Saturday, July 06, 2013

The bell-curve of to-do list productivity (and how to manage it)

I'm a big fan of to-do lists, but I've noticed something about them.  If I have too few to-dos, I'm not really productive because I'm still trying to keep all my tasks in my head.  If I have too many to-dos, I'm not really productive because I'm getting to far down in the weeds, and am unlikely to get to all of them.

If we chart to-dos on the X-axis and productivity on the Y-axis, this implies that to-do list productivity follows a bell curve, with a productivity peak around 5-7 tasks per day.  The question is, how should you trim your list to the optimal length?

In my own life, I find that two things help reduce my to-do list.

The first is to establish habits.  I don't bother putting things like "take the kids to karate class" or "cook dinner for the family" on my to-do list because I do it every week.  The same applies to routines at work.  Every startup operates on certain rhythms--daily deploys, weekly meetings.  Try to make them into habits that don't require to-dos.

The second is to schedule a task on to my calendar, where I can rely on the calendar reminder to tell me what to do and when to do it.  Once you schedule a task, you can stop thinking about it, and pick it up only when the time is right.

Whether you're using Asana, Trello, Basecamp, or (ahem) PBworks, managing the bell-curve of to-do list productivity can keep you and your startup on track.

Checklists make sure you ask the right questions

I recently finished reading/listening to Atul Gawande's "Checklist Manifesto," the 2009 bestseller about using checklists in medicine, construction, and air travel.  Gawande's book argues that the incredible complexity of modern endeavors such as building a $100 million skyscraper, flying a jumbo jet, or performing open heart surgery is best managed using simple checklists.

For example, administering antibiotics to a patient prior to surgery has been proven to dramatically reduce the risk of infection.  Despite this fact, modern surgery is so complex that this simple step is often forgotten, even in the world's greatest hospitals.  Making this critical step part of a checklists helps ensure that it happens.

Startup entrepreneurs might think that there is little they can learn from checklists.  After all, unlike Gawande's world of clearly defined problems, well-established techniques, and broad consensus on what to do, startups deal with the constant "fog of war."  Usually a startup is pioneering a new product, technology, or market (and sometimes all three at once) making the concept of an airline style checklist seem irrelevant.

But I think we need to take the broader picture.  While it's hard to build detailed, step-by-step checklists, I do think it is possible to adopt general checklists that can make sure you ask the right questions.

Recently, one of my startups presented their go-to-market plan.  The two founders had worked really hard on the plan, and delivered a detailed 30-minute presentation, complete with budgets and week-by-week timelines.  I listened to the plan, noted their hard work, and then asked, "Have you set a specific target or success criteria for each marketing program?"

They hadn't.

They had worked for 20-30 hours and thought of every detail except for the most important one.

These were smart founders.  One was working on his second startup, and the other had just finished her MBA.  But the complexity of building a business and the fog of war can cause any of us, no matter how smart or experienced, to skip over a small but vital step.

What kind of simple checklists might you adopt that could help your startup?

Why (it seems like) all VCs are assholes

There's one school of thought that tries to paint VCs as the enemy of the entrepreneur.  The VC-haters cite a litany of evidence, ranging from the tendency of VCs to turf out founders to the pressure they put on startups to scale prematurely.

There is no doubt that VCs--like the rest of us--make mistakes.  But the VC-haters are cherry-picking their evidence.  It's rare for VCs to fire founders who are successful, and I've yet to see a VC put a literal gun to an entrepreneur's head to scale up.  Back at my first company, I was pressured to grow faster, but it's my own fault for going along with advice that I didn't really trust.

Here's the real reason it seems like all VCs are assholes: They say no 99% of the time.  They have to, if they want to make money.

I am a humble angel investor, and I probably see about 500 pitches a year.  I invest tiny amounts of money in a small number of startups each year, which means I have to say no more than 99% of the time.

Now just imagine the plight of a real VC, who sees 5,000 pitches a year, and has to decide whether or not to invest millions of dollars.

It's not easy to say no to so many smart, persuasive, charismatic founders.  But it's how the model works.  And if you're an investor, you have to find some way to deal with the emotional fallout of being Dr. No.

Naive entrepreneurs might think that VCs delight in saying no.  Far from it.  It's much more fun to say yes, and to bask in the gratitude and regard of the entrepreneur.

Most of the behavior that entrepreneurs hate, like the tendency to avoid a firm "no," are the result of liking the entrepreneur too much.  We probably give more benefit of the doubt than is strictly good for us.  Of course, the experienced investor knows that a firm "No," along with a clearly articulated reason why, is the kindest way to help an entrepreneur.

