(work in progress - this is my series of articles relating to early startup thoughts I have - I’m rushing this out due to a talk for NYP. Please forgive me for any errors)
It might be tempting to solve the biggest problems - like global warming, food shortage and labour shortage. The solutions seem to be obvious, EVs, Urban farms and Robotics. However, this shouldn't be the first startup for many people. Hard Solutions require hard Entrepreneurs. Instead for your first startup, consider these points:
If you need to make real things, like hardware companies, you need massive economies of scale to make things in a price-competitive way. Mainly because:
- You need a multi-disciplinary team to develop the product and accompanying high R&D costs. Nowadays, it is almost required to have software/firmware to accompany your hardware. You likely can't ship shitty intermediate versions (unlike software)
- There is also the issue of paying for capital equipment, factories and workers.
These costs mean you likely need multiple millions of dollars to start. There are ways to reduce this need, such as using contract manufacturers and developing your product yourself (if you're an engineer). However, even contract manufacturers require minimum purchases. Scaling from prototype to small-scale production to mass production is a massive challenge. Even successes like Pebble & Boosted went bankrupt. Read more:
Do you have experience raising a large amount of capital? It sounds simple, but often first-time entrepreneurs solely focus on the product and immediate first steps. Who would blame them? There is already so much on their plate to focus on.
The more capital is required, the more this shouldn't be your first startup.
The more Operational the company, the harder it is.
B2b Enterprise products, grocery delivery and logistics are examples of heavily operational businesses. How many sales reps, operators, and men on the ground do you need? Even a small team can easily cost a small fortune to run. For example, a group of 5 reps can already cost $15k per month (& usually cost way more). These costs do not go away when you scale up.
Other than the capital question, do you have experience managing large groups of people? Recruiting, training and even firing them - you will need this to run a very tight ship. I'm sorry. You're almost certainly a lousy manager if you're young, and it isn't our fault. For most, we simply do not have the professional & life experience that it takes to be a captain of a big ship.
The more operational the business model is, the more it shouldn't be your first startup.
Deep tech type of companies requires massive amounts of money to get started. Research, for example, requires years of development and experiments. But, even then, you might not have a scalable technology.
It even doesn't mean anything if you get the initial technology. You have to sell it…and Businesses are Beast. Feeding it while you scale up will consume you unless you have a plan for an exit (acquired, profitable or IPO-ing).
Another issue is that the longer it takes to develop the technology, the more competitors enter the field. Look at self-driving cars - there are 100s of companies competing to bring out the first self-driving cars.
Ask yourself:Is anyone on the team a PHD or one of the foremost experts in the field? Yes, it's that high of a standard.
It's ironic, but the more technological the solution, the more this shouldn't be your first tech startup.
What should I do instead, then?
Most first-time Entreuperuers would benefit from doing an asset lite, no operations, and a low-tech startup to execute.
If your heart is in the capital, operational and highly technological startups - then make sure you get experience before starting the business. (I have some case studies below)
Instead of operational, capital and technological businesses, focus on secrets, brand and timing.
Characteristics of your first startup
Capital and ssset Lite
Being asset lite can mean software or perhaps media, e-commerce. Example - Airbnb. Instead of building a better hotel, Airbnb built a marketplace for hosts and travellers to transact. The great thing about being asset-light is that you can start immediately. There aren't capital requirements. Also, running an expensive capital-intensive business is usually about keeping high utilization rates. On the other hand, asset lite means being able to reduce costs in line with demand.
Little to no operations
Can you or a small team potentially build it & scale it? Human resources are the most important but also the hardest to master. If you can run a tiny ship at scale, you can move way faster & with fewer headaches. An example is Instagram - when Facebook bought Instagram for 1 billion - it had a total of 12 people.
Using consumer & off the shelf tech means using tech platforms that are already developed - cloud, crypto, smartphones and building on top of it. Maybe sell innovative board games.
