The Importance of Talent

Arguably, one of the most crucial, if not the most crucial decision you have to make as a start-up founder is choosing who you surround yourself with. And knowing how to hire is one of the most difficult parts of the job.

Traditionally, companies emphasize first-order competency in their hiring process. They look at the specific experience and skills you have. Are you good with Excel; can you code in Javascript; are you familiar with Healthcare; have you brought a product to market? Although these big companies will claim to look for "smart people" with "potential", their main imperative is to fill in a specific position with a specific candidate. They are not looking for the best, and why should they? They just need someone who can fill the role with minimal risk and friction. Eric Paley encapsulates this concept well in The Curve of Talent. "The large company corporate world is filled with C players. [...] C performers struggle to competently fill their role, but are somewhat productive with sufficient coaching. [...] Large companies thrive on inertia and the core job description of a large company employee is to keep that inertia going and do nothing to screw it up." 

As much as this type of thinking works for large companies, it can lead to costly mistakes for start-ups. Start-ups are constantly on the edge of failure and cannot afford to have reasonably competent individuals at their core - people who deliver only the bare minimum. The truism "If there's any doubt, there's no doubt." is particularly applicable here. What they need are individuals with strong second-order competency - those who can learn quickly, adapt and roll with the punches without losing their resolve.
If you think about return on investment as a curve over time, you will realize that those with simply experience have a higher Y-intercept - they are more valuable at the time of hiring, but their competency is "maxed out". On the contrary, a candidate with greater potential but less relevant experience has a steeper curve - he starts lower but will, not too far down the line, become far more valuable to the company.

Don't hire based on Y-intercept.

(Taken from Professor Ousterhout's class at Stanford).

These individuals are much harder to find, because their potential is not written black on white on their resume. These are hires you can only appraise by sitting down and engaging with, rather than putting them through a formulaic interview process. Not only that, they are very selective about who they choose to work with. So keep looking for that candidate that will give your team a boost, and don't settle.

The compounding return on hiring decisions doesn't only apply to your core team, but all the people who are involved in helping your venture in some shape or form: lawyers, accountants, contractors and even advisers. In these situations, the better options are often the pricier ones, but well worth the cost. Their increased competency and better decision-making will have an outsized effect on the fate of your start-up.
Unless you can't afford it, you are better off with a lawyer who is twice is expensive if you think they are at least twice as good as your other options. Even more so for a top-notch developer who can get the job done 10x as fast and take your product to the next level. A caveat to my point is that the more expensive options are not always the best ones - as with everything you buy, the price tag is reflective of quality only to a certain degree, the rest is up to your better judgement.

The bottom line is, you should always be selective about who you work with, even if that means taking a little longer to find the right person.

Market vs. Technological Risk

We've observed the proliferation of social, mobile and gaming start-ups in the last few years, and how some of them managed to hit the 'lottery ticket' and make large exits, while most others crash and burn. It is my opinion that most start-ups in those spaces are doomed to failure due to the intense competitiveness of those markets. Or at the very least unable to build a long term business model by focusing purely on user growth.


A better way of understanding the current problem in the start-up ecosystem is to think about market risk vs. technological risk. The risk involved in creating a new company is inevitably a mixture of those two, and it is interesting to think about where on the spectrum a given start-up will fall.

Many of the over-valued and 'pump and dump' start-ups in the social, e-commerce and mobile space are faced with the challenge of extreme market risk. Although they are not necessarily tackling a difficult problem from a technological standpoint, the intense competition with other similar start-ups and uncertainty when it comes to user adoption and monetization make them highly volatile. And their outcome is less in the hands of the founders, thus the label of 'lottery ticket'.
The only ones that succeed are those that manage to create their own specific market (ex: Twitter) or brand themselves exceptionally (ex: Zappos). 
For that reason, many start-up will often try to label themselves as unique or different, and narrow their market, despite that not being the case. They will tell intersection stories: LinkedIn ∩ Artists ∩ Online Gallery. Peter Thiel has a good example of this type of start-up:
"Starting a new South Indian food restaurant on Castro Street ... is, a hard way to make money. It’s a big, competitive market. But when you focus on your one or two differentiating factors, it’s easy to convince yourself that it’s not."
There is a rush to get into the 'trendy' markets and get a product off the ground quickly, pivot as many times as necessary and get accelerated ad nauseum, losing sight of any real long term goal. Even though the initial execution might be easier, at the end of the day the same amount of sweat and tears is involved than with an ambitious, long-term focused idea.


