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10 lessons for tech startups

Having been involved in a number of web and tech startups from Vottle.com to a VoIP mobile startup under the auspices of Internet Solutions’ ISLabs, I have been lucky enough to have worked with some very bright entrepreneurs, and have learnt some valuable lessons along the way. From Two-Minute noodles, to Darwin, to Ham-and-Egging, here are my 10 lessons for founders.

1. The Boot:

Almost every business can be bootstrapped to start, and should be. Not even Google needed outside financing for its first couple of years. Superstar entrepreneurs have an uncanny knack of making money go extremely far and this in itself forces creative solutions to problems that almost always spawn new opportunities. I strongly encourage entrepreneurs to seek financing later in the development of their business, usually post prototype, and as close to product launch as possible. Too much capital makes businesses fat. If you use finance as an excuse to start your business, you should be getting a job, not starting a business.

2. Capital Efficiency:

I have never found a reason to pay founders what they are “worth” in the market. If you want to start a business and believe that the venture finance should be paying like a professional, you should be a getting a job. In fact, I have always believed that founders should use venture finance only for stuff that relates directly to a cost of sale. The easiest thing for founders is to beg, borrow and steal from the 3 F’s (friends, family and fools).

3. Cash really is The King:

“Turnover is Vanity, Profit is Sanity and Cash is Reality”. There is nothing more important to a startup than cash-flow. Nothing. I advise all founders to build a real-time cash-flow model that works for them. There is no need to get caught up in GAAP intricacies either. Put simply, it is your total cash in the bank less bills (“burn-rate”) plus revenue. Income statements and balance sheets are irrelevant for startups and operating small businesses. In fact, they only become useful if you want to sell your business.

4. Two-Minutes Noodles:

If the entrepreneur can eat Two- Minutes noodles and still be evangelical about their business, you know your founder has the right value system. The truth is, successful entrepreneurs never do it for the money, they do it to change the world. This is, of course, less about eating the noodles and more about seeing what type of person you are.

5. Product Paradox:

This is an interesting contradiction that needs to be managed when starting a business. The founders need to get a product out as soon as possible and then iterate through a fast customer feedback loop. At the same time, the founders need to operate as professionally as possible. Product development needs to be thoroughly thought-out. And I don’t just mean in the founders heads. I strongly suggest doing a business plan for every product. This discipline will force the founders to think of hurdles and ensure they can react quickly. Balancing this is probably the hardest objective as it requires the founders to simultaneously wear two hats.

6. The Law of Two:

I haven’t studied or been exposed to startup that has been successful (measured in terms of revenue) without two founders. One is usually a big picture business person and the other is the highly technical and analytical. Both need to be skilled in the others areas too, ideally, but they will own one of these two areas. The technical person understands the vision and sales, while your business person needs to understand, even if only at a high level, the product technically.

7. The Darwin Rule:

It is not the strongest of the species that survives, nor the most intelligent that survives. It is the one that is the most adaptable to change. The best product, although very helpful and ideal, is almost never the deciding factor of success in a startup. The most adaptable business wins over time. People who are set in their ways and want the next day to resemble the previous should get a job.

8. Ideas are like Carbon Monoxide:

They are increasingly abundant and of little use. Don’t be married to your idea and don’t think your idea is worth money. Ideas are worth nothing without execution. Ensure you spend time unpacking your idea and formulating a business plan. The devil is always in the details. Most great businesses started off with an idea that was, at best, only loosely-related to what made them successful. Such is the evolutionary nature of business.

9. Evangelical Rule:

Entrepreneurs need to believe so strongly in what they are doing, they believe they are saving the world through people buying their product. They believe, like Steve Jobs, that they are “putting a dent in the universe”. They have evangelical zeal that on the surface is quite annoying. It is hard to overstate the importance of this frame of mind in your founders. It is the difference between people who do 8 hour and 14 hour days; between two-minute noodles and long lunches; between living your startup and seeing it as a “job”.

10. Ham-and-Egging:

Coined by Profs Bhide and Stevenson, it is the challenge entrepreneurs have of getting both capital from investors and sales to customers without having either in-hand. The ultimate goal is to do both simultaneously, but can be done incrementally. Start-up salespeople (one founder at least) need to be natural ham-and-eggers. They have to make the case that their company is perfectly capable of providing their service without any experience of having done so successfully. This is often difficult because it borders on lying. My take on this, is that if you honestly believe your startup can deliver, do it. It is true that many successful and socially beneficial startups have done this at the early stages, so it is clear to me that this is one of the awkward necessities of a startup.

The ideal founder?

