Shana tova u metukah! it’s the first day of the Jewish New Year, and as we prepare for Yom Kippur, the day of atonement, it is a time of self reflection, and resolutions.
The past year was a wild ride for startups and founders, giving a whole new meaning to the ”rollercoaster” aspect of being an entrepreneur. What should we keep and what should we change?
1. Embrace a frugal mindset: cashflow is king
A combination of competition for top talent and an effort to bring employees back to the office drove startups in Israel to throw extravagant parties and all-inclusive retreats abroad. The press took notice, especially since just a few months later startups were laying off employees en-masse to cut costs. In times of uncertainty, be like Scrooge McDuck!
2. Sustainable growth: Prioritise sales efficiency over growth at all costs
We’re moving from ‘Blitzscaling’ to ‘precision weapons’ when it comes to growth. Startups must grow to be successful, but the recent months have shown that simply throwing money at growth is not the solution. Watch your CAC < LTV and focus on ways to make the growth sustainable. This post by Rex Woodbury of Index Ventures has some interesting insights for consumer businesses on this topic.
Sustainability doesn’t end in responsible growth. It can mean addressing the UN’s SDGs (Sustainable Development Goals) and thinking about the impact of your startup on wider society and the planet as a whole.
For more about forecasting growth in these uncertain times, check out Sequoia’s “Adapting to Endure” presentations published in May 2022.
3. Remember that speed is the secret weapon of startups
“Before product-market fit… just care about speed of iteration according to your customer feedback. So in terms of hiring, get people that can help you build the product faster… anything that minimizes the time between observing a need or a problem, and the execution or the fix for it.”
Patrick Collison, self-made billionaire founder of Stripe
There aren’t many structural advantages for a startup compared to a large company, and speed is a rare exception. Corporates and large companies may have many more resources, but they move slow and may take a while to react to new challenges and opportunities. Use agility to your advantage and make speed a team priority.
4. Put your users first: pretend that your customers have a seat at the table when you design your product roadmap
“Your most unhappy customers are your greatest source of learning.”
Bill Gates, founder of Microsoft
From all the mistakes a startup can make, not focusing on the user can be a fatal one. It doesn’t matter if your company is B2B or B2C, as Y Combinator puts it, you need to build stuff people want, and obsess about making it as user friendly, friction free and smooth as possible.
For other mistakes to avoid as a product manager, check out my recent Linkedin post on the top 10 mistakes product managers make and read everything you can by Marty Cagan.
5. ValuatIon should be a function of value, not ego.
Kawasaki’s Law of Pre-Money Valuation: for every full-time engineer, add $500,000; for every full-time M.B.A., subtract $250,000.
Guy Kawasaki, author
As I recently shared in my post on the 32 Israeli Centaurs, the rare breed of SaaS companies that reached $100 million in ARR, there are now over 1,000 unicorns globally. But valuations, especially those in the private market, are not necessarily a predictor of growth/ success. Many startups that raised money in 2021 on inflated valuations that were detached from their actual value, are struggling to raise up-rounds and face difficult choices these days: down rounds, early sellout or failing altogether.
A good way to think about valuation in seed/pre-seed is to reverse engineer the next round. A founder should know (more or less) what milestones she can achieve with the current round (in terms of product, revenue, etc). As most rounds are aimed to last 12-24 months, If the founder believes the company would struggle to justify a 2-3x increase in valuation in by the time of the next round (typically at least 6 months before the end of the runway), it’s a sign it might be over priced. Build the company on fundamentals.
6. Early hires are super important: check for skills, motivation and cultural fit.
“I’m a firm believer that most people who do great things are doing them for the first time. Returning to my theory of hiring, I’d rather have someone all fired up to do something for the first time than someone who’s done it before and isn’t that excited to do it again. You rarely go wrong giving someone who is high potential the shot.”
