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First Steps

December 12, 2005

Although I'm still in the throes of making my startup fly, I thought I'd share some of my philosophy and perhaps a little advice on the first steps I've already taken. I read a pretty good post on 37signals blog and it spurred me to finally get around to polishing and posting something I've had in draft form for a while.

I don't think I'm alone in that the first step always seems to be the hardest. Whether it be writing an essay or embarking on some difficult endeavor, the hardest part for me is how to begin. Once past that hurdle, everything starts to "flow". Disregarding the easier-said-than-done nike-commercial-advice of "Just do it", how do you take the first steps to creating a technology startup?

1) The Idea

Maybe you've had a neat idea rolling around in your head for a while. The would-be entrepreneur's worst enemy is usually their own inner critic. Don't obsess about whether the idea is perfect or not, like I've said before, your successful idea is not likely to be the one you start with.

That's not to say the choice of first idea is inconsequential. The choice of your first idea is likely to impart inertia and momentum in the direction of your eventual successful idea. In other words, your final successful idea will very likely be related in some way to your starting idea. You want to try to choose something that you are passionate about, something that has revenue potential, and something that's focused but not so laser focused that you won't have the ability to significantly alter the idea when it's necessary.

Does your startup idea have to be wholly original? I would argue that the answer to this is no. There is the thought that if the startup ideas isn't completely new, that you couldn't possibly succeed with it. There is a "first mover" advantage, but there have been several "first movers" who have executed poorly and lost the market. I've seen several comments on entrepreneurial blogs to the effect of, why not enter an already existing market, something proven? In all cases you must have something unique and compelling to offer. This can be superior quality, lower cost, anything that significantly differentiates your offering from what already exists. Customer thinking is likely to fall along the lines of the old cliche, "The devil you know is better than the devil you don't". In other words, existing products will carry a certain amount of momentum with their customers that you must overcome.

2) Know yourself

Is the idea of being CEO of a company exciting? How about accountant? Sysadmin? Salesperson? Customer service rep? How about janitor? Starting a company you are going to be forced to wear lots and lots of hats. If you are someone who is amazingly good at one thing but doesn't like leaving your "expertise" area, try to partner with others. Even when partnering with others, if you feel incapable of working on things that are completely unrelated to your area of expertise reconsider creating your own startup, you will be forced to do other things. I like the following from the presentation given by Olin Shivers at startup school.

It also helps to have a high tolerance for feeling like a moron. If you want to be a fluent speaker of mandarin, the only path to fluency, to excellence, is clumsiness. You have to get out there and have a lot of really terrible conversations where you butcher the language with native speakers. Startups are like that, only more so. Ok, you have to be very comfortable residing... you will be residing permanently outside your comfort zone.

Can you handle being an idiot? Prior to being a 'genius' all the business startup CEOs we like to idolatrize were called an idiot at some point. I listened to a venture voice podcast with Scott Rafer, CEO of Feedster a while back and something he said stuck in my head. While he was talking about the differences between silicon valley and other places to create a startup, I still thought it was a relevant quote, "People I know in other regions call me up and say 'Everybody I know is calling me an idiot, what do I do?' and my comment is, well, you thank 'em, cause if they all thought you were right, you'd be too late." Paul Graham characterized this as "in the startup sphere, you are a loser until you are a hero". As a startup founder you will be spending a lot of time as a loser.

I've been asked many times by people who learn I am working out of my apartment, "it must be really hard to focus on work being at home, right?". Well, only when Oprah's on... oh and my Soaps. Seriously, I've never been more motivated and focused in my life. If you think that it's hard to stay motivated when left to your own devices, a startup isn't for you. My company is on my mind in some form or another seemingly 24 hours a day 7 days a week (yes I've even dreamed about it). Working on weekends? Definitely. If I'm not actually sitting at my computer developing code/financial projections/business strategy, I'm thinking about the business. My girlfriend has been really understanding about all of this, sometimes saying to me "where are you? You're not 'here'." This is when I realize that I was off thinking about some business or development minutia, probably with the '1000 yard stare'. I've tried to partition out some time where I'm not obsessively thinking about my company, but it's hard. Only recently have I also been writing little articles about startups for this blog, usually when I'm stuck on something. I believe to create a startup you must be either obsessed, or insanely disciplined. I fall into the former category.

3) Start your plan

If you haven't started yet, you should take some of your spare time and begin planning your startup. The only way you can begin to prepare yourself for striking out on your own is to do a full financial analysis of your situation. What are all the financial resources you can bring to bear to your startup? How much money do you need to survive? How long do you think you'll be able to survive without any income? These are all questions you need to answer for yourself. Once I had decided to start my company, I had my personal financial analysis done, so I aligned all of my resources to make it a reality.

