Tag Archives: entrepreneurs

Why do individuals become entrepreneurs? – New York University Research #Entrepreneurship

Why do individuals become entrepreneurs?

This is a research paper review.

This research paper was published by the New York University professors Deepak Hegde and Justin Tumlinson. In this paper they posit that there are 2 theories, both of which are based on information asymmetries.

When information frictions cause firms to undervalue workers lacking traditional credentials, workers’ quest to maximize their private returns drives the most able into successful entrepreneurship

Information Frictions and Entrepreneurship

The researchers have built a mathematical model to view data on a) who becomes an entrepreneur vs working at a firm, b) what their earnings over time are and c) why do entrepreneurs choose to start a company.

Empirical analysis of longitudinal samples from the U.S. and the U.K. reveal the following patterns:

(i) entrepreneurs have higher cognitive ability than employees with comparable education,

(ii) employees have better education than equally able entrepreneurs, and

(iii) entrepreneurs’ earnings are higher and exhibit greater variance than employees with similar education.

What this means it that employers value people’s degree, credentials, etc. Most entrepreneurs believe they are as good (or better) than their peers who might have graduated with a degree from a better institution.

For example, potential employers commonly accept educational attainment and work history as signals of unobservable ability. However, the signals are imperfect if a worker believes his ability exceeds what potential employers can infer from his observable characteristics, then he chooses entrepreneurship and becomes residual claimant of his productivity, rather than join a firm in which he would be paid according to his observable signals.

Creating artificial constraints as a means to innovation

Many of the entrepreneurs I know have created new innovative startups thanks to real constraints they had. For example, I was hearing AirBnB’s Brian Chesky, on the Corner Office podcast and he mentioned that when he and his cofounder were trying to get some money to get started and the only way to keep afloat was to “rent” their air bed they had in their room. That, then led to Air Bed and Breakfast, which is now AirBnB.

This was a real constraint they had – no money to “eat” so they had to make it happen somehow.

I have heard of many stories of innovation where in the protagonists had real constraints of either financial, technology, supply, demand, economic, social or any number of other characteristics.

The interesting story that I have also recently heard of how Facebook has “pivoted” from being a desktop offering to getting a significant part of their revenue from mobile is how they were given the arbitrary constraint of only accessing Facebook via the mobile phone.

So there are ways that you can create “artificial” constraints to force innovation to happen.

Most larger companies and some smaller ones as well, have to constantly find ways to create artificial constraints – to find a way to innovate and be more be a pioneer.

While some constraints are good – lack of funds at the early stage for example and lack of resources, there are entrepreneurs that are stymied by these constraints and those that will find  a way to seek a path to go forward.

I think this is a great way for you to think about innovating in a new space. If you have constraints, find a way to use it to your advantage.


When should a startup transition from direct selling to selling via partners and channel?

For B2B startups, one of the biggest challenges and costs is “sales”. Especially if the product costs greater than $10K annually. While many of the lower price point SaaS products might spend more money on marketing, the immediate costs of hiring, managing and growing a sales team is a big challenge for most entrepreneurs.

I hear from a lot of entrepreneurs who try to “develop” a channel, the frustrations of working with a large company’s sales force.

In the attempt to tap into their existing customer base, they end up educating the “channel” sales team on questions to ask prospects, how to qualify opportunities and how to handle objections and not getting enough from the process.

In still other cases, entrepreneurs try to work with partners in the ecosystem – system integrators for example or existing products in adjacent spaces and trying to engage with their sales and technical sales professionals to help position and sell new products to customers. They realize after many weeks or months that the teams are rarely given an incentive to do anything more than sell the company’s own products.

While I am a big fan of trying to drive indirect sales via partnerships and business development efforts, I also believe doing it too early sets the wrong precedent for startups.

 The question is “When is too early to engage partners to sell”?

There are no actual numbers, but some rules of thumb that I follow.

First, if there is enough demand for your products that you are unable to return customer calls or you are unable to fulfill requests from customers for meetings, then you should engage partners. The best and easiest way to help build a loyal partner base is to drive the initial business to them.

Second, you should have enough case studies to cover at least 3 use case scenarios in your top industries as examples. What that means is that you should have 3 possible case studies of how your product helps drive initiatives in a specific industry that the partner operates in, where you are targeting to get customers.

