Land Grab Turned into a Land Mine
Speaking with a founder today reminded me of my days as a founder. He and his team have a great product and they’re focused on producing as many of them as possible to get them in the hands of customers. It’s early days for them, and naturally they don’t know everything. They’re still trying to find product–market fit.
I remember a time I had a bright idea at CCAW: let’s add a ton of new distribution centers all at once. We literally flipped a switch one day and added over a dozen massive warehouses to our distribution footprint. What could go wrong? Um . . . huge problems kept orders from being in customers’ hands when they expected them. Working through the various reasons this happened was painful and stressful for our team.
I later realized that we had trained our valuable energy on the wrong thing: growing our distribution footprint and revenue. We didn’t have product–market fit yet, so we should have been listening to our existing customers, not executing a land grab to get new ones. We missed out on valuable customer insight during a critical phase of our startup journey. The company still scaled and was successful, but I believe that missed insight was the difference between eight figures in revenue (which we achieved) and nine (which we did not).
Focusing on the right thing at the right time is critical for early-stage companies—there’s only so much bandwidth to go around. If I could do it all over again, I’d work on understanding my customer’s problems before adding operational complexity to acquire more customers.
The Rise of the Retreat
With more companies working remotely, I’ve been hearing more founders searching for ways to keep their teams connected on a deeper level. Some of them are putting more thought into their retreat planning. Retreats are usually meetings outside the office where everyone gets together to bond and discuss the business. Some last one day; others are multiday. Many include team-building activities to allow team members to overcome a challenge together.
I’m a big fan of retreats and attended two a year before the pandemic. Most were for two to four days and attended by other entrepreneurs. Without a doubt, these have been some of the most transformative and enlightening experiences I’ve ever had. I’ve always left more focused and excited about what lies ahead.
Retreats were helpful before the pandemic, but I think they will be a critical tool for leaders going forward. Can’t wait to see all the creative ways people find to get teams to bond.
There’s Usually More Than One Way
As a founder, sometimes it’s easy to get caught up in seeing things your way. You see an opportunity and a path to pursuing it. You’re locked in and focused. Founders often miss that their way isn’t the only way or always the best way. As the old saying goes, there’s more than one way to skin a cat.
Founders should be locked in on a destination but not necessarily a path. They should be searching for the best path to get to the desired destination. Sometimes that path will be something they thought of, and sometimes it will come from others. That’s one reason I’m a big fan of founders sharing their ideas with other people. Sharing invites feedback, some of which will be valuable insights.
If you’re a founder going after a great opportunity, consider taking time to solicit feedback. You never know, you might just uncover the yellow brick road to your Emerald City.
Over the years, I’ve noticed that I’m most productive in the mornings. I try to do things that require heavy mental lifting in the a.m. Recently I had a conversation with someone, and we randomly got on the topic of what habits work for me. To my surprise, his profession involves discussing habits with his clients. He said that a high percentage of them are the same—very productive in the a.m., and they get the most done before normal office hours.
Understanding my optimal hours and scheduling the right things at those times has been beneficial for me. Random things come up, so I have to be flexible. But when I’m able to stick to my schedule, I’m more productive. I get my high-priority work done early in the day and deal with reactive or mindless tasks the rest of the day.
Being self-aware is important for founders. It can sometimes be the difference between success and failure. Understanding your best hours and optimizing them is part of that. If you’re a founder, consider asking yourself, “When am I most productive? Am I working on the most important things then?”
This weekend I listened to an investor discuss his strategy and track record. The strategy revolves around having conviction about an investment. He gains that conviction through his own research into the company and market. He talks to customers or potential customers who experience the problem the company is solving. Once his belief in the company is sufficiently strong, he pulls the trigger with a large investment. A small number of strong-conviction bets with a large amount of capital is his strategy. It’s worked out extremely well for him—some of his investments have been wildly successful.
Today I had a conversation with a founder friend turned investor. We discussed the strategy described above and tried to answer this question: “Is there a correct approach to early-stage investing?” I know successful investors who have used a methodical style like this one and others who have totally different styles. Like other things in life, I believe investing styles are a bit like personalities. There is no right or wrong style in the abstract—the right style for an investor is the one that works for them. Everyone has different risk tolerances, horizons, etc. Imitating what has worked for someone else may not work for you. Each person must figure out the approach that’s true to them, test it, and adjust (if necessary) as they learn.
I’m looking forward to learning and refining my own investment style.
A Picture—or a Clear Summary—Is Worth a Thousand Words
A friend does real estate projects, which I love hearing about. As we walk his sites, he tries to describe the end product. It’s hard to grasp what it will look like as I listen and look at the incomplete construction. He recently began getting renders, and he showed me one of the final version of his current project. I got it right away. The rendering brought his words to life and filled in all the gaps in two seconds. We discussed how helpful that rendering was for someone like me, and he shared an insight: it’s also been helpful for his workers and vendors. They understand what he’s aiming for now, and they make better decisions on their own that align with that vision rather than constantly ask him questions.
This past week I had a conversation with an early founder who’s building a software company. We’ve been working on his one-page strategic plan for the last few weeks. It includes his vision, mission, values, target market, three-year-goal, annual goals, quarterly goals, and quarterly projects. It’s essentially a roadmap that measures progress. It details where the founder wants to go, how he’ll get there, and what he needs to be working on this quarter and this year. The founder rolled out the plan to his team and got an interesting response from a team member: “I don’t feel like an employee anymore. I feel like an owner now, and I know exactly where we’re going and what I need to be doing.”
