Peachpit: Congratulations on the upcoming publication of The Smarter Startup: A Better Approach to Online Business for Entrepreneurs by you and your co-author, Sonya Zhang. Why did you decide to write this book?
Neal Cabage: Thank you, we're both excited about the release of the book.
The book came as a result of obsessively studying online products, trying to figure out why some succeed and others don't. My second startup was not as successful as the first, despite doing a lot of things right, and that experience left me perplexed. I realized there must be some big picture wisdom that could have better guided my efforts, which would have increased my odds of success, but I didn't know what that was. Rather than trying to build another startup based upon an arbitrary decision of what to build, I was inspired to instead try to find the answer to my question.
A couple years later, I had figured out a few of the issues, but was still perplexed by a few others. I began to discuss this with Sonya, who introduced me to a number of academic models that immediately filled some of the holes in my theories. Together we realized that we had built a fairly good understanding of what was missing from my past efforts, and wanted to share what we had put together.
Peachpit: Who is this book for? Do I need to already have an idea for a startup for this book to help me?
Neal: We cover many of the topics that first time founders need to be aware of, but we also go significantly deeper on important topics. For example, in the first chapter we discuss whether entrepreneurship is really a good match for every personality, assuming someone is considering whether to create a startup. But we also go quite deep into discussing how to use analytics to optimize user flows and conversion rates, which is a more advanced topic. Our goal was to address the topic with both scope and depth. For the first timer, they may find it’s beneficial to read the book a couple times, peeling back the layers along the way. For someone more experienced, some of the more nuanced concepts may immediately resonate.
Peachpit: How is your book different from other startup books?
Neal: Many books (and conferences) are full of hyperbole and generalities, with stories of success beyond image, with minimal time or money invested. While these books may inspire action, they're short on details, and set readers up for failure in many respects. Our goal was to do exactly the opposite. We are providing insights around some of the more difficult challenges that are critical to understand, in order to increase your odds of success. We have introduced several new insights and frameworks, as well as a few known academic models to accomplish these goals.
Peachpit: How has the Internet affected people’s ability to start a business? What business rules are different than the rules of 30 years ago?
Neal: The Internet has certainly changed the dynamic of starting a business and finding your place in the market. The cost of starting a business is considerably lower today with cost effective cloud-based solutions and easy access to information. Sourcing products from remote regions of the world and reaching specifically segmented customers is all much more efficient now than before. But there is a challenging side effect to all of this efficiency as well; because it is so easy to start an online business today, a lot of people are doing it. The challenge is no longer building a functional business; it is breaking through the noise of excess competition.
Peachpit: Based on your experience, what key ingredients help a startup be successful?
Neal: Timing. In fact, there are many key ingredients that become increasingly important as a market matures, but if you can enter at the right time, you can temporarily neutralize the other factors and give yourself a real head start that can impact your success trajectory more than any thing else. If your timing for entry is less than ideal, then you're going to need to spend money to catch up in terms of product quality and features, and pay close attention to your competitive positioning, to find differentiation in the market. This has a compound effect of increasing up-front capital risk and decreasing potential customer base. It can be a viable method to insert yourself into the market if it’s not already too far gone, but it is an inferior position to be in compared to being early to market.
Peachpit: If you could give one piece of advice to someone interested in creating a startup, what would it be?
Neal: Focus on helping other people, and everything else will fall into place. Too many business-minded entrepreneurs focus on making money, which causes the focus to shift away from creating value, toward profit margins and opportunity. Engineers meanwhile often focus on developing a cool product they want to build, without first determining if there is a need for the product. The solution, as simple as it sounds, is to shift your focus back to helping your customers. If you can develop something of value to your customers, they will generally reward you by buying your product. Train your focus on how to bring the greatest value to people and you’ll automatically be positioning yourself for success, without getting lost in all of the details.
Peachpit: What is the biggest mistake most startups make?
Neal: There are generally two types of startup founders - the hacker and the hustler. The hacker is the engineer or product guy who loves building a great product but typically fails on marketing and business development. Conversely there is the hustler who is good at creating business relationships but falls short on building a compelling product and longer term planning.
These perspectives also have the potential to drive dysfunctional biases toward what type of product (or service) to build. The hacker is naturally inclined toward products that would be fun to build and would augment their technical skills, but this supply-driven approach can cause the development of a product the market does not value. The hustler meanwhile is naturally drawn to markets where there is a lot of action and potential for high volume of business, but this inclination will naturally put them too late into the market maturity cycle, which can be dangerous when you begin to consider the inevitable challenges of commoditization.
Peachpit: What are the advantages and disadvantages in developing a start-up at a co-working location and/or startup accelerator?
Neal: Many startups benefit from having a team of co-founders rather than a solo entrepreneur driving everything. Co-working spaces provide an excellent opportunity for founders to network and potentially meet a future entrepreneurial partner. Or even if the entrepreneur wants to work solo, it at least provides a community for entrepreneurial support and insights. Working alone can be great for getting things done sometimes, but when you hit those corners and need a fresh perspective, joining a co-working office can be a great help.
