“You can know the name of a bird in all the languages of the world, but when you're finished, you'll know absolutely nothing whatever about the bird...
So let's look at the bird and see what it's doing — that's what counts.
I learned very early the difference between knowing the name of something and knowing something.”
- Richard Feynman

You’ve probably heard a lot about startups, and you might be in the process of building your own.
When you hear the word, you probably associate it with lots of other emotionally charged words, like Risk, Investment, Technology, Scale, Exits, Bro, Scam, Venture Capital, Pivot, Hack, Raise, Seed Round, Silicon Valley, Success and Failure.
And that makes total sense, since there are so many startup stories that involve 3 or more of those words, especially the startups that attract media attention.
But these cliches are not mandatory, they’re not an essential part of what makes a business a startup.
Let’s have a look at the fundamentals of what a startup is (and isn’t), and what you can expect as you build one for yourself…

Two Definitions

If you go for the Google or dictionary definition, a startup is defined by the fact that it is new – it is just starting up.
You cannot have an old or established startup, it refers to a new business, but nothing more specific than that.
e.g. by this definition a café can be a startup, a doctor’s surgery can be a startup, a bookstore can be a startup.

It’s not that this definition is wrong, but it’s so broad that it doesn’t really describe what people mean when they talk about startups.
Within the industry, people usually gravitate towards Paul Graham’s definition:

“A startup is a company designed to grow fast.
Being newly founded does not in itself make a company a startup.
Nor is it necessary for a startup to work on technology, or take venture funding, or have some sort of "exit."
The only essential thing is growth.
Everything else we associate with startups follows from growth.”

This resonates because it matches a lot of common startup behaviour and milestones, but it doesn’t assume that everyone needs to have the same journey.
i.e. your growth may come from technology, it may come from investor money, it may involve lots of pivots, but the non-negotiable part is the focus on growth.
So you could have a startup in the coffee industry, the medical industry or the book industry, but it would be aiming for something much larger than one singular shopfront.
Or your startup might solve a valuable problem for all of those businesses.

Freelancers vs Entrepreneurs

Not everyone wants to be an entrepreneur, some people want to leave a corporate job and be their own boss.
Seth Godin makes a helpful distinction between freelancers and entrepreneurs – both are good but they are different:

A freelancer is someone who gets paid for her work. She charges by the hour or perhaps by the project. Freelancers write, design, consult, advise, do taxes and hang wallpaper. Freelancing is the single easiest way to start a new business.

Entrepreneurs use money (preferably someone else’s money) to build a business bigger than themselves. Entrepreneurs make money when they sleep. Entrepreneurs focus on growth and on scaling the systems that they build. The more, the better.

The goal of a freelancer is to have a steady job with no boss, to do great work, to gradually increase demand so that the hourly wage goes up and the quality of gigs goes up too.

The goal of the entrepreneur is to sell out for a lot of money, or to build a long-term profit machine that is steady, stable and not particularly risky to run. The entrepreneur builds an organization that creates change.

This is a great distinction because it doesn’t try to make freelancing seem like a baby version of entrepreneurship, it has a different end-goal.
Freelancing is about creating an amazing job for yourself, entrepreneurship is about building a company that you can eventually step back from.
A freelancer can try to turn their work into a startup, but their role will need to change – they won’t be able to see every customer, they’ll be growing the business.

It’s important because some people start working on a startup when what they actually want to do is to be a brilliant freelancer; they’re focused on quality and freedom, not on growth and scale.
This isn’t a petty distinction, it completely changes your success metrics and how you can best spend your time.
Which one do you want?

Startups Create Something Remarkable

Another gem from Paul Graham:
“One sign of a startup idea is the word "shouldn't."
If you find yourself saying "users shouldn't have to do x" or "we shouldn't have had to build y," it's often a sign of a missing startup.
And if you're the one saying "shouldn't," that you would be a good person to start it.”