You don't need to feel sorry for VCs--after all, they are getting paid large quantities of money to have their ass kissed all day--but you'll be better off mentally if you understand their situation and let go of any hard feelings.

You can't mass-produce startups

The rise of the startup accelerators has given many the impression that you can mass-produce startups.  500 Startups has invested in 450 companies.  Y Combinator has graduated 567 startups.  Every demo day, the startups and their pitches get more polished.

But the problem with mass production is that it causes entrepreneurs to focus on the things that are most easily standardized (e.g. pitches) and not on the things that really count (e.g. customers).

My pal Brendan Baker wrote a great Quora post on the top 5 Demo Day cliches:
http://b.qr.ae/16eWTUL

Brendan's post is both hilarious and depressing at the same time.  The startups at these demo days have been coached and polished to a fine sheen.  But here's the dirty little secret--all that polish only matters because the companies don't yet have traction.

If you can show a series of charts that illustrate how your startup is a) profitable and b) growing explosively, you don't need polish.

And generating traction is not something you can reduce to a formula or perfect with a couple of 1-hour coaching sessions.  Traction is the result of endless fiddling with the product, market, and message.  It comes from going down blind alleys and licking your wounds.

I'm a big fan of Tandem Entrepreneurs (and no, I don't have a financial stake in that organization).  They take on a handful of startups and work with them intensely (the startups all work in the same house as the Tandem team).  It's costly--10% of the common stock--but the value they provide is far greater, and I've steered a number of startups their way.

Tandem is an old fashioned workshop, where master craftsmen work on perfecting a couple of pieces of work.  It might not generate the volume or make as much money as a production line, but the products of the workshop have that old-fashioned quality.

It's easier to push the big picture to the frontlines than to feed details to headquarters

Most entrepreneurs are control freaks.  That's not a bad things.  When you're a 1- or 2-person company, and when you want to create a great product, you need the person in charge to really sweat the small stuff.

The problem arises as the organization increases in size.  Soon, other people are talking with customers, writing the code, and pitching for new business.  The "fingerspitzengef├╝hl" you once had as a founder gives way to an uneasy sense that you don't have all the information you need.

The natural reaction is to try to find better ways to collect the information you need.  Better reporting.  More customer visits.  These are all well and good, but they can't solve the fundamental problem:

The more a startup grows, the more information that bombards its boundaries on a daily basis.  Pretty soon, that information exceeds the ability of any human being to process and manage.

This doesn't stop plenty of founders from trying.  Witness the tale of Dish Network:
http://buswk.co/1aNw7Kn
"Although Dish had more than 100 people employed in its marketing department and reams of customer data to analyze, when it came time to figure out how much it was going to charge for satellite service, Ergen [Dish CEO Charlie Ergen] went into his office and came up with the final number alone. “It would be like the CEO of Kraft (KRFT) getting up in the morning and determining how much they were going to charge at retail for 12 slices of American cheese,” says Neuman. “It wasn’t that he didn’t invite input or share his thought process, because he did both. It’s just that he’d had his hands on the wheel for so long that he trusted his own judgment the best.”

What made it worse, Neuman says, is that Ergen was almost always right."
Through superhuman effort, Ergen manages to micromanage his enterprise, but at the cost of being labeled "the meanest company in America."

The fact is, it's easier to push the big picture to the frontlines so the people there can make the right decision, than it is to feed every last detail back to headquarters.

As the leader of your startup, your job isn't to make every decision; it's to make sure that you convey the strategy and values of your startup to every employee so they can make the right decisions.

You're not your audience

Judd Apatow is probably the most influential person in the movie industry today.  Thanks to a string of hits that he directed or produced, like Old School, Wedding Crashers, Superbad, and Bridesmaids, his brand of comedy has become the dominant school.

So given his success, you'd think that Apatow would rely on his billion-dollar comedy instincts and create movies for himself, right?

Wrong.

As it turns out, Apatow's approach is to screen material for audiences as soon as is humanly possible.  His philosophy is that he and the rest of the filmmakers are not the audience for the film.  They're too aware of the industry, and too close to the material.  Comedy is an art, not a science; the only way to tell if it works is to try it out on the people you want to laugh.

Sound familiar, startup entrepreneurs?

Over and over, the most successful people rely on feedback, not gut.  Whether it's Apatow and his test audiences or Chris Rock trying out material in clubs, these "geniuses" got to where they are with a ton of hard work, and by listening to the reactions of their audience.

