Traps for smart but naive start-up entrepreneurs
OPINION: Last week local tech businessman Mike Carden published a lively piece about moving from being a founder to an investor.
It’s a subject he’s qualified in. He founded HR cloud software Sonar6 in Wellington 10 years ago and sold it to US firm Cornerstone Ondemand for more than $20 million.
More recently he’s been a lead investor in a bunch of noteworthy tech companies, from NPS wunderkind Ask Nicely through to process management tool ProMap and motivation monitor JoyousHQ.
Carden’s piece was titled: ‘‘Most advice is just nostalgia’’. And if you know Mike you can appreciate the wry combination of mongrel insights and black humour embedded in the title. It’s start-up porn with an edge.
It’s also a useful reminder that cognitive bias, along with a tendency to romanticise our past successes, means we need to make sure we we are encouraging rather than restricting innovation when giving advice to others.
This thought came to mind last week after I participated in a Dragons’ Denstyle event for business entrepreneurs to help them apply their commercial smarts to the technology world.
They were shrewd guys and girls with passion in spades. But they also ran the risk of wasting time or money, most likely both, as they tried to get businesses off the ground.
There were five common pieces of advice I found myself handing out.
The first of these was a straight steal from the late Steve Jobs. Start with the consumer and work back to the software. All too often, start-ups think about their product or tool; they obsess about it and become intoxicated with its self-evident brilliance.
In doing so they forget about the customer and what they need. What they really need. Which is unlikely to be a piece of software at all. The software is just a way of fulfilling that need.
The second thing to keep in mind is that airware is nowhere for investors. If you can’t demonstrate a working prototype of the website or app, then all you are selling is an idea.
Given no self-respecting investor is going to sign a non-disclosure agreement for what is just an idea, the danger of one of those potential investors building your idea before you do is real. And then your idea is likely valueless.
Plus, as an investor, you’d be a mug to put money into a non-operating web service. Beta – live but buggy – is fine. But without it there’s no proof that the founder can execute worth a damn.
The next learning is that you can’t afford to just buy in your tech resource. If you are the business brains of the outfit but can’t code, you’d better find someone who can and be prepared to swap some equity for that ability.
Any start-up that relies on having to employ a web development company every time they need something built, tweaked or connected to a database is going to run up six-figure bills on a regular basis. Such a dynamic works directly against the nature of quick iteration and pivoting. Plus it bleeds money.
Number four on the list is about competitors. Few start-ups enter a market completely free of competitors. The challenge is to find competitive advantage and harness that advantage to delight your customers.
But if one of your competitors is Google or Facebook, then the chances are you’re dead before you begin.
If your vanity business involves trying to generate its own social network, or plans to return better search results than Google, then you are doomed to fail. Pushing against the network effect of these companies – the phenomenon whereby a service becomes more valuable when more people use it and critical mass is passed – is exhausting and pointless.
Better to build your service within the walled garden that is Facebook or harness the dis-intermediating grunt of Google than go against it.
Last on the list is scale. Specifically, how will it grow to ensure the monetisation model will return a profit one day? Any start-up that says it will rely on its service ‘‘going viral on social media’’ is pretty much guaranteed not to scale.
I reckon the best way to scale is to get a handful of blue chip reference customers who love the service and to then employ a smart channel strategy.
This involves finding established firms operating in the vertical you are trying to target, which are prepared to piggy-back your service on top of theirs. Xero have reduced this to a fine art by partnering with accountancy firms. Online quiz firms partner with liquor companies to deliver up pub quizzes.
The essence of Carden’s wisdom is not to pay too much attention to other people’s advice. That means you should feel free to ignore parts of the above. But perhaps not all of it ...
Mike ‘‘MOD’’ O’Donnell is an e-commerce manager and professional director. His Twitter handle is @modsta and he’s good at ignoring advice.