Startup Mixology

by Frank Gruber

  Once you start transacting as a business, you'll want to think about your bookkeeping and find a good accountant who has worked with startups. You'll definitely need an accountant and good record keeping skills if you plan to raise funding, because you'll have to show statements to banks, investors, and even friends and family if they contribute. You will also have to be up to date on all your state and local taxes.

  Even if you aren't raising funds, good accounting will make it easier to make key decisions. It helps you understand revenues and expenses and figure out ways to optimize your business. Some of the elements of accounting include:

  A balance sheet, with assets and liabilities

  A list of account transactions

  An income statement, with revenue and expenses

  Payroll records

  Records of outstanding payments (that you owe and are owed)

  Taxes to pay during the year, if applicable

  If accounting is new to you, then you may want to kick things off by meeting with an accountant to get an overview of what you should be tracking in your earliest months. Accountants can help you determine whether the business is fundamentally healthy or not and help you understand your tax landscape, liabilities, and obligations. Some local and state taxes have to be filed monthly or quarterly, for example, and unfiled taxes can result in fees, even if you had no revenue. And April 15 isn't the only tax date to be aware of; various forms and taxes are due at different times of the year.

  To save yourself time and money, stay as organized as possible and don't use tools like QuickBooks if you don't understand them. A spreadsheet you understand will go so much further in helping you stay organized. A good bookkeeper will take care of all your general accounting duties on a daily or weekly basis. I advise you find one when you can afford it.

  Be honest with yourself about how much you understand about your business, and either learn what you need to learn or bring in help via staff, a partner, or a professional service. For example, if you're running an e-commerce site and don't understand the terms profit margin and cost of goods sold, you'll have a very difficult time making the decisions you need to run the company.

  For a list of tools for legal and accounting, check out http://tech.co/book.

  The Harsh Reality

  The recent films The Social Network and Jobs shine a light on some of the inner workings of business—and in business, there are sometimes cofounder troubles, disputes, and departures. In the Facebook lawsuit, the Winklevoss twins' ConnectU filed a lawsuit against Facebook. It was eventually settled for $20 million cash plus Facebook stock. Ousted cofounder of Snapchat Reggie Brown filed a lawsuit in early 2013 for one-third of the ownership of the photo messaging application developed by Stanford students.

  Why does this happen? Lawyer Chris Good of Fowler & Good LLP has seen many startups struggle because they didn't clearly define things like roles and responsibilities. “This is fine if everyone is pushing the startup forward, but if someone starts backing away from the startup, this generally ends up either breaking up the company or in litigation,” he says. Litigation is not what you want to be using your time, money, or energy on. Wouldn't you rather be focused on starting and running a company? So take our advice and clearly define your roles and responsibilities.

  You don't necessarily need a lawyer to help you make decisions. Try to come to an agreement about key issues first and then find a lawyer to help paper the agreement so you have something to work off in the future.

  When picking your lawyers and accountants, keep in mind that cheap is, well, cheap. SweatGuru chief executive officer (CEO) and cofounder Jamie Walker found that out the hard way when she selected the cheapest accountant available. After working with this individual for a while, she discovered the company wasn't even accredited. “It ended up being a nightmare and took us a good year and a half, a new accountant, and a lot more money, time, and energy to fix. They ended up screwing up all of our business tax information, which made our subsequent tax season extra painful and time-consuming.”

  When Jen and I set up Thankfulfor, we made a checklist of things we knew we had to do: set up our LLC, get a tax ID number, open a bank account, and more. But in the excitement of starting up, we didn't do enough research. When January rolled around, Jen reached out to an accountant, unaware of what was to come.

  “Questions came pouring in. What is your state account number? Did you set up your sales tax account? Did you submit your Schedule K-1? Did you send out your 1099-MISC forms? Along with many others,” she recalls. “My facade of organization came crumbling down.” We spent the next few weeks bouncing back and forth between the tax offices at city hall, filling out forms, getting permits, and paying fees and fines. We got it all taken care of, but asking more questions up front would have saved time, money, and stress.

  Celebrate: Enjoy the Journey

  I'll be the first to admit that it's hard to make paperwork fun—but paperwork can be a lot of fun…when you finish it. It's an amazing feeling when you know all your books are in order. One of the best things you can do is set up goals for getting your accounting and legal paperwork in order, and then celebrate. Set up a schedule—perhaps you do payments on Fridays and close out your books by the fifth of each month. Treat yourself to something you enjoy each time so you have something to look forward to.

  Walker and her business partner at SweatGuru retreated up into the mountains to hammer out a business plan, investor deck, and financial documents. It took days, but they celebrated by returning to their families. Some apps are even making accounting fun by sending you push notifications when you receive money. Cha-ching!

