Jun 8, 2010
In 2008 I left Portugal and BCG to come to MIT Sloan and join the MBA class of 2010. One of my goals coming to Sloan? To learn about entrepreneurship, absorbing experiences shared by the existing entrepreneurial community. I believe I learned a few lessons about it from different sources, and since I haven’t seen a similar compilation posted anywhere, I wanted to share them with whoever might be interested. I know I would have been two years ago…
When I started to organize all the tips, lessons, and patterns I kept hearing from all the interesting people I met during these last two years, I realized they all fell in 4 different categories regarding different sections/challenges in entrepreneurship: Market, Financials, People, and Product. Therefore, I decided to use them as a framework for the lessons shared below.
A1. Think about what is the core of the business idea, and why will you do it better than everyone else
You need to be solving an existing problem better than anyone else. This competitive advantage will help you to naturally succeed. If you are better than others, sooner or later you will win the battle against them.
The first time I heard Howard Anderson – MIT professor and a successful entrepreneur – say this, I thought he was referring to a radio station! In reality, this means What’s In It For Me? For all stakeholders involved, you have to add value! This way, the incentives are aligned for everyone around your venture, and it’s easier to overcome the natural inertia to change.
A3. Focus on one particular segment and product first
Think about it: today people are overwhelmed by information. With the span of attention going down, you want to make it as easy as possible for someone to understand what are you trying to do. Also, you have limited resources as a startup. Therefore you should focus on getting one product in one segment out of the door, and take the first chance you get to excel. You need to prove yourself first! Generally this means you should aim for the highest market share in a niche that can easily grow to other segments and products.
A4. Diversify / go for another product launch or market segment after your first success
This should be the natural step following the last lesson. Now that you succeeded with your first product, the field is open to continue with a pipeline of products that can leverage on your experience and client base to continue growing.
B1. Think big and change the world: go for a $50M potential business in 3-5y, otherwise it might not worth the effort
While talking to entrepreneurs either for an E&I class (the Entrepreneurship and Innovation track that exist in MIT’s MBA curriculum), or local events for entrepreneurs, I noticed they all had a passion to do something big. If you want to create an impact, why wouldn’t you want to be big? You can contribute to change the world, and it all starts with this mindset. This will also motivate you even more, and it compares better with the opportunity cost.
B2. Low fixed-costs is important!
I have to say that, when I was first talking to VCs last summer to see what kind of opportunities existed in interesting portfolio companies, I didn’t expect a big salary cut compared to other internships. When one VC told me that he didn’t know of a startup that would easily pay what I thought was more than reasonable for an internship, it made me rethink what an entrepreneur should earn. I came to the conclusion that the founders should start earning as little as possible to manage the scarce resources/cash available. In fact, I even think that some startups’ CEOs earn too much. It seems the tradeoff is made along a spectrum from bootstrapping (earning almost nothing but keeping all of the control and upside), to having VC money and reducing the personal/professional risk (good salary, but less control of the startup, and less compensation on an exit). Incubators and programs such as YCombinator from Paul Graham and TechStars program from the Foundry Group help to create the right mindset by providing minimal funding and a structured path to product launch.
B3. Watch your “burn rate” and follow cash flow statements carefully!
I’ve heard this time and time again: A majority of startup fail because they run out of cash. The money is limited, and if you don’t have a close eye on it, you will quickly be in trouble. The last place you want to be is raising money when running out of cash. First, it might be too late by the time you get funding. Second, if you are able to get it, the investor has a huge negotiation power which will be translated into ugly term sheets for the entrepreneur.
B4. Go for a high margin business
Creating a company should be exciting, with all dynamic variables in the organization changing, and decisions made with little information. You’re sure to make mistakes, and high margin businesses, besides being interesting because of potential returns, also create a cushion for these mistakes.
C1. Have at least 3 founders on the team
In 2008, Ed Roberts, Chairman of the Entrepreneurship Center at MIT, presented a very interesting study on MIT startups’ (get it here). One of the conclusions was a positive correlation between the number of founders and the rate of success of the companies! To me, it makes sense: if the founders have a good dynamic going, they will motivate each other, solidifying the commitment and cheap labor the venture needs. Although I agree with this rule of thumb, I think that if this is the only thing you’re missing, go ahead and found your company. I worked for a year on a startup idea with only one other person.
C2. Understand the commitment: next 5-10y counting money, while all Investment banking/Consulting/etc friends are making at least 6 digits a year
I really think this is an important lesson. If one is not prepared to understand this, then I believe there will be more frustration and a higher temptation to quit.
C3. Startups are all about the ability to execute perfectly, rather than constantly overanalyzing the market
After talking to several entrepreneurs I concluded that success with startups is all about execution. Act before having all the facts, as startup analyses are not the same as for big corporate companies.
