How To Measure Customer Happiness

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Are your customers happy?

Such a simple question is remarkably difficult to answer. You could ask them, but rarely will someone tell you their honest opinion of you. You could wait and see if they remain customers (unhappy customers will leave) but by then it’s too late to change their mind. You could have someone else ask them, but in the end most people have difficulty explaining their own feelings.

Ideally, you would have a way to measure customer satisfaction that:

  • Is a simple metric (a single number).
  • Fast enough that you can measure it on a regular basis.
  • Does not require a lot of analysis.

The great news is that this simple measurement exists and it is called the Net Promoter Score. It allows you to ask your customers a single question to tell you everything you need to know. That question is:

How likely are you to recommend our company/product/service to your friends and colleagues?

The answer takes the form of a score, from 0 to 10, with 0 being not at all and 10 being extremely likely. To see how this works, please take the Sean on Startups net promoter survey here. I appreciate the feedback!

You then group your customers into three groups based on their response:

  • Promoters (9-10): Customers who love your product and will recommend it to others.
  • Passives (7-8): Customers who are ambivalent.
  • Detractors (0-6): Customers who are unhappy and may advise against working with you.

At first, this seems rather aggressive since you need to score a nine or higher to be considered a promoter. However, most people have an inherent ratings bias where they avoid giving very low ratings. Setting the thresholds at these levels adjusts for that bias.

To calculate your Net Promoter Score (NPS) you simply subtract the percentage of customers who are Detractors from the percentage of customers who are Promoters:

Net Promoter Score = % who are Promoters – % who are Detractors

Your NPS can be anywhere in the range of -100 (very bad) to 100 (very good). In most cases it will be in between, with a positive value better than a negative value. For example, in 2013 the Apple iPhone had an NPS of 70, Costco had an NPS of 78 and Southwest Airlines had 66 (source).

What then do you do with this number?

The most common use is to compare your NPS to average NPS scores for your industry. There are many resources available to do this and the more narrow your industry the more useful the benchmark. You can also easily find NPS scores for companies and products online.

This should also become a core metric for your business that you track on a regular basis. It is fast enough that you can survey your customers on a regular basis and track your NPS over time. In fact, Survey Monkey even has a pre-built template (which I used to create the survey for this blog). If you want to measure NPS on a very frequent basis (say monthly) it is a good idea to randomly sample customers for each survey as even this short question can lead to fatigue if you ask it too often.

The NPS is not a replacement for talking to your customers, which you should still do on a regular basis. However, it does provide an objective and quantitative measurement for customer satisfaction that you can use to measure your progress over time.

So, are your customers happy? Ask them one question and find out.

Fighting Amongst Yourselves Is a Great Way to Die

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In the early days of developing an idea, it is critical that you challenge every assumption behind that idea. That kind of questioning will either make the idea stronger and more crisp, or it will tear down its facade and reveal that there was nothing behind it.

It is tempting, when first assembling your team, to surround yourself with people that are just like you. These people share your interests, your sense of humor and your passions so it makes it easy to get along and agree on ideas. An environment where your team is universally similar in these ways is known as a monoculture and it poses a serious danger: If everyone agrees with you, who will question your ideas?

At the same time, you cannot afford to waste the limited time and effort you have with endless arguments about ideas and strategy. After questioning your idea and evaluating it objectively, your team needs to be able to make a decision and move on. I call this the difference between debating and arguing. You want to debate and not argue, and here is how you can tell the difference.

Debating (Good)

  • People come prepared to a discussion on the issue with background and well thought out explanations for their opinion.
  • There is a decision making framework that is used to evaluate all options.
  • People leave the discussion(s) having either changed their minds or compromised on a clear solution.
  • There are consistent retrospectives to evaluate decisions and whether they were correct.

Arguing (Bad)

  • You discuss the same issue at least 3 times with no clear progress.
  • You leave discussions about the issue with no clear agreement and everyone still married to the ideas that they had when they entered.
  • Side discussions start to erupt among factions with different points of view that don’t include people with differing opinions.
  • There is no objective framework for making a decision, or to evaluate if the decision was correct. Instead, decisions are constantly revisited with the same reasoning again and again.

Using these definitions, debating allows you to move quickly to handle issues with a reliable process. Arguing drains energy away from your goals by having everyone focus on the argument instead of on the strategy.