The reason why someone would create a company focused on growth is usually because they see a big opportunity, either a significant problem, or the chance to delight a large number of appreciative customers.
If a problem is limited in scope or unique to your area, it might be resolved by a small business or project, rather than needing to grow larger and larger each year.
Luckily (or unluckily), there is no shortage of problems in the world, or opportunities to delight large groups of customers.
Most startup advice suggests that a founder/prospective entrepreneur start by understanding problems and opportunities in detail, rather than trying to invent a new product/service off the top of their head.
Pamela Hartigan called this “apprenticing with the problem”, getting your hands dirty and developing a thorough appreciation for how it all works.
i.e. if you’ve never worked in a certain field, or been to a certain country, don’t try to instantly guess and solve their surface-level problems.
Not only does this not work, you’ll come across as absurdly arrogant and ignorant.
We want to learn about what already exists, what’s been tried, why things are the way they are, what might be different in the near future, and what customers truly care about.

For a startup to succeed, several things need to go right:

1.     We need a good market with good customers
If we don’t have customers, we don’t have a business.
If there are people who could use our idea, but aren’t shopping for a solution or won’t spend any money, they’re unlikely to be the basis for a good market.
If everyone in the market is content with what already exists, it will be hard to capture their attention or very much market share.

2.     We need to tap into a High Value Customer Job
It’s one thing to create something people could want/need, but it’s another thing to have them care enough to take a risk and make a purchase.
Not all customer impulses are equal, we want to find areas where customers are enthusiastic, motivated, ready to spend money.
If customers are easily distracted or can avoid making a decision, it will be hard to make sales and grow the business.

3.     We need well-designed products and services
The products and services we design need to be better or cheaper than the competition.
If you trick people into making a purchase and they’re underwhelmed with your results, not only will they not come back, they’ll tell the rest of the market about your poor performance.
“Better” doesn’t mean “Elite”, it might mean more suitable, more interesting, more sustainable, more tailored, more enjoyable, more convenient.

4.     We need a path to profitability
There isn’t an expectation that a new business will be profitable from day 1, but we want to be confident that we can get there eventually.
If you’re selling things that are fundamentally unprofitable (e.g. a $20 product that costs you $23 to create), then growth will kill you faster.
If you can become profitable when your operation becomes more efficient, you’ll want some clear ways of measuring how long it will take you to hit that point.

Any failure on one or more of those four points and you’ll need to make a change.

·      If it’s a bad market, your work won’t be appreciated.

·      If customers don’t care enough to take action, you’ll be twisting arms to make each sale.

·      If you don’t have the right products and services, you won’t build a loyal audience or a good reputation.

·      If you can’t make money in the foreseeable future, you’re heading for ruin.

Most of the startup development process is on navigating these issues, making progress or deciding to change the business.

Three Lenses Of Innovation

A helpful framework is The Three Lenses of Innovation.
IDEO named three “lenses”, which help us see a different aspect of our business: 

·      Desirability – who are our customers, what do they want, how will we talk to them, what would make them come back for more?

·      Feasibility – who’s on our team, what are our assets, how will we acquire and retain customers, who can we partner with, what can we outsource?

·      Viability – how does money flow in, when do we spend our money, will there be money in the bank at the end of each week?

Our startup needs to have all three.
If it’s not desirable, revenue will be tough to generate.
If it’s not feasible, we will burn out our team, under-deliver and frustrate our customers
If it’s not viable, we will run out of money, slowly or quickly.

The role of an entrepreneur is to make changes and improvements so that we land in the middle of these three lenses, both for the present and for the future.

Pivots vs Perseverance

There’s an unpleasant and unavoidable truth in the high failure rates for new businesses.
Roughly speaking:

·      50% of new businesses close within a year

·      70% close within two years

·      90% close in five years

We’ve just seen the main reasons why they might run into trouble, but these stats can be misleading.
It does not say 90% of entrepreneurs fail, it says 90% of businesses fail.
An entrepreneur can launch many businesses, learning more each time, increasing their chances of success.
Max Levchin uses a great example:

“The very first company I started failed with a great bang. The second one failed a little bit less, but still failed. The third one, you know, proper failed, but it was kind of okay. I recovered quickly. Number four almost didn't fail. It still didn't really feel great, but it did okay. Number five was PayPal.”

