10 start-up fundamentals for founders who want scale
When I was thinking about founding the business that eventually became Clear Returns, I knew I wanted to achieve 3 things:
Scale - I wanted a big, high growth business. My theory (correct, it turns out) was that it takes at least as much effort to run a very small business as a big one, so this time I wanted to do it bigger
Product - I had done the consultancy/agency thing, I wanted to sell tangible product or SaaS because I felt that is essential to a truly scalable business model
Exit route - I wanted to create a business I could personally exit from, very difficult in a lifestyle type business. So the company needed to offer me a route out, whether acquisition or succession
But though I had started and run companies before, I knew that to achieve these aims I couldn't do it all myself. I would need people, money - I did know how or where to start.
So I asked the most amazing serial entrepreneur I know - Denis Mortensen. He has success at scale down to a formula - and he kindly shared that formula with me in the form of 6 carefully considered points, which I then followed almost to the letter in my pre-start and start-up phases. This was so absolutely helpful to me as a founder that now I have taken the process full circle, I felt I must share these learnings with other people. Especially anyone wondering how to start a business where going it alone is not an option.
It is now 6 years from getting Denis' original 'rules'. Once I had them I understood it was possible for me to start-up with the goal of growth from day one - he helped me break-down how to start. And now that I am the end of this particular journey, I feel I learned some extra things on the way. So that is why there are 10 and not 6 things on this list - I've added a few other things that I will do differently next time. Refining and iterating the process of starting up itself can only reduce risk and shorten the path to validation (or otherwise!) for each successive business idea - so I hope you find these as useful as I did!
1. Pay other people to help you stress test your idea to destruction and back
This is about committing to your own idea to the extent you put a little bit of money behind it and encourage people to tell you all the ways your baby is ugly and why your idea might not work. Yep. You pay people to tell you what you don't want to hear. Why is this important? Well, I am an ideas person - I have 20 business ideas every day. Most barely last a few minutes, some gain traction in my mind for weeks (and inevitably I acquire a slew of domain names) and every once in a while there's one that I am convinced might just work - the one I become obsessed with. This is a dangerous time for the entrepreneur - you're desperate to rush in and friends, family, and those around you will tell you your idea is great. You are full of infectious optimism (my partner calls it my reality distortion field). No one is going to tell you why this plan is flawed, or its execution not easy as you'll think it will be. At least until you hire them for that exact job - then the gloves come off.
I recommend getting 5 - 8 people with a range of skills together and shutting them in a room. Make sure you include at least a couple of people with general business knowledge and a few who really know the space your idea is in. Pay them a few hundred pounds each (yes - this is about you making a commitment to your idea here), hire a meeting room for a day or weekend, get them to sign an NDA and then pitch them your idea. The rest of the day/weekend is about extracting every possible objection, barrier, complexity, competitor and possible problem you can about your idea.
If the idea is dead in the water, you just saved yourself years of your life and loads of heartache and cash. Bargain! If it survives this stress test, it will likely have iterated into something far stronger than your first concept, and you will have broad and deep new perspectives - as an extra bonus you may even have found yourself some possible co-founders.
2. Assume you're thinking too small
Both the problem and the size of the market need to be big for a really scalable business. If you relax your grip on your initial idea/solution a little, chances are there is a bigger opportunity you haven't seen yet. It is way easier to do this early, rather than mid-flight. Yes you need focus, yes you need to deliver in manageable chunks - but the big vision needs to be really really big and chances are that you won't see the whole of the moon on your first glance.
And definitely assume you are thinking too small about the money and resources you will require - everyone told me it would take way more money and way more time than I'd planned, but I thought I had factored that in. I really hadn't.
3. What can you refine to make yourself an antibiotic, not a vitamin?
This one is about your compelling reason to exist and generates urgency on the part of the customer - it really becomes critical later when you're out there selling. If you think harder about your urgency-creators at the outset, you will be able to prioritize where you spend your time and cash from the outset. So ask yourself and keep talking to your target market about their problem and their pain. This about convenience factors and how you could improve their world. Keep digging until you expose the kind of urgent need/pain/inconvenience that is so compelling people would change their behaviour or part with cash to solve it (a way bigger task than you think!). Understand that critical pain well, then you can focus on creating a compelling solution that will get traction fast, rather than something you have to sell the hell out of, or worse still, a finished solution in search of a problem.
4. Don't settle on the very first founding team you find
You will almost certainly need a co-founding team to scale, 3 is usually cited as the magic number, but that doesn’t need to happen on day one. You can build a co-founding team 3, 6 or even 12+ months in, depending on your own skill set. The wrong co-founders will kill your business, whereas no co-founder will slow you down at the start and limit your chances at fundraising later. But with the right team around you, your business has a much better chance to soar. And as you will spend way more time with your co-founder than your romantic partner, potentially for years, this is more of a soulmate search than a Tinder date.
