Start-up success typically boils down to three elements: hard work, talent, and luck. Yet when we dissect the successes and failures of other start-ups, we tend to focus on the hard work and talent of the team, completely disregarding the important role that luck (or the lack thereof) may have played.
Luck definitely played a huge role in my career, both on a company-level as well as a personal level. In the early days of AbeBooks, our company got lucky twice. Luck struck first when Barnes & Noble approached us to become a reseller of the books of our sellers. This immediately doubled revenues of our sellers and attracted more inventory to our site. And then luck came again, when Amazon bought our competitor Bibliofind and folded it into the main site. This led most sellers to leave Bibliofind and join AbeBooks.
I’m certain that without both of those events, AbeBooks would most likely never have become the uncontested market leader in the used books space. And while one could argue that our hard work and talent created the right environment for Barnes & Noble to approach us, I have no doubt that both scenarios could just as easily played out another way…completely altering the course of events.
And I also got lucky a few times on a personal level. Back in 2003, I felt like leaving AbeBooks and starting something new, but my parents convinced me to stay at the company. That proved to be the right decision, as most of the success of AbeBooks (including the ultimate exit to Amazon) came in the subsequent years and defined my career.
What’s the moral of these stories? Don’t underestimate the power of luck in shaping the future of your start-up. For some this may be unnerving…after all, luck may play such an important role, yet we cannot do anything about it. However, instead of worrying about luck or fate, focus on what you can control. Aim to create the right environment for luck and its opportunities to take hold.
Generally speaking, I’m a huge fan of crowdfunding. I’m an investor in one of the major platforms, Indiegogo. Crowdfunding sites like Kickstarter and Indiegogo are helping fill the financing void for startups that struggle to find traditional financing. For example, I recently wrote about crowdfunding being a viable option for hardware startups who notoriously have a tough time attracting funding from VCs. But there is a bit too much hype around crowdfunding right now. And as we know from history, too much hype doesn’t always end well.
The Good: When crowdfunding works…
In particular, I’m bullish on crowdfunding when it’s about passionate consumers rallying around an idea, cause, or product concept they believe in. In this case, the funders have modest expectations…either a small perk (like a t-shirt) or just the simple satisfaction of supporting a company or cause they care about and watching it grow.
Take JamStik as an example. It’s a prototype mini-guitar that interacts with an iPad or iPhone. The project has currently raised $129,000 with an initial goal of $100,000 on Indiegogo. Its funding packages range from an exclusive backers t-shirt, your name on the Founder’s wall, to discounts on a JamStik or one of the earliest prototypes.
Crowdfunding can also be a way for startups to finance parts purchasing and manufacturing by taking customer pre-orders. For example, Tindie fundraisers can give startups working capital to buy parts for the final assembly of their products (full disclosure: I am an investor in Tindie).
The Bad: Disappointing expectations
While Tindie fundraisers usually work very well in terms of meeting customer expectations, turning crowdfunding into a wide-spread platform for taking pre-orders can be risky business. The Pebble smart watch may have had one of the most publicized delivery delays, but they’re hardly alone. Statistical analysis by Professor Mollick of Wharton uncovered that 75% of all funded projects on Kickstarter shipped late.
When consumers start to look at a crowdfunding site as the equivalent of an online store where they can buy new toys, there will be trouble (hence the Kickstarter blog post: “Kickstarter is not a store”). Delays in production/delivery are usually expected among investors, but even a few weeks delay can frustrate and anger this new class of ‘investor customers’ who are expecting the same smooth process as when they order something from Amazon. Their frustration ripples throughout the web, souring the entire industry.
The Ugly: Crowdfunding for equity
Recently, there has been a lot of talk about crowdfunding for equity. The idea here is to make it very easy for anybody to invest small amounts of money in startups through crowdfunding platforms. I personally think this is a recipe for disaster. Here is the problem: the fact is that few angel investors make good investment returns…and that’s true even for those who are lucky enough to have a huge winner in their portfolio. On average, VCs had pretty dismal returns over the past decade. And those are sophisticated investors who look at hundreds of deals and then work for years to help their portfolio companies build the best teams and execute.
In short, early stage investing is hard and typically only the top tier investor with a proprietary deal flow can make great returns. It’s not the place for the average consumer to put his or her money.