  Tech Cocktail lightens up an otherwise-boring employment contract by ending with this: “Despite the formality of this document, the Tech Cocktail team is jumping for joy, eating cupcakes (and green smoothies because we're health-conscious) at the prospect of you joining this team and helping to build this dream of ours into an amazingly awesome, new type of media company that will affect people around the globe!!!” To show their agreement, our employees are directed to sign and send a photo giving a thumbs up. And they actually do.

  Final Thoughts

  In the big picture of your business, paperwork may seem like a small but sharp nail hiding in the corner that you try to ignore as long as possible. But the more you learn, understand, and prepare, the less stress it will be, leaving you more time and energy to focus on your core business.

  No matter how well prepared you try to be, there will be surprises. But your goal is to minimize them as much as possible. If you're considering starting a business, save yourself a lot of stress down the road and ask a lot of questions up front. Your mantra must be, “I don't know what I don't know—but someone else does.” Use resources such as your local city, county, or state websites, where you can often find small business checklists of forms to fill out and taxes to pay.

  I must end by sharing an important disclaimer: I'm not a lawyer or accountant and therefore this is not professional advice. I've made some suggestions and given you food for thought, but you'll still need to find trusted experts to advise you.

  Part 2

  Product

  Chapter 5

  Product-Market Fit

  In a great market—a market with lots of real potential customers—the market pulls product out of the startup.

  —Marc Andreessen, investor and cofounder of Netscape

  In previous chapters, you've come up with ideas and started to turn them into action. You've simultaneously begun structuring your company as an official entity and pulling in the right people to help or advise you with accounting and legal (or at least started to think about it!). But now you've got to start testing your idea to determine whether it's something worth solving. You need to figure out who has the problem and what they're looking for to solve it. This will help you find your customers and, in doing so, lead to what's called product-market fit. The market should help guide you in the right direct
ion.

  Marc Andreessen

  Marc Andreessen is the cofounder of Andreessen Horowitz, a venture capital (VC) firm located in Silicon Valley. He cofounded Netscape (acquired by AOL in 1998), cofounded Ning, and coauthored Mosaic. He's also the board director of HP.

  You might say that inDinero, which makes software for accounting, payroll, and taxes, was pulled out of the market by customers. It was cofounded by Jessica Mah while she was an undergraduate in computer science at the University of California, Berkeley. In the beginning, she asked herself: What's the most fun thing we can do to get this in the hands of customers? So inspired, she and her cofounder created mock-ups in Photoshop, pretending they had a product.

  Small businesses were interested, so the team took it to the next level: they asked for credit card information. And more than 100 businesses handed it over.

  Mah knew a bit about the lean startup process, so she gave herself a strict schedule: every Friday, she would get out of the building and talk to customers. She would line up back-to-back interviews, meet customers at coffee shops, and then watch them use the product—the best kind of usability testing. “That was the smartest thing we did,” she recalls in a Stanford Entrepreneurial Thought Leaders interview.

  “Each customer led to a completely different set of insights that we wouldn't have gotten from past customers,” she says. In the end, the best insights came from customers who fell somewhere in the middle—they didn't love or hate the product; they just liked it but saw a lot of problems.

  Initially, Mah and her team thought they would build some kind of easier-to-use QuickBooks clone. But when they talked to small-business owners, they realized that businesses weren't using QuickBooks—and they didn't want to. They were using spreadsheets, and they wanted something simple and easy. Without talking to customers so systematically, inDinero would have created a product no one wanted—a solution without a problem.

  As the inDinero story illustrates, you can have users before having product-market fit; the way to get there is to listen to them. And it takes awhile—a long process of patiently learning and revising and being humble. According to Ellie Cachette, vice president of product marketing at Koombea (previously founder of ConsumerBell), “There is almost a user for everything, so just gaining them is not always indicative of product-market fit. Product-market fit is defined by something that both has its niche but also has a supportive economy around it that is willing to pay. Some early disrupters take years to build up the use and the community around their product before reaching product-market fit.”

  Customer Development

  It is easy to be heavy: hard to be light.

  —G. K. Chesterton

  Lean startup is a recent movement with origins tied to Eric Ries, an entrepreneur who coined the phrase in 2008. He was largely influenced by his startup experiences and learnings from his mentor Steve Blank, a Stanford University professor and entrepreneur. Blank calls Ries his best student.

  Blank is known for advocating against the traditional product development approach—where you come up with an idea, develop it, test it, and launch it. With such little focus on your customers, you generally end up building something that no one wants, like inDinero almost did. As a result, Blank explains, companies that try to launch new products fail (that is, are not profitable) 9 out of 10 times.

