10 Rules for Startups

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I was hiking with a good friend from a previous company this last weekend and we got to talking about some of the things we’d both learned over the last few years of working in tech startups.  I mentioned that I’ve put together a list of rules that for me determine whether I think a company is likely to succeed or not and he expressed interest in seeing it, so here it is.  I reference these rules both during the job hunting process as I’m evaluating opportunities from various recruiters and to decide if and when it’s time to jump ship and look for something new.

1. Address a real need

This is the first rule and the most important for me.  There are a lot of companies making products that are cool or nifty or interesting but that don’t solve any real pain points or provide a service people actually need.  Successful companies, however, do.  Moreover those value propositions can be easily summarized by anyone who has a basic understanding of what the company does.  For example:

  • Salesforce allows businesses to organize, archive, share, and retrieve their Sales data in an organized way so they don’t lose productivity by having things fall through the cracks or lose track of critical operating info when staff turns over.
  • Facebook provides an easy and accessible way for people to stay in touch with friends and family regardless of geography.
  • Tesla provides a high-performance vehicle with minimal negative environmental impact and great looks and also provides the battery technology that’s driving the entire electric car sector.
  • My local plumber provides fast friendly service to clear clogged drains and do critical maintenance work to keep my house from flooding.

These four businesses have basically nothing in common in terms of industry and business model, but they all provide real easy to understand value and solve real problems.  As a result, you can expect these companies to stick around for a while.  The rule is simple: add value or die.

2. Be profitable or at least have a clear plan to get there.

Within our current socio-economic system you have to make money to stay in business long term.  This plan to be profitable doesn’t have to be all inclusive but it does need to be realistic.  That means your pricing structure needs to cover your costs and have some left over – if not now than in the immediate future once you’ve reached a functional scale.

Anyone who’s ever run a real business knows this but I still talk to an amazing number of self-described “entrepreneurs” whose whole business plan is to build something cool using other people’s money and then get acquired and cash out.  That may work for a lucky few, but everyone who works at companies on this model is making a gamble. Even if that gamble pays off, if you’re not a founder the fact that your stock options aren’t preferential means you almost certainly won’t get the payday you’re hoping for.  There are exceptions, but they’re called exceptions for a reason.

Even for the founders it’s a poor play.  Building your company without any revenue flow means that you don’t own it and are entirely reliant on others to keep it afloat.  It doesn’t matter if your title is CEO, you are in fact an employee of the investors and the board.  Those investors will not hesitate to fire you if you don’t meet their expectations.  In almost every case you’re better to be bootstrapped (self-financed) and profitable from jump.  Bootstrapped companies may grow a bit slower at first, but paying attention to that bottom line means they are far more likely to provide real value and still be around in a few years when your stock options finally mature.  Venture backed companies can succeed of course, but they need to have a clear vision and a road map to put it into place from the very beginning.

3. Be product driven. 

Every good company starts out with a solid product idea and a functional revenue model.  At some point that revenue model is going to require selling your product.  If you’re very lucky and your product solves a particularly urgent need you may be able to let word of mouth do the hard work for you… for a while. This won’t last long term, your success will inspire copycats.  If you’re lucky your head start will mean you have a leg up on them, if you’re not lucky they’ll learn from your mistakes and have a leg up on you.

You have to sell and sell hard to capture market share up front, but you cannot afford to let your product development lag in the process or your competitors will overtake you and that market share will evaporate.  I’ve seen more than one company where they were the first major player in the space and got big fast by pumping resources into Sales instead of Product, only to have their market share evaporate as soon as the market caught on to the fact that their latecomer competitors had stayed focused on product and developed a more sophisticated offering.

3.5 Avoid Technical Debt

Being product focused doesn’t just mean innovating, it means fixing what’s broken and addressing technical debt before it becomes and issue.  Clients will usually wait for new features – particularly if your Sales team is disciplined enough not to sell things that don’t exist yet – but they tend to be very impatient when it comes to fixing things that are broken.  You’ll virtually always be better off to make sure things work right before pushing them out the door and fixing things that break, even if you move a little slower.  Failing to fix known bugs is the fastest way to alienate users and undermine confidence in your product.

The issue of technical debt is a real one.  As a startup you’re forced to make tradeoffs.  This is a good thing in most cases.  But be aware that they are tradeoffs and that every corner you cut is a debt that will have to be repaid.  The database maintenance you don’t do or the infrastructure you don’t build to scale will cost you many times the amount you’re saving in the short term when your product finally starts to be adopted and everything goes down. This should be obvious but it’s one of the single most common pitfalls.  A few companies can get past this issue – Twitter invested a huge amount of energy and money into revamping their server infrastructure and their infamous “fail whale” disappeared.  But many more companies have their user base evaporate when they hit that wall.