If the driving force behind crowdfunding platforms is to make it easier for anybody to become an angel investor and have fun tracking the progress of their project (without much expectation for a return), then crowdfunding is a welcome addition to the financing landscape. However, if we start to see people putting up large swaths of their retirement savings in the hopes of funding the next Google or Facebook, this will end in a disaster. Time will tell what happens. But unfortunately, if the future is anything like past history, the latter scenario is more likely.
- CircleUp raises $7.5m to expand its crowdfunding platform to more consumer companies (banklesstimes.com)
- Donald Trump gets into crowdfunding (finance.fortune.cnn.com)
Despite the recent media buzz surrounding the hardware revolution and emerging maker space, the overwhelming majority of hardware startups have a hard time attracting financing today. Hardware requires time, money, and inventory. As a result, most venture capitalists are reluctant to touch hardware projects, opting for the lower costs and smaller risks of software.
While my portfolio is primarily centered around consumer internet as well as enterprise SaaS startups, I typically talk to two to three hardware startups each week. Here’s the advice I give these teams who are navigating the tough world of hardware financing.
1. De-risk your startup as much as possible
Manufacturing innovations like 3D printing support quicker and cheaper prototyping and design. This means the overall costs of launching a hardware product are coming down considerably, yet hardware is still costlier (and thus riskier) than software. To increase your chances of venture capital financing, you’ll need to lower the risks as much as possible, such as:
- Bootstrapping as long as you can to get a working prototype into the market.
- Following an iterative manufacturing process. Instead of taking a year to develop and launch one product, it might be advantageous to run through four development cycles in smaller batches.
- Having at least one team member with a deep background in hardware manufacturing.
2. Focus on VCs who have done hardware before
The reality is that few venture capitalists are ready to write a check to a hardware startup today, and it’s not all due to the risk. Many VCs have a background in software and are less familiar and comfortable with bringing hardware projects to market. In order to minimize the time wasted during fundraising, you should focus your efforts on venture capitalists that have done at least one hardware deal. For example, Softtech and True Ventures funded FitBit.
3. Patents versus traction
In the software space, it is commonly accepted that barriers to entry are no longer created by patents or by tech differentiation alone, but by superior traction in the marketplace. One could argue that the same development will hold true in the hardware space. Therefore, when you pitch investors, it’s wiser to focus on the traction you have built up in the market rather than pitching your patents.
4. Look at crowdfunding options
Crowdfunding sites like Kickstarter and my portfolio company Indiegogo are helping fill the financing void for hardware projects. For example, Pebble (a watch that wirelessly connects to a smartphone and displays its messages) raised $10M on Kickstarter in 2012. Muse (a brain sensing headband that lets you control things with your mind) raised $287K on Indiegogo.
Along with providing much-needed cash in the early days, success in a crowdfunding community shows product validation and market demand, since people are committing to a particular product. However, there’s a challenge when your investors are also your customers. Production delays are quite common with hardware projects and, as Pebble found out, it’s easy to disappoint customers when dates are missed.
In addition to gathering seed money, hardware startups are also finding success in raising working capital to buy parts via online fundraisers on Tindie (another portfolio company).
The making of a hardware revolution
It feels like we are still in the early stage of the hardware revolution. With further refinement of design, prototyping, and manufacturing tools, the costs and risks associated with hardware should come down enough so that hardware becomes palatable to traditional funding sources. With Lemnos Labs, we already have a hardware-focused incubator, so it will only be a matter of time before we see VC funds emerge that focus exclusively on hardware. In the meantime, hardware startups should look for innovative ways to get their product to market.
- How a Garage-Based Incubator Is Fueling the Hardware Revolution (adafruit.com)
- Hardware is Feeding the World (taylordavidson.com)
Few decisions can be as life-changing for founders as deciding when to sell a business. Companies get sold for a whole host of reasons: founders break up; money runs out; shareholders force a sale. And in many cases, the financial upside of a sale is just too seducing for the entrepreneurs, particularly for first-time founders.
When making such a major decision, you’ll undoubtedly need to weigh many factors and most likely, some competing interests. However, I think the most compelling reason to sell is when the founders run out of ideas for how to grow the company further.
At the time, AbeBooks was still a nicely growing and highly profitable business, but we didn’t know how we could turn it into a billion dollar company. At the same time, the business could provide a lot of strategic value for many players in the book business, namely Amazon. So we decided to sell.
