipping and dumping you into the dark blue cold water of the abyss. It’s time to consider what might be wrong with the crowd consensus and opine where better opportunities may lie.

How a Large Customer Can Kill a Startup

I often hear a founder get very excited about the prospect of a large customer.  The implied expectation is that this out-sized customer is going to shower the startup with cash & confer on them the imprimatur of legitimacy.  However, when I hear a founder start talking about “the big one” I cringe.  I  start thinking about how to break it to them that pursuing this large customer strategy is highly likely to cause a lot of pain and suffering – and quite possibly kill the startup. While I know it’s my duty to inform the founders this is a bad idea, I know from experience that my message is not what they want to hear and is likely to be ignored, at least for a while.

Startups and large customers are a mismatch.  Large sales are always complex, and involve huge resources to get all the constituencies of the prospect company on board.  Big customers tend to want a long testing period for which they almost never pay and this usually will require the majority of the startup’s resources.  Large customers also have needs that are often different from the rest of the market and they will usually demand that you modify your product to fit their needs.

Selling to large customers is like climbing a mountain with numerous “false peaks”, where you think you see the top of the mountain, but when you reach that spot, it turns out there is another higher peak and so on and so on.  This process grinds you and your poor little startup down, and the oxygen (cash) just keeps getting thinner until you are exhausted and broke.

What’s worse is if by some small miracle you actually make it to the point that they decide they want your product or service, they will then grind you down on price mercilessly.  They realize their leverage over you and promptly employ it.  Even if you make it to a deal you can live with, you now have a one-customer company, which is not very impressive for a seasoned investor because one data point does not make a trend. It could just be an anomaly.

A single-customer company is in a very precarious position indeed.  My first company, Inmark Development was in that position for a while & I learned the hard way (which is code for the expensive way) about all the real-world pitfalls.

By contrast, building a real business on small customers, then working your way up the food chain to medium customers and beyond makes for a far sturdier business.  Importantly, the sales cycle is much shorter and requires fewer resources and often no modifications to the core product.  You also get the benefit of more accurate and timely market feedback, which is so critical for a startup. It’s also much easier to stay true to the company or product mission, rather than being yanked around randomly by a single voice.  With a diverse portfolio of customers, a single customer can’t inflict significant damage if you lose the account.  Finally, investors will have more reference points and the traction that you gain will be more tangible and durable.  Once you build a stable business of right-sized customers, at some point you will be in a position where you can afford to dance with elephants.

As I stress in my book, The Start-Up J Curve, it’s incredibly important for startups to do things in the proper sequence.  Of course, large customers are fantastic once you are ready for them.  But they can be fatal if you attempt to take them on too early.

So the non-intuitive advice that I end up giving a founder of an early stage startup when I hear them excitedly tell me of an elephant-sized make-the-company sales prospect is: “Dancing with elephants is dangerous, I recommend we blow ’em off.”  For now.

The Minimum Viable Product (MVP)

I discuss MVP’s in my book, The Start-Up J Curve, but I wanted to add some additional color because it’s so critical to get it right.  As most people  in the startup world are aware, MVP stands for Minimum Viable Product.  Each of those words are important.  Minimum means the least amount of time, money and effort that you can put into the product to test the hypothesis.  Viable means that from the perspective of the user, it works enough to test the hypothesis.  Product means it is something real – it is more than a discussion or a pitch.

Prior to even embarking on building an MVP, I recommend having discussions with potential users and customers.  Those discussions can help you hone in on what the customers actually care about, as opposed to what you think they care about.

In my experience, 90% of MVPs are not really MVPs, they are really a version 1.0 of a product.  As a result the startup spends way too much of their scarce time and money building something when they don’t have any real-world proof that people care about it.  I frequently see MVPs that take 3, 6 or even 12 months to build.  Of course it depends on the product but, just to pick a number, if it takes longer than 2-3 months, I’d say you are quickly moving out of the spirit and reality of MVP land.  Personally, I think anytime you take longer than 2-3 weeks, you should be rethinking your MVP strategy.  A bell should ring after 1 month and if you are still developing, then you should start hacking features out and push to finish it immediately.  If you are into 2 months, a guy like me is going to start asking a lot of questions, because I will suspect that something is wrong.  Past 3 months and I will begin assuming my investment is a zero, because in my opinion the team is not “getting it.”

