Risk and the Entrepreneur

“Don’t get into a spaceship with a madman. Hasn’t anybody ever told you that?” – Dr. Who

A startup is a temporary organization designed to validate a business model, to roughly quote Steve Blank.  Entrepreneurs seek out problems to solve, preferably problems that affect millions of people.  The biggest opportunities come from problems no one else has been able to solve, especially if they are really hard problems that cost a lot of time and money.

Here the thing; if you are playing in this space, it means you are trying to do something no one has done before.  There are no history, no data, and no trend charts.  There are no patterns and therefore, no prediction of the future can be calculated.  All the market research money can buy cannot predict even a 50% chance of success.  If you don’t believe that, look at how many new TV pilots fail… 65% over the last few years. (screenrant.com)

“Customers will tell you what they want but they won’t tell you what they’ll buy” (or watch on TV). – Chuck Witkowski

So now you come up with a new idea that’s going to change the world.  No one knows you and you haven’t done this before.  And, you need a lot of money you don’t have.  Plus there are statistics:  Only 2 out of 100 startups seeking funding will get it and of those, only 10% provide any substantial return on the investment.  50% of startups fail within 5 years.

Everyone will evaluate a startup, like any other business, in terms of risk, whether it’s calculated or perceived.  Your stakeholders will do it.  Your investors will do it.  Your new employees will do it.  Your spouse will do it.  Even your first customers (innovators and early adopters) are defined by their ability to take on risk.

Banks won’t touch a startup.  They typically require two years of financial statements that show statistically that you can generate enough profit to pay back the loan.  But for low capitalized businesses (no cash or hard assets) even this is not enough.  They usually require what’s called a personal guaranty, which means the founders will pay back the loan personally if the business fails.  Hence the saying:

“Banks only lend money when you don’t need it.”

Banks simply do not tolerate risk.  Investors on the other hand will tolerate some risk but they charge a hefty price, usually a relatively large portion of company equity.  Entrepreneurs are always surprised and usually offended to learn that an investor requires as much as 40-50% equity or more in return for a seed stage investment.  It’s the price they charge to offset your risk.

Here is the bottom line:  Anything in life carries risk, either known or unknown.  The difference is that entrepreneurs confront and embrace this risk while others blindly carry on oblivious to the fact they could loose their livelihood with no notice.

So how do you deal with risk?

“Entrepreneurs are no less risk averse than anyone else.  The difference is an entrepreneur identifies his or her risk and faces it head on.”

The entrepreneur’s job is to identify risks and craft a credible narrative around how you are going to manage them.  The story you tell others about your company must put at ease their innate sensitivity toward risk.  In every investor’s mind are the questions, “what about this?” or “what happens if…?”  If you can anticipate these questions in advance and bake into your narrative simple answers as a part of the story, you can begin to put at ease many concerns so that you can focus on the fundamentals of the business opportunity rather than dance around silly questions about market size or customer validation.

Better yet, confront the major elements of risk head on.  In future posts, we’ll discuss categories and frameworks to guide your thinking but for now, spend some time confronting the brutal facts about your business.  What are the things that are likely to kill you and what are you going to do about it?  Confronting the inevitability of risk in your business shows a focus on execution and a level of maturity in the CEO who has a plan to pull it off. You cannot eliminate risk.  The best you can hope for is to identify it and manage it.



The Mom Test: How Can Something So Simple Be So Hard?

The Mom Test CoverAll the entrepreneur gurus and those of us who aspire would all agree that one of the most important things a startup founder can do early is to “know thy customer”.  This comes in a lot of different names: Market Validation, Value Proposition, Customer Value, Customer Discovery, MVP.  That’s what we do.  We give names to stuff that is really very simple so we can sound like experts, or we write books and blogs and we have to sound credible.

Then someone comes along and blows it all out of the water by covering a concept in its very essence, so basically that we slap our own foreheads and utter in jealous disgust, “why didn’t I think of that?”

So it is with Rob Fitzpatrick’s The Mom Test.

In western culture, and especially in American culture, we are raised to be individuals with our own unique ideas and dreams.  Other more traditional cultures have a framework for how one is to behave and how destiny is mapped based on class or some other “box”.