You’ve heard it a million times: what do VCs care about when evaluating a startup? Team, product, market. What matters most? team. Because the product and market can likely change in the search for product market fit. Choosing a co-founder, and hiring the early employees is key to building a successful company.
Every job interview sums up in 3 checks:
- Skills – does the candidate have the right skills and strengths to do well in their role?
- Motivation – will they love the role? what makes them get up in the morning?
- Fit – can we work well together? More about culture and how to create it below.
As a small company, you may feel that you have a disadvantage compared to the tech giants who have bigger offices, more perks, etc. While they can outspend you, a startup offers real ownership (equity/options), more impact per employee, and the chance to change the world/industry.
7. Leverage your board and investors: a good board is a discussion, not a lecture
2021 gave us plenty of examples for bad governance in both startups and venture capital. Some of the most popular TV shows included Bad blood, We Crashed and Super Pumped. In many cases, the failures (financially, morally etc) happened because of a charismatic founder and not enough governance.
The investors and board can be a huge asset if leveraged correctly. A board meeting should be a discussion, or even a white board session, where the founder and management team can have a sounding board on strategy and tactics.
To better manage your board, err on the side of sending regular updates, being honest about highlights and lowlights and explicit about where you can use help.
On best practices for structuring and managing your board, check out Eden’s post “No board member ever got fired for not doing anything” and Reid Hoffman’s “Building a great startup board“.
Big boards can be counter productive, so aim to keep the board small (up to 5 people) in early stage companies.
8. Create a positive, constructive team culture, and prioritise diversity
“Because your culture is how your company makes decisions when you’re not there. It’s the set of assumptions your employees use to resolve the problems they face every day. It’s how they behave when no one is looking. If you don’t methodically set your culture, then two-thirds of it will end up being accidental, and the rest will be a mistake.”
? Ben Horowitz, What You Do Is Who You Are: How to Create Your Business Culture
Culture dictates how people behave and what values they hold dear when they aren’t being watched. Culture is not the perks you give in the office like free pizza or weekly Yoga classes. It’s the values you stand for and the impact you want to make.
Be intentional about building your team’s culture – it will not only pay dividends in the long run, but also help you filter for fit in hiring and improve employee retention.
It’s important to mention, that to be a good leader, and create a good culture, a founder should take care of themselves and their employees first. I covered this in my VC Cafe post “5 ways to cope with hard times as a startup founder“.
9. You can be successful and be a fierce competitor, without being an asshole
The image of Roger Federer with Rafael Nadal, holding hands, laughing and crying together, after years of rivalry on the court shows why sport is so awesome. As a startup founder you have to be competitive by nature, but competition is not always a bad thing. It can be a motivator to keep innovating, it can validate your market, and it can push you to build the best company.
This tweet (translated to English below) resonated with me:
Yesterday I had dinner with a competitor’s CEO. One of the most important lessons I learned is the need for maturity in managing work relations with competitors. They can be someone you’ll do everything for forever, but they’re still the closest people to understanding the things on your desk. Respect them, learn from them and always appreciate competitors who are good people.
Eynat Guez, founder and CEO of Papaya Global
10. Stay optimistic
“Optimism is a strategy for making a better future. Because unless you believe that the future can be better, you are unlikely to step up and take responsibility for making it so.”
– Noam Chomsky
We are living through trying times. The ‘easy money’ that was characteristic of the venture market in 2021 has gone away, and venture activity contracted 30% globally in Q2 2022 alone. Then there’s the war in the Ukraine, rising energy prices, inflation, climate change, pandemic and who knows what other curve balls will be thrown our way.
But there are still many reasons to be optimistic as I mentioned in post on VC Cafe back in July. It sounds like a cliche, but it’s true: the best companies were built during down cycles. The best times are yet to come and the world still (maybe more than ever) needs innovation and tech to solve challenges.
I’ll take the opportunity to wish readers of this blog a Shana Tova u Metukah ??. We are all work in progress. Never stop learning!