4. Keep your Sales team on a tight leash and never sell vaporware.

Many sales people are “coin operated,” I had a boss at a previous company who used to say this all the time and the organization he built reflected that expectation.  People who are driven by a hunger for the biggest commission possible instead of by passion for the product and the company will say whatever they think the customer wants to hear to close the deal. This attitude will destroy your reputation and the good will in the industry you’ve worked so hard to build. Establish early and clearly that this is unacceptable behavior and come down hard and fast on people who lie to customers and promise things you can’t deliver. A short term boost in revenue is not worth the damage this behavior causes to your brand.

In my career I’ve been lucky enough to work with many very talented Sales professionals including the Sales team at my current company (keeping it that way is a core part of our corporate culture). If you’ve built a solid product your team won’t need to sell vaporware to close deals.  If your product is lagging behind, however, the pressure to make their numbers will push many otherwise honest people to blur that line.  The best sales people will leave your company at this point rather than make promises they can’t keep because they know that their industry contacts are their most valuable asset and burning those contacts will come back on them personally. If you’ve done a good job building a transparent and accountable culture they’ll bring their concerns to you before leaving. Which brings me to my next point:

5. If you’re not leading by example you’re not leading. 

There is a common mindset in human societies that says anyone outside the tribe is less intelligent, less capable, less worthy of respect.  Whether it’s the sales guy doing a dupe and dump, a support engineer who’s more focused on closing tickets than helping customers, or the CMO I met at an industry event a few years back who told me derisively that “customers don’t know what the hell they want, we could paint a turd gold and serve it to these brands and as long as we used the right buzzwords they’d buy it.”  His company went out of business six months later because customers recognized a turd for a turd.

That last example highlights the core issue – if leadership isn’t accountable for their attitudes and actions no one else will be either.   Treat customers with respect and put their interests first and your team will mimic your tone. Real leadership isn’t about giving orders, it’s building trust, walking your talk, hiring good people, and then trusting them to do their jobs and getting out of their way. I talk to my boss when I need him to do something to make my job easier and that’s the way I like it. He’s as much a services vendor as a supervisor. As far as I’m concerned that’s a sign he’s doing a good job. A horizontal organization is a healthy one.

6. Accountability matters.

A good example isn’t enough all by itself, you need formal accountability too.  That might mean sales guys don’t get a commission unless the customer is satisfied with the product and still a customer after some period of time that makes sense for your business model.  That forces them to stay engaged and not make unrealistic promises. Support staff shouldn’t be evaluated just on the number of tickets they close, but on the average satisfaction ratings of those tickets.  Engineers should be evaluated not just on the number of features they can push out the door but on the integrity and elegance of their code and whether it actually fits the requirements set in the planning process.  And if your engineers are consistently having trouble building what’s planned, that’s a performance metric for the people doing the planning too.

Far too many startups skimp on performance reviews and feedback because everyone is busy.  This is shortsighted.  Without a clear career road map and a sense of how they’re doing on earning promotions and advancing you can’t expect people to stay engaged – especially not in the tech world where your best people are getting messages from recruiters offering them new opportunities literally every day.

Make time for those performance evaluations and make sure they don’t just run in one direction.  Just because you gave yourself a fancy title when you started the company doesn’t mean you actually know what you’re doing.  There are probably people in your organization who’ve been in this industry longer than you and have valuable things to teach you that will save you pain and missed opportunities (and if there aren’t you should go out of your way to find and hire them).  Listen to them.  Trader Joe’s – which is as disruptive a business in their space as any tech startup – can chalk up a big part of their success to the fact that their entire team reviews their co-workers, subordinates, and bosses every six months and those reviews by subordinates actually matter.  Poor managers are therefore far less likely to be promoted into positions where they can do greater harm and most of them end up leaving the company entirely after a few rounds of negative reviews.

Lastly, don’t base performance reviews on how busy people are.  If your team is consistently working long hours you need to hire more people or get them better work-flow management tools so they can be more organized and efficient. Let them go home to spend time with their families and friends at a sane hour instead of burning out.  Study after study shows that people who work 10 and 12 hour days consistently are actually less productive than people who work a solid well organized 8.  Evolution has not prepared us to maintain that level of focus long term.  So while long hours for specific projects are a fact of life, long hours all the time are a sign of a dysfunctional culture and breed dysfunctional people.  Hire more people if you need to, get better tools, and keep your people happy, focused, and glad to go home and come back hungry the next day.