Third, you sales cycle time should be reducing 10% per opportunity and your sales process must be defined enough so it is consistently predictable. For most companies, this does not happen until you are selling for a year and have about 30-50 customers already.

I usually get the question that if these were already in place, why would you need partners? The short answer is to scale.

Similar to funding from institutional investors, if you already have a business that’s doing well and growing, then funding and partnership sales helps you scale quickly not to generate the initial excitement. 

In fact, my suggestion to enterprise B2B startups is to not consider channels and partnerships for selling until they have raised their series B funding from an institutional investor.

Channel sales for startups
Channel sales for startups

Channels take time to develop and you have to invest a lot of money to gain the benefits over a long period of time.

I would highly recommend you be in control of your own destiny and push yourself to directly engage, generate and close your initial leads and customers.

Channels can come much later in your journey.

The size of your ambition determines the value of your outcome

When you are building a technology startup, one of the first choices you make even before you get started is the size of your ambition. Most entrepreneurs dont think about it, so it tends to be an unstated but large impact choice.

If you get inspired by another entrepreneur, such as Sachin Bansal of Flipkart or Drew Houston of Dropbox, then you are likely to think in terms of a large market-changing company. If you find inspiration instead, in a wrong that needs to be righted then you are more likely to build a purpose-driven company. Finally if you think in terms of targeting a large market and are interested in being a meaningful player, then you going to end up doing that but only smaller.

What I have found from my experience is that entrepreneurs that start with the intent of solving a small problem, but in a large market have a much higher chance of creating a large company. Which is very counter intuitive.

This is dramatically different than what most investors have been looking for and what most entrepreneurs to be true as well.

“Focus on becoming big”, we are told. “Go big or go home”, is another term bandied around.

What I have noticed is also that having a large ambition but wearing that on your sleeve up front tends to distract most entrepreneurs.

The single biggest indicator of increasing ambition, unsurprisingly is confidence from achievement.

Which means, the small goals you set for your self and overachieve, the more size of your ambition becomes.

It becomes a self perpetuating virtuous cycle of delivering on your smaller milestones and gaining confidence from them.


So what are the other items that determine the size of your ambition?

The obvious one is market. Larger the market, the more ambitious you become.

The next one seems to be time together with your team. The more your team has worked together, got some wins together and more the battles you have fought, the bigger your ambition gets.

One proxy indicator seems to be amount of money raised, but that’s usually not a signal for anything other than the artificial pressure on the founders to return the money that investors have poured into the company.

So, if you are ever in doubt about how big you should become, I’d say aim higher. Much, much higher, but execute towards a smaller goal faster to let your ambition grow.

The toughest fork in the road – from high growth startup to lifestyle business

One of the toughest pieces of advice I usually give to the founders I have invested in is to understand when and how they have to make the transition from a high-growth-chasing startup to a lifestyle business.

Entrepreneurs feel like they “gave up”. Many actually prefer to shutdown their companies and decide to either get another job or start something fresh, instead of spending more time learning which of their assumptions were incorrect.

In this blog post I am going to try and make the case for why you should transition to a lifestyle startup instead of giving up and going to another “idea” or solve “another problem”.

If you decide to join a big company or to get another job, if you startup does not pan out, I understand that. I dont think you will enjoy the transition, but a less stressful, more defined and predictable life is something people crave for after the roller-coaster ride that’s in a startup.

If, on the other hand you choose to start a new company in a new space, with a new idea, I think that will be a bigger waste of time than pursuing the “customer development” efforts in a given space.

Excellence as a Habit
Excellence as a Habit

From my experience I can tell you that it takes between 2 to 3 years on average to learn the contours of any given industry, its players, the mechanics of how it works and the entire value chain. I call this the “happy learning phase“.

Usually at this phase the growth on what you learn is typically 10% day-on-day.

During this period, while you are trying to build an early version of the product, get a few customers and iterate on the “actual problem” that you have to solve. Even when you believe that you have a problem and some form of product-market fit, you will need time to find the early adopters, or to weed out the naysayers and to find your early wins.

Most entrepreneurs set up early goals for their startup which have certain milestones, one of which is fund raising. Associated with the fundraising metric are business metrics as well – # of customers, revenue, # of employees hired etc.

