Entrepreneurship with sense — Chapter 2/3: the How

Chapter 2/3 of a series around why, how and when to become an entrepreneur. Summary of my talks at Clavis Association’s 3rd annual meeting and at ThePowerBrunch by ThePowerMBA

In the first chapter of this series, I explained how we live in a world with too much hype around entrepreneurship and how you can probably achieve better outcomes by working for somebody else. In this context, I introduced the reasons why you should or should not become an entrepreneur through my own personal experience (still short!). Basically, the key conclusion was that you need a profound reason why you want to create the company — otherwise you won’t put enough skin in the game and you won’t survive the startup rollercoaster. There has to be a big reason why you, at this point in history, are the right person to solve this problem, and you have to be passionate about it. That is more important than the team, the market size or the technology you want to use.

Having a big why is necessary, but not sufficient to become a successful entrepreneur. Once you have a good idea and a big reason why you want to put your efforts into a company, you then need to execute it the right way.

I believe there are 2 key variables which you need to consider when creating your startup:

• How do you create a founding team to launch the company
• How you prove that there is a viable business

1. How you create the Founding Team

There are many articles out there which will explain why the team is probably the single most important feature that investors take into consideration in a startup investment. Therefore, you should put time and effort into creating this team wisely.

There are 3 things that you need to remember when creating a startup team:

• Do NOT create a startup with a family member or close friend unless you are willing to lose that relationship.
• At least one person needs to have experience in the sector — investors will ask “why you?”, and you need to be able to answer convincingly.
• Stay small and complementary, at least at the beginning. Otherwise you will be slow and will need to outsource many tasks.

It is amazing how many times I have heard this same advice and how many times I see people making mistakes in the team they put around a startup idea. But, to be honest, I also didn’t listen to this advice and I made the mistake myself — I hope you are smarter than me and listen to this. Let me show you how I failed in creating successful teams, so you can learn from it.

A. Do NOT create startup with a family member or close friend

Although, in my first article, I explained that Nova is the business where, by far, I am being more successful, I also introduced in that first chapter that I made many mistakes. Here, my biggest mistake was to co-found the company with a close friend from school. The reality is that, years after starting the company together, we are not as close as we were and we have had many problems because of co-founding this company. If we hadn’t done it, I am sure we would be much closer.

Although this won’t make any sense to you, as it didn’t to me, I have seen this trend repeating over and over: people creating businesses with relatives or close friends which were either unsuccessful or broke the initial close relationships between the founders.

But why do we repeat this error? Simply because, when we create a company, we look for someone close with whom to share the idea and start working on it. Normally, that person is a relative or a close friend, who is also thinking about becoming an entrepreneur and likes the idea. However, this is a huge mistake for 2 reasons:

1. Between relatives or very close friends, it is hard to give honest, transparent and constructive feedback — precisely the one needed in a startup environment. In my case, for too long, I had trouble telling my partner the things he did that I didn’t like, or the difference in commitment I perceived. This wouldn’t have happened if we hadn’t been so close friends.
2. Between relatives or close friends, it is hard to sign good, clear and objective partners agreements, with vesting, non-compete clauses and the like. I didn’t, which then backfired in the form of a big equity stake lost in someone who was not part of the company anymore.

Of course, this is not to say that you should create startups with people you don’t know at all. You will spend a lot of time together so having good vibes and being able to trust each other is key. Therefore, there is a sweet point somewhere in the middle, probably with a colleague or a “not-super-close” friend who you can trust but who is distant enough so you can put personal things aside and have a healthy professional relationship.

B. At least one person needs to have experience in the sector

In my second startup, TagToShop, we tried to solve the problem of checkout lines in brick-and-mortar stores (particularly fashion ones) through RFID and a mobile application which would enable you to check-out without waiting in the line.

The team was amazing, very diverse and well balanced:

• A Columbia MBA candidate as CEO (ex-BCGer with experience in retail projects — he was in charge of the business)
• A Fulbright Software Engineer as CTO (who was doing a Masters in Columbia — he was in charge of the application)
• Myself as Product Manager (leveraging my electronic and mechanical engineering experience from ICAI — I was in charge of the hardware)

Slide of TagToShop pitch deck

Why didn’t we succeed then? One of key reasons is that we did not manage to land a pilot in any store in the entire NYC, not even small ones. We did not have connections nor experience in the sector, which damaged our credibility in front of potential pilot stores. Also, the investors we wanted, such as XRC Labs, wouldn’t trust us precisely because we had no experience in the fashion industry.

On the contrary, when co-founding Nova in Spain, I had all the credibility from Lars-Henrik Friis Molin, a serial entrepreneur who had already co-founded a dozen HR startups. Also, our selection process and our data were backed by Universum, probably the most famous Employer Branding company in the world.

This is why I firmly believe that, when launching your startup, you maximize your chances of success if you have experience in the sector, particularly if it is a B2B (not so much in a B2C).

C. Stay small and complementary, at least at the beginning.

Finally, my biggest advice to you when creating a startup team is to try to build a small and diverse team. If you are all too equal, as happened in my first startup experience in Daskit.com, you will end up all having the same role and fighting each other for small decisions.

