Goldenson.com

In a recent coffee with Steve Blank, the topic of entrepreneurial personality traits came up. We talked about the Myers-Briggs scale, which classifies our preferences and tendencies on a spectrum of four traits:

–Extroversion (E) vs. Introversion (I): Where do you put your social attention and get your energy? Extroverts get it from socializing, introverts from being alone or in small groups. Introverts are not necessarily shy; they just enjoy solitude more. 

–Intuition (N) vs. Sensation (S): Where do you put your mental attention and how do you process information? Intuits favor patterns, theory, and focusing on the future. Sensates favor details, sensations, and focusing on the past and present.

–Thinking (T) vs. Feeling (F): How do you make decisions? Thinkers favor facts and principles, feelers favor personal concerns and harmony. 

–Probing (P) vs. Judging (J): How do you organize your life? Probers are more spontaneous and flexible, judgers are more deliberate and structured.

Myers-Briggs doesn’t say people are all one side of the spectrum or the other. It posits we have natural set points for each trait, and while we can exert effort to temporarily be more one way or the other, at rest we tend to resort to our set point.  

Controversially, it does say people should strengthen these tendencies and find the best environmental fits rather than try moving to the center on all traits and being all things. For example, introverts shouldn’t try to gain energy from socializing, but strengthen their ability to reflect and enjoy solitude.

What set of traits do you think most favors entrepreneurialism? While any combination can succeed, I think there’s a clear combination most predisposed to startups: ENTPs. These folks are only ~3% of the population and classified as Inventors: 

“Inventors are keenly pragmatic, and often become expert at devising the most effective means to accomplish their ends. They are the most reluctant of all the types to do things in a particular manner just because that’s the way they have been done. As a result, they often bring fresh, new approaches to their work and play.

They are intensely curious and continuously probe for possibilities, especially when trying to solve complex problems. Inventors are filled with ideas, but value ideas only when they make possible actions and objects. Thus they see product design not as an end in itself, but as a means to an end, as a way of devising the prototype that works and that can be brought to market.

Inventors are confident in their pragmatism, counting on their ability to find effective ways and means when they need them, rather than making a detailed blueprint in advance. A rough idea is all they need to feel ready to proceed into action.”

Steve and I discussed the importance of both intuition and sensation for his concept of customer development. Steve says entrepreneurs should start with a vision (intuition), then collect data to validate their hypothesis and revamp the vision (sensation). Entrepreneurs without intuition will get lost in data and miss valuable patterns; entrepreneurs without sensation will chase ideas without supporting data and produce unwanted products. It’s a tough balance.

As a dyed-in-the-wool ENTP, I have felt the temptation to brainstorm in a dark room without customer data. I am good at seeing patterns of behavior and needs people may have, but I need to focus more on confirming these ideas by getting outside my head and the building, as Steve would say. 

It’s worth noting Myers-Briggs is itself the product of intuition. It is based on Carl Jung’s theories, which relied primarily on anecdote instead of controlled studies. Another prominent personality tool used to diagnose mental illness, the Minnesota Multiphasic Personality Inventory, is entirely empirical with no initial theory. The creators just posed a list of 600+ questions to people and observed what answers correlated to diagnosed mental illnesses. It is a sensate method.

Of course, any psychological theory is a simplification compared to the complexity of actual people. Yet, my (intuitive) observations are that ENTPs have an inherent advantage in entrepreneurship, and are at the very least, a lot of fun to be around. 🙂

P.S. I’m mainly focusing on the traits of founders. Early employees in other roles are probably optimized by other combinations, like architects (INTPs) and salespeople (ESTPs).

Who is more important in a business transaction: the buyer or the seller? It is tempting to believe they are equally important, but I will argue that buyers are a lot more important.

A thought experiment: go to a street corner and try to sell a bag of snot for $1,000. Would you have any takers?

From the same corner, offer $1,000 for a bag of snot. What would happen? You’d have people lining up for half a mile sneezing into bags.

This is a bit misleading because a bag of snot has a market value of almost zero, unless perhaps it’s celebrity snot. If you substituted “bag of snot” with “cure for cancer”, no credible research firm would accept a buyer’s offer of $1,000. The market value for a cancer cure would take a novelty-sized check to print.

The examples illustrate the source of power in business: demand. Buyers drive markets. 

A definition of a market by Merriam-Webster is the extend of demand for a product or service, not how much of it can be supplied. Sellers can influence demand, as the $100 billion TV ad market tries. They can even occasionally create demand, as much of the beauty industry tells you happiness is just a body wash, tummy tuck, or dick pill away. But this is very expensive. Sellers still primarily follow where demand leads them.

This is true even if there is scarcity or monopoly on a low-demand good. If you are the only person on the planet that can create a bag of snot, the demand for it is still limited to its novelty value, which is likely small (but probably above zero; items like Christ-shaped potato chips have a few buyers seeking entertainment, status, or some unique need).

