Startup Opportunities

Startup Opportunities

KnOw when tO Quit YOur DaY JOb

Second edition

Sean wise and brad Feld

Cover images: Memo with paper clip © t_kimura/Getty Images; background © Nicolas Balcazar/EyeEm/Getty ImagesCover design: Wiley

Copyright © 2017 by Sean Wise and Brad Feld. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey.

The first edition of Startup Opportunities was published by FG Press in 2015.

Published simultaneously in Canada.

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Library of Congress Cataloging-in-Publication Data:

Names: Feld, Brad, author. | Wise, Sean, 1970- author.Title: Startup opportunities: know when to quit your day job/Brad Feld and Sean Wise.Description: Hoboken, New Jersey: John Wiley & Sons, 2017. | Includes index.Identifiers: LCCN 2017011359 (print) | LCCN 2017009358 (ebook) | ISBN 978-1-119-37818-1 (cloth) | ISBN 978-1-119-37817-4 (ePDF) | ISBN 9781-1-19-37819-8 (ePub)Subjects: LCSH: New business enterprises. | Entrepreneurship.Classification: LCC HD62.5.F445 2017 (ebook) | LCC HD62.5 (print) | DDC 658.1/1—dc23LC record available at https://lccn.loc.gov/2017011359

Printed in the United States of America

10 9 8 7 6 5 4 3 2 1

To Amy and Marisa,our wives, who are by far the best opportunities we have ever invested in

vii

Contents

Foreword xiii

Preface xvii

Trust Me, Your Idea Is Worthless 1by Tim Ferris

Chapter 1 What Is a Startup?  3How to Use This Book 5

Who This Book Is For 5

Notes 6

Chapter 2 The Democratization of Startups 7The Cost to Launch Is Approaching Zero 7

The World Is Flat 8

The Path Is Known 9

Access to Capital 10

Chapter 3 Opportunities  13The Four Criteria for an Opportunity 13

What Is Opportunity Evaluation? 14

What Is the Cost of Poor Opportunity Evaluation? 16

Execution Trumps Opportunity 19

Risk, Uncertainty, and Ambiguity 21

The Issue of Bias 23

Notes 27

viii Contents

Chapter 4 Approaches to Opportunity Evaluation 29Where Does Opportunity Evaluation Fit into the Overall Startup Process? 29

Overview of Business Model Generation 31

Overview of Customer Development and Lean Startup 33

Overview of the Disciplined Entrepreneur 35

A Modern Version of the Scientific Method 36

Notes 40

Chapter 5 People  43Team 43

Working Full Time 47

Been There, Done That 47

Passion 48

Coachability 50

Ability to Attract Talent 53

Business Acumen 53

Domain Knowledge 55

Operational Experience 55

Mentors 56

Board of Directors/Advisors 57

Customers 58

Social Capital 59

Notes 60

Chapter 6 Pain 63Compelling Unmet Need 65

Size 65

Durability and Timeliness 68

Notes 71

Chapter 7 Product  73The 10× Rule 73

Rate of Adoption 75

Rogers’ (1976) Diffusion of Innovations Theory 75

Intellectual Property 76

Key Asset Access 77

Proof of Concept—Selling Your Product in Advance of Making It 78

Gross Margins 79

Contents ix

Scalability 81

Notes 81

Chapter 8 Market 83Market Stage 84

Product/Market Fit 87

Disruptive Innovation 90

Industry CAGR 90

Distribution Strength 91

Customer Acquisition Costs 93

Viral Marketing 93

Competition 94

The Goliath Paradox 96

Barriers to Entry 97

Government Regulations 98

Partnership Status 99

Knowing Why You Need to Raise Money 99

Notes 102

Chapter 9 Plan  105Time to Launch 106

Plan to Scale 107

Reasonable Not Right 108

Get Out of the Building 111

Plan B 112

Notes 115

Chapter 10 Pitch  117Short Form (Under 10 Minutes) 118

Long Form (30 Minutes) 118

Business Plan—or Not 119

Executive Summary 121

Q&A 121

Notes 124

Chapter 11 Raising Money  125Building a Relationship with a Potential Investor 126