So, if we take the above lessons and construct the ideal founder, they would look something like this:

A zealot with an almost annoying passion for their business and who could talk about their startup up every day, all day, easily. They are good at selling. They believe living frugally is spiritual and necessary. Understanding highly technical ideas as well as the bigger picture is something they are good at. They are not usually analytical. They don’t mind that each day is continually different, despite the chaotic nature of such. They know that money matters, but don’t spend too much time worrying about their personal bank account – that doesn’t help sell the product. Blind faith is often used to describe them. So is naivetéy.

They are comfortable with these personifications, even reveling in them and the fact that it makes them an outsider and “strange”. They deplore rules, even when the rules make sense. Nothing is ever accepted knowledge until they have put it to the test. They are almost impossible to manage and are often deemed self-centered. The latter is just zeal misunderstood. Consideration is for people with jobs and they, after all, are changing the world for the better, so you need to get out the way.

  • Ian

    Brilliant insights !! – this is spot on.

  • As an entrepreneur who is living frugally believing it's spiritual and necessary while I change the world – this was a great read.

  • Nice one there Justin,

    Cash really is the king as building business model for your startup helps you to really “change the world”. Imaging how perfectly crafted your product is and you don't have enough cash to push it to people who needs it? you can change the world.

  • Nice one there Justin,

    Cash really is the king as building business model for your startup helps you to really “change the world”. Imaging how perfectly crafted your product is and you don't have enough cash to push it to people who needs it? you can change the world.

  • Adrian

    A great article that underlines the universality of your startup lessons.

  • nevo

    dude, 8 points are about 1 – passion and 2 are about humility. if that is all it took to make a startup work, there would be more successful startups :(

  • All points spot-on! (Except #10 for me… no need to ham-and-egg if the product fills a gap and growth is there. )

  • The Darwin Rule – I really like that one. Nice article, thanks.

  • Excellent talking points. But then again, we've come to expect this level of insight from you :)

    Re: your points where you posit an alternative by 'getting a job' – I do disagree with you here, as you are essentially modeling an employee no one would really want. IMHO – a lot of the points you've mapped out are equally applicable to an employee who is passionate about their job. It could be argued that if they're that passionate, they should start a startup… although I'm happy for them to stay here at IS for the time being too.

  • oneafrikan

    Hey Justin, feels like I was reading a description of myself ;-)

    Great article. Only comment is the 2nd para in the “ideal founder” section.
    Would argue that I've met a lot of founders who aren't self centred and do right by people. Saying that, I've certainly met my fair share who are arseholes and don't give a cr@p about anyone else… but tend to stay away from those types of people anyways, so I guess I'm biased.

    My 2 cents:
    “Cashflow is king” is a mantra I wish I could tattoo on my forehead. When I have an office with my own walls, I am going to put it on a big sign and hang it up.

    “Ham and egging” is a fundamental skill.

    Thanks for making me smile!

  • ragstowreckages

    Nice article. I like your insights! We share more about how successful entrepreneurs learn from their mistakes at http://www.ragstowreckages.com. If you sign up for the free newsletter you’ll and get a free 7-point plan to what successful entrepreneurs are doing in 2010

  • paullombard

    Hey! Nice article. Have a look at http://www.twitter.com/dharmesh 's presentations on start-ups, i think you two will get on swimmingly ;)

    I recommend the one on SEOMoz's Professional Training Series. Very good.

  • Fantastic stuff. Here are my contributions:

    1. Simplicity. I urge you to try http://www.switchnode.com to see what I mean. I wrote it fueled by two-minute noodles. It is hosted with other projects on a shared server, at the cost of pocket change. It will eventually be monetized with a paid edition and will be profitable on its first sale. This is as simple as it gets.

    2. The advertising fallacy. Unless you are trying to get into the advertising business, don't let advertising be your only source of revenue.

    3. Fork. Make your modus operandi to take an interesting aspect of a previous project and spin it off.

    4. Eat your own dogfood. Even if you aren't your own target market, your product will be so much the better if you try to be.

  • Fantastic stuff. Here are my contributions:

    1. Simplicity. I urge you to try http://www.switchnode.com to see what I mean. I wrote it fueled by two-minute noodles. It is hosted with other projects on a shared server, at the cost of pocket change. It will eventually be monetized with a paid edition and will be profitable on its first sale. This is as simple as it gets.

    2. The advertising fallacy. Unless you are trying to get into the advertising business, don't let advertising be your only source of revenue.

    3. Fork. Make your modus operandi to take an interesting aspect of a previous project and spin it off.

    4. Eat your own dogfood. Even if you aren't your own target market, your product will be so much the better if you try to be.

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