Understand what you need before you identify who you need. What are the gaps you really need to fill in order to start? What would your smallest possible dream team look like? What are the essential things of immediate & long term importance to this business that can't you do yourself and can't be easily outsourced? What can't be filled by a smart advisory panel? Are there pre-existing off the shelf solutions to non-core components that mean you can get by without a key person/functionality until you have reached certain milestones?
And don’t just stick with who you know. Sometimes a great colleague isn’t the right one for this idea on day one - perhaps your skills or network overlap too much, or you urgently need a really specific functional expertise.
5. Ask your co-founders to put cash on the table
This is the one I originally ignored - I was just so happy someone wanted to start a business with me, I couldn’t possibly then ask them for a few thousand pounds for the privilege. But I missed the point of this one. Skin in the game is essential - it is not about the money, but understanding someone’s attitude to risk and their willingness to take on some small share of the pressure and responsibility with you. Startups are not for everyone, even those who initially like the idea can baulk a few months in when the reality of no cash, no glamour and no prospect of immediate success kick in. If people aren’t able or willing to risk a little money at the start, this probably isn’t the right path for them at this moment in time. As a founder, you simply won’t have the capacity or ability to carry non-committed people from the outset and succeed. So, even it is a few hundred pounds, your co-founders should buy into the risk and responsibility alongside you.
6. Protect the share cap table with your life
Don’t give away equity. Fortunately, I listened to this one, so when I needed to revisit the original co-founding team, we could do it amicably, fairly and without having to end the company. We had agreed goal based, vesting share option agreements (thank you Denis). But there are plenty of horror stories of joint equity owning co-founders in conflict because of real or perceived differences in effort - the founder disputes at Zipcar is one such tale.
No splitting the company 50/50 or equally amongst co-founder without very serious consideration and formal agreements that cover what happens if someone leaves or fails to pull their weight.
Consider share options, not full equity - especially for non-co-founders. And have good shareholder agreements from before day one. You really can’t come back to this later. If you only listen to one thing I say, do not go into business with anyone without a clear options/share agreements and articles - ever.
7. Don't wait until you have everything you need - show yourself you can execute
Maybe you need £10 million, or £2 million or £250k to achieve what you have in mind. Unless you have a substantial track record of success, you will not get this money until you have made some measurable progress. Only once you no longer need the money will you be sufficiently de-risked enough to get it!
So faced with that conundrum, waiting is not an option. If you’ve validated your idea at step one, you are ready to start somewhere. Break down what you are doing into small attainable chunks that prove to yourself and others that you are creating something people absolutely have to have. Define a step, deliver on that step, review how that worked and repeat. The next 2 points are part of this.
8. Create some kind of value for/revenue from your target customer in first 3 months
This is one of those learned the hard-way lesson, and also where the UK/European start-up scene differs markedly from the US. Unless you are heavily VC backed - in which case you probably have different challenges - you will need cash coming in. Revenue of any kind buys you the breathing space to build your business, rather than permanently be out raising money. Not only that, building something your customer pays for also avoids the trap of building a solution primarily for peers, fans and investors, rather than your end user.
You can't afforded to wait until you are funded, nor can you expect enterprises to buy air-ware. So how do you fund your build? You have to go for high impact, manageable wins that bring in revenue or prove compelling value, and fast. Realistically, I believe you need to think about your business as having a series of revenue models - the early stage model that gets some cash in and proves key metrics, then your scale out revenue streams connected to your growth plan.
9. Define and sweat your indicators of traction from the outset
You can’t manage what you don’t measure. Your time is so precious, you must focus on the right things. I firmly believe the right personal and business performance indicators are essential. Measure your traction, define robust metrics - and don't wait for potential investors to define them for you.
This will enable you to prioritize your time, money and energy - then at the right time will aid your investment case because you’ll be able to prove demand and how you can deliver.
10. Don't cede control too soon
Be very careful who you give your power to and when you do it - and never accidentally give control away at the beginning because you did not properly understand your Articles of Association, these are your rules of future engagement with your board and shareholders. It is perfectly possible for a founder to retain a significant shareholding and the CEO title but have very little strategic power or control, depending on how your board, voting rights, legals and investment terms are structured.
This is an important piece by Heidi Roizen on how founders can build a unicorn and still walk away with nothing. And that real-life documentary that is HBO's 'Silicon Valley' has the founder/CEO firing arc summed up nicely. The devil is always in the detail, and that detail is defined long in advance of it becoming of existential importance to you.
As a very collaborative person, comfortable in delegating decision-making, I have always been OK with the idea of owning 5% of a £100 million company rather than 100% of a £5 million one and a founder/CEO transition out at the right time is usually an important part of that. But I'd advise you keep a grip on the fundamentals of control during the very early stages - because your business and your exit may suffer if you are pushed out too soon, or are so overly restricted in key decisions that you can’t fully execute on your vision.
So here we go again...?
Being an entrepreneur has been the most rewarding experience of my life and I have no doubt that I am just about to get back on the horse and do it all over again. So keep those ideas and opportunities coming my way, give me a few years and I’ll let you know if these updated 'rules' helped!