Ideally, it is way shorter than months and measured in weeks or even days.  Groupon did the MVP of their famous morph from “The Point” within 2 days. DoorDash spent up-front time talking to over 200 prospective restaurants about their operations system, and when the restaurant owners didn’t show enough interest they asked them about their problems.  “Deliveries are painful” was the most common answer, so they put together a prototype in a couple of hours and got orders the first evening they went live.

Utilizing a proper MVP strategy is critical when you are in the nadir of the J Curve, in Morph stage where your back is against the wall and you are trying to figure out the product.  Executing proper MVPs will give you multiple “shots on goal” that will give you the greatest odds of success.

I think the trick to a good MVP strategy is to answer up front the 2 most important questions: 1) What specifically is our hypothesis and; 2) What do we need to do to prove or disprove that hypothesis?  If you skip or skim over this, you are already headed down a dangerous path.  Spend time on this and keep forcing the team and discussion back to this simple, yet tough, question.

MVPs are all about figuring out every possible shortcut to save time and money.  For example, lets say you want to sell a great new service or product.  You can cobble together a website in a few days, but you don’t need the perfect back end payment system, just hook into PayPal or another quick and easy system.  It’s OK if the MVP is not perfect as, in a way, it generates a stronger signal if people like it despite the fact that it’s imperfect.

I should note that there is a time where MVP is not appropriate.  Specifically, if you are determined to get into an existing market and your product is not highly differentiated, then there will be a minimum bar or hurdle that you will need in terms of feature set.  We do this at LoveToKnow, when we think we have a particular advantage that we would like to leverage to get into an existing market.  It carries its own set of risks and those risks are magnified because the initial product can take well over 3 months.  So we need our confidence to be quite high to pursue these.  Still I think we probably do too many of these and not enough MVPs.

Becoming really good at MVPs is a required startup skill.  Nailing that strategy can make the difference between a joyful adventure in the wilderness on your way to success, or a very long, cold winter at the bottom of the J Curve.   Don’t over-bake your MVP, keep it simple, test the hypothesis and roll from there.

Angel Investing and the Power Law

The Power Law has become a widely accepted reality in venture, particularly as it applies to a classic venture portfolio.  While it may be an important factor when understanding future or past venture returns, I think it’s a mistake to extend it to all forms of venture, especially angel investing.

At the risk of oversimplifying, the Power Law states that venture returns are highly skewed towards a small number of big winners and that one or a small number of these winners drives the eventual returns of a venture portfolio.  A more erudite explanation is here.  I was recently reading an article that implied that, by extension, if you didn’t have a good way to find these potential Unicorn deals and participate in them that your angel investing was doomed.

My venture partner David Hehman and I have been investing in angel deals for over 20 years and what we have seen is different.  Our biggest wins have been deals that were not “Unicorns” where we invested a small amount of money that then multiplied by 1,000 and “made the portfolio.”  Rather, our success has come from backing excellent entrepreneurs very early, receiving a relatively large amount of equity, working hard for the company, and sticking with the investment for a long time.   There are several reasons why our style allows us to avoid relying on the Power Law.

First, by working hard to avoid failure, we have a higher success ratio (fewer zeros) than the average venture portfolio.  Part of this is that we often accept lower risk, knowing that it means in some cases a lower potential reward.  Also, when a company isn’t working out we help the entrepreneur on a soft-landing strategy, which I describe in detail in my book, “The Start-Up J Curve.”  These soft landings reduce the impact on the entrepreneurs and our investment.

Second, we hold investments much longer than most would, thereby enlisting the magic of long term compounding.  Having an imperative to sell an investment that is otherwise doing well, I believe, really reduces returns and especially wealth creation.  My rule here: “You can’t get rich selling!’”

