01. Startup Fundamentals

Let's assume you want to get rich. How would you do it? Perhaps the best way to answer is by understanding how the rich got rich.

Every year since 1982, Forbes magazine has published a list of the richest people. If we compare the 100 richest people in 1982 to the 100 richest in 2020, we notice some big differences¹.

The number of people getting rich by inheritance declined not because people stopped inheriting fortunes, but because more people started making them. In 1982, getting rich by investing in early stage companies was almost unheard of. Oil and real-estate companies formed the largest portion of companies. All this changed because of the technological shift that was brought by the internet. Wealth was created more through innovation, entrepreneurship and financial expertise.

So, the best bet to become rich in today's world would be to start or invest in a startup!

What's a Startup?

A new business that is designed to scale fast is a startup. Millions of small businesses start every year: restaurants, barbershops, electronics or mobile phone shops, etc., but they are not startups because they don't scale.

Economically, a startup is a way to compress your whole working life into a few years². Instead of working at a low intensity for forty years, you work as hard as you possibly can for four. This pays especially well in technology, where you earn a premium for working fast.

If you are a decent programmer in your mid-twenties, you can get a job of about ₹20 lakhs (in India). This means you do at least ₹20 lakhs worth of work in a year for the company. One could probably do twice as many hours of work as a corporate employee and get twice as much work done in an hour with proper focus. You get another multiple of two when you eliminate the drag of all the middle managers and pointless meetings. There is another multiple of two possible assuming you are twice as smart as your job description expects you to be. Combine all these multipliers, the claim is that you could be 16-20 times more productive than in a random corporate job. So, the person worth ₹20 lakhs a year is worth ₹3.2 crores a year if you eliminate all the corporate nonsense.

Now, the claim is not that the productivity multiplier is in range 16-20. Because a company is solving a problem valuable enough, has tools which let employees perform better, has an established brand unlike a solo worker, etc. But the multiplier is certainly more than 10, and rarely as high as 100. Also, ₹3.2 crores a year is the limit case: the case where you enjoy nothing and work so hard that you endanger your health. So, there is a conservation law at work: if you want to make ₹1 crore, you have to endure ₹1 crore worth of pain. You can do that by spreading it in a span of 30 years, or compress all of it in 3 years.

But, how do I earn ₹100 crores? ₹1 crore a year seems too less to me! Well, one crosses beyond a particular mark when they get lucky! Bill Gates, Elon Musk, Mark Zuckerberg, and a whole list of self-made billionaires, no doubt they are very smart and hardworking, but they also got extremely lucky! Steve Jobs became billionaire not because of Apple, but because of Pixar! Steve barely looked at Pixar; he was just too busy with his NeXT Technologies. The problem statement, the solution, the business model, everything was the work of the CEO, Lawrence Levy, and the core Pixar team. He just happened to be the beneficiary in the early stages.

How Important Is Luck To Be Rich?

The short answer is: it is important.

Derek (Veritasium) has amazingly explained the role of luck in success in his video Why Being Delusional is a Superpower⁴. However, what people often miss is that the impact of luck is not uniform. To earn ₹100 crores, you must be extremely luckier than earning ₹10 lakhs. Unfortunately, people tend to give too much importance to luck even before ₹10 lakhs mark or ₹1 crore mark. They believe things are often not in their control, or they can do nothing to change whichever situation they are in. This is learned helplessness³. If one has picked this trait unintentionally, they must do deliberate practice to unlearn it if they really want to become rich.

People who have studied Probability Theory or Random Systems understand that even when events are occurring randomly, there can be an inherent pattern or distribution that can be exploited. If you understand the dynamics of luck, you can make yourself present at places where you have higher chances of getting lucky!

This insinuates the question, can we create our own luck? Can we do something different to be luckier than what we are today? I would want to believe the answer to this question is YES. Because if luck is so important in life, I am very doubtful that nature/supreme being/holy spirits/god distributes it randomly. It is simply too precious of an entity to be given out just like that.