Contrast that with major tech companies like Google or Apple. During their inception, most of the risk involved coming up with the right technology to address the market needs, and pulling it off. They were not worried about how unique their market is, how many users they need to get in order to get to the next stage of funding, or how they will monetize, because their product was fundamentally novel, useful and difficult to pull off. They are shielding themselves from a hyper-competitive market with a high barrier to entry.
An extreme example of technological risk is SpaceX. The market risk is virtually nonexistent - they will find clients if they can create a relatively cheap and reliable rocket - but getting there involves considerable effort and risk.
Tackling difficult and concrete problems reduces the importance of market risk (albeit not completely, since product/market fit is always paramount) and puts more emphasis on the type of risk that founders have control over: addressing specific customer needs, improving the quality of the product.
As Paul Grahams says:
"That scariness makes ambitious ideas doubly valuable. In addition to their intrinsic value, they're like undervalued stocks in the sense that there's less demand for them among founders. If you pick an ambitious idea, you'll have less competition, because everyone else will have been frightened off by the challenges involved."


I believe that if more start-ups where tackling difficult problems, rather than going for what is 'trendy' and easily executable, we would not be in a climate of market risk and facing the Series A crunch that we are facing today.

Wait, so why are we doing this?

The question of 'why' is perhaps the most interesting in the context of start-up creation. There are obvious and easy explanations as to what would motivate someone to grind long hours and endure the emotional pain of getting a new venture off the ground. I am talking about financial reward and social recognition.
Upon closer inspection, these are actually very poor motivators for creating a company. The numbers show that the return on time spent is quite low, given that your odds of success - a high growth company with a valuation upwards of several million - are probably around 1 in 100. The above average scenario of a few million dollar exit would probably represent a few hundred thousand payout for the founders, due to equity dilution from successive rounds of financing. If you do the math in terms of a yearly salary, we are probably looking at a reasonably well paid entry-level job.
Of course this analysis only holds for your average entrepreneurs. If you are a Steve Jobs or a Jeff Bezos, your odds of success might be a lot closer to 50%, in which case the financial reward is very tangible.
What about fame? There is no doubt that on some level everyone has the desire to bask in the glory of their achievements. It is human nature. However the desire for fame is short-lasting fuel for an entrepreneur; soon enough things will get hard, failure will seem likely, and the only thread keeping you going will be a deep commitment to the vision and the product. You can read TechCrunch and feel a sudden rush of desire to become an 'overnight successes'. But truth is, by the time these hot start-ups actually make it to the big stage, their trajectory seems more like a painstaking marathon than an overnight success.

As much as the desire to stand out and be recognized as an original is compelling, I believe the main motivation for all great innovators is the desire to change society. It sounds obvious at first, but in fact (in my opinion) very few people are fundamentally motivated by innovation and discovery in the same way that it consumes entrepreneurs (and scientists). Just like a researcher will stay up all night solving a minute problem in order to reach that state of 'truth', a entrepreneur will do the same to implement a puzzle piece of their vision.
When I see photos of SpaceX successfully docking the Space Station, or Google Driverless cars, I get chills and it reminds me of why the schlep of creating a start-up is all worthwhile. There is an incredible driving force in creation and innovation, one that transcends day to day life and aspirations. This is especially true in a society where 'incrementalism' and complacency is the norm.

The other major factor for me (and I think many entrepreneurs) is independence and empowerment. There nothing quite like the ability to call the shots and implement your own vision from the top down. I have always disliked authority, because I consistently end up being in disagreement with the implicit rules of societal dogma and red tape of corporate management. The desire for innovation is also an expression of dissatisfaction with the status quo.
I am in a constant state of questioning, whether it concerns social phenomena:
- Why do people hold on so tightly to aspects of 'traditional values' and religion that are irrational and counter-productive to society? 
- Why are people so easily swayed by the vicariousness of reality TV and pop culture press?

... technology:
- How could this packaging be better engineered?
- Why would I use poor legacy software when there are far better alternatives?
- While access to information was the major challenge of the 20th century, is information processing and curation that of the 21st?

... or processes in place:
- Why is the US rail system still so poor?
- Why does x, y, z require so much paperwork?
- Why are companies so bent on having the work day start at 9am?

I realized the only way I could get answers to these questions, or some control over the processes that govern professional life, was to take my career into my own hands and figure out which problems I want to solve and how. In that way entrepreneurship becomes less of a job and more of a vocation, even a lifestyle.

This sums up what I believe drives entrepreneurship on a fundamental level, based on my observations and self-evaluation. Beyond that, I expect every entrepreneur has their own driving force(s) shaped from their respective life experiences.

