The rst things you need to know when starting a company...

Nir Eyal nir@nireyal.com

So much advice you could be listening to. Blogs, mentors, books, speeches, videos - limitless ways for you to spend your time unproductively Im sympathetic to this dilemma. Thats why Im here today, Ive started and successfully sold 2 companies, went to Stanford bschool, and learned from teams of great people. Im here to share some lessons I hope will help you

Startups are easy and I have all the answers.

Well youre in luck, turns out startups are easy and I have all the answers which I will impart on you today. Ensure youll all be billionaires next year. Of course this isnt true, but every source you talk to will make it sound this way. But no one has all the answers, youre doing something brand new. It doesnt matter how condent someone is in giving you advice, or what theyve accomplished in the past, or how much they curse, you need to remember that all advice is autobiographical and its your job to lter. That being said, the wonderful thing about Silicon Valley is that people are very open and generous with sharing their insights, and Im honored to be able to share what Ive learned about this topic. So heres my take on what should matter to you right now on the topic of startup research.

You need to understand your...

Self User Industry Fulcrum

You need to understand 4 things Yourself, your user, your industry, and your fulcrum and Ill walk you through what you need to know about each one.

Who are you?

Capacity Function Passion Contribution

First, its critical you do some startup research on yourself. And I think you need to answer these four areas for yourself - your capacity, your function, your passion, and your contribution. Because when it comes to deciding what youre company is about (PAUSE) you really need to know what YOU are about...

You are your company.

Because you are your company. A lot of entrepreneurs dont really understand this. The DNA of the founders, almost literally, the blood, sweat, and tears, form your company. It will be your own esh, your baby, believe me. My daughter was born the same week that I closed my angel round on my last company and let me tell you, I spent much more of my life working on my business, and with equal affection. So realize that you cant disconnect yourself from your company, you are one. Your personality, your virtues, your aws, will all be expressed in your company. So the rst thing you need to understand about yourself, is...

Capacity: 3 Ps to succeed

your Capacity. You need to be very honest with yourself and ask yourself if you have the 3 Ps required for entrepreneurial success. These are the 3 things I think you MUST have as an entrepreneur. I believe they can all be learned over time but its hard work and not for everyone. The rst and most important thing you must have is the ability to..

Prioritization

Prioritize Prioritization is about knowing what matters and what doesnt. It requires making very hard decisions: Ask yourself: - Are you good at nding the signal in all the noise and understanding whats the MOST important thing to do right now? and whats waste? - This is the capacity I see most lacking in 1st time entrepreneurs - the ability to understand what really matters and act according to whats most important for their business. The ability to prioritize is critical. Next is ..

Positivity

Positivity As an entrepreneur, your game face needs to be ALWAYS on. Peoples jobs, their businesses, and their money is riding on you. Can you always stay positive in the face of adversity? Can you persuade, can you sell? Can you sell to prospective employees on why they should join your company? Can you sell investors on why youre worthy of their capital? And of course, most importantly, can you sell to your customers? Selling requires positivity. You just cant persuade without oozing positivity. If you cant do this well or arent willing to learn quick, get out of entrepreneurship. and nally...

Perseverance

Perseverance Like Sisyphus here, you need to be able work very, very hard under extreme uncertainty of ever accomplishing your goal. Entrepreneurship is not a sprint, its a long journey requiring true grit. While I can not guarantee you success, one thing I can promise you is that you will have failures along the way. How you deal with adversity and struggle, namely how you recover and keep pushing that bolder up the hill, will play a huge role in the story youll tell your grandkids some day. You MUST have grit! If you dont have grit, you need to nd another line of work.

Exit criteria
Capacity - Am I ready? Function - What role do I want to play? Passion - What do I want to ght for? Contribution - What do I want to work on?