And we don't want to be lucky all the time. We just want to be luckier slightly more often than the average. I believe over a long period of time, this small edge will compound to bring monumental differences. So, how to be lucky!?

How to be Lucky?

According to Marc Andreessen, there are four kinds of luck⁵.

Chance I: Blind Luck

In Chance I, the good luck that occurs is completely accidental. It is pure blind luck that comes with no effort on our part. For example, winning the lottery. Right place, right time. Thank your stars for this kind of luck and run with it.

Chance II: Motion

In Chance II, luck comes from activity. This was the kind of luck American Inventor, Charles F. Kettering, had in mind when he said: "Keep on going and chances are that you will stumble on something, perhaps when you are least expecting it. I had never heard of anyone stumbling on something sitting down." This luck encourages you to stir up the pot, and things will collide in fresh combinations and lets chance operate.

As an entrepreneur, if you happen to pick a good market, just being active in that market means that you are likely to stumble onto something. The advice to increase to enhance this kind of luck is to keep trying things. Stop analyzing, thinking, pondering; just do it! Have a bias to action.

Marc says, "The odds of a hit versus a miss do not increase over time. The periods of one’s career with the most hits will also have the most misses. So maximizing quantity — taking more swings at the bat — is much higher payoff than trying to improve one’s batting average."

Chance III: Recognizing Good Fortune

In Chance III, luck is present, dressed in camouflage, and blind to most. However, someone uniquely equipped to observe it, visualize it conceptually, grasps its significance. It involves a special receptivity, discernment, and intuitive grasp of significance unique to one particular recipient. It gives you that flash of brilliant insight, an 'a ha' moment that you get because you were able to put things together uniquely to recognize good fortune. Louis Pasteur characterized it when he said, "Chance favors the prepared mind."

When scientific discoveries happen by accident, this is the kind of luck mostly at play. The textbook example is Sir Alexander Fleming discovering penicillin accidentally. Some nine years before discovering penicillin, Fleming was suffering from a cold. His own nasal drippings had found their way onto a culture dish. He noted that something in his mucous had killed the bacteria. His experiments led him to discover the enzyme lysozyme but for reasons it couldn't be used for medical use. Fleming continued to search for alternatives that could kill the bacteria.

One day, he was at his work bench in the laboratory, made an observation, and his mental sequences then went something like this: (1) I see that a mold has fallen by accident into my culture dish; (2) the staphylococcal colonies residing near it failed to grow; (3) therefore, the mold must have secreted something that killed the bacteria; (4) this reminds me of a similar experience I had once before; (5) maybe this new something from the mold could be used to kill staphylococci that cause human infections. The discovery wasn't random. Fleming’s mind was exceptionally well-prepared.

Aaron Levie, CEO of Box, says, "To get ahead of the competition, startups need to focus on finding and creating unfair advantages — areas of their business that the competition simply can’t emulate. These advantages can manifest in the product, business model, and even how the business operates⁶."

If you aspire to do something truly legendary, in business or any other field, you will discover that the biggest breakthroughs come from obsessively pursuing insights that defy conventional wisdom. In the startup world, this translates to having what PayPal founder and Facebook investor Peter Thiel calls a secret or what Benchmark co-founder Andy Rachleff would describe as an idea that is non-consensus and right.⁷ Finding secrets or coming up with an idea that is non-consensus and right very often involves Chance III.

Chance IV: Luck Seeking You

In Chance IV, luck comes to you, unsought, because of your specific knowledge. We all have a distinctive individualized knowledge or skill. There is surely one thing we can do better than most around us. This is specific knowledge.

By 2019, there were not a lot of people who knew how to stream a live video online. It was a very niche/specific skill. Then COVID happened. And a lot of startup founders found opportunities for online businesses where people could connect live, teach in real-time, entertainment services flourished, etc. However, these people realized they couldn't take the advantage of the opportunity themselves. They found these specific technical people and shared millions with them. In simple words, if you are wonderful at something and people know about it, they will bring you their share of luck when they get lucky.

