I am reading a book Originals – How non conformists move the world. It is about folks that challenge the norm. In it, the author quotes from Malcolm Gladwell
“Many entrepreneurs take plenty of risks—but those are generally the failed entrepreneurs, not the success stories.”
This is not new and very controversial at the same time. He mentions multiple examples of highly successful entrepreneurs from the founders of Warby Parker to Bill Gates, as folks who had a side-gig in their venture before they plunged into something.
On the other hand, my experience has always been that when you commit to anything full-time you get a lot more success, as I have seen in my own case.
I am curious, how many of you are doing a side-gig or a project that you hope someday turns into a full-time opportunity or startup?
I’d love to also hear if you think that committing full-time versus doing it on the side will get you to your goal.
As an investor I never invest in any entrepreneur that’s seeking investment for an opportunity they are doing part-time. Should I be changing that perspective?
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.
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.
I get an email or 2 every week from employees at large companies who have interviewed at a startup wondering if “startup X” is good, will do well, or “is a good bet”. Most of the time I dont know about the startup or the founders, so I tend to focus mostly on the market trends and the problem the startup is trying to solve.
Occasionally I will also get folks sharing their salary and ownership details with me (mostly junior folks) who would like some advice on how to negotiate a better salary or more stock options.
I used to be rather dismissive of the negotiators and ask them to focus on the learning and experiences, but that turns off most people I think. They wanted advice on how to negotiate better and here I was telling them what they were getting was good enough.
Instead, I decided to develop a framework to think about the opportunity and the startup role.
The first thing you want to ask yourself is why you want to work at a startup. Or leave your current job and join another startup. If you are at a big company (and have been there for a while) and have made a good salary and are looking for a “big retirement win from 3-4 years of work” at a startup that’s going to go public, then it is very hard to choose the right startup.
If you are however at a big company and looking to learn more and get a different set of experiences, you will likely have expectations that can be met.
Predicting which startups will do well is hard. In fact, over the last 10 years, given that most companies are raising a lot of money in private markets, it is harder to “get an exit” and make it big (financially speaking) in a short period of time.
Lets start with your objective.
If you are looking to make “risk free money in a short period of time” with your talent, you will get a small reward. A role that similar to your big company role and with a pay package that fairly consistent.
If you are seeking to learn how to be an entrepreneur and master how to start a company, you are better off joining an earlier stage startup than one that’s “sure to go public in a year or two”.
If you are looking to make more money than your current role offers and advance your career, it is best you join a later stage startup that’s looking to scale.
Startups that are less than 2 years young are the riskiest, will offer the most in stock and less in pay. Especially if they have only raised a series A.
Startups that are 2-5 years young and have done one or two rounds of institutional funding will likely offer good pay and decent benefits but limited upside in stock options.
Finally, “unicorns” which are over a billion dollars in capitalization will offer compensation that’s commensurate with your current pay and benefits and even more limited upside in terms of stock options.
If you are looking for the “perfect role” with the “most awesome pay”, that’s equivalent to your current pay and “huge upside” in stock options with guaranteed returns, that does not exist.
So, my recommendation is to decide what’s important to you – steady pay with strong benefits, but learning a new technology or being part of a new culture – then join a later stage startup.
If you decide that being a part of a fast growing startup which has some traction but still has potential to scale, where you will learn and grow with the company, is important to you, then join a venture which has been around for about 3-5 years.
Finally if you wish to learn how to start your own company after this one’s done and want to learn the fundraising elements of the startup, understand how to market and scale the business, then join a much earlier stage startup.
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.
If you still have the desire for the space you are in, and the problem you have chosen to solve, then overcoming all other odds is easier, because you still believe there is a wrong to be righted.
Most founders, though dont realize they have lost the desire for the space or the problem until much later. They are taught that persistence is the key to success, so the slog through the early warning signals.
How do you find out if you have lost passion for the space, earlier?
“Going through the motions” is one way to find out.
“Not getting excited to get up and go at it” is another way.
“Inability to acknowledge the small wins” is a third.
I can list many more.
The next part of the question is how do you know if this is “temporary loss of passion” or “permanent lack of desire” for your startup.
It is a permanent problem when your opportunity cost of doing something else is more than your current situation.
Some of them talk about possible “channel” sales efforts via partners or larger companies in their domain who can help, who they would like to approach.
When I tell them about the potential costs, commissions and the customer relationship efforts that are involved, they take a second look at their direct sales efforts. I thought I’d document that for many of the other entrepreneurs who have the same question.
There are 5 models of partnerships I have encountered so far in my career. I will outline these models and list their pros and cons. While I cant say which model will work for you, and there may be other models as well, I think understanding the landscape will help you figure out which one makes sense in your situation.
First off, most channel or indirect sales models assume that the partner has an existing relationship with the startup’s customer. After all you are trying to shorten your sales cycle by using the partner’s strength.
Lets now look at these different models.
