Lost and Founder

by Rand Fishkin

Non-Fiction
Startups
Mindset

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Book in 1 paragraph

Rand Fishkin’s 16 journey starting Moz as a consulting business, turning it into a product business, raising a lot of money, and becoming a leader in the industry. Rand shares everything he’s learnt in this time


5 Key Ideas

  • Know what you're getting into. Evaluate the pros and cons of day consulting vs product, VC backed vs self funded, going anal vs going build. Rand shares his own experiences with us
  • Forget what media says. VC isn’t the only way forward. And being small may be an advantage
  • Focus on the long term - building growth, focus. Forget growth hacks and diversification
  • There’s something special in entrepreneurship. The journey while filled with pain, self discovery, and challenges is worth it (for some of us)
  • The company is an extension of the founder / founding team DNA. Best way to improve the odds of company success is to know ourselves (and grow ourselves)




Contrarian Ideas

  • Execution is not everything. Plan , strategise
  • Don't raise VC money until you know what you’re getting into
  • Get acquired is good = liquidity for founders (life changing amount of money)
  • comes with minimise VC raise if you can - founder & investor interests aren’t aligned
  • Focus on marketing flywheel, not growth hacks
  • most growth hacks only bring attention to the business, they don’t improve customer satisfaction, product, and therefore don’t improve product stickiness - instead created brand perception of low discount, team’s constant pursuit of shortcuts, and little customer retention.
  • Better to focus on the long term benefits, and use growth hacks to ease friction and introduce new traffic
  • MVP doesn’t work for all products. Be careful with what you ship - assess market, competition, and your reach


Consulting vs. Product businesses

Consulting Benefits

  • Little to no setup costs
  • Revenue from day 1
  • can grow organically purely from revenue
  • Less market competition
  • Less employee attrition from SaaS head hunters
  • Better financial outcome for founders - less likelihood to raise outside capital, less dilution
  • Can pay themselves a profits.Not as much money needed for reinvestment. Unlike product businesses which require liquidity event to cash out. Moz does $45m/yr but Rand is still cash poor due to reinvestment/ growth requirements of product business
  • 4 times as likely to survive as product business (US Data: 45% vs 10%, 5 year survival rate)
  • More likely to get to do what founders love. Revenue can pay for staff (unlikely on product business whose  fighting changing guys changes every 6 months, and mostly about managing people, evangelising the business)
  • Because of no dilutation. Likely higher acquisition value


Product Benefits

  • Scales well
  • Higher margins (generally 70%+)
  • Much higher acquisition multiplier
  • Have (very small) possibility of hitting a home run and scale into 8, 9 figure business


Reason to do Product

  • Willing to accept risk
  • Feel like there's a calling and a Mission we have to achieve


3 biggest causes of consulting to product failure:

  • Too entrenched in consulting business and reliance on consulting income
  • Failure to dedicate time to product business
  • Failure to find the right audience for the product (not all consulting clients will transition)


"Start with a product that's informed by your consulting. Services you provide expose you to problems that your customers face"

  • Applied knowledge gained from consulting gives unique insight into product features that customers will pay for. Solid examples of transition from service to product eg hotjar, moz


Founder DNA

Startups inherits founder strength, weakness, quirks. If we can structure the startup around those to maximise strength, minimise / delegate weakness. Much better chance of success. Caveats to watch out for:

  • A lack of understanding in a field usually means lack of contacts and not knowing what the business really needs - unknowns unknowns
  • Founders DNA will be so embedded in the business it would take time to unwind eg non tech founders will have businesses with large tech debt
  • Losing people who have been in the business for a while will unwind key aspects of the business


Map our own weakness to functions in the business should unearth gaps on the business


Learning an unknown area

  • Ask employees what best practice they used the where
  • Learn from leading blogs in the niche
  • Champion an employee who can make a real difference
  • Recognise when the employee has gone beyond pragmatism and into misled religious fever
  • How leaders who can articulate and can teach and not afraid not to reveal details to neophytes


Startup building

  • Audience before product. Moz accidentally built the audience, brand, trust and technical expertise required for a product business. These are things consulting business wouldn't need (which only required word of mouth to fill pipeline). It was a nature fit to move toward product.
  • It's not always necessary to find a solution. Changes to company structure, protocols may be sufficient to move the situation forward
  • Even if a leader doesn't lead up an area, better to take time to understand it so hiring for (leaders) for that area
  • Startups inherits founder strength, weakness, quirks. If we can structure the startup around those to maximise strength, minimise / delegate weakness. Much better chance of success

Running a company


Identifying personal weaknesses

  • What level of knowledge do I have - theoretical, managerial (managed someone who did the work), practical, expert.
  • What knowledge is required for the role?
  • Founder weakness
  • make a list of previous successes and failures - chances are high weaknesses are those not on the list
  • keep shared list of successes and failures with team - over time can analyze those for personal and team patterns
  • when problems arise, do I / founders step in? If so, is the issue fixed?
  • list functional areas of the business - the area with high turnover generally indicated weakness in business
  • in the strategic plan / lean canvas - which area has the least bit of detail


Focus

  • We’re led to believe we must pursue growth at all costs. Diversification becomes an easy target because there’s money and there are resources. e.g. acquisition, R&D on new products or features
  • but focus is necessary to be the best in the world.