Reputation is so important to get lucky in this category. You would want to make long-term relationships that people would want to get their deals done via you. Warren Buffet gets the first offers to buy out companies and invest in them because of the reputation that he has built over years.

So, in order to be luckier than average, we should

1. Keep Moving. Keep Trying New Things. (Chance II)
2. Stay curious. Be prepared in terms of knowledge. Keep looking around and be receptive to camouflaged luck. We will get an aha moment soon. (Chance III)
3. Be exceptional at something (specific knowledge). According to Naval Ravikant⁸, this only happens when you do what looks work to others, but looks like play to you. And make sure that many people know about the specific knowledge we hold. Have reputation. (Chance IV)

The Value Creation Process

Before we conclude this article with principles of starting up, I would want to take a chance to rewire the way you think about money.

Understanding Value & Money

Society works on three concepts: wants, value creation, and value exchange.

Wants drive everything. Why do farmers grow crops and vegetables? Because people want food. Why do people open restaurants? Because people want to eat out. Why are there so many fashion brands? Because people want fancy clothes. You cannot create value unless you make something people want.

What is value? Consider the case of the bread. We know that people want bread. For it to be made, the farmer must first grow grains. Now grains by themselves are not as valuable. So the miller increases the value by converting them into flour. The baker then increases the value further by converting it into bread. The bread's value increases even more when it is packaged and distributed to every retail shop for us to have it at our convenience. Consider any product or service. By the time it reaches the end consumer, it has gone through a value creation chain, usually handled by different people at different steps.

In a specialized society like ours, you can't make most of the things you need for yourself. You need other people to provide you with that product or service. In order to get something from others, you must give them something in return. This is what we call trade or value exchange. Now, barter works fine as long as only two parties are involved. Suppose you are a tailor, and you want to get your house painted. You would stitch dresses for the painter, who in return would paint your house. But this is inefficient.

In a society with many painters, how would you find the painter who wants to get some dresses stitched? Or what if the painter wants to get dresses stitched but not this month, and you can't delay getting your house painted? And how would you solve multi-party value exchange? For example, suppose the painter immediately needs vegetables, the vegetable vendor needs someone to educate his kids, the teacher wants to get dresses stitched, and the tailor (you) wants to get their home painted. This value exchange works only when everyone has found someone else who can provide them what they want and the loop closes at some point. But why does one need to wait till the loop closes?

Hence, we invented money. You create value today and get paid in money. Tomorrow, when you want something, you can get it with the money you earned before. So, money is like the proof of value creation; it shows that you once created value in society, and now you want some value back when you spend it.

Every year people continue to create more and more value. Farmers create new crops every season, builders create homes that didn't exist before, new babies are born, new students enter school every year, doctors cure diseases that people never had before, new dresses appear on the market, new stories are written, new movies are made, etc. The existing money that people hold is the accumulation of all the value they had created by that time. So, to keep rewarding this value creation process, the government prints more money every single year and puts it into the economy. The job of the reserve/central/federal bank (depending on the country) is to ensure that they don't print more or less money than the value created.

So, in an ideal scenario, people should have more money with each passing year. This means they can afford to consume more: buy more bread, get more dresses, own bigger houses, etc. But the supply of the majority of things is limited. A given area of land can produce only a certain amount of crops, only so many houses can be built on the land available, etc. So, to balance this rising consumption, the prices of goods and services must increase. And that's inflation.

So, the more value we create in society, the more money the government has to put into the economy. This debunks a very popular myth: if rich people had all the money, it left less for everyone else. If you plan to start a startup, then whether you realize it or not, you're trying to disprove this fallacy.

Lastly, value can be created without being sold. Scientists, till recently at least, effectively donated the wealth they created. We are all richer with the contributions made in medical science because we're all less likely to die from basic infections. We have access to the internet which has made the whole society wealthier than ever before 1990. No doubt billionaires put billions of dollars into AI, but now that we all have access to it, we are all wealthier with it than before 2022. Almost every server on the internet runs on Linux, which was developed by Linus Torvalds for free!