So we have them.  Ideas I mean…  And it is only natural that we seek validation for Like Buttonour ideas and creativity, which is the basis for our prolific social network culture.  Those that love us give us validation and technology has made it easy.  All you have to do is click “like” or retweet and BOOM, you’re validated.  In a way, we’ve become the self-esteem generation with participation trophies and everyone’s a winner.

People will lie to you by telling you what they think you want to hear.  Since we want to hear good things, our brains are programmed to get them.  “Here’s my great idea.  Do you like it?”  “Well of course I do.”

But, as Rob Fitzpatrick states honestly but brutally, “People stop lying when you ask them for money.”

In order to have a business, you have to have a customer.  Customers have money they exchange for stuff that delights them or eases their pain.  You don’t get to decide for them.

The Mom Test is a simple formula for getting to the truth:

  1. Ask people about their problems, instead of talking about your solutions
  2. Ask them about specifics of the past rather than opinions of the future
  3. Talk less, listen more.

If you get nothing else from this post or the book itself, get this:

Talk Less Listen More

Here are the top 12 Things I took away from The Mom Test:

  1. It’s your job to find the truth
  2. Opinions are worthless, the future is a lie
  3. Some problems just don’t matter
  4. People want to help.  Give them an excuse.
  5. You get three big questions.  Chose them carefully.
  6. The purpose of the conversation is to get data
  7. Look for emotional signals
  8. Keep it casual
  9. Meetings are either succeed or fail.  Successful leads to “what’s next.”
  10. Compliments cost nothing so they are worth nothing
  11. It’s not real until you write it down
  12. Stop only when you stop hearing new stuff

For some reason, we are afraid to talk to actual people about about their problems and when we do, we go into manic sales mode about how great our ideas are.  If you want to know what your customers need and want, ask them about their experience.  Then shut up and write down everything.

Entrepreneurial Entropy

I have this diagram on my white board that I need to erase.  It’s taking up a lot of space.  It looks like a chemical reaction. It was drawn in a fit of inspiration after I watched a science show about the expanding universe. Entropy is a word that was coined to describe the second law of thermodynamics, which basically says that energy in a closed system, will dissipate toward some state of equilibrium.  It is why the universe is expanding but it’s also why ice melts and bodies decompose.

The timing of the this epiphany came during a “period of transition” in our community as there are now several organizations that support entrepreneurs; all striving for recognition, relevance… and funding.  So many people competing with each other to do good.  So much energy consumed maintaining the status quo.  It’s like our collective energy is dissipating toward some state of equilibrium… ENTROPY!  It’s a cloud that represents the community with everything in its place, working efficiently, and well measured.  Then something happens to change things and all of the sudden a lot of energy gets spent to achieve the next state of equilibrium. Equilibrium consumes energy.  Or rather, it dissipates it.

Entrepreneurial Entropy

This process is painful.  Innovation is sacrificed for efficiency and a well ordered system.  A lot of money is spent on resources to manage the system.  And perhaps most frustrating, attention is poured into efforts not focused on why you’re in business in the first place.

If this is truly an example of Entropy, then, at least philosophically, you can’t do anything about it.  It’s a law of the universe. It is the way of things.

If this is true, then this reaction is predictable and therefore can be “managed”.  Status quo can be the impetus for change.  Change can be embraced as opportunity.  It can be a time for the innovators to get out and make the way for change.  The key then is to learn to recognize the equilibrium in the system and look for way to focus energy on a new and better solution.

This is the role of the innovator.  He or she is the one that gets out. Ahead of the status quo. Seeing what’s next and going to find it.  To be the catalyst for the next upheaval.  To sense a state of equilibrium and realize a lot of energy could be pointed in a different direction to solve a real problem.  But unlike the prophet who merely points the way, the innovator hoists the pack, grabs the walking stick and finds the way.  While the entropic crowd worries about maintaining itself, the innovator discovers a way to provide value to a willing customer.  And when this happens, the innovator has become an entrepreneur.


