By Garrett Fisher
March 15, 2013
When isolating advice to someone launching a startup, most founders and CEOs will provide a litany of business advice – all of which is sound when considering the actual execution phase. What comes before said execution phase and simultaneously lies beneath it is the mind of the founder launching the startup. In other words – why did the founder launch? What did he hope to accomplish? Why does he do the things he does? Failure and success afterward are generally relegated to outside influences – when few talk about flawed thinking patterns that come from within.
The mind of the founder is a foundation to the business. How so? Consider that the founder is going to a) be the leader b) select the product c) govern its development and d) respond to inevitable disappointments. How can an expert in their field with a completely flawed approach to how they think make any success out of a, b, c, and d? Can they build a great product and destroy the business execution? The overwhelming answer is “yes” – and in fact, the majority of startups end badly due to flawed thinking patterns.
So what thinking patterns are we talking about here? First of all, what does the founder expect to get out of the startup endeavor personally? Will the founder be satisfied personally with the company that is being built? Are they doing it solely for the money? Second, has the founder considered the mind of the customer? Why will the customer purchase the startup’s offering? Third, has the founder considered the inevitability and unpredictability of risk? Is he or she aware that risk is a certainty and that how it is faced will govern the outcome of the launch?
Launching a startup “just for the money” is a grievous mistake. How could I make such a claim? Two psychology studies shed light on the equation between money and satisfaction. In the United States, psychologists sought to determine the best annual earnings amount for the maximum amount of happiness. What they found was that happiness continuously increased until earnings hit $75,000 per year – and then happiness increased only minorly above that amount. A conclusion reached by other studies found that the maximum happiness coefficient that could be had by virtue of earnings is to “earn 10% more than you need.” The first response from most to his idea is “Of course earn more than you need!” followed by scoffing that it can’t be done. Lets reconsider a moment. If you need $50,000 per year to pay the rent, food, transportation, health care, etc – in other words, your needs, then maximum happiness will be had (from a monetary standpoint) earning $55,000 per year ($50,000 plus 10%) and keeping expenses at $50,000. The extra $5,000 becomes something that is at the disposition of the person to use – and they generally will pick activities and items that will bring the necessary balance of freedom, control and whatnot to provide them happiness.
There are two ways to approach definition of what someone’s needs are and the ensuing happiness that comes from having money that they can control. The person could reduce costs and achieve the 10% factor – or they could increase earnings and keep costs the same. The American fallacy that happens is that committed expenditures follow earnings. A promotion with a pay raise results in a better car, a bigger house and a general increase in monthly outlay for perceived “needs” – and suddenly the person is miserable again – relegated to a terrible commute, cubicle farm job, little extra time and no extra money to play with.
That being said, a founder should realize that a 10% pay raise is the most happiness money will buy. Launching a startup has to be motivated by something other than the pursuit of wealth (though let us admit that wealth is quite nice to have).
Science has discovered reward centers in the brain that are fixed reward centers. They previously thought that the reward centers were flexible – ie, that we could individually train ourselves to like one thing and dislike another – when it was found that these particular reward centers are both strong and inflexible. We are effectively born with them. “Who” we are is something unique and to a large extent unchangeable.
Therefore, each person has things that they are passionate about – and come what may in life – they continually strive to achieve them. Some people call these things “dreams” – and while that is true – I find that there is better terminology. “Dreams” implies fantasies – and fantasies are always better than realities. On the other hand – who we are as individuals and the things we strive for often come true – and therefore do not belong as dreams.
A founder is best suited to follow their individual essence when electing to launch a startup. They must do something they are passionate about. Complex psychology aside, the workings of the brain make it much easier on a person when they follow their passion – as they will have an individual ability to stomach pain and adversity – steps necessary to overcome risk as the startup launches into success phase.
It has been said that “if you love your job, you’ll never work a day in your life” – meaning that “work” will not be work – rather it will be an enjoyable experience. That joy and satisfaction is felt by others – in product development and employee, vendor and client relations – which creates a positive feedback loop for company operations. People are more comfortable paying you to do something you love that they do not – it is the essence of psychological negotiation.
When someone tries to say that they are passionate about having money, it doesn’t hold water. Further, such an argument is hardly reason for potential customers to want to part with their money – as it provides little reason for a successful business operation.
Criteria for a Startup – What the Market Rewards
Most would say that the #1 thing that the market rewards is “hard work.” That is simply not the case. Diligence is required in business transactions – a basic foundation of delivering on what was promised and actually showing up for work. Merely persevering under duress is ignored by the market unless it is matched up with what the market really wants.
Markets reward 2 things. The first is purchasing an asset before someone else realizes they wanted it. That is also known as “investing” – and by the definition in the prior sentence – it is only rewarded when someone is successful at it. Startups are rarely about investing (unless they are a servicer to an industry related to investing).
