Although I’ve co-founded a handful of companies, I didn’t really create my first startup till seven years ago. The first one was Crazy Egg, which helps make websites more useable. And it wasn’t till four and a half years ago till I co-founded my first venture-backed startup KISSmetrics.
As they say, “the startup life is a roller coaster with ups and downs”. So, if you are looking to start one, I hope this blog post will help you.
Download this cheat sheet of 11 things you should know before starting your first startup.
Here are 11 things I wish I knew before starting my first startup:
Lesson #1: Investors love to make excuses on why they don’t want to invest
When we first started pitching Crazy Egg, no investor would write us a check. It wasn’t their fault as my co-founder and I sucked at pitching. They all had different reasons why they didn’t want to invest. After getting over 20 “No’s” from investors, I realized something was off. Each one would sugarcoat the “No” and tell it to you in a way that would make them come off nice.
I don’t blame them as no investor wants a bad reputation. But one thing I learned as an entrepreneur is that when an investor tells you “No”, you should ask what you could have done differently to improve your pitch. By asking this, you will get feedback you can use to improve your overall pitch and increase your odds of raising money.
Lesson #2: Raising a lot of money doesn’t mean you’ll get a high salary
Our seed round for KISSmetrics was a million bucks, and our series A was three million. When we raised our seed round, my co-founder and I were ecstatic as it was the first time we raised outside capital. We were over the moon that we could take a salary. We were even hoping that we could take a nice six-figure salary.
Our lead investor True Ventures was very flexible and didn’t restrict us on how much of a salary we could take. They explained, however, that if we took high salaries, it would increase the overall burn. This means the company would have to raise more money faster, which would cause more dilution for my co-founder and me.
Due to this, we decided to take only a $5,000 a month salary… even after we raised our three million dollar round.
The reason I say we took a $5,000 monthly salary instead of $60,000 a year is that we couldn’t always pay ourselves each month as we had to conserve cash when things didn’t work out the way we wanted. In the long run, everything worked out, but we wouldn’t have been around if we didn’t penny pinch… not just with our salaries, but with everything.
If you are going to raise capital, don’t be dumb by paying yourself a lot of money. That will just cause you to have to raise more money, which means you will own less of your own company.
Lesson #3: Options is the quickest way to dilute yourself
Especially in the Bay area, employees and advisors are notoriously known for asking for a quarter of a percent to a half a percent in equity. By all means, good employees deserve a lot of shares as they are getting paid less to work for you than they would have had they worked for Google or Facebook.
We made the mistake when we signed on a ton of advisors and gave many of them what they wanted early on. This caused us to use up our option pool faster than we would have otherwise, so when we raised our next round, we had to refresh our options pool to a full 10%. This caused my co-founder and me to get diluted more than we would have liked. This wasn’t the fault of our advisors as they provided a ton of value, but we should have done a better job negotiating.
Treat your options as if they are gold. Hold onto them so you can give them to your key employees. If an advisor wants a lot of shares, make sure he/she gives you a written contract on what he/she is going to provide you with for those shares.
Also keep in mind that if an advisor has a big personal brand, the advisor probably won’t have much time to help you. So, get a written contract on what that person is going to provide you with for the shares. (This is only necessary if the advisor is requesting a lot of shares.)
Lesson #4: 90% of startup networking events are a waste of time
What you learn at most startup networking events is the same stuff you can learn online. The only difference is startup events typically cost money. There are a few networking events that are worth attending, but most aren’t.
Look at attendee lists before you register for conferences or networking events. Make sure there are either potential clients or people who are a lot smarter than you are at these events. If you are the one teaching the room on how to run a company, something is off. You can only learn if people who are smarter than you are at the event.
If you want to attend good networking events, look for the ones that are intimate and invite only. It’s hard to get into those events, but when you do, it will be worth it. Those are the type of events that will allow you to create new friendships and business partnerships.
Lesson #5: Live in San Francisco, but don’t build for it
Although I don’t live in San Francisco, I’m there a lot. My business partner lives just outside of the city. The one mistake both of us made is that we built a business based on the feedback we got from individuals within the tech sector.
This may seem wise at first because you are getting feedback from really smart people, but you need to take a step back and realize they are probably not your ideal customers. Startup people don’t like paying for stuff, and they make up a very small portion of the world’s population.
When building a product or service, you need to consider all of the people who live outside the Bay area… like someone who may live in Lincoln, Nebraska. Remember, the majority of the world doesn’t live in the tech epicenter.
But just because your customers may not live in San Francisco, it doesn’t mean that you shouldn’t. You’ll find more tech investors in the Bay area than anywhere else. They tend to invest in people they know and believe in. You won’t be able to get to know them as well unless you live close to them.
Lesson #6: It’s never too early to start making money
When you raise money for the first time, you have less of an urgency to create a revenue stream for your startup. When you take on a seed or series A round, you end up spending more time building a product versus getting paying customers. On the other hand, if you were using your personal savings to build your company, you would try to break even ASAP.
The biggest mistake we made at KISSmetrics to date was that we didn’t start selling early enough. We focused on creating a great product, reaching product market fit… and all of those other things startups do. But even before you have product market fit or even a working product, you can start selling.
It’s been more than a year since our VP of Sales joined the company, and within six months of him joining, our revenue started to shoot up and to the right. It takes a while for anyone, no matter how good they are at sales, to figure out how to sell your product or create a revenue stream from it.
We should have started the sales process before we even finished creating our product because not only would it have helped bring money to reduce our burn, but it would also allow us to learn from paying customers faster.