There are so many stories and perspectives on startups, and a lot of them are the opposites of each other.
You can find countless examples of founders who succeeded by persevering; by rejecting suggestions to change their goals, who bet on themselves and pushed through hard times.
You can also find countless examples of founders who succeeded by pivoting; by changing their work, their business model, their customer or their product, and suddenly made a lot more money.
This is the danger of listening to one singular perspective – if you only read stories about entrepreneurs whose businesses flourished, it makes it sound like every business can flourish if you follow the same steps.
If you persevere when you should have pivoted, you throw lots of time, money and energy away instead of building the business customers are asking for.
If you pivot when you should have persevered, you throw away your progress and start over.
It’s better to look at lots of diverse stories, and ask lots of good questions of your work.
Startups can learn from other startups, but there are no foolproof recipes.

The Double Loop

A good visual for this work is The Double Loop, which describes the design process.
There are four main stages of work, two of them are theoretical and two of them are practical.
The top loop contains our two theoretical steps: Understanding & Ideation.

Understanding is the process of spotting opportunities, which can take months, or it can strike you like a lightning bolt.
This is when we dig into the problem, learning how it works and why these issues haven’t been resolved.
Problems often have a lot of facets, so we want to understand both the macro and the micro situation, and there might be 10 different sub-problems upon closer inspection.

Ideation is the process of dreaming up solutions and compelling value propositions for customers, creating offers that would make someone say “shut up and take my money!”.
There are lots of different ideas that could work for every problem, so we want to think of a long list before narrowing it down later on.

The bottom loop contains the two practical steps – Prototyping and Validation.
Prototyping is when we “get our hands dirty”, making real or seemingly real versions of our ideas.
This helps us understand our options, our limitations, our preferences and our customers’ behaviour.
We can create cheap and fast prototypes, show them to our target market, and learn about what people appreciate – and what they ignore.
Validation is the “moment of truth” when we discover if customers like our offers enough to pay for them, or enough to take a next step in the sales process.
It does not matter how much we believe in our work, if the market rejects it or misunderstands it, we need to make changes and test it again.

At the end of these four stages, we have a much clearer “Point of View”, and can choose what to do next.
We might spend more time understanding the problem/opportunity, we might create new ideas, we might make newer/better prototypes.
This is not a linear process – we’ll do this again and again until we have a business that is strong enough to scale up.
Some people find that vague or frustrating, and fair enough, but if there’s an issue with the company then investment won’t help.
Money tends to magnify, and it can magnify a small working business into a large successful business, but it won’t transform an underwhelming company into a popular one.

The Role Of Investment & Investors

Growth takes a lot of energy; if we want to make something bigger, we’ll need a good source of fuel.
Your business needs assets before it can serve customers, and bigger assets to serve more customers in a better/cheaper way.
At first, that fuel comes from the founding team, who put in time and effort to create something out of nothing.
It might also come from the team’s own pool of funds, or the resources you already had access to.
In some cases, this might be enough fuel to get to the prototype stage – a website, a mock-up, a pitch deck, etc.
Sometimes you can make sales, earning revenue from customers that can be re-invested into your growth.
This is called “Bootstrapping”, from the old expression of “pulling yourself up by your bootstraps”.
Bootstrapping involved running a lean business that is careful with its money, keeping full ownership of itself, especially in the early days.
You have fewer resources and fewer obligations.

But in a lot of industries, the growth needs to happen before you can make a lot of sales.
That means we need someone who is happy to take a bit of a risk, who can help us set up the business and start serving our market.

As a general guide, there are two ways of taking on investment – debt and equity.
Debt refers to a loan that you pay back at an agreed time with an agreed interest rate.
Equity is when you sell a piece of your company, giving ownership to someone else.
Each of these have their merits and their drawbacks.
With debt, you carry the risk and the obligation, especially if the loan is “secured” against something of yours.
You’ve probably seen movies and tv shows where a business owner worries about losing their house if their business fails.
This is not a common occurrence in the real world today, the whole Lean Startup movement is designed to prevent huge risks, but the thought of it can put people off starting a business.
With a loan, the amount you have to pay back is capped, and once it’s repaid then there are no further obligations.
With equity, the investor carries the risk; if the business closes then they walk away with very little.
But the amount they can earn is unlimited, and their piece of the company entitles them to a piece of your profits indefinitely.
There are no strict rules for founders here, so you’ll want to consider lots of different options and combinations, and your investors will too.