Problem With Jobs

After completing education, people in most countries join a company as an employee to earn money. A company is an institution that is creating value, and people picking up jobs in a company help it in its value creation attempts.

In a conventional setting, jobs don't make us rich. This is because of two issues.

1. Companies are not set up to reward people who work extremely hard. You can't go to your boss and say, "I'd like to start working ten times as hard, so will you please pay me ten times as much?" So, everyone works at their average potential and even when one attempts to work hard, the returns that the company makes eventually more or less average out to all employees. Also, most employees work in an interdependent manner. Even if the CEO wants to pay everyone proportionate to their work, there is no way we can measure the work contribution so accurately.

2. In a job, your inputs are very closely tied to your outputs, like professionals. Doctors, lawyers, accountants, teachers, and all other professionals wouldn't make money if they stopped providing their professional services. You simply can't earn non-linearly. Doctors get rich when they open a hospital which keeps working even in their absence, lawyers open law firms, accountants open accountancy firms, teachers would need to open schools/colleges, etc. But just providing services on an hour-by-hour basis would never make us rich because we have so few of them - just 24 in a day!

Another drawback about a job is that, in the majority of jobs, people don't create enough value. They are being asked to do the bare minimum so that the machine keeps working. And since there is no high intellectual effort being made in a particular job, those people get the bare minimum to get things done because they are so easily replaceable. Most set roles can be taught, and if they can be taught, anyone else could replace you.

To be rich, you need to get yourself in a situation with two things, measurement and leverage². You need to be in a position where your performance can be measured, or there is no way to get paid more by doing more. And you have to have leverage, in the sense that the decisions you make have a big effect. An example of a job with both measurement and leverage would be a lead actor in a movie. Your performance can be measured in the gross earnings of the movie. And you have leverage in the sense that your performance can make or break it.

Other examples of people in similar situations are CEOs, media stars, hedge fund managers, and professional athletes. A good hint to the presence of leverage is the possibility of failure. Upside must be balanced by downside, so if there is big potential for gain there must also be a terrifying possibility of loss. CEOs, stars, fund managers, and athletes all live with the sword hanging over their heads; the moment they start to suck, they're out. If you're in a job that feels safe, you are not going to get rich, because if there is no danger there is almost certainly no leverage.

Another problem that keeps people poor is that their lifestyle is very much connected with their monthly salary. When you do a job, you don't suddenly jump from earning ₹20 lakhs a year to ₹1 crore a year. That's a progression over a long career. And as that happens, one subtle problem is you upgrade your lifestyle as you make more and more money, and you stay in the wage-slave trap⁸. The way you want to get rich is by keep working and working when you are poor and suddenly one day you get a big paycheck. This is again how startups work. You don't make money for years, and then you have a giant pay-day.

Measurement & Leverage

To be able to measure the individual contributions, you must be a small team (at max 10 people). Smallness = Measurement. Remember that a startup is not merely ten people, but ten people like you or better than you who also want to work harder and get paid a lot more money than in a big company.

Leverage comes by inventing new technology or technique. Technology = Leverage. It's the way we all do things. And when you discover a new way to do things, its value is multiplied by all the people who use it. The leading edge of technology moves fast. Technology that's valuable today could be worthless in a couple of years. And one way to be in position of leverage is by solving hard problems.

It's obvious that biotech or software startups exist to solve hard technical problems, but I think it will also be found to be true in businesses that don't seem to be about technology. McDonald's, for example, grew big by designing a system, the McDonald's franchise, that could then be reproduced at will all over the face of the earth. A McDonald's franchise is controlled by rules so precise that it is practically a piece of software. Write once, run everywhere. Ditto for Walmart. Sam Walton got rich not by being a retailer, but by designing a new kind of store.

