Guest post by Jim Manzi, founder and Chairman of Applied Predictive Technologies, and the author of Uncontrolled: The Surprising Payoff of Trial-and-Error for Business, Politics and Society.
A few months ago, I was asked to give a talk to the MIT Enterprise Forum in London on the rules for executing a successful new start-up company. Having listened to more than one such bloviation session myself, I began with some caveats.
First, even though every guy who has done a successful start-up somehow feels he's therefore become the philosopher-king of business, all experience is bounded. Any observations I make apply to venture-backed enterprise software targeting scale-up. Many of the things you would do for a biotech start-up or a consumer-oriented social media business, as examples, are probably very different. Further, there are companies that exist to sell products at a profit, and companies that exist to sell equity to investors. I only know about the former. The latter tend to flourish in the later stages of a bubble, and rely on a totally different set of skills related to promotions, networking and PR.
Second, even within the universe of relevant companies, all "rules for success" are either obvious or incomplete. Each suggestion in this post will be incomplete, in that it will ignore inevitable exceptions and complications. In other words, there are no rules for success. If there were, lots more people would do successful start-ups.
I'll divide these observations into those relevant for each phase of getting from a new business idea through about the second or third year of operations. After that (if you are the unusual start-up that makes it that far), things become quite different again. Caveat emptor.
IN THE BEGINNING..
You are selling a dream to prospective investors, employees and customers. Be ruthlessly honest with yourself at all times.
Have a co-founder. You're getting married to this person, so make sure you trust him or her, have great mutual respect, and can speak openly at all times. Drama is your enemy. Ideally, you should have high overlap in your view of the world, and only partial overlap in your skill sets.
Seek blue water. Do something innovative enough that nobody else is even trying. This is the best way to get around scale advantages that others have over you. Since you don't know what you're doing yet, it's better if nobody else does either.
Ignore capital markets and industry analysts until you are ready to exploit them; they are rear-view mirrors. If you are doing at start-up phase what the capital markets say is valuable, you're usually too late. You have to do what they say is stupid now (or are just not thinking about now).
In several years, you will either be proven wrong (in which case, they will say "told you so"), or you will be proven right (in which case, they will shamelessly ignore their prior opinions). It's nothing personal; it's just their business model.
Plans are basically useless, but a small amount of planning before you start can be valuable. A good business plan is done in Excel, not Word:
-- See if you can (A) make a list of the companies that might buy your offer, (B) estimate what each would pay for it. Multiply A by B. This, not "the CRM market" or whatever, is how to think about market size.
-- Guess at how many people at what comp level by person you would need to provide some early version of this offer. Gross up the headcount by a simple factor for rent and other costs, plus any other very expensive capital equipment you need to make a simple cash flow statement.