Reflections on founding a company

This article is the end of a series about how to manage a small software start-up, the first article & overview is found here.

Team at UniteLabs before the Corona-Times

After reflecting on my journey of founding my first company, I have very mixed feelings about the experience. On the one hand, I learned a lot and had many moments of joyful adventure; on the other hand, the constant uncertainty and stress can really take their toll on you.

I am definitely thinking that also, in hindsight, I would embark again on this venture. Still, I am aware that I have a pretty massive Positivity Bias and want to share my thoughts on some overarching aspects of entrepreneurship.

Don’t start

If you need inspiring words, don’t do it — Elon Musk

There are many inspiring articles out there to encourage founding a company and why you should start one even if you don’t feel capable (a gem from Paul Graham). While I agree that it can be an excellent choice for some people, I think it helps to be aware of the potential downsides — and if these discourage you, great: Then maybe you shouldn’t start a company at this point. I don’t think that fairytales and wishful thinking help anyone; embrace reality and deal with it.

The potential downsides I wish I was more aware of were potential health issues, potential financial ruin, and constant uncertainty.

Health deterioration of founders is the most important issue, in my opinion. According to this study, the risk of mental health conditions amongst entrepreneurs seems to be at least 50% higher than amongst the average population. If you think you are immune to this risk, you are most likely kidding yourself.

I am (negatively) amazed by the hustle culture fortified by books like Ben Horowitz’s “The hard thing about hard things”, sharing phrases such as “The Struggle is where your guts boil so much that you feel like you are going to spit blood”. As if that’s what makes you “tough” and is necessary to lead a great company; If anyone sold a drug with similar side effects, they would land in prison. Be aware of this major risk, surround yourself with caring people, and better follow non-toxic people like Tobias Lutke.

Potential financial ruin is a topic I haven’t heard about in any startup guide, seminar, or coaching. I find this a grossly negligent attribute of “startup communication” that needs to be fixed. Everybody should be aware that “limited liability” doesn’t mean “excluded liability” and make prudent choices accordingly.

One example in Switzerland is that if your company can’t pay the social costs of your employees, the government will hold you personally liable. Other legal action can happen if you don’t declare your company bankrupt early enough — inform yourself about this topic! (As highlighted in the previous article)

Constant uncertainty of everything shutting down at any minute. Most friends founding companies underestimated this part; pretty much everybody is constantly “running out of money” — top runways I have heard have been 6–9 months.

You have to face this reality of startup life and still be able to plan long-term, as otherwise, you will feel like a constant treadmill and never follow a bigger mission that can inspire you and others. Also, don’t fall for the illusion that you will ever get rid of the financial worries, this question of a friend really hit hard in this regard: “Do you really think you will worry less when you grow, and there is even more money and people on the line?”.

There exist this famous saying that you will only regret the things you didn’t do — While this may be true for going out of your comfort zone, I consider it a dangerous piece of advice for really risky endeavors such as a startup. Be careful that you don’t end up broke and burned out; otherwise, you might regret the choice to start a company.

Are you ready?

Whatever problem you are trying to solve, I think you should be passionate enough about it to work on solutions for the next 5–10 years at least! Many people, including me, were not aware of the time needed to get a company off the ground — so think hard about what will make you stay for such a big part (or even most of) of your life.

Even if you are passionate enough about the problem, you should invest proper time to understand it well enough, some possibilities:

  • You are a customer of a solution, or you could be one in the near future
  • You had a job and worked in the customer environment
  • You work on projects with potential customers where you learn about the problems

Thinking you can solve a pain you don’t fully understand is a recipe for failure, in my opinion. You should also get a feeling of the timing of your endeavor, as it’s one of the biggest reasons for failure. If you are too early, maybe work in a job to improve relevant skills and network. If you are too late, perhaps it’s better to find something else entirely.

The Work

Source: Paul Graham via andrewchen.co

While you will be very excited at the start of your journey or at least should be, the novelty will wear off eventually. There will be long periods with only occasional moments of inspiration. Pretty much everyone enters this “trough of sorrow,” and you should set up good habits to get through.