The founder was surprised that a simple one-page document was so illuminating. Having been a founder, I knew exactly what he meant. I also knew what he was missing. I reminded him that founders have more background knowledge about their market and where the company is heading than anyone else on the team. It’s all in the founder’s head. He’s been thinking about it nonstop. It’s clear to him. It makes sense to him. Other team members’ knowledge is full of gaps. Laying it all out in a simple way fills the gaps, making clear to everyone what’s so clear to the founder. It can be a rendering, a one-page strategic plan, or something else. If it connects the dots for other people, the outcome should be the same.
These two conversations were independent and about different industries, but the founders’ conclusions were the same. It’s important for founders to empower teams by painting a clear picture of where they’re going and how they plan to get there!
Preparing Financially for Entrepreneurship
An aspiring founder asked what I did financially to prepare for entrepreneurship and what I recommend. I started my company over a decade ago. I wasn’t far removed from college, and the world was a different place in general (inflation is real). Here are a few things I thought about that others may find helpful:
- Reduce fixed expenses – Your personal cash flow (i.e., salary) will likely decrease during your early years as a start-up founder. Reducing your fixed expenses (recurring fixed monthly payments) will give you more flexibility. You want to be able to focus on the company. But you don’t want to reduce them to the point where life is miserable, either.
- Reduce debt – Eliminating or reducing unnecessary debt is easier said than done. But if you’re fortunate enough to be in a position to do it, it will help diminish financial stress and lower debt repayments or remove them from your fix expenses altogether.
- Increase savings – Start-ups are hard and unpredictable. It’s not unheard-of for founders to take small salaries, go without a salary, or inject personal capital into the company when times are tough. Savings are a financial cushion that helps you weather the early years. If you can, increase your savings before you start your company.
- Get buy-in from loved ones – If others are affected by your entrepreneurial decision (e.g., family or a significant other), being on the same page is important. Discuss how entrepreneurship will affect the household (including finances). It’s important for everyone to have an idea of what the journey will look like and buy in.
- Consider a Roth IRA – If you’re eligible, consider opening a Roth IRA (you can fund it later). This is a great retirement vehicle in the traditional sense and also an interesting tool that founders can strategically use to invest or hold alternative investments (e.g., private company shares).
- Eat in – We eat three meals a day. Eating out is expensive, so eating in can improve your personal cash flow quite a bit.
These are just a few things that aspiring founders can consider doing before they start their company. Everyone’s situation is different, so some of these won’t be feasible for everyone. Still, they’re good things to be aware of and think about. Building a business is hard. Minimizing stress in other areas in your life can help a lot.
Bootstrap or Raise? Why Not Both?
Had a great conversation with a founder who’s taking a hybrid approach to capitalizing his company. He raised a small amount of initial capital and used it to build the early version of his product. He’s been acquiring customers and fine-tuning the product based on feedback, in search of a product–market fit. Instead of raising more capital, he has his customers sign one-year agreements and pay for the entire year up front. The company is cash-flow positive and can stay afloat without raising again as long as it continues to acquire customers. The founder is thinking about raising a large round to accelerate growth once the business achieves product–market fit.
This founder’s capitalization strategy is interesting, and it’s working well for him. He raised capital to get off the ground but began bootstrapping the company after the investor capital was spent and the product launched. Customer revenue is the cheapest and best source of funding for a company. The challenge is getting enough of it to fund investments in future growth, which this founder is doing with annual up-front customer payments.
I like this founder’s approach, and I’m looking forward to watching his journey. I’m sure he and his team will find more creative ways to build a big business!
Company Equity: A Few Things to Know
Today I had independent conversations with two founders about founder equity versus investor equity. Founders usually set up only one company, so they often need to rely on other people’s advice. A few things I shared with these two founders:
- Common shares – Common shares are usually issued to founding team members who actively work in the business—ideally full-time if the business can pay salaries. It’s a good practice (and a requirement of many investors) that common shares issued to founders be on a vesting schedule.
- Preferred shares – Preferred shares are usually issued to an individual or organization that injects capital into the company but doesn’t actively work in the business. Preferred shares have a stronger claim to company assets than common shares do. Preferred shares issued to investors are usually not on a vesting schedule.
- Cap table – A cap table details who owns what amount and what type of shares, how much capital investors put into the company, and other details regarding capitalization of the company. Many founders do this in a spreadsheet because it seems easy enough, but small mistakes can be extremely costly down the road. Using—as early as possible—software like Carta or LTSE Equity (formerly known as Captable.io) is highly recommended.
Every company and investment has its own nuances and circumstances, so the info above isn’t set in stone. It’s just a high-level starting place for founders. Company equity and cap tables are important and something founders should pay close attention to. It’s worth spending the time to do research or ask others if you don’t understand something related to these topics.
Building “Operating Systems” for Small Businesses
I’m a big fan of software helping small businesses run more efficiently, and I’ve shared my thoughts on how workflow management can help achieve this. I’m always curious to learn more about how software aligns with this thesis. I’ve talked with founders who have deep knowledge in an industry and are building what they call an “operating system” for smaller players in that industry. The idea is that these industries are manual and inefficient. The “operating system” will handle most aspects of the business in a way that takes into consideration nuances of that industry, thus freeing up time the small business can use to focus on other things.
I agree with these founders. Some industries need software to handle their unique needs. But there are limitations to this that founders building operating systems for small business should consider. For example, accounting. QuickBooks has been creating accounting software for small businesses for a long time. The chances aren’t great that your operating system will be better at accounting than QuickBooks. Integrating with this established leader is likely a better strategy. And there are other examples.
Figuring out the most painful and inefficient problems small businesses face and solving them with an operating system is a good strategy (to begin with). That will create value, which should lead to customers. The less painful areas can be handled with integrations. Sure, everything won’t be in one system, but it’s a lot better than a completely manual process.
Operating systems for small and medium businesses don’t have to reinvent the wheel. They just need to solve the most painful problems well!