So Ive just reviewed what I think encompasses your entrepreneurial capacity. But I think there are more things you need to understand about yourself before moving forward. While the other things Ill show you in this presentation will be iterative questions which youll constantly need to research as you go, I think you need to know yourself rst, and make sure you know what you want out of this experience. This is your base on which everything else is built. So you need to answer these questions. (read them off) Now heres the important thing.. you need to answer these questions and give the answer ASSUMING you will FAIL. That is to say, What do I want to ght for, even if I fail? This is a test for making sure your walking on a journey, not charging towards an illusive outcome. If your doing it for the dream of money or prestige, your delusional. But if youre driven by a function, passion and contribution you really care about, youre going to succeed no matter what. Ok, so youve concluded the research about yourself and youve determined youre in! Great, next, lets talk about researching your user...

Who is your user?

Notice I didnt say customer, customer is the person who PAYS you, and that may or may not be your user. Its important to truly understand the person using your product rst and foremost. You need to know him extremely well. This is a tool called an empathy map developed by a company called XPlane. This tool allows you to better understand the wants and needs of your users in a systematic approach. Why is it so important to intimately focus on your users?

People Needs Business vision Uses Features User stories

Source: Janice Frasier, LUXr

Code

Because, people are the beginning of what your building for. Many rst time entrepreneurs start with the end product, the nished code. Well thats actually the last place to start. This is something I learned from Janice Fraser at Luxr. You must rst start with people, living breathing real people! And those people have needs. What are they? Then, if you have a REAL person with a REAL need Then, you can gure out if there is a business model to address those needs. Then, you can think what USES the businesss product will be helpful for. Next, what features are required to carry out those uses? Then, those features will get translated into user stories, which can then be scoped and prioritized and only then, does code get written. But everything starts with the user, the person your building for. If you dont know enough about the user, the person at the TOP, everything downstream will be crap. Of course one easy way to increase your odds of creating something people actually need...

Scratch your own itch

Is to scratch your own itch. Your life will be much easier if people like you, or people you already know very well, are your users. Be aware that your cycle time for getting user feedback will be much faster if you have ready access to your users. Whereas, if your users are far off in some big corporate tower across the country, in an industry you dont know well, well feedback is going to be very slow. Its best to make stuff that scratches your own itch if at all possible. In fact, I see very, very few companies make it when they dont make something that scratches their own itch. They just come off as inauthentic entrepreneurs and they usually loose to people who understand the user much better than they do. In any case, make sure you know enough about your user to answer questions like these...

Do you know?

Where do they spend their time? Who are their friends? Whose opinions inuence them? What do they SAY their deepest aspirations and beliefs are? What feelings and beliefs ACTUALLY guide their behavior?

(READ OFF SLIDE) after you can answer these kinds of deep questions, and you know who youre building for, your are now ready to understand your industry...

What makes your industry tick?

Business models Power

The next step is to understand how your industry works, what makes it tick. This will be something you will never stop learning, but most of what really matters in your business can be learned quickly using some tools and thought starters Im about to show you. I think two things are critical to understand as soon as possible. 1- What are the business models in your industry? 2 - Who holds the power?

Business Model

Source: Alex Osterwalder, Business Model Generation

Lets look at business models rst. This is from Alex Osterwalders book on business model generation. So what is a business model? (ask class) Heres the denition per Osterwalder: A business model describes the rationale of how an organization creates, delivers and captures value. The critical pieces of the business model are the elements above in this graphic. I dont have time to go through all of the pieces of a business model but Osterwalders technique is the most simple yet comprehensive Ive seen.

Source: Alex Osterwalder, Business Model Generation

With it, you can framework the fundamental elements of the business models of players in your industry as well as your own business model. This is his iPad app and this happens to be the business model for book publishing. If you want to learn more than I can cover in this talk, I recommend you take a look at his book...

A great guide

I wish I could break it all down for you right now but I only have 20 minutes. However, I think this is one of the best guides Ive seen. BTW, Osterwalder is from Netherlands but hes giving a 2 day seminar next month on how to apply his work. I think its very much worth attending. see me afterwards if you want more details. So lets say you now understand the fundamentals of your industrys business models. The next thing you need to understand about your industry is..