Whenever you experience painful moments, and they will come, make sure to make space to properly reflect, as these moments can be the opportunity to break into the next chapter of your journey.

Because the work is such a rollercoaster and there are hundreds of different tasks to juggle simultaneously, you will make a lot of stupid mistakes in seemingly trivial matters. This is completely normal — it’s almost impossible to properly think through all actions in entirely disparate fields such as engineering and human resources.

As much as it sounds like a platitude: The most important thing is to have fun — take time for retreats into nature and team-building experiences. There is a certain magic in properly bonding with your team in joyful moments :-)

Fundraising

As mentioned in the first article, I don’t have too much experience in looking for investors — but of course, it’s a topic that will come up eventually for every entrepreneur, even if they decide against it.

Even though I know people who have been fundraising with just a concept, I am a strong proponent to first have a minimum viable product with some traction (users or sales) before pitching your company to investors. Once you have an idea that your product could solve the problem, think about the market dynamics and if outside money really makes sense; for example, in a winner-takes-it-all fast-moving market, you might need capital to not be left behind.

Realize that once you have outside investors, you will lose a lot of your independence and have to plan an exit strategy to eventually return the money. For most companies, the exit strategy is to get acquired by one of the “big guys”. Acquisitions usually come with terms to force the management team to stay for a while to receive the pay-out on a vested basis — depending on how much you believed in your mission, you might regret this sale later.

Alternatively, you can plan for slower growth and aim for enough profitability to buy out your investors as an exit strategy — check some successful examples.

However you go about it, don’t go blind into negotiations and already prepare a term sheet. Check for example the fair term sheet example from Wingman Ventures.

Photo by Austin Distel on Unsplash

Lean Startups

The best minds of my generation are thinking about how to make people click ads. That sucks. — Jeff Hammerbacher

I have a bone to pick. The concepts of the lean startup movement about producing quickly testable hypotheses and validating them with quickly built and cheap Minimal Viable Products (MVPs) are undoubtedly valuable. But I feel they lead many people to focus too much on pleasing customers as quickly as possible without thinking if their business makes “fundamental” sense such that it actually makes the world a better place and brings something novel to society.

I would urge every prospective founder to ask themselves if their product is really creating a positive impact; dopamine-driven feedback loops of Facebook and others or mountains of waste from electric scooters are rather unlikely to do so.

As written in this lovely review by HBR about the lean startup method, it leaves out the most important questions you should be asking about your business idea, such as your unique hypothesis on the new world created by the products & services you envision. In addition, focusing on fast feedback makes development prone to incremental improvements instead of working on disruptive innovations.

“Some people say, “Give the customers what they want.” But that’s not my approach. Our job is to figure out what they’re going to want before they do. — Steve Jobs

Another problem I see is the missing focus on the market dynamics of the industry you are entering. Will you be able to focus on a niche market and build a monopoly? (The Zero to One approach) Is the innovation an incremental improvement with incumbent competitors, or does it have disruptive potential? (Understand innovation dynamics from the innovator’s solution) You should have a hypothesis about the customer’s needs and the market involving potential solutions — and this hypothesis should run deeper than just a list of competitors on a lean canvas.

Closing

Many people I know have a pretty deep personal identification with the business they are running — if something fails, it feels like you are the one failing. This is probably natural and fine up to a point. Still, I also advise you to regularly think about what the company represents and how it works as an organizational organism without you.

After leaving my own company, I had the intense desire to reflect on all the different aspects we discussed for hours within the team over the years and wanted to share especially those perspectives that I haven’t read a lot in the many startup articles and books out there.

I found the best form to reflect via writing these articles, and it helped me immensely to understand my own viewpoints on company forming activities. I hope they are helpful to fellow humans out there in whatever capacity, and I would love any kind of feedback on any aspect 🙂

Please also feel free to reach out if you are curious about any viewpoint or experience that I shared. In my following writings, I will focus more on the future mission I have defined for myself — cheers!