C4. You need founders with different complementing skills
There are no perfect people. Some have communication skills as their strength, others are outstanding developers and love to code, etc. I don’t know anyone who does everything right. It seems natural to me that having all of these skills working together is important.
C5. Don’t give fancy titles to new employees and founders easily
When you try to give a job to a potential employee, it is easier to give a nice job title – eg. VP of Marketing. Don’t do it without carefully thinking about it. Is the person really capable of having that title when the startup grows? It’s easier to attract top talent with better job title, however, what it the cost of doing this? Can you demote the person if you need to bring someone more experienced on board to take care of an expanded venture at a later stage? Additionally, don’t give CxO titles easily, including to founders, without understanding if that person is willing to be demoted in the future. The title “Founder” seems great to me and it’s flexible enough as well!
C6. Don’t forget to have vesting for founders’ equity
It’s important to split equity, but don’t be afraid to put it off a bit until roles are solidified. More importantly: create a vesting schedule. In one of the group projects I did at MIT, we interviewed several finalist companies from the last 3 years of the 100k Business Plan Competition. One of their biggest regrets? Not having thought about vesting! In several cases, a founder left the company right in the beginning, taking a huge stake of the equity. When the team needed to bring someone else on board, there was little equity left to give without big dilution. The incentives have to be aligned. If someone leaves during the first year, they should definitely get not all their equity. Naturally, VCs put this on the term sheets they offer to companies, but entrepreneurs should do this at the earliest stages.
D1. Prefer a product to a services business
Services are hard to scale, products are not. You will get more economies of scale with the latter, possibly translating to a higher margin business and a more rapid expansion.
D2. Get feedback, as often and as early as possible
Keep the client close. You have to understand what the client needs, and act accordingly. The earlier you know this, the better. Make the client part of the development process.
D3. Start selling in the vaporware stage, but make sure you don’t commit to deliver the next day
As soon as you launch your startup, you should begin the selling process. Sometimes the sales cycle can take awhile, and if you can get a client to commit, do it. This will give you less risk, but also means that you have to manage expectations flawlessly. Make sure product promises are achievable! Of course, when selling, a picture is worth a thousand words, and a prototype makes selling much easier
D4. Go through Quality Assurance (QA) / testing before you ship
When you start shipping your product, it means that you did a good job getting a sale. This means you agreed on *one* opportunity to show what you’re worth. Don’t waste it by sending something that works poorly. It brings your credibility down. And this means not only credibility with your client, but in the market as a whole. A bad product has word of mouth working faster than you would believe. Under promise and over deliver!
D5. If you have to cut features to ship on time, do it and prioritize
When developing a new product in a startup, you have so much flexibility and creativity that you might think about all possible features. Nevertheless, at some point, you just have to ship. Remember, R&D is an investment, but a sale brings the money home! As an example just think of the first generation iPhone. The timing of launch was great, as there was nothing similar in the market. However, it came out without the latest mobile network technology (ie. no 3G). It was a hit, but if it was launched later, there was a chance that the market wouldn’t be as receptive…
D6. Be obsessed about the product!
I read this statement recently on Brad Feld’s blog (a successful entrepreneur and VC, and a MIT alumnus), and it immediately resonated with me. He says that successful entrepreneurs he knows are completely focused on the product, love to talk about it, and probably dreaming about it every night.
And there you have it. These are the entrepreneurship lessons I’m keeping with me. I am amazed by the impact these two years at MIT had on the way I see the world. The amount of different experiences I had clearly made me grow personally and professionally: working in Malaysia for a small startup for G-lab, a summer internship starting a boutique luxury hotel chain in the Caribbean, becoming part of the diverse and wonderful 2010 class and the entrepreneurial community at MIT / Cambridge, and traveling all over the world, from Asia to South America. I am now a different person. Hopefully, better prepared for the future. All this, while having fun! What more could I ask for?
What about my own company? With all this enthusiasm about entrepreneurship, shouldn’t I be working on a startup by now? Well, I worked on one for a year, but decided not to pursue it. Why? I had expected proof points that I felt I needed to overcome my opportunity cost, and we were not able to get there in time. The main hurdle was having a customer working with us by January of this year, which we weren’t able to secure. In the end, I’m returning to consulting, but have started to think about other ideas to work on in the future.
My advice to incoming MBAs that want to become entrepreneurs? Start early and focus on it during breaks (IAP, Spring break, etc), saving money and getting closer to important milestones. That being said, I have no regrets whatsoever. This a tradeoff I am glad I didn’t fully make, as traveling was very important for my experience. Coming to Sloan will give you a ton of options, just choose the best ones for you.
Ricardo Diz is a proud MIT Sloan MBA class of 2010 graduate and a Guest Writer for the MIT Entrepreneurship Review