Ten things to consider before starting a startup
There are so many things to think about when starting your own business. I’ve been involved in around 1,000 startups thus far in my career. Some of them seem to get off to a fast start and have no trouble attracting mentors, customers, and investors. Others struggle mightily. When I thought about what the best companies seem to do before starting, I came up with this list that I hope will be helpful to you as you embark on your own entrepreneurial journey.
1. Articulate your purpose
When creating a company, there’s nothing more important than purpose. Start with your “Why.” This is not a marketing exercise. It’s a vision of an improved world and the way in which your company will contribute to that future state. For example, at Techstars our purpose is “We believe that great startups can be built anywhere. In support of this, we’re creating the best global ecosystem for founders to bring new technologies to market.”
One of my favorite quotes is from Simon Sinek, who said “People don’t buy what you do, they buy why you do it.” Every startup founder should invest 20 minutes to watch the popular web video “Start With Why.”
When I invested in the very first investment round of Uber, I believed in the purpose of the company. They wanted to make transportation as reliable as running water, everywhere for everyone. This purpose stated simply enabled me to invest in the people and the purpose before a single car was on the road. That’s the power of purpose.
Many founders that I meet express their purpose in terms of the financial upside. This is not purpose, it’s a beneficial side effect of successful execution of purpose. Don’t confuse purpose with financial motivations.
Once you know your purpose, don’t spend any time wordsmithing it. Just write it down. This is your reason for being. Make sure everyone knows it, including the people you hire, your investors, your mentors, and your community.
2. Commit to at least 10 years
Now that you have a clear purpose, make sure you can commit at least 10 years of your life to this purpose. If you can’t, you’ll likely fail because startups are too hard to build unless you actually care about solving the problem. It’s too easy to quit, so be sure you have this long-term commitment before starting down the road.
In your life, you’ll hopefully have three to five career segments. In my life, these have been technology coder, startup founder, angel investor, and venture capitalist. In each case,
I made an emotional 10-year commitment to everything I’ve ever done. When I think about the one thing I’ve done that failed at the macro level, it was a startup to which I didn’t consciously commit 10 years of my life in advance. It was hard, and I gave up too early. I wasn’t driven by the purpose of that particular company. It wasn’t “me,” and as a result I wasted one of my bullets as a startup founder.
Startups take time. Be sure you are dedicated to your purpose for the long term.
3. Get family on board
I always say that entrepreneurship is a life choice, not a job choice. When you have a typical job it’s possible to leave it at the office at the end of the day. It’s possible not to feel fully responsible for the employees that work for you. When you start a company, there’s nobody else who can pick up the slack for you. It all comes down to you.
Often, this burden rolls downhill toward your family. Your emotional ups and downs will affect your family. A lower-than-market salary and income will place additional strain on the family at times. The long hours can cause challenges in your relationships.
This is not a commitment you can make alone. Be sure your family supports you in your decision to start a business and understands the likely downstream implications before setting off on the long journey.
4. Define your culture
Now that you have a long-term commitment, your family is on board, and you understand your purpose, it’s time to define your company culture. Many founders let culture happen automatically and are not thoughtful about it in advance. I’d encourage the opposite; think carefully about what you want your culture to be and live it every day inside your business. Your culture can be defined as a set of values that you’ll always protect. They should be simple and memorable. At Techstars, we have four core values that define our culture. They are:
- Do the right thing for
- Quality before
- Network over
A great mentor of mine once drew a chart for me with an X- and Y-axis. The X-axis was labelled performance and the Y-axis was labelled cultural fit. He explained that you can move people along the X-axis if they’re not doing well. That’s something you can work on. But if someone is low on the Y-axis, you have to move quickly to fire that person or the individual will compromise your culture. This is not hard when X and Y are both low. But it’s extremely hard when cultural fit (Y) is low and performance (X) is high. Firing people who are high performers and poor cultural fit is critical for maintaining culture over time and living your values. This way of thinking makes hard decisions very easy.
5. Avoid cofounder conflict
Dharmesh Shah has been a mentor at Techstars since 2009 and he wrote a chapter for the Techstars book entitled Do More Faster entitled “Avoid Co-Founder Conflict.” In that chapter, his key pieces of advice are to clearly discuss and agree on the following things before starting the new business, among others:
- How should we split the equity?
- How will decisions get made?
- What happens if one of us leaves the company?
- Can any of us be fired? By whom? For what reasons?
- What are our personal goals for the startup?
- Will this be the primary activity for each of us?
- What part of our plan are we each unwilling to change?
- What contractual terms will each of us sign with the company?
- Will any of us be investing cash in this company? How will this be treated?
- What will we be paid? How will this change over time and who will decide?
- How will we fund the company and what happens if we can’t raise capital?
By having these discussions up front, you’re likely to avoid the most common types of cofounder conflict down the line. From investing in over 1,000 startups, I can tell you that cofounder conflict is a major source of company failure.
