I’m sending the manuscript of Pendulum to the publisher this week. Like the tower, it turned out profoundly better than I had imagined. Here’s what the reader will find on the front page of the book when it hits the bookstores next spring:
“If you will see into the heart of a people, look closely at what they create. Examine the inventions to which they pay attention. Read their bestselling books.
Listen to their popular music.
This is how you will know them.”– Roy H. Williams
Having made my 90-minute presentation on Society’s 40-Year Pendulum to 241 auditoriums full of people in the past 8 years, I began this book by trying to disprove my own 40-year hypothesis.
My friend Dr. Kary Mullis, winner of the 1993 Nobel Prize in Chemistry, said,
“Roy, there are few, true scientists left in the world. Too often, a scientist will develop a hypothesis and then look for supporting evidence. They identify with their hypothesis and they want it to be correct. This is bad science. When you have a hypothesis, your job is to try to disprove it. No one knows more about your hypothesis than you do. No one else is as qualified to discover its flaws. When you believe a thing to be true, your first responsibility is to do everything you can to disprove it.”
I’ve long been a fan of Roy Williams & Wizard Academy. Years ago I was granted as scholarship to attend Roy’s Magical Worlds Workshop and there I first heard of his ’40 Year Pendulum’ – it changed my perspective on people, culture and business!
As Roy has been writing his new book, as he explains above, he is being forced to re-examine his hypothesis to ensure his science is true and unbiased. This reminds me a great deal of the early stages of building a technology company today.
As a founder of a technology company and as an advisor to several others, it is key to seek to prove our hypothesis – not just assume it is accurate and drive forward writing code. That is what the lean startup, customer development and MVP is all about.
If launching a startup is like jumping off a cliff and building a plane on the way down, then lean startup principles are the kiddie parachutes you deploy to buy yourself time before you hit the ground. While they’re no guarantee that you’ll land safely, they do minimize your chances of a spectacular crash and burn.
To the uninitiated, the lean startup movement advocates maximizing learning and minimizing cash burn during your search for a sustainable and scalable business model. If that seems like a mouthful, here’s a summary: put your stuff out there as fast as possible, see how it does, and keep iterating until you succeed. Do both qualitative and quantitative research to figure out whether you’re building a product people actually want and whether it’s possible to acquire customers in a cost-effective way. This usually entails taking a hard but honest look at the assumptions you may have about your product, target users, monetization models, competitive landscape, and distribution channels.
1. Valuation is temporary. Control is forever. Ravikant’s point is that entrepreneurs should make sure that, at the beginning, they always retain control of the company’s voting rights, regardless of how much money they raise. It does no good to have a high valuation where you take in lots of money, if you lose control. The way to do that is to create alternatives to one particular deal, using creative financing ideas.
2. The less you raise, the more it matters. Usually the early raises (first institutional rounds, known as the Series A) have a lot more impact than later raises (Series B+). Usually, this is because early rounds are the most dilutive (i.e., you have to give up a greater percentage control of your company) and establish the terms which are often picked up by the later investors. And the more you raise from investors, the more your control decreases.
3. If you want advice, ask for money. And visa versa. If you go asking for money, VCs give you an earful on how to run your company. If you go asking smart people for advice, eventually you’ll do well enough that those advisors will refer you VCs. This is assuming that you get good advice and follow it. Here’s more on the value of advisors.
4. Money has karma too. Too much money can actually kill a startup because it raises expectations about what kind of return will be possible. Big amounts of money are like drugs. They’re addictive. But it means you can’t go after small markets, even if you can build a highly profitable company. Going after niche markets is a problem because early stage investors know you’re not finance-able by later stage investors, so they won’t fund you. It’s game theory, looking back from the end. As for being lean, Sequoia Capital has taught us why it’s important.
KDYKES: Read this full article because these are key elements that any startup founder needs to understand when going to raise money. In my first company where we raised significant money ($5 million +), we got caught up in the heady times of the late 90’s and made stupid mistakes. We raised too much, lost voting rights and watched the subsequent team come in an blow up the company we’d spent years building.
If you want to build an online service, and you don’t test it with a fake AdWords campaign ahead of time, you’re crazy. That’s the conclusion I’ve come to after watching tons of online products fail for a complete lack of customers. So I thought I would walk you through exactly how to run a “fake landing page” test using cheap tools that require no technical skills whatsoever. Our goal is to find out whether customers are interested in your product by offering to give (or even sell) it to them, and then failing to deliver on that promise. If you’re worried about disappointing some potential customers – don’t be. Most of the time, the experiments you run will have a zero percent conversion rate – meaning no customers were harmed during the making of this experiment. And if you do get a handful of people taking you up on the offer, you’ll be able to send them a nice personal apology. And if you get tons of people trying to take you up on your offer – congratulations. You probably have a business. Hopefully that will take some of the sting out of the fact that you had to engage in a little trickery.
KDYKES: This is a great approach so you don’t waste time or money on an idea that is not fully baked. Go read the full article.
Posted on June 5, 2009 by steveblank
I’ve screwed up a lot of startups on faith.
One of the key tenets of entrepreneurship is that you start your company with insufficient resources and knowledge.
At first, entrepreneurship is a Faith-based initiative. There is no certainty about a startup on day-one. You make several first order approximations about your business model, distribution channels, demand creation, and customer acceptance. You leave the comfort of your existing job, convince a few partners to join you and you jump off the bridge together.
At each startup I couldn’t wait to do this. No building, no money, no customers, no market? Great, sign me up. We’ll build something from scratch.
You start a company on a vision; on a series of Faith-based hypotheses.
However, successfully executing a startup requires the company to become Fact-based as soon as it can.
Think about all the assumptions you’ve made to get your business off the ground. Who are the customers? What problems do they have? What are their most important problems? How much would they pay to solve them? What’s the best way to tell them about our product?…
Ad infinitum. These customer and market risks need to be translated into facts as soon as possible.
You can blindly continue to execute on faith that your hypothesis are correct. You’ll ship your product and you’ll find out if you were wrong when you run out of money
Or you can quickly get out of the building and test whether your hypothesis were correct and turn them into facts.
KDYKES: Tremendous insight (1) test your idea with customers as soon as possible (2) transition blind entrepreneurial passion into fact-based decision making and (3) if it will fail, make it fail quickly so you burn less time/money.
What we have discovered over the past nine months are growing diseconomies of scale. Bigger firms are harder to run on cash flow alone, so they need more debt (oops!). Bigger companies have to place bigger bets but have less and less control over distribution and competition in an increasingly diverse marketplace. Those bets get riskier and the payoffs lower. And as Wall Street firms are learning, bigger companies are going to get more regulated, limiting their flexibility. The stars of finance are fleeing for smaller firms; it’s the only place they can imagine getting anything interesting done.
As venture capitalist Paul Graham put it, “It turns out the rule ‘large and disciplined organizations win’ needs to have a qualification appended: ‘at games that change slowly.’ No one knew till change reached a sufficient speed.”
The result is that the next new economy, the one rising from the ashes of this latest meltdown, will favor the small.