Startup fundraising isn’t about convincing skeptics but rather finding true believers

— 

@leehower on linkedin series A financing, http://t.co/14jFUJU (via @Jess)

So true. Either an Investor gets it, or they don’t. The Investor that you have to painstakingly walk through your thinking process just to get them to agree is probably not the right partner to bring on to build your business.

(Source: bijan)

4 Ways Startups Fail

1. Run out of money
The number one reason a company fails is it runs out of money.  Many of the “acqua-hires” by Facebook and Google are teams who ran out of cash looking for a home.  They did not sell their company as a talent buy.  They literally just get hired in with standard employment packages.  One common variant of this are the various seed companies that raise a $1 million seed round and hire up a 6-7 person team prior to getting to product market fit.  The company burns through the cash in a year, and then tries to shop itself to Google, FB, etc.  If the sale falls through, the company shuts down and the employees get hired individually by various companies.  This scenario is most common on teams with a large number of business founders – e.g. if you have 3 business founders and 3 engineers, the engineers may leave early on with trouble and the residual value of the team is low or none which means the company does not get an exit at all and the founders disperse to look for jobs.
Ways to mitigate:

• Run lean.  Only hire up the team when you are confident you will be able to make money or raise more money.
• Raise more cash then you need when you can.
• Bootstrap the company or charge for the product from day one.
• Focus on having an engineering heavy team from day 1 to increase the odds of a talent buy if all else fails.

2. Team implosion
Lack of clear decision making?  Founders constantly fighting?  Hiring a bunch of jerks that irritate everyone?  A lot of companies end up imploding due to bad team dynamics leading to a lack of clear direction, internal infighting and backstabbing, and a terrible working environment.
Ways to mitigate:

• Make sure you and your co-founders have clearly defined roles and there is a single person ultimately in charge who can call the shots.  
• Make sure you and your co-founders can communicate openly, have mature and frank discussions (can you give each other constructive feedback?), and are aligned on where you want to take the company (does one person want to sell early and the other wants to build a long term global business?).  
• Have a high bar for culture and team fit for early hires. Correct hiring mistakes quickly.

3. Living dead company / lifestyle business.
Depending on your perspective this is either a great outcome (a small, lifestyle, tech business) or a terrible outcome (“living dead” startup with little or no equity value).  VCs and hyperambitious founders think of companies that reach a certain scale, but never become a breakout success as the worst form of failure. Rather then fail fast and be able to move on to something else, the entrepreneur is locked into a company on a slow to nonexistent trajectory.  The company spins off enough cash to stay alive and pay salaries, but not enough to grow at a meaningful rate.  Additional funding is not available as the company is viewed as a small cash business.  The entrepreneur feels like she can never leave (“I owe it to the employees and investors to stick around”) and the VCs are stuck with a board seat that takes up a big chunk of their time.
Ways to mitigate:

• Chose a large, rapidly growing market.
• Always ask yourself how you can 10X your business.
• Pivot from the so-so business (very hard to do) or be willing to take a small exit (may not be able to do so if you raise from VCs)

4. Bad board / investors.
Stupid things a bad board member or investor may encourage a startup to do:

• Raise and burn lots of unnecessary cash leading to too high a valuation to exit and too much dilution for the founders to be incentivized.
• Fire the founders and hire a “professional CEO”who takes the product/company down the wrong path.
• Block an exit even when it makes sense, and watch the company get crushed by the larger player who tried to buy them 6 months before.

Ways to mitigate:

• Do due diligence on your investors.  Ask other entrepreneurs, angels what their experience with the investor or board member was like in the past.
• Don’t add people to your board until you know them well.
• Bootstrap your company or raise angel money without giving up a board seat (harder to do with a venture round).

Let me know in the comments what other failure modes you think are common for startups.

Great Post! - http://twitter.com/#!/eladgil

Patrick Foley recently made an observation on how everything I do now seems to be an “experiment”.

Running experiments is a key activity in Lean Startups, but my bias for experimentation preceded Lean Startup. While I can trace it back to several interests I’ve held, one that particularly helped me develop this skill was cooking. Cooking and startups have more in common than you’d think.

A perfect experiment for me is a time-boxed practice session that is part repetition and part improvisation.

While repetition helps you master technique, improvisation helps create leaps in learning.

Cooking lends itself perfectly to both. What I learned from cooking definitely spilled into my Lean Startup experiments. Even though I was experimenting before Lean Startup, I am now better able to codify the process.

What follows is a recipe for how I approach anything new:

1. Start with the Right Attitude

“Good cooking depends on two things: common sense and good taste.
It is also something that you naturally have to want to do well.”

- Simon Hopkinson, Roast Chicken and Other Stories

Working backwards:

Commit to continuous learning

While I’m generally interested in a lot of things, I only keep a few interests at a time because I believe things are only worth doing if you can do them well.

Broaden your experience

The way to develop good taste is to taste more. I’ve been an avid foodie for much longer than I’ve been a cook. Even now, when I tell people I cook, the next question usually is “what type of food”. At first, I didn’t know how to answer. Now I reply: “Everything”.

Patterns are everywhere

As you broaden your experience, patterns begin to emerge. You start tasting the ingredients in the food, seeing the techniques that went into the cooking process, and realizing how a few key ingredients have the ability to completely change the flavor profile or ethnicity of a dish.