Before you have a track record, you might go to the famous “Three F’s” for investment; Friends, Family and Fools.
Having seen that play out on several occasions, this is a dangerous way of growing a business, with a lot of personal relationships at stake.
Then there are “Angel Investors” – high net worth people with spare money, who are willing to take a calculated risk in the very early stages of the business’s growth.

But in today’s market, you’re going to mostly hear about “Venture Capitalists” or VCs; groups of investors who buy into high growth companies.
These investors aren’t looking for safe, steady dividends like what you can get from the share market – they want the chance to own a piece of a company that can grow 10x – 100x.

The thinking goes, according to those who work in these firms, “if we can invest in lots of companies, and many of them fall over but a few grow by 100x, we’ll still be massively ahead”.
That casual approach to failure might sound welcoming, but the stakes are high and it’s a serious business – they will push you into growth, and in some cases, will try and take control of decision making (depending on the terms of your deal).
This isn’t about idolising or defaming VCs, they are like most professional services: there are good ones and bad ones, like how there are good and bad mechanics, or good and bad hairdressers.
The right VC could take your company to the next level, and the wrong one could undermine all of your hard work.

What An Investor Will Want To See

The relationship between a founding team and an investor is tricky for many reasons, but the main one comes down to risk.
An investor will want to see that the founders have done as much as possible to advance and de-risk the business before they put in their money.
Founders will feel like it’s already been de-risked, and that the investor should be giving them a better valuation.
For an entertaining caricature version of this power struggle, have a look at reality TV shows like Shark Tank or Dragon’s Den.
Investors try to pick holes in business ideas, and if they’re excited enough to make an offer to buy into the company, the founders might want to haggle over the price and what the investor is bringing to the business.

Broadly speaking, investors will want to see:

• Well-articulated concepts and thinking, demonstrating that there is a genuine opportunity here.

• Prototypes, functional or non-functional

• Validation, signs that customers are truly appreciative of what you can do for them

• Traction, evidence of early sales and customer growth

• Projections, showing your work, assumptions and the maths behind how you make/spend/retain money

• Your team, and why you’re able to achieve what others couldn’t/can’t

• Interest from other investors, a form of social proof that this is a potentially lucrative deal

And you know what?
Fair enough.
Those are actually pretty reasonable requests, as they all benefit the founders.
The process of doing that work will sharpen your thinking and prove these concepts to yourselves.
Most of these are objectively fair tests for new businesses, and it’s in your interest to think them through.

Higher Stakes

As we mentioned, VCs are looking for high-growth opportunities and potentially massive returns.
That means when they want to see a High Value Customer Job, they want to see it affect millions of customers, not hundreds or thousands.
When they want to see traction, they’re talking about rapid growth and market share, not steady gains and trusted relationships.
When they want to see prototypes and your products/services, they want to know that these are substantially better than what’s out in the market today.
When they ask about what makes you different/better than the competition, they want to know that someone else cannot easily re-create what you’ve built.
They want to know that you have a protective “moat” around your proverbial castle, something that will make it hard for rivals to attack your market share.

One VC was honest enough to tell our cohort “we’re actually not interested in businesses that make a normal amount of money. If that’s what they build, we’ll sell them back their equity for $1 and write it
all off. We’re looking for big deals and big returns.”

Their honesty is refreshing, but the pressure to scale can be unhelpful.
VCs drive a lot of the narratives in the startup ecosystem, and so their books, conference talks and podcasts can create the impression that startups are an all-or-nothing game.
Either you hit a billion-dollar valuation and become a “unicorn”, or you aren’t considering the new company to have been truly successful.
That’s not actually the case, but it can feel true, especially when you hear of other startups raising impressive-sounding amounts of money.

Investors have skin in the game, as your success is tied to their success.
They can be influential partners and allies, but this can also be very expensive in the long run, and can lead to power struggles in times of uncertainty.
Realistically, the way to get a better deal from an investor is to have a strong, validated business model, and this is within your control.
The stronger your business, the more options you’ll have and the better deal you can strike.