The second reward is delivering a good or service better than average offerings. This is where the bulk of startups fit in. Some would begin to quibble on what a startup is – is it a revolutionary idea, tech business or simply a new business being started? Those debates are for a separate discussion; however, the rule applies to all forms of startups. Commodified businesses (dry cleaner for example) have to follow the same rule. Why would customers stop going to their current dry cleaner and endure the risk of the new one? Price, marketing, customer experience, quality, innovative product offerings – those are reasons that customers will change their habits. Some would argue that there could be a gap in the market – that there simply aren’t enough dry cleaners in a particular area – and that innovation is not needed in the product – simply good demographics are needed. Well, the counterargument is complex on two fronts a) demographic studies themselves are where innovation stands out and b) if the market need is that evident, competition will follow in the course of time and then innovation will be needed to win against new contenders as the market need balances out. Clearly, we see that innovation in goods and services is the foundation to success in a startup environment – whether tech, main street businesses or revolutionary ideas.
Risk – The Proving Ground
All startups must face risk in the quest to deliver a good or service that is better than the current offering. Risk can be equated to the unknown – in that it is not known how the product development or launch will necessarily turn out in the end. Markets also refuse to permit risk-free launches – if there was no risk, the market would rush in and someone would take advantage of the opportunity. That leaves only risk-prone opportunities for new startups to face – which the passion of a founder can overcome to deliver their product.
To illustrate risk, lets consider the concept of Facebook. Before Facebook, if someone came up with the brilliant idea to build a social network – they faced a myriad of risks. It hadn’t been done before; hence, it was unknown if people would use it. How would they produce revenue? How would they build the technology to scale it? Further – when Mr. Zuckerberg was first building the restricted version of the network, mobile device power, functionality and widespread usage was nothing like it is now. It simply was impossible to even foresee that mobile devices would ever get to a point that would significantly boost the social network’s power. It was illogical to believe that the business was built assuming those technology implementations would ever happen – rather, Facebook followed the founder’s passion and navigated the future as it happened. To summarize – they embarked on a highly risky proposition, overcame the risks and find themselves successful. In fact, they are so successful that they changed the marketplace – you and I can open a social network account and monetarily benefit ourselves with next to no risk financially or timewise.
Founders must therefore expect risk, navigate in response to it, be willing to change and accept the inevitable likelihood that things will get worse before they get better with a startup. A necessary skill to manage this uncertainty is to have a high tolerance for pain – being able to stay focused realizing that the pain is [hopefully] short term and that there is a reward for success.
When some CEOs and founders hear that risk is a certainty – they mistake risk as being a good thing. They in response go pursuing risk – which is gambling. There is a difference between managing risk and pursuing risk (gambling). Founders are wise to avoid unnecessary risk. Instead, they need to have a sharpened perspective of where they are going and what risks to overcome and face them with diligence and wisdom as opposed to emotional recklessness.
A further issue with risk is that some founders have almost no ability to tolerate it. In response to this skill void, the tendency is to look for a bank or investor to shoulder nearly all the risk – while trying to sell the concept that the founder gets a significant portion of the reward. To the extent that such a thing can actually get pulled off – it is a great victory for the founder – and usually requires something extraordinary such as a likeable personality, fantastic idea or excellent sales skills. Absent an extraordinary tool to facilitate risk transfer, most founders have to learn the hard way what kind of risk banks and investors will tolerate and what they will not. That is fine except for the fact that valuable time is lost learning the lesson while the business could be launched.
Safety & Control
The relationship between safety and control is nearly primal – and is toxic to a business navigating uncertain waters. When people feel unsafe, they gravitate toward what they can control. Unfortunately, the marketplace lets people control that which is economically irrelevant. So, mixing an emotional drive to feel safe, the need to control something and the fact that what is easily controllable is irrelevant, the concept of following one’s feelings in this area is ultimately useless and a distraction. While that may be the case ethereally, seasoned executives in a state of high duress routinely continue to gravitate toward controllable items – which is opposite of what is needed.
In a state of high uncertainty, what a startup needs is for its leader to navigate those waters and deliver a successful outcome. Since that involves risk – and since that involves facing down uncertainty – there can be no room for feeling comfortable controlling things. In fact, a founder must do the opposite of what feels good and face seemingly uncontrollable problems. Lets illustrate some examples.
A CEO that wants to grow his company truthfully needs two things, in this order of importance 1) revenue growth and b) fulfilling the revenue by delivering on it. Since revenue is the most unpredictable and ultimately hardest to get, the situation feels out of control. So what do many CEOs do to placate their emotions? Spend money. Hire people! Lease offices! Buy technology! “WE’RE GROWING! HURRY UP AND GET READY!” Meanwhile, there is a curious lack of revenue. Should not the CEO be delivering the revenue and relegating the simpler task of spending money to a lesser executive/manager? I have seen this case study happen time and time again in my consulting practice. The CEO did what made his emotions feel good – not what was good for the company. He did what he could control so he would feel safe – even though what he could control was economically irrelevant.
Above these preliminary concepts, it is important to realize that sound business advice for operating companies rides above these paradigms. Intelligent methods for managing specific problems, good staff management, good planning and wise execution are mainstays to a successful business. However, those things are like the frame and interior of a house. How the founder thinks and what motivates him is like a foundation. Applying wise advice that runs up against emotional insecurities, poor motivators and desperation is like building on sand instead of a foundation – the effort will be a waste – and the house will get built and fall down over and over until the foundation is figured out. Startups are about passion and dedication – and seeing or believing in something that the world hasn’t thought of yet. When the founder delivers despite the odds, then he has something truly different that stands to make a dent in the marketplace and lay the foundation for a successful launch.