This morning, I talked with an entrepreneur who has pivoted his company numerous times during the time I've been advising him.  He started off in media sharing, shifted to shopping, and is now doing a specialized kind of photo sharing, and is seeing traction.

Of course all of us would rather find the right model from the beginning, but if you're not lucky enough to find that product-market fit right away, you have to try different things.  And the only way to determine product-market fit is to put your product in front of an audience.

The reasonable startup valuation formula

It seems like it's unfashionable these days for investors to worry about startup valuations.  In my opinion, that kind of thinking is likely to lead to disaster for both investors and startups.

Far too many people make the mistake of focusing on relative valuation.  "This deal is a bargain in comparison to the other deals I see."  The right approach is to calculate a valuation based on fundamental principles.  Much like Warren Buffet, the intelligent investor focuses on how much a company is actually worth, not how much others are willing to pay.

To that end, I thought I'd share my simple heuristic for calculating a reasonable startup valuation:

Reasonable Valuation = (1/2 * Exit Value) / 3

Each of the terms has its purpose.

The 1/2 is to account for dilution.  Let's say a startup raises two VC rounds before an exit.  If the VCs take 30% of the company in each round, the original equity is sliced neatly in half (0.7 * 0.7 = 0.49).  You could even argue that 1/2 is too aggressive, and that it should really be 1/3.

Dividing by 3 is to account for the classic 3X cash-on-cash return benchmark.  Because angel and venture investments are risky and illiquid, they need to earn outstanding returns to justify the risk incurred.  The classic benchmark is being able to triple your money over the life of a fund, which is typically 7-10 years.  Again, this is aggressive; you'd need an even higher divisor to match a top quartile return.

But let's just treat those two terms as constants for now.  1/2 and 3 are good enough for estimation purposes, given the uncertainty associated with any startup.

The implication is that Reasonable Valuation (RV) is a function of Average Exit Value (AEV).

For example, if you think that the AEV is $20 million (and this is the average across all investments, successful and otherwise), then the RV = (1/2 * $20) / 3 = $3.3 million.

When valuations creep up to the $10 million range, the implication is that the *average* exit needs to be $60 million.  If you buy that, I've got a bridge I want to sell you.

Sunday, June 30, 2013

Y Combinator's Startup Math

Paul Graham has a great essay out in which he explains his view of both Y Combinator and the startup ecosystem.  As usual, it's a thoughtful essay with a lot of great points.  But what I'd like to focus on are the numbers he provided on YC's portfolio:
http://bit.ly/13kaUV5

"Y Combinator has now funded 564 startups including the current batch, which has 53. The total valuation of the 287 that have valuations (either by raising an equity round, getting acquired, or dying) is about $11.7 billion, and the 511 prior to the current batch have collectively raised about $1.7 billion."
The usual caveats apply; valuations are a guess at value--the eventual value might be much lower...or much higher.  Nearly half of the YC startups don't have a valuation, since they raised money via convertible note.  As a result, the $11.7 billion is probably an underestimate of the total value of YC's portfolio companies.  Nonetheless, it is probably a reasonable number, and unlikely to be off by an order of magnitude either way.

So what can we see from the numbers?

The average valuation across the 287 startups that have them is a little under $41 million.  If you look at all 564 startups that drops to a little under $21 million.  To avoid being accused of hype, I'll use $21 million as the figure for my calculations.

1) The average YC founder is a millionaire.  Assuming that the average founder has a 25% stake after co-founders and investors are taken into account, he or she is sitting on 25% of $21 million, or about $5.2 million in equity.  No wonder people are eager to get in!

(Note of course that this is the mean result; as Paul points out, most of that $11.7 billion comes from the big winners in the portfolio.  Take out the top 10 startups, and the remaining 554 startups are worth $3.1 billion, or about $5.6 million each.  But the same dynamic applies to any VC firm or angel investor, so it's not fair to reverse cherry-pick.)

2) YC is a money machine.  YC invests about $20,000 per company, and takes a 6% stake.  Even assuming dilution to 3% by follow-on rounds, their $11.3 million in seed funding for 564 startups is now worth a cool $351 million, for a 30X gain.  YC does a lot more for its startups than the average investor, so there's a lot of sweat equity involved, but I'd still take those numbers any day.

3) It's still tough to be an angel investor.  The average valuation at which investors get into YC companies is probably around $8 million (higher now, lower in the early days).  $21 million represents a better than 2:1 cash on cash return, but still trails the traditional 3X multiple that's considered a success in the venture business, considering the illiquidity and risk.  And as I've noted in the past, YC's portfolio is probably well above-average.