  Instead, Blank advocates for what he calls “customer development,” which focuses on constant contact with customers. What does it look like? You figure out who your customers are and learn as much about them as possible. The job of the customer development team is to make sure that customers are interested in the particular features that are concurrently being built or learn their actual needs. Product development and customer development are happening at the same time and playing off each other.

  When inDinero was young, everyone did customer development, going out to dinner once a week to discuss customer problems and decide on new features. Soon, they realized that their three- or six-month plans made no sense. Constantly learning about customers meant their product road map was constantly changing, so it was more reasonable to plan only a few weeks out.

  To put this all into practice, you start with a very basic product created by the founders' vision. Then you identify some potential customers, and try to figure out how much they care about the problem you're focusing on. Ries calls this initial version a minimum viable product (MVP), allowing you to maximize learning with the least possible effort. Then, you test it. There's no marketing around these launches. They are simply tests. You can test with Google AdWords, landing pages, or paper prototypes (even before you have a product). The prototype hardly has to work, as long as it allows you to test the concepts you need to test and gather customer feedback and information.

  For example, productivity and collaboration software company Twoodo created multiple landing pages, including different ways of expressing the problem and solution it was working on. Then, the team tested which ones had higher conversion rates, giving them insights into the real problems and needs of Twoodo customers. “The best strategy is still throwing pasta on a wall and seeing if it sticks,” says Denis Duvauchelle, founder and chief executive officer (CEO).

  weeSpring, now a community for sharing and finding baby product reviews, started out as simple as possible. The assumption the founders wanted to validate was that parents loved talking about baby products. So they created a survey on SurveyMonkey that asked only one question: “Which three baby products do you recommend to your friends most often?” weeSpring generated more than 500 responses in a few days with little promotion, and the founders considered their assumption validated.

  What you're testing in this stage are the hypotheses you have about the problem, solution, customers, distribution, pricing, competition, and more. According to lean startup expert Ash Maurya, assumptions about the problem are often much riskier than assumptions about the solution. The solution would be risky if you were worried that you didn't have the technical capability to build it. But more often, you should be asking yourself things such as: Do people really have this problem? And will they actually pay to solve it?

  Customer Validation

  The second step in Blank's customer development is customer validation. To validate that your customers will actually do what you think they will do, you need to get people to purchase your product. And sometimes, the person purchasing isn't the same person who's using the product, as is the case for lots of business software. If you're on the right track, your customers and sales will be repeatable and scalable; in other words, you can use similar processes to acquire new customers. You need to be able to easily find more customers and make more sales; you don't want to run up against a wall where mainstream buyers aren't interested. If things aren't working, you may want to consider targeting a different group of customers or building a different product.

  A little Chicago startup named The Point developed their first prototype for a new social e-commerce marketing concept on a simple WordPress site. But instead of taking off right away, traction was uneven. Customers flocked to one particular part of the site—where groups got together to negotiate discounts—and The Point eventually spun off that part into another little Chicago startup, Groupon, that quickly gained traction.

  “Your idea is probably wrong,” says Aaron Batalion, cofounder of LivingSocial. “Don't be scared, everyone pivots…there really are hundreds of pivots you go through as an entrepreneur.”

  Ries's lean startup methodology is also inspired by agile software development and lean manufacturing principles. It gives startups some structure to help eliminate uncertainties, rather than the haphazard guidance to just do it. Ideally, your first product is actually an experiment to answer the question, “Should this product be built?”

  For a list of lean startup tools, check out http://tech.co/book.

  Our Tech Cocktail journey has also been a process of testing, learning, and changing. A few years ago, I leveraged a
white-label Ning product to build out a community site for Tech Cocktail with the goal of boosting online engagement around the brand. Registrations were strong, but activity was disappointing and got weaker over time. After our events, where were people creating profiles, connecting, and communicating? Facebook. I killed the Ning site and created a Facebook page for Tech Cocktail, which proved much more effective.

  On the event side of our business, the market literally pulls our product into new geographic regions, which fuels our event expansion. The content side is trickier, and we constantly experiment to see what our audience responds to most in order to grow page views, return visits, shares, and newsletter subscriptions. Because of the highly competitive landscape, this part of the business is evolving at a rapid pace, requiring constant testing and monitoring.

  If you're interested in finding out more about the lean startup methodology, I recommend you do some homework by reading Steve Blank, Eric Ries, and Ash Maurya. They wrote entire books on these concepts, and it's not my intention to rewrite their work. Some folks use lean startup methodology religiously, but you don't have to if you focus on your customers and in doing so, let that lead you to profitability and success.

  The Harsh Reality

  What happens if you don't listen to your customers (or even talk to them)? Well, you might spend a lot of time, money, and energy building an amazing piece of art that never sees the light of day or helps anyone.