How to build a Cockroach Startup (instead of a Unicorn)
My controversial perspectives on building a startup
Startup is a buzz word. A startup is a business that just got started and has not achieved sustainable profit. A startup is by default a failing business until you make it profitable.
A unicorn startup is one that has been valued at more than 1 billion dollars by investors. A unicorn startup doesn’t have to make money. A unicorn startup doesn’t have to show healthy business fundamentals. A unicorn startup only needs growth and to be priced by investors.
I proposed that, perhaps, there is another kind of startups — Cockroach Startups. Cockroach startups are ones that aim at profitability and focus on making money. To succeed in creating a profitable startup, you have to focus on the actual business. I propose that there are a few rules we can follow, some of which are highly controversial.
#1. Charge Money from Day 1 💰
No matter what you are going to make, you should charge money from Day 1. Somehow, there’s a notion that as long as you make your product free, and a lot of people use it, you can worry about monetization later. For many businesses, this is flawed.
When your product is free, you have no way to test the true value of your product. As a user, when you see something free, you have nothing to lose, so you will say yes most of the time. When you see something that costs $1.99, now you have something to lose. If you don’t truly value the product, you are not going to pay for it. For business owners, this is a disaster because you can’t directly measure how others value your products.
McDonald’s charges money. Apple charges money. Airbnb charges money. Somehow, a lot of people think their startups don’t need to charge customers money.
As a cockroach startup, you discover your business through charging money. You discover your pricing, positioning and cost structure through charging money.
#2. Your ideas are probably dumb, and so are mine 🙄
As a startup founder, your job is to experiment. Einstein didn’t come up with the special theory of relativity on Day 1, so you shouldn’t expect yourself to land the perfect business idea on Day 1.
Ideas are also worthless until you execute them. When you are implementing your business, every detail matters. You will have 10 ideas for a small detail, which sums up to 1,000 tiny ideas for the entire business. The faster you try out these ideas, the quicker you will learn and reach profitability. To be clear, I am not asking you to try 1,000 different businesses. I am asking you to try 1,000 different tiny ideas for the same business.
No one can judge your ideas. In fact, no one knows anything. Your ideas will prove themselves successful if they help you make more money.
As a cockroach startup, you need to keep trying tiny ideas to improve your business. A cockroach can survive a nuclear explosion, and so should your business.
#3. Care about every user 💁
To my surprise, people don’t care about their users as much as I thought they would. I have been consistently tweeting different bugs to products I’ve used, and less than 50% of them reply me at all. Big and small, these products are used by many other users who would see the same bugs as I do with frustrations.
It’s a competitive advantage if you just really care about your users. When users report bugs, you can fix them immediately and thank them. If they email you, email them back within an hour. If users give you advice, try to incorporate them into your product. Users are not always right, but you shouldn’t ignore them. Mark Zuckerberg once said Facebook is successful partly because “We just cared more”.
Paul Graham repeatedly said that founders should do things that are not scalable in the beginning. I struggled to understand the meaning behind it for a long time. Does he mean automations are useless? Does he mean all scalable ideas are bad? No. I believe what he meant is that you should care about your customers. To truly care about your customers, you need to take care of each and every customer. To do that, you have to personalize your services and make each customer happy, which is unscalable in the beginning.
As a cockroach startup, you need to care about every single user. If you can’t provide good values and services to 1 user, how can you do well with 1 million users?
#4. If you are a technical founder, stop avoiding making sales 😭
There’s this dream that all technical founders share, which is that they can build something great, and millions of people will immediately use it. This is also my dream, but it’s just a dream though.
In reality, you have to convince people to pay for your products.
As a user, if a random person comes up to you and offer you some kind of product, will you buy it? Well, it depends if the person succeeds in convincing you that the product is valuable to you. In most cases, you will not buy it. As a founder, you can’t expect people to trust you at first sight.
Technical founders should embrace the process of convincing others because it’s the only way to receive honest feedbacks from customers. This also goes back to charging money from day one because if you don’t, feedbacks you get would not be true reflections on your product.
As a cockroach startup, you define your product through convincing others to pay for it.
#5. If you are a non-technical founder, become technical ⛏
If you really care about your product, you should be involved in building it. As a tech startup, your business is built on top of technology. Your competitive advantages lie in how you improve and optimize your product. Without a certain level of technical understandings, you will miss out hundreds of potential improvements.
If your business is about food, you better understand food. If your business is on technology, you better understand some tech. Some founders tell me they don’t have time to learn, yet I see them waste days and weeks on doing something that requires technical knowledge.
As a cockroach startup, you should be the one building the product.