Who Makes the Ask? 127

x Contents

Use of Proceeds 127

Raise the Least Amount of Money to Get to the Next Level 128

Ask for Money from the Right Kind of Investor 129

Raise Money When It’s Available 131

You Aren’t an Exception 132

Why Anything Other Than a Yes Is a No 134

Be Realistic about Your Valuation 136

Even Angels Have Investment Committees 137

Notes 141

Chapter 12 Pitfalls  143Showstoppers and Red Herrings 143

Excessive Valuation 144

Taboo Businesses 145

No Skin in the Game 146

The No Asshole Rule 146

The Key Person Dependency 147

Drinking Your Own Kool-Aid 147

Notes 150

Chapter 13 Don’t Quit Your Day Job If You Aren’t . . . 151Passionate about the Space 151

Able to Execute the Solution 151

Certain That the Problem Is a Need (as Opposed to a Want) 151

Certain That the Problem Is Shared by a Large (and Growing) Market 151

Able to Offer a Solution That Is 10× Better Than Anything Else in the Market 152

Ready to “Burn the Ships” 152

Able to Access Potential Customers 152

Able to Spend Six Months without Personal Income 152

Able to Garner Enough People, Users, and Money to Create a Minimum Viable Product 152

Prepared to Get into the Weeds and Do the Grunt Work 152

Glossary 153

Acknowledgments 159

Contents xi

About the Authors 163

Index 165

Excerpt from Brad Feld’s Venture Deals, Third Edition 173

xiii

Foreword

“Dear Chris. I have an idea that will revolutionize a $34 billion indus-try . . .”

Do you know what that is? An email I will never open. No matter how elegant the prose that follows, I see a snippet like that in Gmail and immediately hit ArChIve.

Why? As you’ve heard me say for years, “Ideas are cheap. execu-tion is everything.”

At some point, each of us has had that moment where we say, “Wouldn’t it be cool if . . . ?” every single human being is capable of churning those out. In fact, I am certain some of you once thought, “Wouldn’t it be cool if I could push a button and have a car and driver show up?” “Wouldn’t it be cool if people could rent out their houses for just a couple days at a time?” “Wouldn’t it be cool if there were an API for payments?” “Wouldn’t it be cool if you could make phone calls and text into your app by using just a little bit of hTML?”

You came up with those ideas, so why aren’t you a billionaire founder on the cover of a magazine? You even bought the endear-ingly vowel-free domain name, so why aren’t you going public?

Because all the value, all the magic, all the accomplishment, and everything else that matters in entrepreneurship comes in the gru-eling months and years following the “Wouldn’t it be cool if . . . ?” question.

Since I started making seed investments in 2007, I have been obsessively focused on founders. I spend tons of time with them and go deep in the areas I know well. I never worked on Wall Street or at P&G, and I suck at excel. So, if we team up, I’m not your supply

xiv Foreword

chain manager or ads optimizer, nor will you catch me estimating Q3 sales five years out.

If we work together, I am there to help you make your product easy and real.

Back in the day, it was expensive to start building a company. Software was proprietary, founders had to buy pricey servers, and they even had to run their own equipment racks in a speedy data center. All of this meant entrepreneurs needed to raise lots of money before they could build anything.

The result? Ideas were splayed across 60-page business plans written by investment banking trainees. Aspiring CeOs were forced to run the investor gauntlet and have every assumption questioned. hand-wavey bullshit artists with dog-eared copies of Getting to Yes and Starting with No on their genuine faux leather coffee tables drove the painstakingly Socratic process.

