Intro

You need three things to create a successful startup: to start with good people, to make something customers actually want, and to spend as little money as possible. Most startups that fail do it because they fail at one of these. A startup that does all three will probably succeed.

And that's kind of exciting, when you think about it, because all three are doable. Hard, but doable. And since a startup that succeeds ordinarily makes its founders rich, that implies getting rich is doable too. Hard, but doable.

If there is one message I'd like to get across about startups, that's it. There is no magically difficult step that requires brilliance to solve.

The Idea

You don’t need a brilliant idea. You just need to make something people want. What people have right now often sucks, so you could just find something that sucks and make it better. For example, search sites sucked before Google. Google basically just indexed more of the web, used links to rank search results, and had a clean and simple UI.

But ideas don’t really mean anything; it’s execution that matters. For example, if you ask a VC to sign an NDA, they’ll tell you to get lost. The market price of an idea is less than the inconvenience of signing an NDA. Also, the initial idea almost always changes a lot along the way.

People

A good heuristic: “Could you describe this person as an animal? (In the sense that they work hard)”. If you say to yourself “so-and-so is an animal” and then you laugh, they’re not an animal.

3 subsequent tests for programmers: 1) Is the person genuinely smart? 2) Could they actually get things done? 3) Does the person have an unbearable personality?

Most startups begin with a group of friends, and personal contacts usually determine the first couple of hires.

Startups often start around universities, because that’s where smart people meet. It’s not what you learn in universities, it’s just the fact that there’s other smart people there for you to meet. It’s not a good idea to make a conscious effort to schmooze though; just work on your own projects, and collaborate with other students.

Ideally you want between two and four founders. One person would find the moral weight of starting a company hard to bear. One reason why you don’t want more than 4 people is because you just don’t need that many people early on, but another reason is because more people leads to more disagreements that are tougher to settle and lingering disputes are poisonous.

In a technology startup, which most startups are, the founders should include technical people. When business people start startups and pay hackers to build the product for them, the business people struggle to know what to do with technology, and don’t know how to hire good hackers.

Don’t think of “business” as dirty word. People who don’t understand it often see it as a mundane mysterious thing that you need a lot of education for. In actuality, it’s not that hard - just get people to pay you for stuff. (Well, there are some esoteric areas that could be hard, but the “business” things you need to know to run a startup are pretty commonsense.)

What Customers Want

If you give customers what they want, things will usually work out well. For example, a restaurant that makes great food could screw up everything else, but still be successful.

The cause of death for almost every failed startup is that the customer didn’t want the product.

It’s important to get a version 1 out fast, get feedback from users, and then make changes (rapid prototyping). The alternative to this is the “Hail Mary” strategy, where you make elaborate plans, and then hire a bunch of engineers to implement them. This usually fails.

Make sure your software is easy for people to use. Hackers are often so used to computers that they forget how horrifying they seem to normal people.

How do you figure out what customers want? Watch them. One of the best places to do this was at trade shows (don’t give canned presentations, show people how your site works and watch them use it).

If you try to start the kind of startup that has to be a big consumer brand, the odds against succeeding are steeper. The best odds are in niche markets because that’s where things are usually the most screwed up.

Raising Money

To make things happen, you’re probably going to need to raise money. Some startups have been self-funded, but most aren’t.

Financially, a startup is like a pass/fail course. If you could trade stock for something that improves your odds, it’s probably a smart move.

To most hackers, getting investors seems like a terrifying and mysterious process. Actually it's merely tedious. Here’s an outline of how it works.

Seed round

• The first thing you'll need is a few tens of thousands of dollars to pay your expenses while you develop a prototype. This is called seed capital. Because so little money is involved, raising seed capital is comparatively easy-- at least in the sense of getting a quick yes or no.
• Usually you get seed money from individual rich people called "angels." Often they're people who themselves got rich from technology. At the seed stage, investors don't expect you to have an elaborate business plan. Most know that they're supposed to decide quickly. It's not unusual to get a check within a week based on a half-page agreement.
• Some angels, especially those with technology backgrounds, may be satisfied with a demo and a verbal description of what you plan to do. But many will want a copy of your business plan, if only to remind themselves of what they invested in. At this stage, all most investors expect is a brief description of what you plan to do and how you're going to make money from it, and the resumes of the founders. If you just sit down and write out what you've been saying to one another, that should be fine. It shouldn't take more than a couple hours, and you'll probably find that writing it all down gives you more ideas about what to do.
• Good angels will provide a lot of value aside from the money they give you. For example, business advice, getting you set up legally as a company, introducing you to other investors...
• To receive money from an angel, you have to incorporate. Incorporating isn’t hard, but to incorporate (become a company), you have to decide what percentage of the company each of the cofounders gets. This could get complicated if the founders aren’t all equally committed, and could lead to bad arguments.
• There’s other things you need to do to start a company (insurance, business license, unemployment compensation…). You’ll probably mess some things up, but no one comes and arrests you if you do.
• Make sure you don’t have any intellectual property (IP) problems. For example, when you work at a company, you often have to sign something saying that your ideas belong to them. If one of these people is a cofounder, the company they work for might legally own part of your company, so beware
• When you offer x percent of your company for y dollars, you're implicitly claiming a certain value for the whole company. Venture investments are usually described in terms of that number. If you give an investor new shares equal to 5% of those already outstanding in return for $100,000, then you've done the deal at a pre-money valuation of $2 million.
• It’s tough to come up with an accurate valuation, especially early on. But keep in mind that the valuation doesn’t just include what you have so far, it includes the value of your ideas and the future work you’ll do for the company.