Power
...Who has the power You see, power within an industry is not distributed evenly. And in every industry, there are always the companies, or sometimes its just one company, who have their unfair share of the power. Power allows them to dictate the direction of the industry, and the terms. Usually, (SLOW) its the companies who are closest to the user ... that have the power. Understanding who really has the power, allows you to understand what your company has to contend with. If you have a technology that helps unseat power, thats exciting! But if you have a company which doesnt change the control of power, you may nd that youre in for a very long, hard slog, that you have a high probability of never winning.

For example.. In advertising, who really has the power? Look at this mess. You wouldnt know this unless you were in the industry, but... At the end of the day, the guys who own the eyeballs, the publishers have the power. Because they own the product which is being sold, namely your time and attention. Now, power may not be spread evenly among them, certainly, if youre not a top 10 content destination, you have a lot less power. But, the top 10, when it comes to off and online advertising - they very much dictate terms that others have to follow. Dont believe me? A good way to know who has power in and industry is by asking who treats customers like crap, but gets paid anyway? Ask any advertiser, the guy who actually pays, if they like buying ads from Google or Facebook, and youll have your answer. The level of service sucks, but we have to buy it thats what theyll tell you. The implication is that if youre business model depends on monetizing through advertising... youd better plan to shake up the power dynamics of the business or plan to be a power holder yourself, that is, be a top 10 content site You see...

Innovation comes from changing power dynamics...

... innovation comes from changing industry power dynamics. This change leads to what Jeff Moore describes as industry Evolution, Revolution or Disruption. The bigger the power shift to new industry players, the greater the degree of change. The thing that creates this shift in power, is the next thing you need to research and understand next, I like to call it, the fulcrum.

Fulcrum

The fulcrum is where leverage comes from and its very powerful. It is the thing that changes an industry. The fulcrum is: (pause) a hypothesis about what will change the power dynamic in your industry. And spotting the fulcrum before others do, will allow you to move your industry, just like this boulder.

A fulcrum contains:
Scenario Abstruse insight Evidence

A fulcrum contains three elements: a scenario, an AB-STROOSE insight, and evidence. Lets dig deeper...

Scenario
What is happening? Why it changes the industry? When?

First, lets discuss scenarios. A scenario describes the change that is happening... - HOW it will fundamentally change the industry... - And very importantly,when.. Remember, too early is just as bad as wrong. Startups are always obsessed with being rst, but often times they are Way early. Remember the Apple Newton? Remember all those guys who laid down high-speed ber in the 90s? As you do your research, you need to know why NOW is the time for your scenario to occur. Now, whether this scenario actually plays out is of course uncertain. But as the entrepreneur, that uncertainty is a good thing. Because even though YOU may see a scenario playing out, others wont see it, or choose not to see it. Having a non-consensus view on your scenario may be a great thing. Its the reason big companies almost never innovate well. Big organizations are built around consensus decision making and they only move when everyone agrees on what the future scenario will look like. But as an entrepreneur, you dont want to do be part of a change everyone else agrees will happen.

NonConsensus

Wacko

Consensus

Bubble

Death match

Wrong

Right

You want to be a star - a company that is guided by a non-consensus scenario, that proves right. Big companies, and unfortunately, way too many startups, tend to innovate from the bottom half of this 2 by 2. Theyre driven by consensus scenarios which are either wrong or right, but neither are fun places to be. If youre wrong about the consensus scenario, you were in a hype bubble. But even if youre right, you end up ghting a death match with competitors who are already in the space. But if you have a non-consensus view of a future scenario, you have the risk of being wrong, and just being a wacko because you did something that didnt work and everyone told you it wouldnt. But, you also have the opportunity of being a star. This is where the money gets made and where companies change the world. They see a non-consensus scenario playing out, and they end up being right. So how do they know? Are they just lucky? Well, it might look like luck but if you scratch below the surface youll uncover what makes the difference between wackos and stars, its what I call the abstruse insight...