Contemporary wisdom puts a number around your growth: measured month-on-month – typically at 10% or 20% (as opposed to Conventional wisdom, which used to be focused on growth with unit economic profitability). Most entrepreneurs feel if they dont hit those growth metrics, then their startup is doomed for failure, even though most realize that not all startups can be unicorns.

If, however after a few months of less than your stated growth, you are inclined to throw in the towel and pivot away, the clock on the “happy learning phase” resets.

Which means you have to start on a new set of learning and the phase begins again. This usually means that you have to understand the market again, figure out the new landscape and finally make new connections.

When you are at the fork in the road when you have to decide between continuing at the startup, versus pivoting to a new idea, I’d highly recommend you turn the company into a life-style (consulting, teaching, training, etc.) business and spend time in the making-money-phase based on the happy-learning you did before.

How to pick and choose early users / customer for your #napkinStage startup?

The first few customers (or users) usually set the tone for your startup. They are the ones with either acute pain or the burning problem, and the earliest of early adopters. Usually, I have found that most entrepreneurs get their early customers because of the relationship they have with them OR they solve a really pressing problem for their customers.

When I talk to most entrepreneurs, one of the first things I recommend to them is to segment their potential customers.

The discipline of finding the factors that differentiate one set of your potential customers from another based on a set of characteristics is customer segmentation.

There are 3 important questions you will need to answer about your customer segmentation strategy before you recruit potential customers.

Most entrepreneurs, at the napkinStage end up getting customers who they know, but sometimes may not have the pain point as much. Else they end up getting customers who have the pain or are unwilling to try anything “not proven”.

When you have been out trying to get early paying customers, you will realize quickly that customers have one of several reasons for not buying or wanting to try your solution.

1. They are risk averse, and not early adopters, so while they have the pain, they use their existing  manual or alternative techniques to solve the problem.

2. They are able to deal with the pain, since they get a sense of job security knowing that they know how to solve the problem, and no product, machine or algorithm can replace them.

3. They believe the ROI from solving the pain will be negligible and their time and money is better spent elsewhere.

4. They want more mature solutions so they can handle their “special situation”, which is unique enough that no early product can customize it and be less expensive at the same time.

5. They believe the solution will weaken their position since it will solve the problem that exposes their “value-add” to the company.

6. They are not emotionally vested in either you or your startup, so they are not willing to take the leap of faith to try an early version of the product.

7. They actually dont believe your solution will solve the problem and are willing to wait and see some more proof until a point that it does.

These and many other excuses / reasons are the ones I have heard of consistently when I have been trying to get early customers for most of my startups.

If your potential customers sees a big benefit to:

a) their personal agenda (promotion, makes them look good, etc)

b) their position in the company and finally

c) their company’s standing in the market.

Picking your early customers though, is almost always a combination of personal relationships, built over time and solving a problem they have that is so intense that they are willing to try anything to get rid of it.

Problem Development Learning: Dont explain what your startup does to a “layperson”

Most entrepreneurs following the Lean Startup Methodology or the Customer development methodology will tell you that it never really works in a linear, sequential fashion, neither does it follow the prescribed set of steps.

The primary reasons are either because you end up getting some feedback or learning during the entire process that changes your perspective quickly or get distracted.

I had a chance to talk to 3 entrepreneurs last week, who had all shut down their startups. One of them got a job at Facebook, after raising money from VC’s (tier 1 VC’s at that), another has started on a new venture and the third is going back to his previous role at a large company.

All 3 of them had spent upwards of 6 months and the most was 18 months in their startup. Surprisingly, none of them mentioned “lack of ability to raise more cash” as their reason for failure.

They all mentioned the challenges of “customer development”.

Stair Step Growth
Stair Step Growth

The startup development process comprises of 5 steps – problem development, customer development, prototype development, product development and revenue development.

I am showing these in a stair step approach, which suggests a sequential method, but I fully understand it is rarely so.

Problem development is a relatively new phenomenon, and your goal is to do a good enough job, fine tuning and understanding the customer problem in detail.

What I have found that in the quest to explain “what is your story” to a layperson, most entrepreneurs end up explaining the problem their solution solves, not the customers real pain point.

