Seven major pitfalls of startup founders – Part 1

This is the excerpt of widely circulated notes by Tang Binsen, a famous gaming entrepreneur in China whose company created Clash of Kings, among other games and tools. 

Pitfall 1: not objective towards your work

• Over-estimating your chance of success. If you ask a founder what is the likelihood of success for his startup, he might say 50%. However, in reality it would more likely to be 5%.
• Founders often think their companies are growing fast enough. In reality, if you can’t grow faster than Alibaba – a mature company with 40%+ CAGR, you are not growing fast enough. Also, if you just acquire customers but can’t have transactions, it means your core KPI is not moving. It will create an illusion that you are growing whilst in fact you are not.
• Do not focus too much on your hard core loyal customers – even if you have a shitty product, you will still have hard core loyal customers. They are not representative.
• If the founder is not objective, it is hard for others in the chain of command to be.
• What is the most objective KPI? Well, to determine whether users love you product, it is best to see if they are willing to pay for it. Any company that does not make money is a shitty company. Also, whether your gross margin can be better than your competitors for the long term is a good indicator of whether you have created a moat.
• How do you evaluate whether you are on the right timing? If you can acquire a lot of loyal customers at very low cost. If you need a lot of money to acquire customers – then your timing is not right.
• Focus on NPS.
• It is not human nature to be objective. People tend to believe what they believe, so it requires a bit of determination to jump out of your biases and see this world objectively.

Pitfall 2: Forgetting that the world is continuous 

• Many business models look revolutionary, but in reality they are stepping into no man’s desert. Many business models seem to be in a hotly contested red ocean, but they face good opportunities and vast growth potential.
• Founders often look for blue ocean with no competition, they typically find desert instead, where nothing grows.
• Starting up is not doing something nobody has done. It is doing something better than others.
• Do not “design” your business model too much. If you see a business model that only you are doing but nobody else is, then you are probably stepping into a desert.
• Learn about Bayes’ theorem. You can predict the future with probabilities. Of course, some major shifts are much harder to predict.
• Why do we always say “this is the year of SaaS taking off”? Why do we always say “this is the year of Chinese entrepreneurs going into India”? If you are playing cards, do not go to the table where the chips are limited, but opponents strong.
• If you find an opportunity that is not simple continuum from the past, congratulations! How to determine? The macro market growing 5-10 times in a year.
• If you are building a business model outside China where your competition is all Chinese – you are not really building a business model outside China.

Pitfall 3: Distracted by noise, and forgetting about the basics

• Doing things that are not relevant from the core – focus on buzz words and means rather than the reasons. This is missing the point.
• Example: a founder learns only the obsession of details and rudeness of Steve Jobs, not other factors (including luck and timing) that truly made him successful.
• Example: “Uber of everything”.
• Do not spend time talking about concepts, but focus on customer requirements. Be careful about people who focus on concepts and do not waste too much time with them.
• Whether a model is good enough – the most important is if you can get people to pay, and if you have good gross margin. If you can’t, then it is not a good model.
• Try to understand human nature – many things that define human Do Not change.
• What kind of signals are useful? Anything that is instantly effective is probably not lasting – focus on right things that are hard to execute. If you manage these, you create value and moat.

Pitfall 4: Underestimating the role of luck

• Successful people often overestimate their alpha, and underestimate their luck and beta. That is why many successful companies in bull markets crumble during a downturn.
• Keep humility – and be thankful to the timing and luck.
• The only opportunity to take off is when you are riding a tide. So really good founders will look for the tide rather than focus on their own skills. Spend a lot of time thinking about that – it is worth it.
• Capabilities and luck could interact with each other. If you believe in your capability, then try a few more times to reduce the uncertainties brought by luck, and increase your likelihood of success.
• Good and resilient founders keep trying and finally will catch up on luck.
• Keep away from two types of people: 1st, those who have tried for 10 years without any success – the factor of luck is already minimal, it probably means their capabilities are questionable; 2nd, those who are extremely lucky when they start but actually very weak in capabilities, because their next gig will probably falter. Try to distinguish luck from capabilities and find people who have truly exceptional capabilities to work with.

to be continued…