Week 7 Reading: How to Start A Startup

The Information Age to the Networked Age: Are you Network Literate? -Reid Hoffman

The networked age is all about networks and relationships. It is no longer about the information age of looking for Job listings. Strong relationships where the flow of information is highly reciprocal can help you put yourself at the intersections of many key networks. There are three levels of network literacy:

  • Apprentice: using networked technology
    • Each level of literacy leads to more specific ways of using the network effects. Instead of saying you are the “executive chairman” he uses “Entrepreneur. Product strategist. investor” because his profile is targeted by entrepreneurs who may want financing. The LinkedIn profile headline is the first thing people will see about you in a professional context: Craft your network identity here (it should be bigger than your current position and company affiliation). Join the groups on LInkedIn in your industry or follow relevant companies and individuals within the domain of your industry.
  • Journeyman: establishing a network identity
    • In the networked age you need to be aware and actively reviewing networked-derived metrics of influence and authority: “who retweets our tweets? who comments on our medium posts? who shows up on LinkedIn as a 1 degree connection? You are no longer just you, you are: who you know, what you know, what they know about you, how they know you, who they know, and so on. As a journeyman, this thinking becomes second nature. Your network helps shape your identity too.
  • Master: utilizing network intelligence
    • Information proliferates faster now than ever before. The Master is able to extract the right information at the right time. If you are fully network-literate, your networks are probably your first reads vs. the typical news outlets (WSJ, NYT, etc.). There is an entire ‘dark net’ of critical-edge information that hasn’t made it into newspapers and blogs. The information that only exists in peoples’ heads. If you are fully network literate, you will know who the thought leaders, critics, and skeptics are in a particular domain. Remember that the strength of the relationship matters more than the quantity of them. them extremely informed individuals who are willing to share all that they know is more valuable than 1,000 people you know superficially. Networks are a two-way street. you need to reciprocate and add value to the network as well.


The Alliance: A Visual Summary – Reid Hoffman

  • The current employer-employee relationship is one built on dishonesty.
    • Employers are continually losing valuable people
    • Employees fail to fully invest in their current job because they are scanning the marketplace for new opportunities
    • No one is investing in the long term relationship
    • Companies cannot afford to offer lifetime employment.
  • The solution?
    • Stop thinking of employees as a family OR free agents
    • Think of your employees as ALLIES on a TOUR OF DUTY
      • An alliance is a mutually beneficial deal with explicit terms between independent players
        • The relationship needs to be based on how they can add value to each other
          • Employees invest in the company’s success
          • The company invests in the employees’ market value
      • A tour of duty is a specific, finite mission
        • it is an agreed upon ethical commitment by the employee and employer
        • A tour of duty has a specific mission with a realistic time horizon: “ship this product in 18 months”
          • It needs to promise specific career benefits for the employee “over the next 18 months you will develop excellent negotiation skills”
        • The paradox: “Acknowledging that your employees may leave is how you build the relationship that convinces great people to stay
        • There are 3 types of tours:
          • Rotational – entry-level employees. Example:2-4 year analyst programs
          • Foundational- People whose lives are fundamentally intertwined with their companies.  The company deeply informs the employee’s individual identity, and the employee has become part of the company’s intellectual and emotional core
          • Transformational – A personalized and negotiated one-on-one by you and your employee. The employee transforms his career by enhancing his portfolio of skills and experiences. The company is transformed by the employee accomplishing a specific mission that improves the business.
        • The Tour of Duty approach relieves pressure on you and your employees alike because it builds trust incrementally.
          • The relationship deepens as each side proves itself
          • The finite term means there is a set time frame for discussing the employee’s career
          • Both sides are open about their goals and time horizons leads to honest career conversations
            • necessary for building trust and loyalty with employees
          • It may seem like this tour of duty will give employees permission to leave, but this permission is not yours to give or withhold
          • If you really want your employees to stick around, provide them with a structure where they take on a series of personally meaningful missions.
      • Hoffman wrote a book called “The Alliance” where he discusses this topic among others



If, Why, and How Founders Should Hire a Professional CEO – Reid Hoffman

It used to be that once you hit a certain critical mass, a you would hand over the keys to your startup to an experienced CEO to scale the business. In the more recent startup climate this has shifted. What we are now seeing is CEO’s that stay for the entire growth cycle of the company – like Jeff Bezos, Larry Ellison, Steve Jobs, etc. There are three key ingredients that founder-CEO’s tend to have that this article talks about:

  • Comprehensive knowledge
  • Moral authority
  • Total commitment to the long term

Without these three key ingredients, a CEO’s won’t be able to maintain the rapid product innovation that is a prerequisite for success in today’s startup world. Despite this hypothesis, Noam Wasserman of Harvard Business School has been studying what he calls “the founder’s dilemma”, which has found that for startups in the 2000’s, founders maximized the value of their equity by giving up the CEO and board control. This leads us to the point of this article: you should ask “should I replace myself?” and if the answer is “yes” then “how do we make the transition”.