Abstruse insight

The AB-STROOSE insight is data which makes your scenario possible. Its a fact, a truth, which few people know, and even fewer can interpret the consequences of. The word Abstruse means something a little bafing or hard to believe. You see, people never see non-consensus scenarios before they happen. Its only because of abstruse insights that massive industry changes seem to come out of nowhere. When you share an abstruse insight with someone, look for this kind of reaction. It should invoke the reaction really? Its the reaction you probably had the rst time you heard that people were buying virtual corn on Farmville with real money. Or the rst time you used Twitter and said the often heard why would I want to tell the world I just went to the bathroom? That kind of reaction is typical for a business that has an abstruse insight. And by nature, companies who base their scenario on an abstruse insight, are nonconsensus...and thats great, because it gives you an opportunity to win big because you can y under the radar while others are left scratching their heads. But to nd your abstruse insight, you need to collect data in the form of ...

Evidence of an abstruse insight informs your scenario.

...Evidence Evidence of an abstruse insight informs your scenario. You need evidence that your insight is for real, and therefore your scenario is likely to come true. So what will your evidence look like?

Evidence of moving down the adoption curve

Source: Moore, Crossing the Chasm

Evidence is data that you are moving down the adoption curve. This is Moores technology adoption curve, its the path every new technology follows to mainstream adoption. Where your company and industry are on the adoption curve dictates the evidence you need to look for and the kind of abstruse insight that really matters. Let me show you what I mean...

If youre here....
Evidence = new user behaviors and habits

If you and your competitors are here, at the very tip of the adoption curve, then the evidence you want to look for is ENGAGEMENT - proof that users absolutely love your product even though its in beta and is really ugly, theyd kill you if you took it away. They exhibit a new behavior no ones else has seen before and they are addicted to your product. Your AB-STROOSE insight will relate to how you gured out a new user need that youre fullling in a really unique way. Your insight will be how you cracked a user need that no one knew existed. And your evidence will show very low turnover and very high engagement. You want to show that your bucket is lling with new users and those you have are very active. If youre in this stage on the adoption curve - your priority is CREATING ADDICTS, thats it! Dont waste your time on PR or other bullshit. Make addicts! However...

But, if youre here....

Evidence = growth into mainstream

If you and your competitors are here, serving early adopters and pushing to the early majority, than your evidence needs to show GROWTH - proof that youre making the move to a wide audience. Your abstruse insight will relate to how you gured out an amazing new way to grow your user base. Your insight will relate to how you cracked user growth in a way no one could gure out before. BTW - many companies start here. I think its a great place to start a company even though some people think it feels like starting a me too business. Dont feel like you have to start something brand new. Finding the Innovators is really hard Facebook, Zynga, Dropbox, Google - all went into markets where competitors were stuck in the chasm between early adopters and wide adoption. Each of them discovered an abstruse insight which made mainstream adoption, and growth possible. Its perfectly ne to go into a space with lots of competitors if you have an insight that can move the market down the adoption curve. So if your company is in this phase of a technology adoption curve, your priority needs to be all about GROWTH. You should be focused on making adoption by the mainstream possible and easier. Growth is all that matters.

Weve covered a lot of ground today. Ive shown you the four things I think you need to understand right now. - Yourself - Your user - Your industry - and Your fulcrum Obviously, there is so much more to learn But, if you ultimately decide that you ARE an entrepreneur, I sincerely hope you enjoy the journey. If you self-select into this club of rebels, hackers, billionaires and blowhards, youre entering into a special community. Youre fortunate to be in the greatest place on earth to start a business - Silicon Valley USA. and the people in this community want to help you succeed. (Pause) I want to help you succeed. You may not fully grasp just how much people really do want to help you succeed. A VC who invested in my last company once told me that the reason she is in this business, is that investing in big ideas that change the world, makes her feels she can touch immortality. People take your success seriously and its up to you to get the most out of this experience. You CAN do this, and dont let anyone tell you different. Now go out and do great work! Thank you.

QA and Feedback

http://goo.gl/UEEX2 nir@nireyal.com

Id be happy to take some questions and start a discussion. But while we do that, I love feedback and would love if those of you with smartphones could use this QR code or go to this URL where youll nd a very brief 5 question survey. If you dont have a smart phone please email me at this address and please let me know any areas for improvement in my presentation today. OK, any questions or comments? *** (Call and response (not Q&A) stay super open to the crowd answering questions for themselves, always answer each question with (what do you all think?)) Reason and evidence