The biggest challenge for you the entrepreneur is to have the problem statement nailed in as great detail as possible when explaining it to your product and development teams. Else the “high level” problem statements, which you will use with customers or investors will result in poorly thought out solutions.

There are choices that you will have to make daily and hourly about product, experiences, features and direction of your product. In the absence of having a detailed set of problem statements – which constitutes the problem development step, most of these choices will be sub optimal.

Focus on problem development in conjunction with customer development for best results.

The new valley startup is the early stage seed investment firm

Over the last 3 days I had a chance to meet with 12 Micro VC funds with 1 or 2 general partners and less than $50 Million in capital raised.

Most of these funds were of 2013 or later vintage and many were less than a year old.

Seed funds and Micro VC’s are looking like startups themselves and that’s a good thing.

They are adopting lean methodology (1 or 2 partners alone, not a big staff, no admins, doing all scouting themselves), hustling to get their initial customers (investors and  entrepreneurs), shipping an alpha version ($1 to $5 Million first fund with only friends and family), building traction and community (Blogging, networking, making investments) and then raising their seed round – a larger fund within a year for $5 – $25 Million) and looking for a way to differentiate their offering (focused investment thesis).

The new valley startup is the early stage seed investment firm.

There are over 250 Micro VC funds or super angels according to CB Insights. Most have under $50 million in investment dollars. In fact based on my cursory analysis, most are entrepreneurs who have decided to “spread their risk” among multiple startups than do one startup alone.

What are the steps to be a seed investment fund manager?

  1. Raise capital from high net worth individuals or be rich yourself to start investing. Over 90% of these investors are entrepreneurs themselves. Except for 3 of the 12 I met, most did not have a “big exit” or success under their belt. Your first fund might even be less than $1 Million (alpha prototype version). Then your follow on funds can be $5 and then onwards from there.
  2. Pick a niche or focus area and start to become an expert at it. There are Micro VC funds focused just on helping entrepreneurs who have a H1B visa, another set of folks just targeting startups in kitchen tech within food technology.
  3. Setup a fund manager (legal, finance), banking and website.
  4. Build relationships with other prominent investors or early stage angels who are doing deals to help you get “cut into deals”.
  5. Invest and help the entrepreneurs as much as you can.

Most of these seed investors are entrepreneurs themselves, so they are scrappy, hustle oriented and founders themselves, so they tend to keep their costs low, focus on a few investments and from the entrepreneurs I have spoken to so far, help the entrepreneur at the early stage, a lot more than your traditional VC firm with partners on the board.

In some cases the investor can be a part of your team, as an extended sales, BD or marketing expert, pattern matching from their other investments and helping you learn from other’s mistakes.

A decade ago or more, raising funds was pretty difficult, so if you were a VC fund, raising capital was the biggest challenge you faced. If you raised capital, then deploying that capital and getting good deal flow was relatively easy. Now, though given that there are so many Micro VC funds, even getting good quality deal flow is a challenge.

Most of the Micro VC funds tell me that their network of folks they have worked with before, entrepreneurs, other investors and angels are their best source of deals, and service providers (such as lawyers, accountants, etc.) do offer some deals, but not as high quality. They also are consistent in their thinking that “cold” inquiries are the “most irrelevant” source of companies to invest in.

To attract quality deal flow beyond referrals, many are adopting strategies to “build their brand” by blogging, podcasting, startup videos, running networking events, extensive PR, building a network of customers and partners for “introductions” to startups. Most though, are till trying to figure out how to get more high quality deals that they should be in.

If you are an entrepreneur looking to raise money from a Micro VC fund, the biggest challenge will be that the follow-on funding from these funds for pro-rata will be largely nonexistent to highly unlikely.

Many funds are so small that they have to spread the risk among enough startups, so they keep very little cash for follow on rounds (or dry powder). Many do claim that they will raise another fund within a year or two just to do follow on rounds, but that remains to be seen.


What do you do with all the advice you get as an #entrepreneur?

I had the opportunity to meet about 20+ entrepreneurs at the Plug and Play Tech Center, an accelerator and coworking space in Sunnyvale. This cohort was 2 sets of companies in the IoT (Internet of Things) space. Companies ranged from those in wearables, healthcare, connected car and home automation spaces. There were none in the industrial or commercial IoT area.