Have the hard discussions early.
6. Assume you are wrong
I’ve found that founders who start out assuming that they’re wrong end up doing the best. They recognize that all of their assumptions are just their best guesses. They are active listeners and are objective about the results they get early on. They test every assumption before accepting that it’s correct. They find ways to instrument their products so that they get data. Then they combine that with their gut feeling and intuition and test some more.
Rarely does a startup ultimately succeed based upon their exact original idea. Consider Facebook, which was started to be a private college directory. Consider Google, which was an Internet search engine that didn’t make money that way. My favorite story is about PhotoBucket, a very successful company that started by trying to be a photo social network. By paying careful attention to the data, founders Alex and Darren realized that people were abusing PhotoBucket to store images for free that they linked elsewhere, such as on Craigslist. Rather than fighting it, they made it easier to do and ultimately built a very large important company. They paid attention to the data and leaned into what their users really wanted. You can do the same.
7. Engage mentors
For any situation you’ll face as you build your company, there is someone out there who has faced it before. Network is perhaps the most undervalued resource by most startup founders. Techstars, and programs like it that are all about mentorship, and accelerator programs are an obvious way to tap into local networks. But there are many other ways. I advise a quality- over-quantity approach when it comes to mentors. Find a few experienced mentors who give first and ask for nothing in return. These can be investors or just local entrepreneurs that you admire. You’ll be surprised at how helpful successful entrepreneurs are willing to be when you approach them in the right way. In my popular blog post “Find and Engage Great Mentors” I have written about tactics for establishing and maintaining great mentor relationships. Among the keys are starting with small requests via email, closing the loop with those who offer feedback, and making it easy to engage with you as a mentee by going to their office for 15 minutes instead of inviting them to coffee or lunch. Target mentors who actually care about you and what you’re building and leverage them early and often. But remember to give back to them and make sure they’re getting something from the relationship.
Great mentor relationships eventually become two-way. And you’ll find that the right ones can change your company in ways that are very impactful.
8. Establish the company
A common mistake with startups is a lack of formality and documentation. There’s no quicker way to kill a promising company than by neglecting to set up an appropriate structure. Consult an attorney early and pick one that is experienced with startups. A great question to ask them is how many companies they’ve worked with that have attracted venture capital. That will give you an indication of their level of experience in working with promising companies. They’ll help you understand what makes sense for you in terms of corporate structure and give you basic agreements you can use with early employees or contractors. That way you won’t wake up one day and discover that all your hard work is worthless because you don’t own the intellectual property. Setting up the company also protects you personally in case of downstream liability.
And, if you’re going to build a real company, well then, it needs to be a real company.
9. Understand financing options
I’ve worked with around 1,000 companies that have successfully raised about $15 billion dollars in capital. The one question I always ask when I’m first approached by startup founders hoping to raise money is, “Do you need to raise money at all?” Bootstrapping is highly underrated. I can tell you from first-hand experience that owning your entire company when you sell it is very exhilarating. I often say that if you can bootstrap, you should bootstrap. It’s the only way to stay totally in control of your own company and it’s the only way to have it all be owned by your team when you eventually go public or sell it. So the first question you should be asking yourself is why you need to raise money in the first place. If you have no good answer, take that into consideration.
Of course, some startups will need outside capital to have a chance at being successful.
In that case, recognize that there are several options available. I’ll call them customer capital, venture capital, angel capital, and loans.
Anyone who has ever gone to a bank for a startup loan knows that this is not the business of banks. They will loan money only to people who have money and will not consider the startup any form of valid collateral in that equation. However, there are groups that make loans to startups, such as Lighter Capital. Generally these groups require you to already have substantial revenue in order to ensure you can pay back the loans.
Customer capital is another underrated option.
It’s how I started my first company. We took a $100,000 loan from a customer in order to deliver a free lifetime license to use our software in the future. This was a great option for us, because we didn’t actually sell any of the company to get access to this capital.
Angel capital and venture capital are the most well known options, of course. Angels invest with their own money and venture capitalists invest on behalf of their limited partners. There are many great resources on the web to understand angel and venture capital, but a few of my favorites include Angel.co, avc.com, feld.com, and of course Techstars.com.
Whatever path you choose, it’s important to work with capital partners that you trust, have a shared vision, and who will be supportive of what is ultimately in your best interests as a founder.
10. Don't wait - start
The hardest thing about starting a startup is starting. Don’t wait for permission—the world will not give it to you. Don’t wait for approval—you don’t need it. Just start building the future. You’ll find that by doing things and working toward the future you want to create, resources and opportunities will become available to you. There’s nothing like the clarity of doing. So don’t wait. Don’t find excuses. Just start doing.
Good luck on your journey toward startup success!
David Cohen, Co-CEO, Techstars