In his experience, to be successful you need to be passionate about the leadership, management, and organizational processes as the company scales. As a founder-CEO you have to want to do the nuts and bolts work that it takes and it is likely much different from the work you started the company for. At 50 people and beyond, a CEO has to focus on process and organization, and that wasn’t what he was passionate about. In addition to strong capabilities, if you are going to hire a CEO they need to have extremely strong alignment on their values, integrity and culture.

The role of CEO has changed in today’s climate. 20 years ago, the CEO didn’t have to be as focused on the product as long as the company was continuously refining it. The rise of the internet has caused the product cycles to go from months to weeks – so the CEO has to be heavily involved in the product (not just scaling). All successful Founder/CEO pairings have had 4 things true:

  • The decision to step back from being CEO is a function of self-realization
    • Not imposed by investors
  • The outside CEO was brought in early, so that he or she could play a real role in shaping the product, business, organization, and culture of the company
  • The original team of founders was a small group of two to three people making it easier to form strong co-founder bonds
  • The new CEO had prior experience running a large organization



The Information Age to the Networked Age: Are you Network Literate? – Reid Hoffman

This article is about pitching to VC firms. It walks through several Myths:

  • Myth: The startup financing is about one thing – money
    • Truth – a successful financing process results in a partnership that delivers benefits beyond just money.
      • Boost the strength of your network
      • Helps in recruiting employees and acquiring customers
      • Network intelligence, so you can prepare for challenges and opportunities ahead
      • When considering a VC, make sure they are constructive during the pitch and financing process. You don’t want to end up with ‘dumb money’
  • Myth – If your team is strong, show the team slide early in your pitch
    • Truth – Open your pitch with the investment thesis. You have the most of their attention in the first 60 seconds. Your investment thesis should be summed up in 3-8 points, then back those claims in your following slides to boost the confidence of those claims
  • Myth- All investment pitches have the same structure
    • Truth – decide whether you have a data pitch or a concept pitch
      • Data pitch – lead with the data because you are emphasizing how good the data already is (track record).
      • Concept pitch – there may be data but the data supports an undeveloped concept. Concept pitches present more of a promised future than data.
  • Myth – avoid bringing up anything that might paint your business as risky and decrease investor’s confidence
    • Truth – Identify and steer into your risk factors
      • Experienced investors know there are always risks. You will lose credibility if you don’t bring them up or can’t answer – you would be either dishonest or dumb. Identify 1-3 risks to your business and how you plan to mitigate them.
  • Myth – Arguing you have no prospective competitors is a strength
    • Truth – Acknowledge all types of competition and express your competitive advantage.
      • If you have no competition, you believe you are either playing in a completely inefficient market or no one else thinks your space is valuable.
      • Why are you going to break out of the pack? what is your advantage? If you cannot answer that question to the investors, the investors will not believe you have an edge that can lead to success.
  • Myth – don’t compare yourself to other companies because you think you are unique
    • Truth – pitch by analogy
      • For high level pitches, analogies work great. See the LinkedIn Series B pitch slide deck for the kind of examples Reid Hoffman used
  • Myth – Focus on today’s pitch. The future will take care of itself
    • Truth – think about the round after the one you are currently raising
      • Assume the series B investors will be interested in your Series A deck and same with the series C investors on the series B deck. In LinkedIn’s A slide deck he presented a growth curve that was good enough to get an investment but also one that he could beat. It gives legitimacy in being able to say “this is what I said before and this is what I did”


The 18 mistakes that Kill Startups – Paul Graham

Reality is, as Paul Graham puts it, there is only one reason startups fail: they are not making things that people want. Really this is the list of 18 things that cause startups to not making something users want.