Venture Capital

  • Great learning experience - trial by fire, lit by pressure to grow
  • Doesn't make founders cash rich.  Net worth tired up in stock with no secondary market (on very rare case can be bought by additional investor rounds)
  • Could take some money off the table. But need a very large round



VC motivation

  • Looking for rate of return of 12.5%, or 3 times ROI over 10 years. Opportunity cost is stocks, bond, public market
  • That's the average, but given startup hit rates the actual ROI VCs looks for would be 100x plus in 1 or 2 of its best performing startups to make up for the loss from its other investments. If the best startup is only making 10x return, that's not enough to considering 3x payback ACROSS the profiling may / may not be achieved depending on how much VCs has put into its most promising stars eg 400m fund need $1.2 billion return. Split across 20 investments. That's $20m each, if only 2 succeeds each successful startup need to return $600m (30x)
  • Expected return = fund size X LP ROI / number of expected successes for fund
  • Usually takes 15 years as startups are created, die, or liquidate. Which explains why angel investing is such an none liquid activity


Build expertise before network.

Build between before fund raise

Eg establish domain expertise in a startup skill. Help other founders, build network with them. Ask for referral during raise



What Rand wish VCs would’ve told him

  • “I invest in dozens to hundreds of startups. Eight out of ten don’t return any money, but I don’t know which ones those will be, so I have to place a lot of bets.”
  • “If you end up looking like one of the companies that will be that big moneymaker, I’ll lavish you with attention, as will the rest of my partners. We’ll make you feel important, powerful, respected—like a dear friend and close confidant, and maybe the kid I never had.”
  • “If things go the other way, and you look like one of the duds, expect that our attention and interest will fade; it may start to feel like meetings with you and requests from you are more of a chore than a shared mission.”
  • “One of our biggest tools in either preserving a growing company’s prospects for success or attempting to recover a flailing startup is to replace the CEO. If things are going well, that’s very unlikely. If things go poorly, especially for an extended stretch, it’s much more likely.”
  • “If you would be happiest building a strong, stable business that’s profitable, that makes you wealthy and happy, that has reasonable harmony between your work and the rest of your life, we are absolutely the wrong choice.”
  • “If you cannot imagine doing anything but grinding as hard as you can, with relentless focus, and demanding the same from the team around you in pursuit of becoming an incredibly rare moonshot of a billion-plus-dollar business, even though the odds suck, congratulations, our model is a match.”
  • “Personal happiness and successfully raising venture capital are rarely correlated.”


Culture

Values

  • Company Values are only Values if there is a cost to them
  • Bad examples: move fast and break things
  • Good example of fun values:
  • Moz’s TAGFEE: https://moz.com/about/culture
  • They could be competitive advantages as well, but the company could potentially suffer a loss of some kind by following them. The integrity to take on that cost is essential
  • Values can’t be dictated, we must be discovered with existing group of employees e.g. ask all employees what attributes they admire in other people, use adjectives to describe the company they want to work in
  • Values will attract the right employees, clients to you. And Repel people who wouldn’t be suitable in working with you
  • The team could align on values without being demographically the same people e.g. white IT guys in their 30s, Asian accountant in their 50s, piercing loving warehouse staff in their 20s could all have the same Company Value


Corporate Structure

Don't make management the only career path towards.

Dual path for people management and technical skills will better career to people's needs


Choosing a market

  • Unless you have to go after big markets & VC dollars. Go after smaller markets - less MBAs etc chasing them.
  • Great products are born from mediocre ones. Key is:
  • time - for iterations
  • humility - to open to our failures and learn
  • survival - profitability. Means we take to not die
  • Our business has more chance of success if incumbent is any combination
  • hated by customers
  • unwilling to evolve with customer needs
  • protected by competitive advantage we can unravel (or changes in market / regulatory conditions that unravels the advantage)
  • in their early stage and not dominant yet (or a non-mature market)
  • Keyword research - will help uncover untapped opportunities

Team

  • Key is having a safe, team bonding culture
  • Support for Vulnerability, and sorry will create an authentic, happy work place
  • While productivity gains not measurable it's certain to improve employee, and consequently customer morale

Founder Health

  • Mental health super important
  • Don't invest in outcome. Invest in behaviours. Consistent behaviours may or may not be the quick fix we want, but will eventually give us the outcome we chase. Reasons to invest in a behaviour
  • Fun and interesting
  • Fits with personal / company values
  • Scales with decreasing friction
  • Has postive causal outcome
  • Had no negative causal outcom
  • When we focus on the outcomes. People game and cheat the system - this is the folly of most corporate KPIs, and why companies with culture focus wins.



Quotes

"Get comfortable with the odds or don't roll the dice. The venture model is about outliers."

"transparency is hard, but it works"

The media, the hype, the legends of how Silicon Valley startups work are just a carefully crafted model home. They’re set pieces, painted by interested parties for their own benefits, built to hide embarrassing flaws. None of it is real.

"Expect to do work you don’t love in order to allow what you do to flourish. If you don’t, the disappointment and frustration can kill your motivation."

"Silicon Valley startup culture embeds founders with the false belief that because growth is what matters most, we should pursue any and all strategies that could lead us there. Far wiser, and much more difficult because of the discipline and patience required, is ignoring those potential off-course avenues in favor of applying the experimentation, learning, and iteration process to the one thing in which you can be best at in the world, and letting those other strategies for growth wait until you’ve got truly massive scale."