In many companies, the CEO prevents the team from falling into the trap of arguing by making decisions themselves by executive decree. Sometimes that is necessary and there is a reason that CEOs exist. However, if you find yourself having to use the CEO stick often you will prevent your team from developing decision making skills and stunt the maturity of your organization. Empowering your team to debate issues and then decide will scale with your company as you grow.

Monitoring whether your team is debating or arguing is an important way to gauge how well your team is working. If you spend a lot of time arguing, it’s time to make a change.

The Sacred Art of Team Building

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You are a person, and chances are high that everyone you add to your team will be a person too. Teams are, of course, made of people which makes building them significantly harder than building products. Great teams will help you overcome difficult challenges and bad teams can fail to capitalize on even the biggest opportunities.

As your company grows, the kinds of people you hire for your team will change as well. Here are some common phases of a company’s lifecycle and what I recommend looking for in the people you hire:

Pre-funding (1-5 people)

When your team is very small, every single person is critical for success. A single bad actor can distract the rest of your team enough to keep you from even getting started. This is not the time to cut corners, every hire should be amazing and make you feel lucky to have them on your team. Follow 5 Rules for Choosing a Cofounder for all of your hires at this stage.

Who you want:

  • The best people you can find. Start by making a list of the 10 best people you have ever worked with in your life and try recruiting them. These should not necessarily be your 10 best friends, but the 10 most productive and passionate people.
  • People with complementary skills. You don’t want only engineers or only sales people at this stage. You need a mix of people that will help you move in multiple directions at the same time.
  • Generalists who can play many different roles, as you have no idea what you will need to ask them to do.
  • Self-motivators. You won’t have time to motivate your team at this point, so everyone should be able to motivate themselves to be as productive as possible. Self motivators are easy to spot since they are constantly doing interesting things in their free time and going above and beyond their job description.

Who you don’t want:

  • Specialists who only want to perform one task or duty. These people become a drag quickly as the company evolves and the task they want to perform becomes less important or non-existent.
  • People not experienced or not ready for the emotional roller coaster. The early days are intense and if you hire someone who isn’t ready for the extremes they will not be happy and that is dangerous. It is hard to be sure if someone is ready without prior experience, so you should try to focus on people you have seen in action.
  • If possible, anyone that isn’t living in the same city. Remote teams at this stage can be done, and done well, but it’s a challenge you should not undertake unless absolutely necessary.

Seed Funded (5-20 people)

Your team is growing and hopefully your product is coming together. You should be well on your way to Product/Market Fit and you need to make sure your team is built to get there. At this point it is important to be sure you can scale your product and lay the foundation for your business.

Who you want:

  • People with experience in your industry or with similar products. These people can help you avoid pitfalls and save you valuable time by not having to learn things the hard way.
  • Leaders. The people you hire now will become the leaders in your organization as it grows so choose wisely. Would you trust the people on your team now to build teams of their own in 12 months? The answer should be yes.
  • Life-long students. There will be an amazing amount to learn as your company grows and you want people who are eager to learn new things and adapt. These people will also be the best at handling the ambiguity of your company’s evolution since they will see it as another learning opportunity.

Who you don’t want:

  • People who focus solely on the internal operations of your business. The time for CFOs, admins and other business operations people will come later but for now you need to focus all your company’s resources on proving you have a viable business. Over-investing in your operations is a great way to have a well run company that runs out of money.
  • People looking for the next big thing. Once you start to get traction, job hoppers will start to show up and you will notice them because they have not spent more than a year at their last 3 jobs. These people are not the bedrock you need to build your team upon since they will jump ship the minute a more exciting company comes along.
  • Anyone who is set in their ways. If someone justifies their decision making by saying that they have done this a dozen times before, that should be a red flag. No matter how many times you have done something if you can’t explain why it is a good idea then you are just clinging to the familiar.

Venture Funded (20-50)

You have proven your product appeals to customers, it is time to prove that you can generate revenue and grow. This is both an exciting time but an extremely high risk time. Most companies that survive the very early days will die here.

Who you want:

  • CEOs in waiting. You need to have people on your team that you feel could jump into the CEO position if necessary. These people understand the entire business, strategy and market inside and out. They have a great relationship with investors and can provide the support/advice you need on a daily basis.
  • Project leads. Gone are the days when you could manage the business yourself, it’s gotten too big. You need people who you can give direction and be absolutely sure that with no further interaction will execute flawlessly.
  • Samurai. These are the brilliant individual contributors that wander between the functions of your company solving the most difficult problems. They are more than just firefighters, they are the glue that keeps the company moving forward. In many ways they are the informal leadership of the company who might not have direct reports, but make sure the gears are turning.