Lesson #7: Experienced employees aren’t better than hungry ones
When your startup has a few million bucks in the bank, you have a lot of flexibility when it comes to hiring. Because of this, you will look for the smartest person out there to hire…you know, the person with a ton of experience who has done what you want to do… such as executives.
What I quickly learned is that although those high paid people did well in their last job, it doesn’t mean they will do well with your company. In many cases, they do much better in big corporate environments. What they lack is the ability to move fast and do so without relying on others.
Those corporate executives are used to farming out the work instead of figuring out how to do things on their own. When a startup is young, these are the people who I recommend you stay away from. Instead, you want to hire hungry individuals who haven’t gotten that big break in their career yet. These are the ones who will fight and do whatever it takes to succeed.
Later on, you can hire those corporate executives, but you don’t need them at the beginning.
Lesson #8: Your social circle defines you
When you were a kid, did you parents always tell you to hang out with the smart kids? I know mine did… they didn’t want me to hang out with kids who were dumb or misbehaved as they feared it would rub off on me.
The same goes with entrepreneurship. It wasn’t till later in my career that I realized that your peers have a big impact on how well you will do. If your friends are smart entrepreneurs who are successful, the environment will push you to do better, and you will develop faster as an entrepreneur.
For example, my business partner hangs out with a ton of product development people and engineers. He loves it as it helps him develop his skills when it comes to building products. Conversely, I hang out with a lot of business/finance guys, which has helped me understand things like how to raise money or structure a buyout.
Neither my business partner nor I started to hang out with people who could help us evolve until we were well into our first startup. If we both knew this ahead of time, we would have moved out of Orange County a long time ago.
You should move to a location where you can surround yourself with people who will help you get to where you want to be in life. At the same time, make sure you reciprocate and help them out whenever you can.
Lesson #9: The grass is always greener on the other side
If you are coming from the corporate world, you probably read TechCrunch and see how young kids are raising millions of dollars and selling their company to Facebook for a billion bucks.
If you are in the startup world, you always hear about people getting paid well into the six figures with perks, such as free food, working at large companies. And best of all, they don’t have a ton of stress because they only have to work from 9 to 5.
The reality is, neither of the above two scenarios are accurate. People in the startup world work their butts off; they don’t get paid much; and it’s rare that they ever succeed. People in the corporate world, don’t always get paid a lot, and many of them work 70-hour weeks even though they are only getting paid to work 40 hours a week.
Don’t become an entrepreneur because you want the entrepreneurial lifestyle. And don’t work in the corporate world because you want an easy job. Do what you love and solve problems while you are doing it.
I first became an entrepreneur because I wanted to be rich. Sure, I do pretty well financially, but I failed a lot along the way. I now am an entrepreneur because I love the challenge of solving problems that I am passionate about. But if I took my work ethic and just went straight into the corporate world, I probably would have done well financially.
Don’t pick a career path like I did just for the money. The startup world isn’t a place where most people get rich. Luckily it worked out for me, but if I were you, I wouldn’t count on luck. If you want to solve a problem because you are passionate about it, become an entrepreneur for that reason, and not for the money. Money is a side effect of solving a problem that enough people are facing.
Lesson #10: Stick to what you know
Warren Buffett is notoriously known for investing in companies that he understands. He is good friends with people like Bill Gates, but he wouldn’t dare to make an investment in Microsoft because he doesn’t understand the tech industry.
I used to start companies and invest in things I was really passionate about. In most cases, I didn’t understand what I was getting into. But the one thing I didn’t learn fast enough is that passion isn’t enough to create a successful business. Had I stuck with creating businesses I understood, I would have been much further in my startup.
For example, with KISSmetrics, my co-founder and I went through many iterations of the product until we had something people were interested in paying for. One of our previous versions of the product focused on solving problems for online gaming companies.
During that time, Facebook games were becoming really popular, but there was one big issue. Neither my business partner nor I understood much about games as we never created one. On the other hand, our current product solves problems that marketers are facing, which my business partner and I understand really well as we used to own a marketing firm. If you look at the business, our growth is exploding because we know what we are doing.
If you want to increase your odds of succeeding, follow Buffett’s advice by sticking to what you know.
Lesson #11: Successful people don’t always know what’s best
When I started out, I used to get mentorship from other successful entrepreneurs. Throughout the years, their advice was helpful, and without them, I wouldn’t be where I am today.
The one thing that I kept screwing up is not questioning advice I got from these mentors. If they said something, I followed it because… who am I to question someone who has sold their business for 100 million dollars?
Mentors are great at giving general business advice and guiding you along, but getting specific industry advice isn’t always a smart idea unless that person has a lot of knowledge about your industry.
Just because someone is successful doesn’t mean he/she knows what is best for your business. Heck, someone who was successful told us at KISSmetrics to go after the social gaming market… but that didn’t work out well for us. And it wasn’t that person’s fault… it was our fault for not questioning the advice.
In the end, we pivoted and found our own direction based on the needs of our customers, which worked out well for us. Our mentors have been great and helped us out a lot. We just had to learn how to ask them the right questions.
I hope this blog post didn’t stop you from taking the plunge into entrepreneurship. I myself love it, and I don’t think I could do anything else. You just need to have realistic expectations when taking the plunge. It’s not realistic to think that you will raise a lot of money, create an awesome company, and sell it to Facebook for a billion bucks.
So, what do you think about starting up a company? Is there anything you wish you knew before taking the plunge?