I would advise making a financial model of your company. Don't worry too much about the details, the model can be something you can refine over time taking into account more and more of the details as you go. If you're not familiar with Excel, now is the time to work on those skills! The math for computing a financial model is trivially easy, mainly common sense, and is mostly comprised of equations like profit = money in (revenue) - money out (expenses). The complexity in this kind of model lies in the multitude of unknowns, how they interact, and how they change over time. How much are you going to sell your widgets/service for? When will you have your first customer? What will your sales growth look like? How much does it cost you to produce each widget?

As you develop your model, you can add inputs and outputs as you realize they are needed. Use the model to try to predict values out for 1, 3, 5, and 10 years, but have the 'time step' be something small like a month. Input variables can include, but are not limited to, time to first sale, sales growth rate, expenses, sales, revenues per sale, cost per item, hires/salaries, initial expenses and other similar factors. Make all of the inputs to the model be 'knobs' you can easily turn. For outputs, you want graphs that, again, can include but are not limited to monthly/weekly cash position, monthly profit/loss, sales per month, and depending on your product, gross margins might be a good one too.

It will feel like you are 'fudging' a lot of numbers. This is inevitable, but it will also let you know what the potential of the overall venture is with "reasonable" numbers. You can start to play 'what-if' games with the model. What if I had crazy-explosive-hit-it-out-of-the-park growth? How would it affect the business. Would I be able to keep up with the cost structures generated by that kind of growth? What if I had limited customer adoption and growth, how long could you survive to turn the business around? The most important things you will learn from this exercise are, what the overall potential for the business is, where you might 'break even', how costs and revenues will be linked in your particular business, a 'worst case scenario' survival timeframe, and what variables in the model, with the smallest 'reasonable' movement cause the biggest changes in the success of the venture. This last, 'sensitivity analysis', can help you understand what the critical aspects of your business are, and help you frame your future strategy.

4) Make some choices

I advocate creating something like the above financial model because it has some 'feedback' effects in your planning process, and the choices you must make. The 'survival' timeframe and cost structures computed above will help you understand what you can and can't do with your own personal resources. Always start with your own resources, seeking investment capital without risking/sacrificing anything of your own is the first sure way to guarantee a "no" in the capital seeking process. If you're not willing to apply your own resources to your venture, why should anyone else?

This analysis will also help you decide whether to seek investment capital or not. Seeking capital is, most will tell you, a full time job in and of itself. Making the commitment to seek capital means developing a formal business plan, creating a compelling presentation, networking, and then dealing with angel investors, venture capitalists, or anyone else you could potentially raise capital from. This is not a short process, filled with 'due diligence', and personal and organizational 'grilling' by those interested.

Will you start full time? Some people say that moonlighting, keeping your day job as you develop your startup is the perfect way to begin. If you can do this, great, it gives you as much "runway" as you want to develop your idea and test its "goodness", but it does severely limit the time you can spend on it.

This, unfortunately, was not a path that would have worked for me. I tend to be "hyper-focused" and a bit obsessive. Knowing this about myself, I knew I couldn't "throttle down" my day job and split my focus. The moonlighting approach was not a solution that was tenable for me, therefore I knew I needed to go full time.

5) Do it

Now that you have some basis for making choices, it's not quite as difficult to take the first step. Of course at this point it's no longer the first step, you've already taken steps to starting your company. You know your idea is a good one although not necessarily perfect. You know you have the fortitude to be an "idiot and a loser" and constantly be working outside your comfort zone. You know you are either insanely disciplined or obsessed with your idea and your work. You also have some idea of where your venture might go and what might happen if things aren't as rosy as you hope. You've decided that you are going to moonlight or go full time and you know whether you're going to seek capital or not.

Having a handle on an initial strategy, beyond "I'll take my idea to a VC and success will flow from how good an idea I have", you can honestly decide whether to do it or not. To the astute reader, it may sound like this is all a veiled method of creating a business plan. Well that's exactly what this is. The term "business plan" however has too much baggage associated with it. What these exercises will do is help show you what the potential for your venture is. It will also give you the seeds of thinking about how you are going to make money with the personal, financial, investment, and time resources that you have available. This is the seed of the implicit 'business plan' that all companies have, how they will turn their raw resources into something of value.

Framing all of this also is my personal philosophy of startups which is not "cash is king" but a slight variation on that sage advice: "Time is king". Since I believe, if you have a passion for your idea and it's a good one, that there is almost always a path to 'break-even' with an idea that's related to your initial startup idea. What you need is enough time to tweak your strategy and idea to spiral in on the one that's going to be your vehicle for success.