Who you don’t want:

  • Trophy executives. These are people you add to your team exclusively because of their pedigree and not because you have a clear need. Your investors will be eager to add executives to your team that have solid resumes and give them piece of mind that the company is in good hands. Hiring people with strong track records is great, but you should have an equally strong reason to hire someone that goes beyond their resume. If the only reason you are hiring someone is because “they were at Facebook” then you should reconsider.
  • Professional middle managers. There will be a time when managing will be a full time job but your team isn’t there yet. Hiring middle management too early will add bureaucracy and slow down your execution. Empower your leaders with more responsibility instead of looking outside for management help.

Scaling (50-500)

You have proven your business is viable and now it’s time to scale that business as large as you can. The question now is whether you can go from $10M to $100M to $1B (and maybe $10B).

Who you want:

  • If you don’t already have them, you need a CFO and a finance organization. There will be so much money flowing around that someone needs to keep track of it and make sure it flows in the right direction.
  • Entire teams. Growing at this stage is a numbers game, one that is easier to play if you can hire entire teams instead of just individuals. Acqui-hires are one good route, but you can just as easily hire someone and then ask them to refer members of their previous team. Hiring a team all at once accelerates team productivity since they have already worked together, assuming their chemistry matches yours.
  • Evangelists. Gone is the time when you know everyone who works at your company, and without significant effort there will be employees that you will never meet. You need to make sure there are people in your organization that share your passion for the business and can convey that to the people you can’t reach. Those are not always leaders, just team members that are full of passion.

Who you don’t want:

  • Distractions. At this stage many people will try to pull your company into new markets or into new directions. That kind of diversity is just a distraction for you since you need to grow the business you have already. If someone is constantly suggesting drastically new ideas, perhaps they would be better off starting their own company.
  • Tons of outsourced/contract employees. The pressure to grow your team will be intense, and outsourcing is always an easy solution. However, unless your company has made outsourcing part of its core operations, the overhead associated with it can overwhelm you. You also need to think of your team as your competitive advantage so don’t outsource your company’s core competency. That being said, you should consider outsourcing everything that is not your core competency.
  • People who refuse to grow with the company. The reality is that not everyone you hired previously will want to grow along with the company. They might have been excellent when you were smaller, but if they cling to the way things were they will start to hold you back. You will need to part ways with some of these people, but be sure to treat them fairly when you do.

Enterprise (500+)

Enterprise companies are different environments. At this point your business is growing strong, your organization is in place and you are operating like a big company because you are a big company. Your biggest challenge is continuing to grow despite having less agility and higher costs.

Who you want:

  • People who love your industry. You don’t have the promise of being the next big thing since you already are a big thing, so you won’t attract the starry eyed start up crowd. However, there are plenty of talented people who want stability and love your product/industry. Those people will still see your company as more than a job, they will see it as an opportunity to do what they love.
  • Innovators who will drive change from within your company. These are people who have the entrepreneurial spirit but don’t want to go out on their own. They can keep your company from stagnating by pushing you ahead and preventing stagnation.

Who you don’t want:

  • People who enjoy playing office politics. These people are usually easy to spot as they talk fluently about product, business and industries but are short on details. When you press into what they accomplished on their own, details are scarce. These people pull down the productivity of your entire company.
  • Resume builders. These people are looking for a specific title that seems a well beyond their experience. Chances are that they did this their last few jobs as well so they are well beyond their skill set even with their current level. You should take chances on promising up and comers but make sure they are the real deal and not the result of years of title inflation.

Team building is an art, not a science, so you will make mistakes. When you do, recognize it quickly and correct the problem immediately since waiting only makes it worse.

How do you know you have built a great team? If you wake up in the morning and realize that your team would do amazing things even if you didn’t go into the office, you are on the right track.

This was a Blog by Request, requested by @myatlyuka. Is there something you would like to see me write about? Just drop me a line. 

The Journey

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After almost nine years, today is my last day as an employee of Flurry. I will remain involved and on the board, but it is the end of a significant chapter of my life and the beginning of a new one. It is a bittersweet day for me.

I have been lucky over these nine years. Most start up companies fail in the first few months, many others in their first year. Not only has Flurry survived, it has thrived and now employs 150 people with a large and growing business. Today, Flurry is recognized as a central part of the mobile world and provides a clear voice for this new industry.

