Week 5 Readings: How to Start a Startup

“The Happiness Culture: Zappos Isn’t a Company, it’s a mission” Steven Rosenbaum

  • “Culture is about giving employees permission and encouraging them to just be themselves”
  • Tony’s (CEO of Zappos) success can be tracked to the feeling he had as a child  – wanting to receive something magical in the mail (he made custom buttons)
  • Hiring process:
    • 2 sets of interviews
      • Hiring fit
        • team fit
        • relevant experience
        • technical ability
      • Cultural fit
        • Personal values match the corporate values of Zappos
  • They have 10 core values:
    • Deliver wow through service
    • Embrace and Drive change
    • create fun and a little weirdness
    • be adventurous, creative, and open-minded
    • pursue growth and learning
    • build open and honest relationships with communication
    • build a positive team and family spirit
    • do more with less
    • be passionate and determined
    • be humble
  • They actually have a training for new hires – they make everyone do call centers for two weeks. They give them the option to quit and they will pay them + give them a $2,000 bonus to leave then. It weeds out the people who are just their for the paycheck
    • they haven’t written a check in over a year
  • Work-life balance should be more like work-life integration. You shouldn’t have to put on a different persona in the office. it should just be life.
  • In the end, you need to be able to combine pleasure, passion, and purpose in one’s personal life

 

How to Convince Investors – Paul Graham

  • Founders typically struggle to convince investors to invest in their company. The thing a founder really needs to focus on is “why their startup is worth investing in”
  • You need three things:
    • Formidable founders
    • A promising market
    • Some evidence of success so far
  • If you seem like a winner, they will like your idea more
    • if an investor likes you, they will be reaching for ideas: “yes, and you can also do X” vs. saying “what about X”
  • A formidable person is someone who seems like they will get what they want, regardless of whatever obstacles are in the way
  • Warning – do not try to imitate the swagger of more experienced founders. Investors are not that good at judging technology, but they are good at judging confidence
  • Truth- the easiest way to portray confidence is to stick to the truth. Convince yourself that your startup is worth investing in and when you explain this to investors they will believe you.
    • You need to truly evaluate whether your startup is worth investing in
    • Know everything about your market – be the expert of your domain
  • The time to raise money is not when you need it. Its when you can convince investors, and not before.
  • Why is it worth investing in?
  • You don’t have to prove you’re going to succeed, just that you’re a sufficiently good bet. You need a plausible path to owning a big piece of the a big market.
    • Your target market has to be bit, and it has to be capturable by you
      • there has to be some sequence of “hops” to adjacent markets and/or market growth to show that you can be a market leader
      • Ask “why now” – why haven’t other people done it?
  • Rejection – if they ask why other investors turned you down, it is usually a best practice to tackle the problem head-on. Explain why the investors have turned you down, and why they are mistaken.
  • At the end of the day, you are really just trying to convince investors that you are a good bet. Ask yourself: does your startup have all the elements of a good bet?
  • Don’t use vague, grandiose marketing speak- it doesn’t impress, and makes it look like you don’t know what you’re talking about
    • be concise
    • if you can’t explain your plans concisely, you don’t really understand them
  • Recipe for impressing investors:
    • Make something worth investing in
    • Understand why it’s worth investing in
    • Explain that clearly to investors
  • Never let pitching draw you into bullshitting: make the truth good, then just tell it.

 

How to Raise Money – Paul Graham

  • Raising money typically comes in a couple different phases:
    • Angel phase – tens of thousands of dollars to get an idea off the ground
    • Raise a few hundred thousand to a few million to build the company
    • Once the company is clearly succeeding, raise one or more later rounds to accelerate growth
  • There is no real order in the real world – but the focus of this essay is on the phase 2  fundraising.
  • Fundraising is hard: it is difficult to convince people to part with their money AND it seems like a puzzle since it is foreign to most founders. The second point here is that it can be overcome using this essay as a guide
  • As a founder, you need to impose external constraints on yourself. This essay lays out those constraints well.
    • Don’t raise money unless you want it, and it wants you
    • Be in fundraising mode, or not
    • Get introductions to investors
    • Hear no until you hear yes – get a commitment in writing before you count your money
    • Do breadth-first search weighted by expected value:
      • expected value = how likely an investor is to say yes X how good it would be if they did. Use this to prioritize your potential investors.
    • Know where you stand
    • Get the first commitment
    • Close committed money
    • Avoid investors that don’t “lead”
    • Have multiple plans
      • Including the plan of how you could get to profitability without raising any money, it would just be slower
    • Underestimate how much you want to raise
      • it is better to say you want $250k if you really want $500k. that way when you raise $150k you are more than half way there. There is no reason you cannot increase this number as you are in your fundraising round.
    • Be profitable if you can
    • Don’t optimize for valuation
    • Yes/No before valuation
    • Beware of valuation sensitive investors
    • Accept offers greedily
      • Simple rules: if someone makes you an acceptable offer, take it. If you have multiple incompatible offers, take the best one. Don’t reject an acceptable offer in the hope of getting a better one in the future.
    • Don’t sell more than 25% in phase 2 – don’t give up too much equity in early rounds
      • Phase 1 should be <= 15%
      • Phase 2 should be <= 25%
    • Have one person handle fundraising
    • You’ll need an executive summary and maybe a deck
    • Stop fundraising when it stops working
    • Don’t get addicted to fundraising
    • Don’t raise too much
    • Be nice
    • The bar will be higher next time
    • Don’t make things complicated

RG

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