#6. You don’t need VC money 👼
A lot of founders believe that the first goal of a startup is to receive funding from external investors like venture capitalists. The media also package funded startups as successful startups. It gives people the illusion that if a startup is well funded, it must be a successful startup. This is completely false.
When a startup is valued at $100 million, it doesn’t mean it’s making $100 million in profit every year. It doesn’t imply that the startup has $100 million in sales. The startup might not even have a product out yet. Twitter is currently valued at $10,000,000,000 USD (that’s 10 billion), and it has never earned a dime from its operations for its investors.
A startup valuation is a price tag said by someone no smarter than you. Media pick up these news because they are good click baits.
You should raise money when your cash flow becomes a bottleneck of your growth. If your startup is not growing quickly enough because you don’t have cash in the bank, you should raise money to fuel your growth.
When you raise money, you are obligatory to earn money for all your bosses (yourself, your co-founders and your investors). You might only want a $10 million business to make a good living for yourself, but your investors are looking for a $100 million business to make their investments worthwhile. Make sure you want what you ask for.
As a cockroach startup, VC funding can be a liability.
#7. Make sure your business model will actually earn money
The end goal for starting a cockroach startup is the same as starting a coffee shop. You are trying to build a business entity that prints money for you by being profitable.
Your goal is to make sure your business makes money. For every sale you make, you are trying to earn a profit. If you lose money on every sale, the more you sell, the more you are going to lose — that’s a very bad business.
If you lose money on every sale, the more you sell, the more you are going to lose.
Some companies burn money to fuel growth by selling below cost. They aim to capture market penetration at all cost, including losing money at a growing rate. It’s a classic growth strategy for unicorns. Selling below cost is worse than being free. I used to be a frequent customer of businesses which offer below-cost products and services. It would be stupid not to take these bargains. But, once they stop these promotions, I stopped being their customer. Cockroach startups simply can’t afford to deploy this risky strategy. You need to earn money to validate your business ideas.
As a cockroach startup, you shouldn’t have a money-losing business model.
#8. A super small team 💪
A cockroach startup probably has a super small team (less than 5 people). A cockroach startup doesn’t have the money or funding to hire others, so founders do everything themselves.
To me, an ideal team size is 2 or 4 people (4 people splits into two 2-person teams). If you have formal meetings, the team is probably not doing enough work. If you need to sync up frequently, your communication is not effective. Everybody should know what they need to do at any given time asynchronously. Prioritization is usually unnecessary. If you know that something will help your sales grow, that task would be 1st priority. Anything else that is not an obvious help on sales is in the same lower priority group, so you just pick one to work on based on your gut feelings.
A lean team forces founders to automate everything, with either software or third-party services. The more they automate, the more competitive advantages they have because they can now do things at a very low cost.
Cockroach founders are usually also highly technical because they have to build products themselves. As I mentioned in #4, technical founders need to go the extra mile to learn how to sell things.
As a cockroach startup, it’s an advantage to have a small team.
#9. Time ⏰ is more valuable than Money 💰
A cockroach startup is defensive. The goal is stick around, earn money and not die. A cockroach startup doesn’t aim to hit the jackpot in the next 3 years. Instead, its founders want to learn how to build businesses that will last for 10, 50 or 100 years.
Starting a startup is a process of learning. From learning how to make slight improvements to learning what customers want, you are learning new skills every day. Starting a business is not based on luck but trial and error like a scientist.
What does a scientist want the most? Money? No. A scientists wants more time. Money can definitely buy time by speeding up experiments, but it’s time that the scientist is ultimately going after.
As a cockroach founder, you are a scientist. If you don’t make money yet, you should measure yourself by the number of experiments you’ve tried. If you are already making money, you should measure yourself by profit growth based on experiments.
Founders should optimize for learning. With time being the limit, you simply increase the number of experiments to gain more learning.
A cockroach startup is no different than a scientific laboratory.
#10. There’s no exit strategy 😵
Founders are often asked what their exit strategies are. Exit strategies are for VCs, not founders. If your business is earning money, why would you want to exit? VCs earn money for their funds by exiting businesses in a 5-to-7-year timeframe. Business owners and VCs often have misaligned end goals.
Your goal should not be selling your shares to a greater fool. If your business is good and profitable, you can obviously choose to sell it to someone at will.
Some founders are looking for a jackpot in 5 to 7 years so that they can retire as soon as possible. Others are looking to build a company they can run for next 30 years. Figure out which founder type you are.
As a cockroach founder, you are not looking for an exit. Your only strategy is to build a business that prints money perpetually.