Along the way, I have been lucky enough to enjoy front row seats for the mobile revolution as it has changed the world. Starting in 2005, back when everyone believed the carriers controlled the world, Flurry has been at the center of mobile applications. Flurry grew up with the industry and as it changed so did we. When the Motorola RAZR became the hottest phone on the market, we were there. When the iPhone changed the definition of a phone forever, we were there. When Android was released as the first free mobile OS, we were there. When the iPad, Kindle and Nexus devices introduced us to the idea of a tablet, we were there. These important moments in the history of business were also moments in the life of Flurry, woven together like a tapestry to tell the story of this amazing revolution.

I am proud of Flurry and what we have been able to accomplish. I am proud of how many mobile developers we have helped to succeed, some of them beyond our wildest dreams. I am proud of the team we assembled and how we were able to do so much while still having so much fun. I am proud of the moments when we were faced with impossible odds and found a way to succeed.

My journey with Flurry has been amazing, but now our paths diverge. I leave the company in great hands with a promising future and will enjoy watching it grow from the sidelines. For the first time in nine years I will have a chance to catch my breadth, relax, and recharge my batteries. There are many adventures left to be had and I am eager to discover them.

So, what’s next?

Are You Sure You Are Solving a Problem?

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“So, what’s your idea?”

If you’ve ever talked about starting a company, that is the first question you always hear. It’s a simple question, but implies that companies are built from ideas – moments of inspiration where you see something no one else has seen. In reality, that is almost never true. Almost every kind of business model has been tried at some point in history. With 7 billion people on Earth, chances are that there are a few people with the same ideas that you have.

What, then, are great companies built on? There are billion-dollar companies being started right now, somewhere, by someone who is most definitely not a billionaire yet. What is their secret?

Great businesses are built by solving problems. A problem is the difference between what a person wants/needs and what they can get today. Some example problems and the companies that were built to solve them:

  • I can’t find anything on the internet. Google
  • I don’t have time to stay in touch with my friends. Facebook
  • I can’t figure out how to file my taxes by myself. Intuit

Even video game companies are solving a problem – they help you avoid being bored and make you happy. Some of these might not seem like problems because they have been solved so well by these companies, but if that company disappeared the problem would reappear. Not all problems are created equal, as problems can range from minor inconvenience to life threatening. You can often tell the difference by understanding how much a person is willing to pay to make the problem go away. For example, someone might be willing to pay $0.99 for a mobile game to entertain them for a few hours, but they would pay thousands of dollars for a new chair that relieves their back pain.

Almost all problems have solutions that already  exist but can be improved. For example, in the early days of the internet the biggest problem was how to find anything. Yahoo solved this problem with their directory. Then Alta Vista, et al, solved the problem more effectively with search engines. Then Google solved the problem even more effectively with a more advanced search engine. I expect sometime soon that there will be an even better solution, continuing the cycle of solution improvement and company creation.

If you can solve a difficult problem in a way that is cheaper, easier or better than existing solutions then you create value and can make money. The more acute the problem and the more valuable the solution the more money you can make in solving the problem.

But wait, you say, what about Snapchat and Facebook? They were started by teenagers and solve no obvious problems, yet have become huge! Well, the irony of life is that you don’t need to be aware of a problem (or how big it is) in order to solve it. In many cases, companies that are overnight successes hit upon problems that no one else was aware were problems (or that could be solved). No one understood a huge problem with existing social networks until Snapchat provided an alternative, surprising even the Snapchat team themselves. You can get lucky in this way, but it’s rare.

Starting from a problem provides a very useful framework for focusing your business as you grow. By always starting from the problem:

  • It is easier to formulate your marketing messages and sales pitch. Instead of trying to explain what your company does, you can explain the problem and how you solve it.
  • It is easier to identify your key customer segments by ranking potential customers by how much they suffer from the problem. You can avoid a lot of wasted time in exploring various customer segments.
  • It is easier to measure your performance by choosing metrics that indicate how well you are solving the problem. If you are trying to save people money on buying cars but the average customer only saves $5, then you are not effective in your business.

After you choose your problem, I suggest posting it somewhere prominently in your office. Reminding everyone on your team, day in and day out, what problem you are solving will bring focus to everything you do.

So, what problem are you solving?