Use difficulty as a guide not just in selecting the overall aim of your company, but also at decision points along the way. In startups, one thumb rule should be run upstairs². Suppose you are a little, nimble guy being chased by a big, fat, bully. You open a door and find yourself in a staircase. Do you go up or down? I say up. The bully can probably run downstairs as fast as you can. Going upstairs his bulk will be more of a disadvantage. Running upstairs is hard for you but even harder for him.

Paul Graham says, "What this meant in practice was that we deliberately sought hard problems. If there were two features we could add to our software, both equally valuable in proportion to their difficulty, we'd always take the harder one. Not just because it was more valuable, but because it was harder. I can remember times when we were just exhausted after wrestling all day with some horrible technical problem. And I'd be delighted, because something that was hard for us would be impossible for our competitors."

Unfortunately there are a couple catches. One is that you can't choose the point on the curve that you want to inhabit. You can't decide, for example, that you'd like to work just two or three times as hard, and get paid that much more. When you're running a startup, your competitors decide how hard you work. And they pretty much all make the same decision: as hard as you possibly can.

Paul continues, "A startup is like a mosquito. A bear can absorb a hit and a crab is armored against one, but a mosquito is designed for one thing: to score. No energy is wasted on defense. The defense of mosquitos, as a species, is that there are a lot of them, but this is little consolation to the individual mosquito. Startups, like mosquitos, tend to be an all-or-nothing proposition. And you don't generally know which of the two you're going to get till the last minute. Viaweb came close to tanking several times. Our trajectory was like a sine wave. Fortunately we got bought at the top of the cycle, but it was damned close. While we were visiting Yahoo in California to talk about selling the company to them, we had to borrow a conference room to reassure an investor who was about to back out of a new round of funding that we needed to stay alive."

I think it's a good idea to get bought, if you can. Running a business is different from growing one. How do you get bought? Mostly by doing the same things you'd do if you didn't intend to sell the company. Being profitable, for example. Potential buyers will always delay if they can. The hard part about getting bought is getting them to act.

For most people, the most powerful motivator is not the hope of gain, but the fear of loss. For potential acquirers, the most powerful motivator is the prospect that one of their competitors will buy you. The second biggest is the worry that, if they don't buy you now, you'll continue to grow rapidly and will cost more to acquire later, or even become a competitor. In both cases, what it all comes down to is users. You'd think that a company about to buy you would do a lot of research and decide for themselves how valuable your technology was. Not at all. What they go by is the number of users you have.

In a startup, you're not just trying to solve problems. You're trying to solve problems that users care about. A restaurant can afford to serve the occasional burnt dinner. But in technology, you cook one thing and that's what everyone eats. So any difference between what people want and what you deliver is multiplied. You please or annoy customers wholesale. The closer you can get to what they want, the more wealth you generate.

13 Principles Of A Startup

I would love to conclude this article with 13 principles of a startup, shared by Paul Graham in his essay⁹.

1. Pick Good Co-founders.

Co-founders are for a startup what location is for real estate. You can change anything about a house except where it is. In a startup you can change your idea easily, but changing your co-founders is hard. And the success of a startup is almost always a function of its founders.

2. Launch Fast.

The reason to launch fast is not so much that it's critical to get your product to market early, but that you haven't really started working on it till you've launched. Launching teaches you what you should have been building. Till you know that you're wasting your time. So the main value of whatever you launch with is as a pretext for engaging users.

3. Let Your Idea Evolve.

This is the second half of launching fast. Launch fast and iterate. It's a big mistake to treat a startup as if it were merely a matter of implementing some brilliant initial idea. As in an essay, most of the ideas appear in the implementing.

4. Understand Your Users.

You can envision the wealth created by a startup as a rectangle, where one side is the number of users and the other is how much you improve their lives. The second dimension is the one you have most control over. And indeed, the growth in the first will be driven by how well you do in the second. As in science, the hard part is not answering questions but asking them: the hard part is seeing something new that users lack. The better you understand them the better the odds of doing that. That's why so many successful startups make something the founders needed.