Third, we are open to what we refer to as “cash flow” deals.  These deals are not and will likely never be venture candidates, nor are they ever likely to IPO, but that doesn’t mean they aren’t wonderful businesses.  Eventually if they succeed, they generate cash flow and distribute out to investors.  Because we organize these companies as Sub-S corps or LLCs, they don’t pay taxes at the corporate level.  This is incredibly efficient and in some cases the yearly distribution exceeds our original investment.  I would argue that most of Warren Buffet’s investments are actually just a form of “cash flow deals.”  His businesses send cash home to Omaha where it piles up until he and Munger figure out what to do with it.  This is one of the reasons a recent article is titled “Warren Buffett has a $73B problem: cash is piling up faster than he can invest it.”  His cash pile is not because he just ka-ching’ed a Unicorn in an IPO, because actually he almost never sells his investments.  Currently, his combined 90 businesses generate $1.5 billion of cash per month!  One of the big advantages of cash flow is that they provide cash flow to invest in new deals.  They also are a good reminder that you own a real business that can generate a profit.  Because we are open to these types of deals, we are able to consider a much, much wider range of businesses than if we were wedded to pursuing a Power Law oriented strategy.

A significant problem with Power Law strategy is that it encourages some bad behavior on the part of the investors and management, such as overinvesting and a “go big or go home” mentality.  Quite often, start-ups who are beholden to this strategy break the golden rule of “Nail it before you Scale it.”  By prematurely scaling, they can often end up slamming into a wall because their product or business model is not fully baked.  Quite often, patience is required with start-ups.

David and I do occasionally invest in companies that are clearly going to be running the Power Law strategy playbook and we are fine with that.  We have a number in our portfolio that are doing very well indeed and we look forward to one day helping them ring the bell at the NASDAQ on IPO day.  But my point here is that it is not the “only” way to invest in start-ups.  As Warren Buffet once said, “There is more than one way to get to investment heaven!”

The Perfect Pitch Deck

Today is the official launch date of my book, “The Start-Up J Curve”, so I thought it would be a good day to share something which can greatly benefit most start-ups – and especially those who are looking to raise money.  I call it The Start-Up J Curve Perfect Pitch Deck.

My venture partner, David Hehman, and I have seen hundreds, probably thousands of pitches over the past 20 years.  Many of those presentations, I dare say, were not very good.  It’s not that the entrepreneur isn’t good, or that their idea doesn’t have some merit – it’s that the presentation just fell short.  It didn’t present the business in the best light and usually left lots of unanswered questions.  In not having a great presentation, they did themselves and their idea a disservice.  So when I was writing the Start-Up J Curve book, one of the things I set out to do is describe how to make a perfect pitch deck.  I did extensive research (the VC firm Sequoia, for example, had one of the better ones) and looked through a bunch of old ones that had been presented to us.   Then I put together a PowerPoint deck with 20 slides.  Finally, I sent it around to some of my VC friends and asked them for their input.  It’s a template that describes exactly what to put on each slide.  If you follow it, you will not only give your business the best possible shot at getting funded, but perhaps even more importantly, it will force you to really think through your business.

The Perfect Pitch Deck also contains general pointers for the presentation, such as:

  • KISS – Keep It Simple. Be succinct.
  • Don’t have more than 3-4 points per slide
  • Don’t have anything on a slide that forces middle-aged people to squint.
  • Skip fancy graphics
  • Shoot for 15 slides total, no more than 20.
  • It’s OK to leave some of the finer details out. You can elaborate in the ensuing discussion.
  • Don’t read off your slides. Slides should illustrate the points you want to make, not serve as speaking notes.

If you really, really know your business, this deck will only take 2-3 hours to complete.  If you don’t, it may take weeks.  BTW, it’s OK if it takes you weeks to nail it – the work you are doing is INVALUABLE!  By going through the process, whether you get funded or not, your odds of start-up success will certainly go up.  That’s a promise.

The deck is available for free at howardlove.com.  Let me know what you think (but please don’t send your deck unsolicited) – my email is howard@howardlove.com.

The Billion Dollar Idea

Recently the Dollar Shave Club was bought by Unilever for one billion dollars.  I know many will think “why didn’t I have that idea?”  However, perhaps a more productive thought is “how could I come up with an idea like that?”  Well, it may sound far fetched but I actually do believe that you can.  In my book, The Start-up J Curve: Six Steps to Entrepreneurial Success, I talk about the process of coming up with the winning idea.  In fact, I even mentioned the Dollar Shave Club as a classic example.