You couldn’t build a bigger while less diverse team than the one we had in Daskit.com: 7 co-founders, studying the same degree at the same university. Our only diversity came from our origins: we were Spanish, French and Italian (which is pretty much the same Southern-European thinking). While all of us could take charge of the business development, the strategy and the operations, nobody knew how to code so we had to externalize development to a Japanese friend.

To create a proper startup team, there has to be a clear owner of each task, someone who is more credible for taking charge of each piece of the business, so you can make decisions quickly, iterate and go fast. Otherwise, you will end up in never-ending debates on topics which are not always so relevant and having to outsource key parts of the business.

Also, at the beginning, I wouldn’t recommend a team of more than 3 people: otherwise it is hard to even find a time to meet. Make sure you are diverse — really diverse — and try to have core functions internalized (i.e. if you are building a tech startup, technology should be one of the backgrounds of the founding team; if you are building a restaurant, you should try to have a cook in the core team).

2. How do you prove there is a business

At the beginning of a startup project, you are basically testing a hypothesis: that your customer is willing to pay you for solving the problem they have with your solution. Yes, you are “testing”, as a scientist does, because you cannot be sure if that is truly a big problem or whether your solution is the right one.

There are 2 basic ways of approaching this “proof” that there is a business:

• The “consultant” (or banker, or however you want to call it) way
• The entrepreneur way

As you probably guessed, the consultant way is the wrong one. Let’s see why and how you have to approach proving there is a viable business to be built.

A. The “consultant” way

Approaching a startup in the “consultant” way is basically creating a big spreadsheet where you throw in a million hypothesis and project a profitable, hyper scalable business in a few years. If this type of approach worked, I would be incredibly rich and successful already, but it doesn’t.

In the consultant way, you basically stay at home and make projections. This is the wrong way.

The reality is that entrepreneurship is much more complex than Excel modeling. Why? Because when you deal with great levels of uncertainty, any hypothesis you make can be wrong, and not by 10–20% as it might occur in a consulting casework, but can be totally (i.e. 100% or more) wrong.

In consulting, banking or in big corporations, Excel models work because there is a limited level of uncertainty: demand can go up or down, but it exists and has been existing for years. However, in a startup, you don’t even know if demand exists or the price point which your clients are willing to pay.

B. The “entrepreneur” way

There are a trillion resources out there to help you build your startup the “entrepreneur” way. My favourite is The Lean Startup, but there are several very useful that any entrepreneur must have read, such as Zero to One, Nail It, Then Scale It, The Hard Thing About Hard Things or Steve Blank’s resources.

The Lean Startup Methodology

I won’t get into too much details of how you do it, but basically it boils down to Steve Blank’s phrase “get the heck out of the building”. The idea is that you need to build a small experiment (as small as a survey), try it out with customers, validate or not your hypothesis based on data and customer feedback, and pivot or build incremental features of the initial experiment to start the process again. There are normally 3 phases to your testing process:

1. Interview Phase: normally, you don’t have any product or service to show your clients, and you shouldn’t build it right away. Instead, you should start interviewing your customers and validating whether they have the need you believe they have. Here I suggest you read the PDF “Talking to Humans”
2. Prototyping Phase: once you have validated a need through surveys, you normally go on to build a prototype of your solution. If you are building a platform or an App, you shouldn’t be coding yet, but rather building mockups and screens of how it would work. Again, you design an experiment and test it with real clients.
3. MVP Phase: finally, once you have validated the need both with interviews and prototypes, you go ahead and build/code a real solution (your MVP: minimum viable product) that works and that you can use or sell to clients. Again, the way you build your MVP must be iterative and incremental. Scrum and agile methodologies will be of a lot of help here.

Summary of key learnings for you

The WHY: you need 3 things to maximize your chances of being a successful entrepreneur:

1. To be the right person (i.e. have relevant experience or skills which give you an edge for this particular venture)
2. To have the right time to market (i.e. there has to be a technological or market reason why your idea can succeed now)
3. But more importantly, you need to have a big reason to launch your startup. Being a user of your product or service, wanting to make money or just willingness to become an entrepreneur will not be enough to enable you to go through the startup rollercoaster. You need to be passionate about the problem you solve and believe you are making some kind of impact.

The HOW: once you have a reason (why) to become an entrepreneur, there are 2 “hows” you must execute well at the beginning:

1. Create the founding team the right way. Here, there are 3 key considerations:

• Do NOT create a startup with a family member or close friend unless you are willing to lose that relationship.
• At least one person needs to have experience in the sector — investors will ask “why you?”, and you need to be able to answer convincingly.
• Stay small and complementary, at least at the beginning. Otherwise you will be slow and will need to outsource many tasks.

2. Prove there is a viable business, and do it the “entrepreneur” way: get out of the building, design experiments, test your hypothesis with real customers and pivot or persevere in a lean way to go fast and not waste resources.

The WHEN… (more to come in the 3rd chapter)