Today, with open source, AWS, Github, and coffee shops with free Wi-Fi, there are few barriers to taking an impulse and slap-ping some code on it. Just $99 will get you a solid logo and smooth- looking homepage that makes it look like you know what you’re doing. No more professional networking connections needed, no fancy B-school degrees, and no slick-talking pitch doctors. These days, builders gonna build.

raise a glass to the democratization of it all! And best of luck to all the now unnecessary investment bankers with incredible PowerPoint and personal grooming skills who have since moved back to New York City to apply their talents to some predatory lend-ing scheme or mass layoff.

But the downside? Too many of you who are founding stuff are skipping the part where smart people beat the shit out of your idea over and over again before anything gets built.

When I first got into this investing business full-time, I was holed up at Brickhouse on Brannon in San Francisco hearing back-to-back pitches. Small teams who could show me live code were impressive. I loved being able to play with a site or an app rather than merely considering a hypothetical.

Yet, almost everything they showed me was irretrievably mis-guided from the get-go. I met hundreds of entrepreneurs who didn’t even know their own competitive landscape, let alone have the abil-ity to describe to me in plain english why they would win the space.

Foreword xv

It was devastatingly clear: They hadn’t done the intellectual work that would be the foundation for everything that came next.

In 2008, I’d had enough of these frustrating conversations, so my wife and I moved to Truckee, a small mountain town near Lake Tahoe. Our thesis was that instead of running from coffee to coffee, we’d identify the most intriguing minds in startups and invite them up to our house for weekends. We would go deep with the founders whose thinking challenged ours. Whether we were skiing, hiking, cooking, playing music, or snowshoeing, we were also spending that time batting around visions and predictions and controversial points of view. We would sit around for hours in our hot tub, which soon became known as the “jam tub.” For days at a time, we just jammed on ideas, pushing one another’s reasoning, testing assumptions, and forging moments of clarity and inspiration.

We soon realized that this worked elsewhere as well. Whether we were in Austin, San Francisco, Montana, New York, Paris, Oxford, Boulder, or vancouver, making time for meaningful group discus-sion was not only the most fulfilling way to spend time, but it was leading to more genuine friendships and, ultimately, much better ideas across the board.

So who was in those jam sessions? Founders from Twitter, Insta-gram, Twilio, Uber, Lookout, Stripe—you get the picture. Sure they are legendary companies today, but consider what those early jams were like. For example, as obvious as Uber may seem today, extensive creativity, original thinking, and robust debate were necessary to hone in on the real problems in the industry and focus a solution to build.

These great entrepreneurs didn’t just come up with a great idea. They started with a notion and bounced it around a lot before ever starting up the business. Who they bounced it around with was vital. early co-founders, advisors, friends, and mentors made a huge dif-ference. What they did with the idea mattered. If they just sat on it, it died. But if they ran around and talked to a bunch of prospective customers or users, it got better. If they actively listened to feedback and incorporated some into their plans, it got even better.

The most successful founders are listeners, thinkers, and tinker-ers. They are iterative, reflective, and rigorous. They passionately believe they are right but enjoy when their assertions or conclusions are shredded. The very best feel that yes is boring, and they thrive when wrestling with no.

xvi Foreword

So take that cute, naive idea of yours and throw it to the wolves. Let your friends slap it around. Ask your peers to tear it up. Meet with fellow entrepreneurs and invite them to bury it. Take what’s left after your mentors spit it out and head back to the whiteboard. Stay up all night jamming. Do this again and again and again, and you’ll realize why founders of billion-dollar companies may be lucky, but their success is never an accident.

I hope to see your name among theirs soon.Chris Sacca

MontanaMarch 2017

xvii

Preface

Entrepreneurs dream of the magical moment in the creative pro-cess when they have a flash of clarity about how to solve a problem or make an innovative product. They often have an interesting story about this moment, and the origin stories of some successful compa-nies have become legend. Yet, this moment of clarity often obscures the massive amount of work required to go from an idea to a real startup. From the outside looking in, a great company appeared out of nowhere. But the entrepreneur knows differently and remembers what had to happen to get from the idea to even the most embryonic startup.