But, if you got into some of the big winners and kept investing during later rounds, you'd probably get a much better return; the key, as always, is to double down on the winners.

Warren Buffett and the Circle of Competence

Continuing my Sunday afternoon Buffettology, I want to highlight one of Warren Buffett's key principles, "The Circle of Competence".
http://bit.ly/19LxN7p

What Buffett means is that the size of the circle and the area it encloses is less important to success than understanding the clear boundaries of that circle.  As long as you know the area where you have a major competitive advantage, you can focus your efforts there and be successful.

For example, Buffett famously eschews tech investments, believing them outside his circle of competence.  He was offered the opportunity to be a founding investor at Intel, but declined.

When it comes to the Circle of Competence, Silicon Valley has exactly the opposite problem as Buffett.  We have a tendency to believe our circle of competence to be far larger than it actually is. One friend relayed a conversation she heard while at a school board meeting; a number of VCs-cum-parents wanted more decision-making power.  "This is what we do," said one General Partner/Mom, "We know how to ask the right questions."

Within the realm of high-tech startups, it is possible to be a process expert without being an expert on every technology.  However, you shouldn't conclude from this that the Silicon Valley process can be just as easily applied to other situations.  It's one hell of a hammer, and it's changed the world many times.  But that doesn't mean it can solve any problem.

Sometimes, naivete about one's circle of competence can be helpful; VCs famously like investing in young founders who don't know what isn't possible, because sometimes, they prove conventional wisdom wrong.  But being aware of your circle of competence is always useful; if you choose to venture outside it, you can do so knowingly, and with an experimental spirit.

Warren Buffett's Secret of Success

Warren Buffett's biography, "The Snowball", is a remarkable book that covers both his incredible career as an investor and businessman, as well as the details of his unusual personal life.  Buffett gave his biographer Alice Schroeder full access, with the proviso that she not be afraid to be hard on him.  Her portrait of Buffett doesn't shy away from his eccentricities and imperfections, or the tragedies in his family (as well as the combination of the two, such as his habit of finding ways to escape from his overbearing mother).  It's a great book that gives you the full sense of a great man's life.

But this is not a book review; rather, it is my take on Warren Buffett's secret of success.  Buffett made money on a wild array of investments, ranging from insurers (GEICO) to candy sellers (See's Candy).  The common thread was his desire to invest in CEOs whom he saw as kindred spirits, regardless of industry.

The Buffett formula boils down into three principles that are easier said than applied:

1) Make a good product.
2) Work hard.
3) Don't waste money.

Time and time again, Buffett's investments followed these three principles, and in most cases, they paid off handsomely.

You don't need to have Buffett as an investor to follow these principles, which I think are as relevant to startups as they are to furniture retailers.

Sadly, we tend to focus the most on point #2, lionizing the crazy hours that founders work.  We don't emphasize #1 and #3 enough, especially during boom times, when hype and fancy parties are taken to be more indicative of success than steady software releases and frugality.

Yet Buffett's career illustrates the long-term power of these principles, which Buffett himself would probably consider self-evident.  After all, if you make a good product, work hard, and don't waste money, you ought to be able to succeed in any industry.

To Eliminate Insecurity, Don't Pretend To Be Something You're Not

Imposter Syndrome is rampant in the startup world, even when people don't seek out the hype.  We love to elevate people to rockstar status, even if they don't want it.  In my own, modestly-successful life, my attempts to explain how little influence I have are generally taken as humblebrag attempts, rather than as an honest attempt to communicate.

If it's easy for people who don't seek the spotlight to have it turned upon them, it's far worse for those who do seek it.

The good news is that you can bask in the spotlight without ever creating a billion-dollar company or changing the world--we're willing to give you rockstar status on potential, rather than achievement.

The bad news is that achieving enough to justify rockstar status is damned hard, and it's a lot harder to be a has-been than a never-was.  As Harvey Dent said in "The Dark Knight," you either die a hero or live long enough to become the villain.  Jerry Yang can testify to the truth of that statement, and he actually created a billion-dollar company that employed tens of thousands of people.

Anyone will become insecure if they receive accolades they don't believe they deserve, but desperately want to retain.  To eliminate that insecurity, don't pretend to be something you're not.

If you don't erect a facade, you won't have to waste your energy defending it.  If you've accomplished great things, there's no need to worry about tooting your own horn.  If you haven't accomplished great things, you should focus your energy on doing something remarkable, rather than trying to prop up an inherently unstable and unsustainable reputation.