Venture Capital

• The next round of funding is the one in which you might deal with actual venture capital firms.
• Don’t wait till you’ve burned through your last round of funding to start approaching venture capitalists (VCs). They’re slow to make up their minds (they could take months), and you don’t want to be running out of money while you’re negotiating with them because it gives them leverage.
• Getting money from an actual VC firm is a bigger deal than getting money from angels. The amounts of money involved are larger, millions usually. So the deals take longer, dilute you more, and impose more onerous conditions.
• Sometimes the VCs want to install a new CEO of their own choosing. Usually the claim is that you need someone mature and experienced, with a business background. Maybe in some cases this is true, but at the same time, a lot of non-business people have been very successful CEOs, so don’t sell yourself short.
• The best leverage you have over VCs is other VCs (use one’s interest as leverage against the others).
• VCs form a pyramid. At the top are famous ones like Sequoia and Kleiner Perkins, but beneath those are a huge number you've never heard of. Aside from the good ones, a dollar from them is worth one dollar (don’t assign too much value to the advice and connections they say they’ll give you).
• As far as how much to tell VCs, don’t be overly secretive, but don’t tell them everything either (they might be funding your competitors one day). They really just want to talk about your idea to see if you’re a smart person.
• Talk to as many VCs as you can, even if you don’t want their money. 1) They may be on the board of a company that’ll acquire you. 2) If you’re impressive, they’ll be discouraged from investing in your competitors. The most efficient way to reach VCs, especially if you’re just looking to meet them, is at conferences that are organized for startups to present to them.

Not Spending It

When you get a couple million dollars from a VC firm, you tend to feel rich. It's important to realize you're not. A rich company is one with large revenues. This money isn't revenue. It's money investors have given you in the hope you'll be able to generate revenues. So despite those millions in the bank, you're still poor.

For most startups the model should be grad student, not law firm. Aim for cool and cheap, not expensive and impressive.

When and if you get an infusion of real money from investors, what should you do with it? Not spend it, that's what. Stay frugal, keep talking to your users to improve your product, and grow slowly. The slower you grow and burn through funding, the more time you have to understand users, and this will pay off in the long-term.

Design your product to please users first, and then think about how to make money from it. If you don't put users first, you leave a gap for competitors who do.

An apartment is probably the right place for a startup to operate out of. Ever notice how much easier it is to hack at home than at work? So why not make work more like home? Besides being cheaper and better to work in, apartments tend to be in better locations than office buildings. And for a startup location is very important. The key to productivity is for people to come back to work after dinner. Those hours after the phone stops ringing are by far the best for getting work done. Great things happen when a group of employees go out to dinner together, talk over ideas, and then come back to their offices to implement them.

The most important way to not spend money is by not hiring people. When you hire people you have to move into an uncool office building, and you have to have meetings instead of just poking your head in someone’s office and talking about an idea with them. This sort of stuff slows you down.

People often hire people because it seems impressive to have a lot of employees working for you. But there’s an important difference between seeming impressive, and being impressive.

Should You?

More people are the right sort of person to start a startup than realize it.

So who should start a startup? Someone who is a good hacker, between about 23 and 38, and who wants to solve the money problem in one shot instead of getting paid gradually over a conventional working life.

It’s tough to start one before age 23 because you probably haven’t seen what businesses are like, and because some people may not take you seriously. But some people would start start one before 23. If you’re thinking, “I don’t care what he says, I’m going to start one anyway”, you’re probably the right sort of person.

The other cutoff, 38, has a lot more play in it. One reason is because you don’t have the energy you did when you were young, and another reason is because startups are a big risk financially. You have more to lose when you’re older, especially if you have a family.

The final test may be the most restrictive. Do you actually want to start a startup? Instead of working at an ordinary rate for 40 years, you work like hell for four.

What a startup buys you is time. If you're the sort of person who would like to solve the money problem once and for all instead of working for a salary for 40 years, then a startup makes sense.