As investors, we hear a simple question from entrepreneurs multiple times a day: “What do you think of my idea?” Sometimes the idea is well formed; often it is vague. Some have already been prototyped, others are just a few sentences in an email. Some have been thoroughly researched by an entrepreneur with deep domain knowledge, others are something completely new and different that the entrepreneur is exploring.

While it is easy to have an idea, it is incredibly hard to translate that idea into a successful business. The startup phase of a company requires a wide variety of activities to go from idea to successful startup. In the past few years, many books have been written about this process, including foundational ones such as The Lean Startup by Eric Ries, The Startup Owner’s Manual by Steve Blank, and Disciplined Entrepreneurship by Bill Aulet.

Nevertheless, we continue to hear some version of the same question over and over from aspiring entrepreneurs: “Is my idea any good?” Sometimes it’s phrased as “How do I know if my idea is

xviii Preface

good?” or “When I have an idea, how do I know if it’s good?” Often, this morphs into “I have the following three ideas. Which is the best one?”

Many of these entrepreneurs aren’t ready to stop what they are doing and dive all the way in to chase their new idea. Some have full-time jobs and are trying to figure out how this entrepreneurship thing works. Others are playing around with multiple ideas at the same time and trying to pick one or are stuck in the ideation phase, coming up with ideas and looking for external validation, but are unwilling to commit to working on a specific idea yet.

Ultimately, they are asking some form of the question “Will there be enough demand for this product that people will use it and pay for it?” Even after being pointed at books and approaches like the Lean Startup, they still have questions about whether their idea is any good.

It’s not a simple question to answer. Most successful companies go on a long and winding journey to find the answer. A founder used to write a comprehensive and tightly structured business plan that evaluated all aspects of the potential business. This document took hundreds of hours to write and tried to set up the theoretical case for the business without testing anything.

While business planning isn’t obsolete, the business plan is. It has been replaced by methodologies such as the Business Model Canvas, Business Model Generation, Lean Startup, Lean Launchpad, and Disciplined Entrepreneurship. Each of these methodologies uses a structured, experimental approach with quantitative feedback loops from potential users, customers, and partners to evolve an idea to a foundation upon which a startup can be built.

But that still leaves us with the questions “Is the idea any good?” and “Should I pursue this idea?”

It is possible to get to a better starting point if you spend some time in the opportunity evaluation phase. Before you even begin testing the idea and building on it, there are some fundamental questions you can answer. Through our work at Techstars, Dragons’ Den, and as early stage investors, we have found ourselves asking entrepreneurs the same set of questions repeatedly. While many of our conversations were short and detailed answers often weren’t forthcoming, we found that even the simple act of being asked the questions often helped the entrepreneur improve the idea.

Preface xix

It is not enough that you think your idea is a good idea. Others need to agree with you so that they will work with you either as part-ners, employees, investors, advisors, or customers. However, many entrepreneurs are afraid to share their idea with others for fear that it might be stolen. But as you’ll see in a moment, ideas need oxygen. In addition to engaging supporters and getting feedback, opening up ideas up and sharing them with trusted advisors as you are having the ideas can help evolve these ideas into something that you can build upon to create a startup.

Our goal with this book isn’t to replace existing methodologies. Instead, we want to complement them by giving you a context and a set of tools to help you evaluate your idea before you start putting any meaningful energy into it. Think of this exercise as the precur-sor to the Lean Startup or the Lean LaunchPad methodologies. We want this to be the book you read before diving into one of these methodologies, especially if you are a first-time entrepreneur.

The audience for this book isn’t just existing entrepreneurs or investors but a much larger class of readers—those who have yet to quit their jobs and take the leap into entrepreneurship. Hopefully, we will help you pick a better idea to build a startup around.