  1. Single Founder – very few successful startups were founded by just one person. Why is this? It is a vote of no confidence – the founder wasn’t able to convince any of his friends into starting the company with him. Even if his friends are wrong, he is still at a disadvantage:
    • starting a startup is too hard for one person
    • You need colleagues to brainstorm with
    • to talk you out of stupid decisions
    • to cheer you up when things go wrong
      • Graham argues this might be the most important one
  2. Bad Location – there is a reason Silicon Valley is the Startup center – then Boston, then Seattle, Austin, Denver, etc. You need to understand why cities become startup hubs: thats where the experts are, standards are higher, people are more sympathetic to what you are doing, the people you want to hire are there, supporting industries, people you run into in chance are in the same business…
  3. Marginal Niche – If you are making anything good, you are going to have competitors, so you may as well face that. You can only avoid competition by avoiding good ideas. A good way to get around the mental block of not wanting to start something is to think about ideas without involving yourself: “what would be a great idea for someone else to do as a startup?”
  4. Derivative idea – most successful startups get their ideas from a specific, unsolved problem the founders identified. Not by imitating ideas from some existing company. Don’t look at Facebook and try to make a new spin that they missed, look at the problems they solved initially. What do people complain about? what do you wish there was?
  5. Obstinacy – Startups are more like science: you need to follow wherever the trail leads. Do not get too attached to your original plan because it is probably wrong. That doesn’t mean you want to switch to different ideas every week either – which can be equally fatal. A test you can use on ideas is to ask whether the ideas represent some kind of progression. if in each new ideas your starting from scratch, that is a bad sign. Also- ask your users for advice. if you think your going in a direction and users are excited about it, you might be on the right track.
  6. Hiring bad programmers – really a big issue for business people…
  7. Choosing the wrong platform – often chosen by bad programmers. A lot of startups during the bubble killed themselves by building server-based applications on Windows. This could also mean platform/program language. A trick you can use if you are not a programmer: visit a top computer science department and see what they use in research projects.
  8. Slowness in launching- all sizes of companies have this issue: software is always 85% done. It takes an effort of will to get something pushed through and released to users. One reason to finish the launch quickly is that it forces you to actually finish some quantum of work. Nothing is truly finished until it is released.
  9. Launching too early – while launching slowly is a MUCH bigger issue, it is possible to launch too fast. The key here is DON’T RUIN YOUR REPUTATION. What is the minimum you need to launch? Identify a core that is both (a) useful on its own and (b) something that can be incrementally expanded on the whole project. Then get it done as soon as possible. This is also a good way to write software: think about the goal and write a small subset that does something useful. Early adopters are fairly tolerant: they don’t expect a newly launched product to do everything, just has to do something.
  10. Having no specific user in mind – You cannot make something users like without understanding them. If you are trying to solve problems you don’t understand, you are hosed. If you do end up building something for users other than yourself you need to keep two things in mind: 1- you cannot rely on your intuitions – ‘you are flying on instruments’ and 2- look at the instruments
  11. Raising too little money – Startup funding is measured in time, every startup that isn’t profitable has a certain time left before the money has run out. Graham uses the metaphor of a runway – the end of the runway is the end of the cash. If you hit that point and you are not airborne, you are screwed. The definition of airborne could vary, usually you need to advance to a visually higher level: prototype, launch, launched, growth, profitability, etc. If you do take money from investors, you need to make sure you take enough to get you to the next step.
  12. Spending too much – the classic way to do this is by hiring too many people: it increases your costs and slows you down. There are three general suggestions about hiring: 1) don’t do it if you can avoid it. 2) pay people with equity rather than salary, not just to save money but because you want the kind of people who are committed enough to prefer that and 3)only hire people who are either going to write code or go out and get users- those are the only things you need at first.
  13. Raising too much money – there are a few pitfalls that you can hit: when you take a lot of VC money, you are expected to put it to work hiring people and spending it. More people will be less committed, and if you took too much money your company could ‘move to the suburbs and have kids’. The more people you have the more you stay pointed at the same direction. Also don’t spend too much time trying to raise more than you need. They advise founders to take the first reasonable deal they get. They could probably get a bit more somewhere else, but bargain hunting is a waste of time: startup investing is an all-or-nothing game.
  14. Poor investor management – founders need to manage their investors. Don’t ignore them, because they may have useful insights, but also don’t let them run the company – that is your job.
  15. Sacrificing users to (supposed) profit – the core problem in a startup is how to create wealth: (= how much people want something X the number who want it) not how to convert that wealth into money. The companies that win are the ones that put users first: Google made the search work, then figured out how to make money off o fit. While it IS irresponsible not to think about the business models, it is ten times more irresponsible not to think about the product.
  16. Not wanting to get your hands dirty – Most programmers would rather spend time writing code than getting users, but users are what makes an idea valuable. you need to make yourself do it.
  17. Fights between founders – about 20% of the startups they have funded have had founders leave. Where this is really a problem is when there are two founders and one leaves or if a guy with critical technical skills to the startup leaves. Most disputes are due to the people, not the situation. It is much easier to fix problems before a company is started than after.
  18. A Half-Hearted Effort – Should you quit your day job? Not necessarily, but he notes that if you believe so strongly in the success of the startup you, you are more willing to hedge your day job on it. Most startups fail because they don’t make something people want, and the reason most don’t is because they don’t try hard enough.

“In other words, starting startups is just like everything else. The biggest mistake you can make is not to try hard enough. To the extent there’s a secret to to success, it’s not to be in denial about that”



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