Some startups don't even produce much tech - like direct-to-consumer startups. Warby Parker, who sells glasses, simply cuts out the middle man (I might be oversimplifying).
Dependent on secrets
Do you know of any secret that even industry experts do not? Do you know a “hack” you can exploit?
It can't only be that most people do not know about it but that even insiders do not know about it. If you do know something like this, it can be a strong basis for your startup. You’re looking for an informational advantage rather than depending on capital etc.
Example - FTX
Have great timing
Focus on the timing of the startup. Is the technology already mainly developed? For example, Apple did the hard work of creating a smartphone and Whatsapp was just built on top of it. As a startup, Whatsapp did not try to make the smartphone itself. When new platforms are launched, these are prime time to make simple products.
Have a great brand & design
To be written.
Your second (hard) startup & case studies:
When you have fund-raising, management and product development experience after your first startup, this is the time to attempt more significant solutions:
Examples of seasoned entrepreneurs who did hard startups after their easier startups:
- Elon Musk first created zip2 - a mapping company (yellow pages online), and PayPal before embarking on the problems he wanted to solve - like Tesla and SpaceX. Also, by then, he already had a massive amount of capital he could personally put at risk and the management expertise to handle the pressure of running a hardware startup. Running Tesla isn't easy. It almost went bankrupt multiple times.
- Kyle Vogt - Twitch -> Cruise
- Palmer Lucky (kind of) - within Facebook & Oculus -> Anduril Industries
- Horrace Luke - Within Microsoft & Xbox -> Gogoro
When you shouldn't believe me and exceptions
There are also examples of people who started technological, operational and capital-intensive startups as their first startups who are wildly successful:
- Austin Russell - Luminar
- Boyan Slat - Ocean Clean up
- Tony Xu - Door Dash
They succeeded due to the following reasons:
Austin Russel dropped out of Stanford after getting a $100000 fellowship from Peter Thiel. If you can solve massive technical problems and are an expert in your field or a genius, technological issues won’t be an issue for you.
A factor in your favour is that the more challenging the problem, the more likely people would be interested in joining you.
They can easily raise capital
Somehow you're able to raise lots of capital:
- Timing (the field is very hot)
- Interest rates are low,
- The ecosystem is very nurturing, like Silicon Valley.
- You're a genius, as mentioned above.
They were great at management
Suppose you're a great manager and leader who can recruit people and delegate tasks. Your employee's respect, adore and love you. Due to specialization, you can outsource jobs and simplify the running of even challenging companies. Tony Xu, the founder of DoorDash came with a Stanford MBA before starting the operationally intensive business.
Why you should ultimately believe me & my own journey.
As the founder of Whizz Mobility - a driverless robotic delivery service - I understand these factors very well. As my first startup, I was focused on the problem & product and as a result, chose a highly technological, capital intensive and operational business to run. I've personally seen many other Entrepreneurs tackle these significant problems head-on using deep tech, hardware & highly operational solutions. Let's just say … it isn’t easy for them. My friends have also asked my opinion on similar solutions, and I feel uniquely positioned to comment after my experience running my company.
I ran a small e-commerce business before Whizz and did well for the public stock markets. I thought this was enough experience for raising capital. However, public markets are different from Venture capital. Being an engineer and having many years making my own projects - isn’t enough. Having run student organizations - I thought this would be enough management experience, but it wasn’t.
Unless you’re basically a genius, perhaps 0.01% percentile of the population, you should consider these points for your first startup. If you’re not careful, the startup can consume your life. I learned a lot, but you can do better by learning from me. There are tons of problems and solutions to solve, but I refuse to believe there isn't an idea with the above characteristics.
Next up, I will be writing about what you should do before a start-up the pre-startup. Be sure to subscribe! In the meantime, read more about why you should take a gap year: Why you must take a gap year in your time at Uni (melvinfoo.com)
For providing feedback to this article!