The Last iPod – End of an Era

This is the inaugural post of the relaunch of OOTG.  Those that have heard my sermons on making pitches or anything I have ever said about value proposition will know how important the iPod is to me as an example of a great product.  It is fitting I launch this journal with a tribute to what for me may be the greatest product of all time.

I have owned 4 iPods.  My last one is a generation 5 and the audio quit working. Plus, it ONLY holds 64 GB and I have nearly 80 GB of music in iTunes.  As Steve Jobs put would it, I can no longer put my musical library in my pocket.  So I had planned to get a new one for Christmas: G6 Classic – 160 GB.  That would hold me for a while.

Three days ago, I saw a blog post that Apple was discontinuing the iPod Classic.  So I went out at lunch to pick one up at the local BestBuy.  There were none in the locked cabinet and the sales guy was confused because “they were there yesterday”.  After a few minutes he explained that he could order one in a week.  No need, I can do that.  Amazon was already selling them at 60% over list.  Something was wrong!

Next stop, The Apple Store.  I LOVE the Apple store but that’s another post for another time.  The sales person said they had one left.  They had pulled them off the shelf and were sending them back to the home office.  But she went and got it for me.  Here it is:


As I was reveling in the fact that I had the very last iPod in Knoxville, it hit me that the original release of the iPod was in the fall of 2001, October 23 to be exact. Thirteen years was a pretty good run for a cutting edge product that changed the world.  It’s that point I wish to commemorate in this post.  I have a peculiar love affair with the iPod because it serves as the object lesson for so many snippets of entrepreneurship education.

Minimally Viable Product – The iPod was not the first digital music player and it was arguably not the best.  Sony owned the market with the Walkman. The mechanical scroll wheel didn’t work very well. The battery didn’t last and you couldn’t replace it.  It only worked with Firewire and the Windows version of iTunes wasn’t released for another 9 months.  It had 2 things.  First, it had a hard drive memory which let you put “!,000 songs in your pocket.” Second, it was beautiful.  The ear buds were white.  You could see a person way down the concourse in the airport with white wires coming out of her head and you knew, “…that chick has an iPod.  She’s cool!”  Within two years, Apple owned 90% of the market in hard drive players and 70% of the total market for MP3 players.  TWO YEARS!!!

Forerunner of the Smartphone – No one can argue the impact of the smartphone on our society.  It has changed everything.  And the iPod Touch was the launch pad for the iPhone.  They were both released in 2007 with mostly identical hardware and operating systems.  The iPod functionality has been a part of the iPhone ever since, although to my disappointment, limited storage (hence my need for 160 GB Classic).

Perfect Pitch – Anytime I teach techniques on making a funding pitch, I always start with the YouTube video of Steve Jobs’ release of the iPod in 2001.  It has most if not all of the essential elements of an effective presentation… for ANYTHING, but specifically an entrepreneurial funding pitch: Story telling, problem/solution, competitive landscape, simplicity, understated passion, building to the climax of the story, and so on.

I’m going to have to update all my presentations.  Pretty soon, the college kids won’t know what an iPod is and I’ll look more like the old guy I really am. Old hip products by definition, can’t be hip. But it’s going to be hard because there is nothing else like it and there may never be again.  A product that changed the world.

Build a bridge and get over it – The iPod was a product everyone could own.  AT 70% market share, nobody cared about Windows or OSX, PC’s or Macs.  It just didn’t matter anymore. There was that brief and embarrassing period with the Zune but it didn’t last long.  iPod introduced Apple to the rest of us.  A recent survey put Apple MacBooks at 48% with college students; a dead heat with laptop PC’s and growing.  Apple knows something most consumer products and services have long forgotten.  Don’t just make products customers like.  Make products they will LOVE using.  It’s as much about the user experience as it is the end result.  Something about the journey being more important than the destination…

So now as I finish up this post on my MacBook Pro, listening to the Eagles Desperado album on my new but obsolete iPod 6G Classic,  I am contemplating getting the new iPhone 6 next week. In a few minutes, I’m going to go upstairs and check Twitter on my iPad.  I am unapologetic and proudly all-in Apple.

Thanks Steve, wherever you are, for sending us a great experience!