- Nathanael

The Nature of Successful Start-ups

This is a widely discussed question in the start-up community, and one with no straightforward answer. And for good reason, otherwise entrepreneurship wouldn't be so hard, and the success rate wouldn't be so low! Start-ups follow the reverse of the Anna Karenina principle: all successful companies are different, since they figured out how to solve a problem in their unique ways; but all failed companies do so for the same reasons. This also explains why it is hard to define deterministic factors of success; at best, they are probabilistic. There is no magic sauce, or as Thiel puts it, success is not a statistically measurable event, since every example is unique and you can't analyze a sample size of 1.


According to Paul Graham, successful founders "live in the future and build what seems interesting". For Peter Thiel, it's about uncovering secrets, finding problems that everyone else has overlooked.
Let me preamble by defining what I mean by success, in negative terms: I do not mean a start-up that exits on a 2M acquisition; I also do not mean a start-up that derives just enough revenue to keep the lights on.  Start-up success follows a power law: a few companies make it huge, and the rest form the tail end of the distribution. For that reason, the average return of a start-up is much more noteworthy than the median one, since most start-ups are doomed to failure or anorexic growth.

So what ARE positive predictors? One approach to answering this difficult question, and by no means the best one, is to look at a start-up along five dimensions:
1. Team
2. Problem-solving
3. Timing
4. Difficulty/Barrier to entry
5. Defined market

Necessary factors

A strong team

Creating a start-up is a challenging, iterative process. There are so many ways your execution can go wrong, whether it be the business model is not valid, the product does not meet expectations or there is internal conflict within the team. Having a team composed of talented, motivated individuals who get along with each other will guarantee that no matter what change of plans occur, you will find a way to iterate and jump back into the game. Most highly regarded incubators, angels and VCs pay close attention to the team and consider it the most important factor in whether they should invest. Some go as far as to say, it doesn't matter if the company changes it's business model completely, as long as there is a superstar team leading it. Make sure your team is well integrated (otherwise communication problems arise which can lead to implosion) and composed of A players.

Problem Solving

This seems like a reasonably easy concept to understand, but many start-ups fail to address this basic requirement: create a product/service that solves people's problem. In other words, create something people NEED, rather than creating something people may want. How many consumer apps have been DOA (dead on arrival) because they attempt to address a superfluous issue or commoditized area (games, social)?
The most natural way that entrepreneurs discover that need is by noticing it themselves in their daily life. They look to solve a problem they themselves encountered, which provides some evidence that the problem does indeed exist. 
At the end of the day, the majority of customers will only pay for what they need, and this is especially true in an environment where most platforms operate on a 'free trial' or 'freemium' model.

Timing

This is probably the most tricky aspect of start-up creation. If you consider innovation as a series of successive waves, your job as an entrepreneur is to catch that wave.
If you attempt too early, you may not have the (hardware and software) tools necessary to implement your vision, or the consumers may not be ready to use it (it is too 'avant-garde'). It is not so important to be the first mover into a market as it is to be the last mover. Facebook is a perfect illustration of this phenomena. The product itself was not novel - Friendster had come and gone years before - but the combination of right timing and a focus on a niche user base (colleges) propelled Facebook into massive growth. In 2005, every college student had a laptop and access to internet, making user adoption inherently viral.
The more obvious way to fail is to come into a market too late. I believe this is what is happening with social/mobile start-ups right now: the market is so saturated, the odds are stacked against you from the get-go. You will have a very hard time displacing the major players.

Other important (but not necessary) factors

Difficulty

PayPal, Google, Apple, SpaceX... All these are examples of companies that tackled difficult problems and did not shy away in the face of complexity in order to establish themselves as the leader in their field. The issue with many start-ups these days is that they want to solve easy problems or develop simple platforms - not simple in the sense of the implementation, as every product should strive for simplicity, but rather simple in the amount of effort required to get it off the ground - exposing themselves to cutthroat competition and extreme time-sensitivity to roll out their product. Sure, you could attempt to build the new gold standard in social or task management apps, but considering thousands of engineers could beat you to it at any moment, you are setting yourself up for an uphill battle.
Rather, you should probably aim to solve a difficult problem, become an expert in it and put a great deal of distance between you and any potential copycats. A very good take on this issue is Graham's short on 'Schlep Blindness'.
Approaching a challenging problem will not only put a high barrier to entry for any other start-ups vying to break into your market, but it will also make the learning process more worthwhile.

Defined market

Many start-ups like to pose themselves as the intersection of multiple markets, with no clear delineation of their relevant market. They try to narrow their market and tell intersection stories: "my company is LinkedIn meets designers meets online fashion". This sounds like a great concept in theory, but will this company be truly competing in a niche market? Or is it actually competing against LinkedIn and all online retail websites out there? Founders must be careful to think about their relevant market and indirect competitors even if their business model seems unique - otherwise, they may end up creating a product nobody will use.

- Nathanael