7. People who actually talk to customers should have direct input into product

In the early days of your startup, everyone talks to customers, but the bigger your company gets the more this changes.  At some point you will inevitably find that your C-Level officers who have ultimate decision making power are no longer the ones talking directly to your clients.  This is important and a critical step in your growth.  But as this transition happens you need to consciously put tools and processes into place to make sure that critical product feedback continues to be collected and paid attention too.  That means listening to your Integration Engineers, Support Engineers, Account Managers, and others who talk to clients every day when they report a bug or issue.

In one example from my own career, there was a bug that impacted the way our product recognized new end users and added them to our database.  The engineer who had built the feature hadn’t read the requirements thoroughly and had taken a shortcut that resulted in the loss of critical functionality, but because we were behind on our road map the people in charge of allocating resources refused to make time to get it fixed.   Support raised the issue repeatedly as a major pain point to no avail…  until several huge clients (companies whose names you’d recognize) encountered it.  By then it was too late, we ended up losing a huge amount of revenue at a time when we couldn’t afford the loss.

Fostering an environment where feedback is actively encouraged and acted upon instead of disregarded is absolutely critical to your success because it will keep your people engaged and make them feel heard and because you’ll end up with a better more functional product as a result.

Another common hazard is letting Sales or Marketing take over your product planning process.  The second you do, any tendencies they may have had to sell vaporware will be magnified a hundred fold and they’ll cover their tracks by hijacking your planning process to force you to build the things they’ve sold whether or not they fit the vision.  Worse, that road map will be getting constantly changed according to whatever deal they’re trying to close at the moment.   I once saw a VP of Sales walk into a product meeting and say that the the long-awaited series of bug fixes and server upgrades scheduled for that month had to be scrapped in order to deliver a feature that a sales prospect – not even a customer – had demanded.  Worse, he got his way, the deal fell through, and we were left with a feature we didn’t need that no one used and the bugs remained unfixed.

Lessons?  Build your road map so it has room for unexpected bug fixes.  Build the features clients consistently ask for and that fit your long-term vision.  Seek out and act on feedback from the people on the front lines.

8. Paying attention to details – User Experience matters!

End users will go for the pretty and easy to use but slightly less functional tool over the tool that has more functionality and a steeper learning curve 90% of the time.  Likewise, they will pick the solution that does fewer things but does them reliably than the one that has a bigger feature set but bugs that prevent those features from working reliably.

I’ve already talked about the importance of eliminating bugs as quickly as possible in point 3, but here I’m going to take it a step further. Make your product not only reliable but easy to use. Intuitive. Doing so is going to mean finding and hiring a solid UI design team. They’ll be expensive and hard to retain but they’re worth it.

Simply put, if your product isn’t easy to use people won’t use it.  There’s no need to belabor the point further.

9. Keep your eye on the type of company you want to build.

You can build a flash in the pan and hope to get acquired before the chickens come home to roost or you can build an organization with real life expectancy.  The difference between the two is where you make your investments.

Do you put your resources and money into hiring a giant sales team that sells vaporware or into developing your product and building the infrastructure you need to scale?  Do you focus on fixing the bugs and keeping the user experience intuitive or on pushing out features that may or may not even meet real needs?  Are you building real value or just pouring someone else’s money down a hole on gigantic bar tabs? This goes back to the issue of leadership and accountability but it goes deeper than that.

There has been a lot written in the last few years about the importance of “Culture” in a company and I think it’s worth paying attention to – with a few caveats. Far too often assessing new potential hires in terms of “culture fit” means hiring people of the same race, ethnicity, age group, and social class as the founders. In the short term this may improve group cohesion, but long term it means that you are depriving your organization of the diverse experiences and insight you need to be able to grow. Refusing to hire older developers because you think old people “don’t get it” is downright stupid and the pervasive sexism of tech industry is well documented. Don’t hire people just because they’re older or women or come from a different background. Do hire older people, women, and people from diverse backgrounds who happen to also be qualified candidates. In so doing you’re inviting different perspectives and ways of looking at the world into your team and building a more robust shared culture that can tolerate differences and will better reflect the diversity of your users.

10. Recognize that you don’t know everything.

In business and in life there are the things you know (knowns), the things you know you don’t know (the unknowns) and the things you don’t know you don’t know (unknown unknowns). Keeping the second and especially third group in mind is essential if you want to avoid pitfalls. Move with passion but be ready to change course when new information becomes available.

In that vein – I’ve been in this space for a few years and learned some valuable lessons but I’m certain I don’t know everything. What would you add to this list?