Technology accelerators are a different animal. They are typically 3-6 month long programs that founders must apply to participate in. When accepted, they offer co-working space, cash, and mentorship to help get the startup going. At the end of most accelerator programs, a demo day is held where the program cohorts present their work to investors, hoping to raise additional funds to build their business. The benefits of joining a program like this can be significant, as the network connections and introductions to investors can really help a company to succeed if they are trying to break into a competitive or fast-moving market. But they are not for everyone--accelerators tend to focus on consumer online products which have a potential for high payoff, but also are high risk and less likely to work out for the entrepreneur. Services based businesses are generally not appropriate for an accelerator program. These programs are also highly biased toward young entrepreneurs who have little family or career obligations and are willing and able to work 60-80 hours per week, with little to no income during the program to get off the ground. So the programs can be a definite opportunity for some startups, but they are clearly not designed to work for everyone.
Peachpit: What's the best way to secure funding for a startup?
Neal: A tech accelerator can be an excellent conduit to provide those introductions to investors, but there are other ways to go about it. Regardless, you need to have a solid prototype to demonstrate for investors, and some indication of having discovered product/market fit that you are ready to execute on. If you're at that point, then it is time to begin networking. Sign up for AngelList and start attending the important social gatherings in your local tech hub. Much of the funding opportunities are only available through closed networks, so mingling and becoming known within a strong startup community is going to be important. An alternative for those who do not have access to these networking opportunities is social financing, which has also become increasingly popular recently, with sites like KickStarter providing meaningful early stage capital.
Peachpit: What’s the worst mistake you made as an entrepreneur, and how can others avoid it?
Neal: With my last startup, I made the mistake of entering a mature market because it seemed like an exiting business to be in. I was at least savvy enough to have done a fair amount of market research, and I identified an opportunity that seemed quite ripe at the time, so I jumped in whole-heartedly. What I did not realize, however, was that market opportunity was already peaking and market consolidation happened shortly after. I watched the cost of customer acquisition triple in less than a year, and soon even segmentation of that market was beginning to look saturated. I am a firm believer that timing is the most critical aspect of entrepreneurship to master after my own experience. If you can get timing right, you can do a lot of things wrong and still have a decent shot at succeeding.
Peachpit: Do you think that there is a particular set of traits that make one a good entrepreneur vs. a bad one?
Neal: Openness is an under-appreciated attribute that is key to seeing opportunity. In the first chapter of the book, we discuss research that illustrates how difficult it is to see opportunity, when you are too focused on solving other problems--a phenomenon described by psychologists as inattention. This is partly a personality trait, as some are naturally more curious and inclined to seek another way rather than accepting the status quo.
Peachpit: Which entrepreneur do you most admire and why?
Neal: I really admire that Jeff Bezos stayed true to his vision of building Amazon.com and continued to heavily invest into infrastructure and operations during the 2001 dot-com implosion, while everyone else was scaling back and going into survival mode, including many on his board. It was a bold move that gave Amazon a chance to get several years ahead of the competition and create a value chain that is unmatched by any competitors. By keeping faith and staying focused on the longer term, he secured the future of his company by taking such a bold competitive move.
Peachpit: To quote your research in chapter 1, “the information industry had the lowest 2- and 4-year survival rates, 63 percent and 38 percent, respectively”. Given these dismal numbers, under what circumstances would you encourage anyone to go for a web startup?
Neal: With higher risk comes higher reward. Besides, much of the risk can be mitigated with knowledge and planning. Some businesses are also inherently higher stakes than others. In entrepreneurship, failure is just part of the process, and need not be a death knell. So long as you are learning and growing from your failures and do not give up or make any terribly foolish decisions along the way, there's still a good chance you will eventually find success.
Peachpit: In chapter two you talk about how many successful companies were not the initial innovators, but “fast followers.” Can you talk more about that idea and why it’s a good one for other entrepreneurs to model?
Neal: The best opportunities come from being early in a market. The danger, however, is being too early in the market, before it is proven and before the market is convinced of the need for this new thing you are selling. If you choose a market and it never takes off, you can waste a lot of your resources chasing something that never materializes. Or even if it does, it could still take a couple years before sufficient demand is there to turn a profit, and you could exhaust your funds before you get there. For this reason, it can be an effective strategy to instead keep a close eye on trends and jump onto opportunity the instant you begin to see market adoption.
Often times the first to market is already exhausted by the time they've arrived. A new competitor can come in, quickly identify what is working, and generate a breakthrough iteration on the original competitor's idea, providing the market with a superior option, just as momentum is building. In this way, the small business allows someone else to do market validation for them. Conversely, if you go through the doldrums of discovering that elusive market opportunity and finally find it, you have to expect there are competitors waiting in the darkness, ready to pounce as soon as your idea shows any momentum. For these reasons, it is never wise for a startup to try to originate new ideas or opportunities. Leave that sort of bold innovation for those better funded than yourself, and instead, focus on executing better than your competition and speed to market, once you have identified an early stage and validated market opportunity.
Peachpit: No doubt you’ve seen all sorts of start ups. Can you name one where you thought, “That will never work,” but it ended up succeeding? Why did it succeed?
Neal: Twitter. I was first exposed to Twitter in 2006 at a conference and heard a number of early innovators talk about how addictive it was. I tried it out and it seemed fun, but I quickly forgot about it. I didn't see a compelling need for the service or a clear business model. I suppose I was trying to interpret it as a communication service and failed to see it as entertainment media. I made the same mistake (and was frustrated by) MySpace in 2006. These are examples, by the way, of why you should know your audience well. I've rarely used either of these services and thus I do not fully understand why people use them. Consequently, I would be unable to create a compelling competitor.