How to Avoid Naming Your Company “Brain Rocket”

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Naming something is very, very hard. Not only is it hard to choose a distinctive name that describes your product or company, almost all of the good names are already taken. There are naming firms who charge hundreds of thousands of dollars to help large companies choose new names, and even then they often end in disaster. So, how should you pick a name?

While there is no silver bullet, it helps to have a process. In addition to reviewing the process, we will practice on a fictitious company and try to give it a name. For this exercise, let us assume we are starting a new consulting company that will help set up IT infrastructure for small businesses. 

Step 1. Metaphor
All of the best names are based on metaphors that describe what the product or company does. Literal names (such as The IT Company) are rarely distinctive enough to be remembered and easily confused with other, similar companies. The more creative your metaphors the more distinctive your name and the easier the naming process will be in the future.

For our example IT consulting company, what metaphors work? Since IT touches almost all aspects of business these days, the company will provide a wide range of services to help smaller businesses grow. Any metaphor that involves getting bigger over time would work well here, including construction and stacking. The word “grow” is interesting and seems to fit well with gardening or farming so let us choose the metaphor of gardening.

Step 2. Word Association

It’s time to exercise your creative muscles and play word association with the metaphors you chose in Step 1. The goal is to create a large list of words that relate to your metaphor, as many as you can. If your creative muscles are out of shape you can use online tools to help generate a list of source words related to your metaphor.

Based on our gardening metaphor you might come up with the following list:

  • Seeds
  • Sprouting
  • Green
  • Watering
  • Harvest

Some companies choose to include more descriptive words in their name to avoid customer confusion. It also makes finding a domain name significantly easier since all single words are taken. Some words that describe IT infrastructure:

  • Technology
  • Infrastructure
  • Hardware
  • Networking
  • Installation

Step 3. Try some names

It’s time to combine the words from our word association exercise, creating a list of potential names. It is okay if they are horrible since we’ll filter them out later. Note that combining the words into new names can take any form you like and sometimes the best names come from combining two words into one. For this exercise we won’t invent new words, just create compound names:

  • Seed Technology
  • Harvest Installations
  • Sprout Networking
  • Green Hardware

Of those, “Green Hardware” and “Seed Technology” sound like biotech companies so let’s throw that out. That leaves us with two potential names:

  • Sprout Networking
  • Harvest Installations

At this point you need to be practical. Check available domain names to make sure they are available and/or affordable. Use a service like 99 Designs to have some example logos created for your names to see how it looks. Talk to your friends and associates about the names and get some input.

It is possible that after all of this you end up with no good names, forcing you to start over again. For a given product I typically find I have to repeat this process 2-3 times before I end up with some really good candidates. If you are lucky you will find a name you really love, but often you will find a name you can learn to love.

I hope that helps. You could always just fall back on naming it after yourself (it worked for Bloomberg) and there isn’t really anything wrong with that. In the end if you have a great product or service, treat your customers well and deliver on your promises it won’t matter what your name is – people will remember it.

NOTE: This post is adapted from an answer I posted on Quora in Startup Advice and Strategy.

5 Metrics to Run Your Business

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Whether you are running a company, driving a car or flying a jet you need a dashboard to tell you how you are doing. One of the most common mistakes is to fill up your dashboard with dozens of metrics covering every aspect of your business. The problem with this “kitchen sink” approach is that it is actually harder to understand how your business is doing. With a dozen different metrics, most days half of them will be up and half will be down – so how are you doing?

Focus on the fewest number of metrics that will allow you to understand how your business is doing. For example, I typically suggest companies use the following five metrics as their dashboard:

  1. Customer Acquisition. How many new customers are you adding every day (or week or month)? This is an important measure of how healthy your marketing efforts are working since this is the top of your conversion funnel. Depending on your business this may be new registrations, first time purchasers or application installs.
  2. Customer Engagement. How active are your customers? Just because you acquired them does not mean your customers are active and using your service. Do they use the product every week? day? hour? If your customers aren’t using your service then it’s only a matter of time before they churn out and are no longer a customer so this is your most important metric.
  3. Customer Retention. How long does someone stay a customer? This is critical to understanding your business model because this allows you to model customer churn. If it costs you $5 to acquire a user but they only stick around long enough to make you $2, then your business is upside down. The higher your customer retention, the easier it will be to grow your business.
  4. Revenue. How much money do you make every month? Focusing on daily or weekly revenue can be very noisy so for running your business focus on monthly revenue. In some cases, it might be more useful to measure revenue per customer in order to calculate a customer lifetime value.
  5. Cost. There are two kinds of cost  you might want to measure, depending on your type of business. Burn rate is how much money you spend every month on everything including salaries, rent and services. Customer acquisition cost (CAC) is how much you are spending to acquire every new user. If CAC dominates your costs then you should measure that, otherwise use the overall burn rate.