5. Better to make a few users love you than a lot like you.

Ideally you want to make large numbers of users love you, but you can't expect to hit that right away. Initially you have to choose between satisfying all the needs of a subset of potential users, or satisfying a subset of the needs of all potential users. Take the first. It's easier to expand user-wise than satisfaction-wise. And perhaps more importantly, it's harder to lie to yourself. If you think you're 85% of the way to a great product, how do you know it's not 70%? Or 10%? Whereas it's easy to know how many users you have.

6. Offer surprisingly good customer service.

Customers are used to being maltreated. Most of the companies they deal with are quasi-monopolies that get away with atrocious customer service. Your own ideas about what's possible have been unconsciously lowered by such experiences. Try making your customer service not merely good, but surprisingly good. Go out of your way to make people happy. They'll be overwhelmed; you'll see. In the earliest stages of a startup, it pays to offer customer service on a level that wouldn't scale, because it's a way of learning about your users.

Tim Cook won't be able to send a handwritten note when a customer buys an iPhone or Macbook, but you can! That's the advantage of being small.

7. You make what you measure.

I learned this one from Joe Kraus. Merely measuring something has an uncanny tendency to improve it. If you want to make your user numbers go up, put a big piece of paper on your wall and every day plot the number of users. You'll be delighted when it goes up and disappointed when it goes down. Pretty soon you'll start noticing what makes the number go up, and you'll start to do more of that. Corollary: be careful what you measure.

8. Spend Little.

I can't emphasize enough how important it is for a startup to be cheap. Most startups fail before they make something people want, and the most common form of failure is running out of money. So being cheap is (almost) interchangeable with iterating rapidly. But it's more than that. A culture of cheapness keeps companies young in something like the way exercise keeps people young.

9. Get Ramen Profitable.

Ramen profitable means a startup makes just enough to pay the founders' living expenses. It's not rapid prototyping for business models (though it can be), but more a way of hacking the investment process. Once you cross over into ramen profitable, it completely changes your relationship with investors. It's also great for morale.

10. Avoid Distractions.

Nothing kills startups like distractions. The worst type are those that pay money: day jobs, consulting, profitable side-projects. The startup may have more long-term potential, but you'll always interrupt working on it to answer calls from people paying you now. Paradoxically, fundraising is this type of distraction, so try to minimize that too.

11. Don't Get Demoralized.

Though the immediate cause of death in a startup tends to be running out of money, the underlying cause is usually lack of focus. Either the company is run by stupid people (which can't be fixed with advice) or the people are smart but got demoralized. Starting a startup is a huge moral weight. Understand this and make a conscious effort not to be ground down by it, just as you'd be careful to bend at the knees when picking up a heavy box.

12. Don't Give Up.

Even if you get demoralized, don't give up. You can get surprisingly far by just not giving up. This isn't true in all fields. There are a lot of people who couldn't become good mathematicians no matter how long they persisted. But startups aren't like that. Sheer effort is usually enough, so long as you keep morphing your idea.

13. Deals Fall Through.

One of the most useful skills we learned from Viaweb (PG's startup) was not getting our hopes up. We probably had 20 deals of various types fall through. After the first 10 or so we learned to treat deals as background processes that we should ignore till they terminated. It's very dangerous to morale to start to depend on deals closing, not just because they so often don't, but because it makes them less likely to.

Having gotten it down to 13 sentences, I asked myself which I (PG) would choose if I could only keep one.

Understand your users. That's the key. The essential task in a startup is to create wealth; the dimension of wealth you have most control over is how much you improve users' lives; and the hardest part of that is knowing what to make for them. Once you know what to make, it's mere effort to make it, and most decent hackers are capable of that.

Understanding your users is part of half the principles in this list. That's the reason to launch early, to understand your users. Evolving your idea is the embodiment of understanding your users. Understanding your users well will tend to push you toward making something that makes a few people deeply happy. The most important reason for having surprisingly good customer service is that it helps you understand your users. And understanding your users will even ensure your morale, because when everything else is collapsing around you, having just ten users who love you will keep you going.

You now know most of the things what one should know before starting up. So now, Let's Startup! 🙂