Looking back, there were several factors limiting our ability to grow, including:
- Geographical markets: We had internationalized to five non-English speaking countries in Europe, but felt that conquering Asia was too risky an endeavor for a relatively small company (our platform revenues were in the hundreds of millions of dollars).
- Vertical markets: Expanding from books to other media verticals seemed unrealistic, considering both the music and movie verticals had a rapidly shrinking share of physical goods.
- Market expansion: AbeBooks specialized in the long tail (used, rare, hard-to-find books). We saw only modest success when we tried to complete our offering by expanding into new books. Amazon’s brand recognition is just too strong among book buyers to allow competition.
- Acquisitions: We had acquired companies both upstream (Bookfinder, a major price comparison engine that sent up a large amount of traffic to us) and downstream (Fillz, a channel manager software that helped our sellers sell on other marketplaces).
Most importantly, we felt that we had optimized our business model to extract as much value out of the marketplace as we could. In short, we were struggling to think of ways to grow the company beyond modest increments.
For some founders, external factors and financial pressures may be too strong to avoid selling. But if you have a choice, don’t think about selling your company until you run out of ideas for how to grow it. Hopefully, that time will be far down the road.
Getting good advice is critical for any entrepreneur and fortunately there’s plenty of advice to go around. Unfortunately, not all advice is worth listening to. Angel investor Allen Morgan (@allenmorgan) summed it up in a recent Tweet: “It’s a power law relationship: for entrepreneurs, >90% of the advice worth heeding comes from <10% of the advice givers.”
The reality is that entrepreneurs should not listen to the bulk of advice that comes their way. Yet, good advice from smart people can be an invaluable asset when trying to navigate your most pressing questions, from how many board members to have, to how much money to raise in Series A, or how to build a monetization strategy.
The key to getting advice boils down to knowing how to filter the good from the bad. Here are four simple ways to weed out the 90% of advisors that you should ignore and focus on the best advice for your situation:
1. Stick to your core values
If you don’t have a clear vision for where you are headed as a founder or startup, it’s nearly impossible to evaluate the advice you get. I’ve seen too many people change direction with every new piece of advice they hear. Before you can really take in advice, you need to have a strong sense of your core values. Then, you can weigh each bit of advice within the framework of your own convictions.
For example, the core values of Twitter’s management helped guide them through the monetization question. Countless experts and pundits were pushing them to monetize via relatively obvious examples like paid premium products or CPM ads. Yet, Twitter took the time to come up with a native monetization model that is not only much better for the user experience, but is also more scalable in the long run. Twitter would be a far different experience today had their management team jumped on the first bit of advice they heard.
2. Listen to people who listen
People who give the best advice are good listeners. They try to understand your specific situation first, rather than instantly spouting off their words of wisdom without any context. Turn to people who ask good questions and seem genuinely interested in the particulars of your question or challenge.
Additionally, you should pay close attention to those individuals who refrain from giving you advice at times because they outright admit they aren’t sure or don’t have the right expertise. Such people will be far more trustworthy in future situations than those who dispense advice just for the sake of feeling important.
3. Change/expand advisors as you grow
Someone who gave you great advice last year could well be a trusted resource in the future, however you need to be cognizant that your needs change over time. Most advice givers are helpful in certain phases of the startup lifecycle, but very few are experts in every area or challenge you face.
For example, a mentor who helps you navigate early-stage product questions may not necessarily be the right person to ask about HR issues as your company grows to 100 people. Again, the most trustworthy advisors will let you know right away if they feel a certain situation is out of their realm of expertise.
4. The final decision is always up to you
There is no standard process for making a good decision. In some cases, you may need to talk to ten different people and weigh each option carefully. In other cases, the right direction will hit you instantly. In most, if not all cases, you need to trust your gut.
No matter how many advisors you talk to, the most important lesson to getting good advice is to never forget that you are running the show. Mentors and advisors can help you build your opinions, but they should never make decisions for you. Don’t listen to people who adamantly push for a certain direction as they most likely have their own agenda.
Lastly, remember that there’s no benefit in being able to blame someone else for a poor decision which is why you should never put an advisor in the position to make the final call. You’re running the show, which means final decisions are always up to you.
- The Art of Finding a Mentor (grasshopper.com)
- 5 Rules for When to Listen to Advice (& When Not To) (inc.com)