You will find that you cannot improve what you do not measure, but you will focus on improving whatever you do measure. If you can maximize acquisition, engagement, retention, revenue and cost you will have a very healthy business on your hands.

These five example metrics might not work for your company, but I bet there are five that do. Think about it and choose them carefully, they will be your guide through rough seas.

Set Your Goal Before You Begin

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If you decided to build a house the first thing you would do is hire an architect to design the house. From the blueprints provided by the architect you would know what the house will look like, how it will be built and what materials you will need even before work begins. The blueprints of the house is your goal, and then your process of building the house is focused on achieving that goal.

That sounds obvious, right? Would you build a house without blueprints? Probably not. Surprisingly, many people spend significantly longer (and more money) building companies but do not set a goal before they start. When starting a company, it is common for founders to plan for the next few days, weeks or months and postpone any further planning until later. They never sit down and think about what their business would look like years into the future and if that business is worth all the effort. In some cases they have an amorphous vision or strong feeling of what the goal will look like, in other cases they simply focus on the first few steps with faith they can figure out the rest later.

The problem with not having a goal when you get started is that you don’t know what success will look like. Yes, you can still build a house without a plan but you can’t be sure it will be a house where you want to live. You won’t know how much the house will cost to build or how long it might take. Having a goal gives you the confidence that all the hard work will lead to something you think is worthwhile.

When starting a new company, take some time to lay out your goal. The elements of a good goal plan would include:

  • Number of customers. How many customers would you have if you were a success? Are there 100, 1K, 1M or 10M people who would use your product? You want to be sure that even in your most aggressive models there are enough customers to build a profitable business.
  • Total revenue. How much money would you be making? Could you make $1M, $10M or $1B per year if you were wildly successful? The last thing you want is to build a huge company that cannot make enough money to support itself.
  • Cost of operations. How many employees do you need? How much does it cost to provide your product? You need to understand how much it will cost to operate your business to understand how much investment you will need and how profitable you can be.

The simplest goal assumes everything goes perfectly and all of your assumptions are true. In that perfect world, is your company as big as you want it to be? Could you raise investment if you need it? Would anyone want to buy the company from you? By answering those questions now you can save yourself some hard decisions later.

These goals should be easily measurable as well, providing a head start in setting up key indicators for your business. If you know that success looks like X customers, Y revenue and Z costs you can track your daily, weekly and monthly progress against that goal to tell how close or far away you might be getting. You won’t hold yourself to the goals you set, as those goals will change, but it does help you know the direction you are going.

I have been told that this flies in the face of the Lean Startup movement that is so popular today. I disagree, the Lean approach is designed to quickly answer if your assumptions are correct. Before even launching into a lean effort to verify your assumptions you should spend a little time deciding if it is worthwhile. Otherwise, you are pursuing a random walk which is not a good way to find an optimal outcome.

Your goals will change as you build your company, they always do. However, by setting out a goal when you got started you will know that the hard work you put in is driving in a direction that makes you feel that effort is well spent. There is nothing worse than working very hard and regretting the destination that you reach in the end.

Why no one will invest in you

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I often have discussions with people who have a great idea and are thinking of quitting their job to pursue it. However, they have fixed costs (rent, car payments, etc.) and can’t afford to work for free. Instead, they want to raise some venture investment to fund their new company and pay them a salary. Inevitably, they are surprised at how hard it is and rarely succeed.

The problem that these potential entrepreneurs fail to see is that investors are looking for investments to make a return, not to fund your lifestyle. If an investor is going to invest in you it will be for one of three reasons:

  • Investing in people (you). An investor might invest in you because of who you are and your track record of success. However, unless you have started and sold companies for tens or hundreds of millions of dollars, it is unlikely that investors will invest in you for who you are. The risk for new companies is too high for someone inexperienced who doesn’t have a product or a plan.
  • Investing in your product. Investors will invest in products that have no plan (or revenue) but are growing like wildfire (Snapchat is a good example). The investor might not know you and you might not have a plan in place, but they see the product succeeding in the market and have faith that you can come up with a plan when necessary. This is exceedingly rare because the product needs to be so amazingly successful as to forgive the higher risk of not having a plan.
  • Investing in a plan. The vast majority of venture investment is in a plan. A plan includes all of the other elements including people, products, marketing/growth, financials, etc. When an investor invests in your plan, it is because they see how their investment will help you achieve your plan and in doing so produce a return on their investment.