Develop good judgement

I’ll talk about developing “common sense” or good judgement a little later.

2. Pick your Teachers Carefully

Even though it’s important to experience and collect a wide range of experiences, I get very selective when I cook. There is no shortage of recipes but most of them aren’t that good. When I’m first learning, I try to minimize as many external variables as possible. If the dish fails, I’d like to know it was me and not the recipe.

To do that, I pick a handful of chefs I admire, make sure I have access to the same ingredients and tools (no immersion circulators, or nitrogen tanks) and follow their recipes literally at first.

Literal execution is important because
a) I always give people with more experience the benefit of doubt especially when they have taken the time to share their learning, and
b) I don’t know any better yet

Over time, you learn that not all cookbooks are created equal. Even the best intentioned chefs skip basic steps, make mistakes, or assume too much. You overcome these limitations by developing your judgement or “common sense”. The key is always asking why.

Before attempting any dish, I study and internalize the recipe several times. Instead of blindly following steps, I need to know why. After tasting the finished product, I think of ways to improve the dish for the next time. If the dish shows promise, I usually work on it a few more times until I have a repeatable process for delivering the desired result.

The best cookbooks (e.g. Ad-hoc at Home by Thomas Keller) balance prescriptive steps with explanations that serve to teach foundational principles. They were the inspiration for my own book: Running Lean.

3. Build a Strong Foundation

Like startups, cooking is not a perfect science. For a while I was drawn to “Cooks Illustrated” which is a cooking magazine that applies the scientific method to cooking. They cook the same dish several different ways in search of the perfect method and often make the process way too complicated. Interestingly enough, I’ve never found their dishes to wow me. Much like building a product, the return on effort diminishes as you go from macro to micro level optimization to where you might actually start hurting the product.

While I do work on improving a dish, I tend to focus more on improving my basic techniques such as finding the best way to boil an egg, cook rice, or roast chicken. Again, I’m looking for a repeatable series of steps that produce good results. Cooking is very much a sum of parts. I find the best place and time to learn these techniques is in the kitchen while cooking – not in a classroom.

4. Measure Results

The great thing about cooking is that the learning is immediate. You get to taste the final product after 60 or 90 minutes of cooking and see if it’s any good. Even though food hits on several senses, taste is the key measure of success. This is something Iron Chef Bobby Flay understands all to well. He rakes in more wins over other more creative (and probably better) chefs who showcase a more creative side to their dishes.

Having 2 young kids at home, makes taste my primary success metric too. My wife (also a cook) and I enjoy having guests over for dinner and we developed a five-star rating system based on how likely we’d cook this dish again and for who:

5 stars: Impressive. Cook for anyone.
4 stars: Very Good. But for a specific type of guest.
3 stars: Okay. Fine for home.
2 stars: Nothing Special.
1 star: Where’s that lobotomy?

Thankfully, we’ve had very few 1 stars. My wife, who is much more process driven here, has a database of these ratings cross-referenced to a link to the recipe which lets us pull these up quickly when needed.

5. Improvise

Learning from others first is an important prerequisite to finding your own style. Ferran Adrià who is considered one of the best and most creative chefs in the world got his start working restaurants as a dish washer, then line cook, where he began learning and memorizing classic Spanish and French recipes. Through repetition, deconstruction, and constant experimentation, he was able to extract the essence of each dish and present them in his own unique “deconstructivist” style. His restaurant, El Bulli, is only open 6 months in a year, seats 50, but receives 400 requests for each table. He experiments on his dishes for the remaining 6 months.

A jazz musician can improvise based on his knowledge of music. He understands how things go together. For a chef, once you have that basis, that’s when cuisine is truly exciting.

- Charlie Trotter

6. Create Flow

I generally cook 2-3 times a week for 60-90 minutes each. Given that I’m incredibly busy, some upfront planning is required to pull this off. I usually do a meal plan on a Saturday before visiting the grocery store. I pick dishes based on what I’d like to learn next, what’s in season, and what goes well together. I strive to use up all the ingredients across several dishes and set myself up for a few fun challenges – such as not planning a side dish and coming up with one spontaneously while cooking based on what’s in the refrigerator and pantry.

60-90 minutes to cook 2-3 dishes is not a long time and requires even more organization. The French have a name for this: “Mise en place” – literally translated to “everything in place”. Before starting to cook, I go over the meal plan and visualize “a path of least waste”. Waiting is usually the biggest contributor of waste and must be avoided. For instance, water takes about 5 mins to come to a boil, charcoal takes about 30 mins to be ready for grilling. That’s time you should be doing something else. The key is getting every step to flow.

7. Always Remember Why You Are Doing This

You have to enjoy the process as much as the end result or this quickly devolves into a chore which kills the fun and learning.

“Drinking good wine with good food in good company is one of life’s most civilized pleasures.”

- Michael Broadbent

Related posts:

1. Building a Lean Startup (Austin Lean Startup Meetup, Feb 2010)
2. 3 Rules for Building Features in a Lean Startup
3. Bootstrapping a Lean Startup
4. Lean Startup is a Rigorous Process
5. Achieving Flow in a Lean Startup

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