The startups were trying to get a sense for the changed funding landscape for startups and how to manage the new set of investors they had to deal with. Many in the connected car space were also talking to “strategic investors” such as the automakers themselves to get a sense for their interest to fund startups.

There was a question that one of the startups asked, which was they were adviced by a mentor who was a venture capitalist that “If we get funding from a strategic investor, then it will be viewed as toxic (sic) since we have to build to their needs”.

I am not sure of the context of that discussion, neither do I know about that investor’s background or intent, but this seems like poor advice at the outset. With more context and analysis I might learn more, but at the first glance, this is poorly construed.

I have written about conflicting advice for startups before and also a framework for entrepreneurs on how to take advice.

I think the best way to deal with experts who provide advice professionally is to resist the temptation to dismiss it rightaway or the desire to take it at face value and implement it rightaway.

Surprisingly I have found that most entrepreneurs actually “forget” the advice and seek out to experiment and find their own answer. That’s goodness, but it begs the question, how do you remember to seek what you learned?

So the problem as most people realize is that (like with storing and sharing good things at home) the problem is not storing, it is retrieving.

How can you recall the right advice when you need it?

Some decisions we make are fairly quick and provide us with very little time to process. Most decisions we make as entrepreneurs take require a longer lead time than a day.

The best way I have found to recall information an advice is to ask it again in context, instead of trying to remember what was said before and assume no judgement or bias before asking for a framework to think about the decision.

That way it gives you the ability to recall in context.

This surprising tactic means you should ignore all the advice you get and filter most of it as entertainment.

Which, if you are an entrepreneur is a much needed distraction.

How to be resilient – What I learned from many “Plan B #Entrepreneurs”

On your journey towards creating your startup and growing it, there will be multiple opportunities to quit. Startups are much harder than anything else you will do in your professional career, so you will have display enormous resilience to bounce back from “near death” experiences.

Over the last 3 years as I have watched multiple entrepreneurs from the sidelines, and about 20% of them have been “Plan B entrepreneurs”. These are folks that were thrust into entrepreneurship, not by choice or deep desire, but by circumstance. There is a story of a successful executive at a large SI who was laid off and found himself on the wrong side of the age equation, so he was “over skilled” for another position, and decided to be an entrepreneur instead. Another story, is that of a good friend, who graduated at the middle of her class and found no “jobs” for an entry-level developer, so she started a training school for average developers who can be placed at smaller companies.

I have noticed that plan B entrepreneurs are more resilient and they tend to display 5 primary characteristics.

How to be Resilient
How to be Resilient

The set of steps they might go through is denial, acknowledgement, acceptance, analysis and finally action, but the time spent on action tends to be the most.

Resilient people have a bias towards action and their action steps are immediate. Surprisingly the ones that I respect the most rarely “Sleep over it”. In fact, a mini-setback really spurs them towards exploration of multiple actions or options. That seemed counterintuitive to me at first, since the advice most people give is to “sleep over challenging situations”, but I guess different people are wired differently.

Second, they display the maturity to understand that setbacks are normal. They realize that the path to success is littered with multiple mini-setbacks. So each of these “mini-setbacks” only convinces them that setbacks are not failures, but successes posing as an obstacle.

Third, they have a “true north” that keeps them going. That true north is usually written down, not in “their head or their mind”. They tend to revisit the “true north” every so often, maybe a month, a week or every time they encounter a mini-celebratory moment or a mini-setback.

Fourth, they are always making a backup plan for the backup plan. It is almost as if they realize their first plan will never work out, so they always have a Plan B, or plan C. Their plan A, many have mentioned to me, almost never has materialized. They spend as much time coming up with plan B as they do plan A, which leads me to believe, that plan B’s are those that take more time, more effort, but are also responsible for progress.

Finally, they tend to be more disciplined and setup small routines to build momentum. Building momentum by identifying smaller steps that display progress tend to help them bounce back, is what I have heard. Some of them celebrate success so small, that they build a great culture in their teams of enjoying themselves a lot more together.

Related to this but on a more personal level, I read and re-read the touching note by Sheryl Sandberg yesterday on Dave Goldberg. It is an amazing read. I’d highly recommend it. Many things are worth highlighting, but the Option B part of the note is most relevant for entrepreneurs.