Now, before you spend weeks writing a 50 page business plan, it is important to understand what an investor looks for in a plan. The best plans are not determined by length, but whether you can answer the following questions:

  1. What problem are you solving? Explain who your customers are, what problem they have and how much money can be made by solving it. The bigger the problem the bigger the market opportunity.
  2. How do you solve the problem? There are many ways to solve the same problem, what is your solution and how is it unique? In many cases this is a demonstration of your product.
  3. Why hasn’t the problem been solved before? There are reasons this problem exists and one of them is that no one else has solved it. Why not? Are there difficulties that you have overcome?
  4. Why are you (and your team) the ones to solve it? While this is your plan, you need to give investors confidence that you can execute the plan.
  5. How will you beat the competition? Even if you don’t have competition today, you will at some point. How will you win when the competition attacks?
  6. How much money will you make if everything goes well? This is the most important question. Investors want to see a business that will become very valuable, very quickly based on the money it can make.
  7. How much money do you need? The final question is how much it will cost for you to build the business to a point where you’ve removed a significant amount of risk. Your plan, no matter how well formulated, has a lot of risk. Instead of giving you $20M now, they would rather give you $1M and see if you can eliminate some of the risk in the plan and then give you more. It is up to you to set realistic goals and estimate costs accordingly, and the investors will evaluate the risk profile from there.

Note that these are the questions for a seed level company, one that is just getting started. As your company grows, the questions you need to answer in your plan will change. Even public companies need to have a plan for their shareholders, who are their investors.

So, if you are looking to raise money for your company be sure you have a plan that justifies the investment. And quit your job first, no one wants to invest in your plan if you don’t believe in it enough to go all in.

Everyone is Successful, Except for You

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If you spend too much time in Silicon Valley, I guarantee that you will start to think that you are the only one who is not wildly successful overnight. Once you step foot here you are quickly surrounded by stories of easy success from your friends, peers and strangers you meet. It is almost impossible to escape.

For example, at a typical networking event you might meet these three people:

  • Bob who just sold his company to Facebook after only 12 months.
  • Carla whose new startup just launched, got featured on the AppStore and is growing by leaps and bounds.
  • Phil who just got started in venture capital and has his first IPO in a few weeks.

Pretty soon, you wonder what is wrong with you since Bob, Carla and Phil found success so easily. You are struggling with your company, dealing with product bugs, fighting for every customer and working 14 hour days. You have been at this for two years and it isn’t getting easier. Where is the short cut, the easy street that they found?

The truth, of course, is that there’s nothing wrong with you. In fact, most of what you heard was an illusion. Bob‘s company was acquired, but it had been running out of cash so it was a fire sale and the only upside was a small retention bonus for employees – no one got rich. Carla‘s company is growing but they only have a few months of cash left and are not having luck with fundraising so she’s looking at layoffs. Phil does have his first IPO coming up, but since he’s junior at the firm he has no carry and he won’t get more than a token bonus.

Of course they will never tell you that, despite the fact that they are very nice people. In Silicon Valley no one talks about bad news as if it is some kind of social more. The correct answer to “How are things going?” is always “We’re killing it” regardless of how things are really going. If someone ever answers “We’re struggling” to that question you would probably die of shock.

There are signs that this might be changing and bad news might become an acceptable topic of conversation. For example, a new conference called FailCon brings together entrepreneurs to share stories of mistakes and failures. I hope this trend continues and people who are working hard are not ashamed that they haven’t found easy success. Regardless, we have a long way to go: even at FailCon, NPR notes that most of the failure stories are told about successful companies by successful people.

Building companies is hard. Yes, some people get lucky and find success quickly and with minimal pain. However, that is more like winning the lottery than finding success, the chances are so small as to be virtually impossible. If you feel like building a company is hard, that is because it is hard. And it gets harder, the more progress you make. Start up companies are not for the faint of heart.

Lest you think this is all fiction, I have met Bob, Carla and Phil (not their real names) myself. They are real people with actual facts. The next time you feel that everyone else has it easy, consider that everyone might think the same thing of you.