Monthly Archives: January 2014

Never Play Fair

When you are starting a new company you are, by definition, the underdog. Your market may have established competitors with massive resources, or maybe the market is new and unproven. As the underdog you are at a disadvantage in the game of business and if you play the game by the rules you will lose.

So, in order to win you have to cheat.

Cheating in business means having an unfair competitive advantage, something that competitors (and the market) can’t easily replicate. There are many kinds of competitive advantages and I’ve listed a few of them below.

  • Technology. A technology advantage allows you to do something no one else can do. The technology could be some new kind of software, new production process or new mathematical model. Any technology advantage is really a head start because someone else will find a way to replicate your technology in 6-9 months. Yes, even if you have a patent. However, that 6-9 month head start is a lot of time to make use of your technology to build other advantages, or continue to improve the technology to extend the head start. Examples: Google, New Relic.
  • Cost Structure. A cost structure advantage means that it costs you less to provide the same or better service than existing competitors (sometimes this is called a “new business model”). Maybe you outsource labor overseas, have volume discounts or have a better process that requires fewer people. Cost structure advantages can last longer than technology since established competitors often have trouble making fundamental changes to their business. New entrants won’t have that problem so you can expect other start up companies to copy your model quickly if it works. Example companies: Amazon, Walmart.
  • Happy Customers. An existing base of happy customers is a huge advantage. Customer acquisition is one of the biggest costs for any business (especially marketplaces) so if you have already acquired customers it becomes that much more expensive for competitors to take them from you. However, they need to be HAPPY customers so you need to continue to invest in customer satisfaction to maintain this advantage. If your customers become unhappy then this becomes a liability quickly. Example companies: Uber, Etsy, Airbnb.
  • Data. If you know something that no one else knows you have an advantage. The trend of Big Data is really just a translation of the data companies already had into a competitive advantage. This is the most maintainable of the competitive advantages since it is a lot like a trade secret – managed correctly your competitors will never know what you know. However, it’s also the hardest advantage to translate into revenue since you need to use it to create new technology, make your customers happy or improve your cost structure. In the best case scenario you can get customers to pay you for your data. Example companies: Facebook, Twitter.

There are, of course, many more possible advantages. The best companies have more than one of these and the struggling companies might not have any. I recommend picking out some companies you respect and thinking deeply about their competitive advantage; it is not always what you think.

When you are getting started it is important to know what your competitive advantage is or what you want it to be. Everything you do should make use of your advantage or help strengthen it. That is how you cheat, you use your advantage to compete and win.

This makes prioritization for your company easier because you stop asking the questions “What can we create?” and “What can we sell?” to “Where do we know we can win?“. Playing an unfair game is how you win and you make the game unfair by maximizing your advantage.

5 Rules for Choosing a Co-Founder

It is extremely scary to start a new company. The risk of failure is high and the workload is intense, so it’s not a coincidence that few people start companies alone. However, many companies fail not because of their market, product or finances but because the founding team has a falling out due to interpersonal problems. Choosing the right co-founder(s) is critical to avoiding those pitfalls and boosting your chances of success.

When you are looking for a co-founder (or co-founders), these are some of the questions you should ask:

  1. Have you worked together before? People behave differently under heavy stress, especially when a lot of money is on the line. Just because you are old friends with someone does not mean you know how they react when things get tough, and in many cases it would surprise you. If you worked together in a highly stressful environment with someone then you know how they handle pressure and you have settled at least a few disputes successfully. Not everyone is ready for the pressure cooker of starting a company and you do not want to learn the hard way that your co-founder is not.
  2. Do you have the same runway? If you have enough savings to last two years (which I recommend) and your co-founder has only six months, then your company only has a six month runway. That is rarely enough time to prove your idea and test it, so you will be making short cut decisions you might not otherwise make. Resentment will grow in both directions and decision making will become harder since you each have different perspectives. If you have the same runway you will both be on equal footing.
  3. Do you want the same thing from the business? Never assume that others have the same goals and motivations that you have. People build companies for many reasons including money, fame, curiosity, boredom and desperation. Whatever your reasons, make sure you are clear and explicitly ask your co-founder about theirs. If you are looking to solve a big market problem but they just want to flip a company quickly then you will find yourself fighting over key decisions.
  4. Do you have complementary skills? Far too many companies are started by people with exactly the same skills. This seems like a good idea at first when there is a lot of code to be written and having two coders is faster than one. However, once the code is written, who will do the marketing, sales, fundraising, customer support, etc.? Bringing on a co-founder with complementary skills gives you a better chance of success by diversifying your companies strengths early. I have seen many teams of engineers write a lot of code and become helpless when their product is not magically adopted by customers. Think about your strengths and weaknesses  and find people who are strong where you are weak.
  5. Do you really, really like each other? This seems like the silliest question but is probably the most important. For any potential co-founder, ask yourself if you would want to be trapped in your apartment with them for a week. You will spend so much time with their person that you really better like them a whole lot.

Even if you can answer yes to all these questions does not mean you will be in perfect sync with your co-founder(s). At the end of the day someone has to be in charge and it needs to be you, the CEO. I agree with Mark Suster who recommends hiring your co-founders, making you the majority shareholder and clear head of the company which helps reduce the impact of co-founder issues.