1. Co selling partnerships: These agreements tend to have a low to medium level of commitment from both the partner and the startup. If a sales person from the partner is going to meet the client, and are in active discussions on a deal and they feel like bringing your solution will help them win the opportunity, they will look at trying to position your product as well. In this case, you will have to go on the sales call with the sales person at the partner. The advantage of this partnership is that you typically dont have to do the initial “opening of the doors”. The “paper” or contract is typically separate as well. This means there will be 2 separate agreements for the customer to sign.
Pros: Since there is no commitment (most times) from both parties towards a quota or target, the discount you offer to the partner is low (typically starts at 20% and can go up to 30%). Also, since you can have a direct relationship with the customer, you can control the relationship going forward. Be sure to ensure that there are lower levels of “pass through” revenue you have to pay to the partner after year one.
Cons: There is no commitment to sell by the partner so you cant quite depend on this channel to deliver consistently. The customer also tends to get confused about the single person who will responsible for their success (the bad term usually used is one throat to choke).
2. Reseller agreements (sometimes called VAR or Value Added Resellers) : This partnership is medium to higher level of commitment. The partner will either resell your product on their paper or include your “quote” in their contract. You will hence have to train and manage their sales professionals.
Pros: There is a quota commitment in most cases, so you can be sure that sales people are motivated to sell, but you want to be sure that there are some downsides if they dont hit the commitments, else all this is a co selling agreement structured on the partner’s paper.
Cons: Since there are commitments, you will pay a much higher commission % – typically 40 – 60% are standard. Some partners may ask you for more. You will still have to train and do the lead generation to bring their sales folks into deals. Typically when you sign an agreement, even if you bring the partner into a new customer, they might ask you for the commission that they technically dont deserve.
3. OEM associations: When your product (or module) becomes part of another product and is integrated in such a way as to cause sales of your product each time the other product is sold, have an OEM (Original Equipment Manufacturer) association. These are typically for run time modules of developer products or a contact management product within a CRM system as an example.
Pros: Since your product is part of another product, you will typically be sold each time the other product is sold. In most cases this guarantees revenues and commits the partner to certain revenue goals.
Cons: Since your product is part of a module, you dont have the end customer relationship. Most OEM products also tend to generate smaller % of sales. Don’t be surprised if the final product is sold by the partner for a significantly more cost that what they pay you. Typically I have seen 10% of the final cost of the product paid out to the module.
There are 2 other models that I dont have much experience with, so I will let you give you an overview and try and address them in a future post.
4. Certified agent alliances: These are loose agency models (typical in affiliate sales) where the solo sales person who maybe has a few clients will try and sell for you. Since you have to recruit and manage each sales person yourself, these will be hard to scale. The only advantage is that the sales person is not an employees, so their base salary costs dont hit your books. This also means they are less committed to your product.
5. Distributor agreements: When your product is sold in a different geography where you need a local partner to stock (for hardware) or help educate local re-sellers, then distributors can help you with education, local tax and integration and identifying resellers. They can help you navigate a local market, but since they stock and manage multiple products for that region, getting their attention to focus on your product tends to be rather hard.
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I had a friend come over to meet local investors and members this week to talk about his startup. It is a good company with very early traction. They are clearly not going to be a Unicorn in anytime soon.
The amazing part was he was not even looking for investment or money. He was seeking support and had a very nebulous but simple ask – get one person to lead the Seattle chapter of his startup and be the local champion to host events and hackathons.
Naturally, to an audience of seasoned investors and entrepreneurs, this seemed to be a small ask. There were a barrage of questions about “Why not do a bigger thing?”, “What is the market size?”, etc. Not withstanding the fact that his startup was already “in the market” with some meaningful traction. The entrepreneur was not looking to “Go Big or Go Home”, but really make a difference and also make some money.
In this market, where most everyone wants to invest in social networking applications that share real time video or a social network for dog lovers, he was building a different kind of company.
It was clear that he was not being able to tell his story and the impact his organization was making, since he was unable to convince most folks that what he was doing was material.
It would be a collective insult to the intellect of the room, if we did not support his cause actually or come up with ideas to help the entrepreneur.
When he was asked these important, but tangential questions, he chose to apologize. Many of his answers were “Yeah, we dont have that”, or “We only do this one small part” or “We have not had that level of impact yet”.
Surprisingly he had more impact on young kids and women in other regions, than I suspect 97% of the people in the room.
Yet, he was the one who was apologizing.
As an entrepreneur, you set out with a vision to change the world, however small. Sometimes you just have a small problem you want to solve. You wont even understand in most cases, the unintended consequences of your product or startup.
Just dont apologize to any self-righteous, unicorn chasing investor.
Tell your story, stick to your convictions and be humble, but stand up to criticism about the market you chose, or the growth you have had. Even if they chose not invest, remember that it is easier to throw rocks than to collect them and build a house.
Keep collecting all the rocks thrown at you. You will need them to build your house made of solid rock.