Here is the excerpt:

One great method to help surface good ideas for the Create
phase is to become problem sensitive. This means training yourself
to notice the problems all around you or, rather, overcoming
your natural propensity to gloss over problems. We mentally
fast-forward through problems as a matter of survival; if we
obsess over every minor obstacle that crosses our path, we’ll never
accomplish anything, and we might be miserable. I’m not suggesting
that you become so problem sensitive that you become
incapacitated. I am suggesting that increasing this sensitivity will
facilitate your search for a marketable product.

For instance, say you have to make a last-minute, inconvenient
trip to the store because you’ve run out of razor blades. So you
drag yourself out of the house late on a Sunday night, arrive at the
store, find your package of eight razor blades, and buy them for
$32. Right there are two big problems: inconvenience and cost.

The guys who started the $1 Shave Club were probably sensitive
to these problems, and it led them to a solution: Subscribe
to the club for $1, and the club sends you razor blades monthly.
It’s a simple but brilliant problem-solving idea, and it hooked
me. Their costs of manufacture and shipping are low, and they
also upsell you to fancier blades, resulting in even more profit.
As the club’s motto goes, “Shave time, shave money.”

By paying close attention to problems in your life—when you
shop, at work, when you’re online—you can find potential ideas
for start-ups. On top of that, you can determine if a problem is
significant and widespread (rather than minor and a result of your
own idiosyncrasies) by talking to others. Are your friends and colleagues
as irritated as you are by a given problem? If so, and if you
think it’s a problem you can solve, you may want to move forward
on creating a solution. And this is a much better approach
than the typical brainstorming sessions that some start-up aspirants
favor—in which people throw out all sorts of imaginative
concepts that sound good in the conference room but lack a realworld
foundation and customer resonance, like having to go out
to the store for an overpriced package of razor blades.

I recognize that looking for problems may sound simplistic
from an idea-generation standpoint. Obviously, it takes more
than the recognition that gasoline is too expensive to develop a
marketable alternative fuel. At the same time, don’t be daunted
by big problems. Elon Musk was determined to tackle our
dependence on fossil fuels, and his boldness has led him to
create Tesla and Solar City. Training yourself to recognize the
problems in life is a great start, but don’t stop there. Be creative
in coming up with solutions, and then figure out a way to make
your solution a reality and a viable business.

You also need to ask yourself if you’re passionate about the
given problem and solution. Passion is a key ingredient and will
help you overcome the many hurdles a start-up presents. Startups
are incredibly hard, and if you aren’t fully engaged in what
you’re doing, then you have a problem you can’t solve.
Numerous factors affect whether a start-up idea bears fruit,
but the genesis is often some problem that bothers you or
inspires you—a problem that an observant entrepreneur grasps
and responds to before their potential competitors, who are still
in their conference rooms brainstorming.

Good luck with your next billion dollar idea, and if you want get that idea to success as fast as possible, check out The Start-up J Curve: The Six Steps to Entrepreneurial Success !

 

The Complications with Complexity

Recent conversations with several very young startups reminded me of a common problem that many start-ups face while they are in their early days: The product is too complicated.

Complicated products don’t work for many reasons, the first of which is they are just too hard to explain and “message”.  When somebody asks you what your product does, you need a crisp one-line answer and you need to be able to deliver it without hesitation.  If you fumble or hesitate when asked, you can assume you have a problem.  If you deliver your one-liner and the recipient gives you a blank stare, that is also likely a problem.  The other big challenge with complicated products is that they are complex to build, so they take too long to get out the door.  And since time is money (and nowhere is that more pronounced than in start-ups), you end up burning precious amounts of cash before your product gets to market.  Hard-to-make and hard-to-sell is not a great way to begin your startup adventure.

So I find myself pushing these early entrepreneurs to cut things out and do so quickly.  You can get there by asking, what is the one single thing I am doing that is unique and really solves a problem? Chuck everything else overboard, focus on that one thing and get it out in the marketplace ASAP to see if anyone cares.  This begins the true journey to find out what the REAL product needs to be.

In my book, The Start-up J Curve, I highlight how the toughest part of the journey is the first few steps: Create, Release, Morph and Model.  Those steps form the bottom of the J Curve, which I also refer to as the “long cold winter.”  The trick is to get through these first steps as fast as possible.  Complicated products delay traversing the nadir of the J Curve and make those first steps a long and painful process.Don’t go there.  Simplify your product now.  Strip it down to its essentials and “Get the Damn thing out there!”