The Role Of Technology

While Paul Graham stresses that technology is not essential to the definition of a startup, you’ll find many examples of startups who have made the most of clever technology.
This might be in how their products/services work, or in how they acquire/serve customers, the systems and assets that run their business, or what gives them a unique advantage in the market.
Embracing technology is one of the few advantages that a startup has over its much larger competitors – able to use the most up-to-date or innovative solutions that make large brands feel nervous.

While you might not be inventing new technology like OpenAI, Google or Apple, you might be a “tech-enabled” company.
Tech-enabled means you’re making clever use of existing technologies, creating better customer experiences.
e.g. when you take an Uber, you’re using your own smartphone, your own PayPal account and the driver’s own car, but their app creates a seamless experience, much easier than using a taxi.
If/when Uber launch their own autonomous cars, that would put them into a different category.

Tech-enabled companies are on the lookout for adaptions, integrations, combinations and small improvements with what already exists elsewhere.
e.g. Whitney Wolfe Herd was initially part of Tinder, who then created a different matchmaking experience with Bumble, achieving massive growth and a loyal user base, without necessarily inventing or pioneering a new technology.
She was able to take her insights from Tinder and her read of what her customer base wanted, and created a vastly improved product.

Creating a better experience is not cheap, but once you’ve got a system that works, technology can roll it out to customers all over the world with drastically increased efficiency.
e.g. Masterclass, the online course company, spends money creating high-quality content with expensive celebrity teachers, but can then roll out their subscriptions to new countries without any hardware, hiring, infrastructure or overheads.
By advertising heavily on social media, they can monitor how their acquisition campaigns are going, and decide to increase their ads by 5x tomorrow if they feel like it, or pause their ads altogether.
It’s not an easy market, but technology gives them control and choices that were previously unthinkable – able to move so much faster than what was possible 20 years ago.

Growing Pains

Growth can be enticing, but it comes with complexity.
As a rule-of-thumb, every time your company triples in size, all of the systems, routines and glue that hold it together will start to break.
e.g. the way you hold meetings as a two-person business will be different when you’re a six-person business.
The way you communicate as a team will be different with five staff versus fifteen.
The way you interact with customers will change when you’re no longer able to know them by name.
The way you hire will be different when you’re no longer in the interviews.

This shouldn’t terrify you, but it means you won’t be able to become complacent.
You’ll be constantly re-building, re-designing and re-inventing the structures, platforms and culture that hold your business together.
This is why you’ll want a range of mentors at different stages, who are able to offer different perspectives that suit your next stage of growth.
It’s helpful to have supporters and coaches who are two steps ahead of you, as well as those who are twenty steps ahead of you.
It’s wise to always listen to multiple perspectives, multiple sources of advice.
Individually, we have biases, blind spots and outdated assumptions, but a collection of allies can give you a well-balanced view.

Expiration Dates

Some of the best advice a startup can receive is “write your principles in pen, and your business model in pencil”.
You don’t need to change your values, they are a helpful compass for you to follow, but your business model won’t ever earn permanence.
It has an expiration date.
Customers change, competitors change, trends change, technology changes, economies change, your team will change.
When that happens, you’ll need a different model or approach in order to stay desirable, feasible and viable.

You can view this as a headache, but it’s also an opportunity.
If your business is successful, it will attract competitors, and that’s ok.
Those competitors will do their homework, read the room, and try to build a better/cheaper/more tailored business to suit the times.
You can do the same – you can beat them to it and reinvent your work.
If you can imagine the nightmare competitor that could put you out of business, could you become that business instead?

Starting Small

Marie Forleo said “Starting small doesn’t mean thinking small”, and that’s a really good way of thinking about the process.
We’re looking for big opportunities, but we’re going to start by trying to delight one customer.
You have the ability to talk your market, find problems, build prototypes, try multiple approaches and see what resonates.
You’re allowed to change your mind, allowed to try things that don’t work out, allowed to follow an entrepreneurial journey that suits you.
You might not know any investors yet, but if we know what questions they’re going to ask us in advance, we have the best chance of deliberately designing a business that can grow.