Tuesday, March 27, 2001

Thinking like a startup

To start a successful company in a down economy, you have to think like a startup.

This advice may seem absurd, but it is essential--and little followed.

Throughout history, successful entrepreneurs have followed a few simple rules like minimizing your costs and focusing fanatically on revenue-generating activities. These time-tested rules applied to any situation, from opening a lemonade stand to starting a legal practice.

During the Internet bubble, however, the new wave of "entrepreneurs" abandoned these rules, and started thinking like big companies.

Big companies are run differently from startups. Their style isn't necessarily better or worse (I may never want to work for a bi company, but there are plenty of people who would, and furthermore, would hate the startup existence), just adapted to their circumstances.

Big companies think strategically; startups think tactically.

A big company has to focus on big successes; small victories are mere rounding errors in the quarterly filings. That means placing bets on strategic initiatives and having the patience to wait for results. Hewlett-Packard spent billions over several years to become a PC powerhouse.

A startup has to focus on getting quick revenues. This often means settling for smaller but more readily attainable wins, and avoiding any projects with long payback periods. But having the flexibility to win small victories lets a startup try a lot of different things to experiment its way to a big success.

Big companies invest for the long term; startups minimize costs

A big company will make capital investments that reduce the variable costs of manufacturing a product with a 5-year life cycle.

A startup will manually process a transaction for 2 months to save the $1,000 it would cost to automate the process. A startup simply can't bet on being in the same business in 5 years--or even being in business. The best way to succeed is to minimize fixed costs and up front expenditures so that you maximize your option value.

Big companies believe what they read; startups believe in the cash register

A big company manager will often make decisions based on what she reads in the business press, or see on the news. The big company mentality says that the world is a relatively orderly place, and that the wise businessman listens to the experts.

The startup entrepreneur knows that there are no experts, that all the analysts are full of bullsh*t, and that she can only believe what she knows from experience.

A lot of people are more comfortable with the big company, big picture philosophy. Life is more reasonable, more manageable, more dignified. The new-look entrepreneurs thought this way, trained by top-tier business schools, consultancies, and investment banks.

Unfortunately, applying that philosophy to entrepreneurship practically guarantees disaster. An entrepreneur knows that life is unreasonable, unmanageable, and often unmentionable, and that it takes a streetfighter mentality to succeed.

So if you want to be an entrepreneur, look at the list above, and decide if you're willing to think like a startup.

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