Perhaps sellers had more power in earlier times when the means of production were limited. For our cavemen ancestors, food, water, and shelter were in high demand and low supply. If you could have created a paleolithic bed and breakfast, you’d have been the first billionaire. Today, demand is more varied but our means and productivity are even deeper, fostering multiple competitors in almost every market. Demand is scarcer and more valuable.

The implications of this are critical for entrepreneurs. The most important is to build something people want. The most common entrepreneurial mistake may be creating something just because it can be, not because there’s actual demand beyond the entrepreneur’s market of one. 

There’s also an important implication for creators of marketplaces, which have a chicken-and-egg problem of attracting buyers and sellers simultaneously and balancing their interests. Because buyers drive markets, they are generally the more key element in the long-run.

That doesn’t mean buyers are the best group to target first. One seller can serve many buyers. When Josh Kopelman started Half.com, he convinced dozens of book sellers to upload their inventory for potential leads. Those dozens let him launch Half.com with a million books, giving incoming buyers a lot to browse once they came.

Sellers are also easier to find: there’s literally an alphabetical list of sellers for most items, but unfortunately not the same for buyers. 

eBay reocgnizes the importance of buyers and has favored them with a host of policies, such as light penalties for non-paying bidders and only allowing sellers to leave positive feedback on buyers. It raises seller ire but without the cash of buyers, transaction fees wouldn’t be an issue because sales would be zero. 

It’s become a fashion to attack companies for selling something stupid, unhealthy, or over-priced, but no matter how true those complaints are, it’s worth remembering demand is the real source of business power.

I have been exploring names for my new venture and thought of a question: what is the worst domain name for a successful company?

Let’s define some traits of a bad domain:

-Difficult to spell
-Confusing or unrelated to its topic
-Contains hyphens or numbers
-Not a .com, making it difficult to remember
-Long (>10 letters)

Looking at the Quantcast top 100 sites, a few candidates emerge:

-#14: craigslist.org
-#50: merriam-webster.com
-#57: ezinearticles.com 
-#96: city-data.com

Craigslist took a while to establish its brand since it’s undescriptive and started as a .org. Merriam-Webster’s spelling and hyphen are problematic but it had an existing brand. City-data also has the hyphen, but at least it’s descriptive.

My choice for worst successful domain name is ezinearticles.com. It’s long and complex, seems like it might have a hyphen, and has a tacky leading “e”. Yet, it receives 16 million visits a month. Like an ugly guy who still manages to get the hot girl, that’s fairly impressive.

Honorable mention: #1 Google, for misspelling their name.

I love Y Combinator. They are scrappy, innovative, entrepreneur-friendly, and created a model that VCs originally laughed at but are now copying. I love Paul Graham’s essays and I like him personally.

Y Combinator invests ~$12k in early stage teams in return for ~6% of the company, implying a typical valuation of about $200k.  Paul Graham says this is a good deal because Y Combinator can increase your value by at least 6%.

While I think that’s true, that’s not the right question. The right question is whether YC’s deal is better than alternatives.

A typical $50k seed-stage angel investment for a team with a promising beta and users, even in this crappy market, is at $1M-$3M pre-money valuation in an equity round and can be as high as $5-6M if you use convertible debt. PlayCafe originally raised $250,000 of convertible debt with a $6M cap. (We eventually switched to a complete equity round when First Round Capital invested.)

Let’s compare the numbers:

[table id=1 /]

A $50k angel investment is almost ten times the better financial deal (9.6 to be exact).

YC asserts that their advice and connections are worth this premium. I respectfully disagree. Advice and connections for even idea-stage entrepreneurs are easy to find with a little initiative, and if you don’t have that, you’ll fail as an entrepreneur. YC’s connections, Demo Day, and brand are indeed value-added, but it’s hard to argue they’re worth ten times an angel and free advice and connections.

YC supporters say their teams are little more than first-time entrepreneurs with ideas. That’s generally true, but YC’s hackers are able to build most prototypes in 3-6 months anyway. Is it worth that time working separately to get a 10x better deal? I think so.

One could say it may be a bad deal but the equity involved is relatively minor. I am open to this point. 6% equity can be quite a lot – it’s $120,000 of equity on a $2M pre-money valuation, or the equity component for 5-10 early hires – but I’d agree it’s not a massive amount. Spending $150 for a restaurant dinner that you can create for $30 may be a bad deal, even considering the value of ambiance, but it’s not a disaster. Small stakes excuse small errors.

How much equity should Y Combinator take? I’d say the fairest method is punting on this question and using a convertible note, which would determine YC’s stake at the Series A valuation. The problem for YC is that $12,000 into a typical Series A pre-money valuation of $3M translates into a paltry 0.4% equity.

One partial solution is warrants that give YC the right to invest more money at a pre-set Series A valuation, such as $200,000 at a valuation of no more than $4M, yielding about 5% equity. We did this with First Round Capital to compensate for the dilution that they would suffer in later rounds.

Thus, recognizing that YC deserves at least a few points of equity, my real suggestion is that Y Combinator should invest more, which given their success so far and a recent $2M infusion from Sequoia, should be more than feasible. If Y Combinator just set their valuations at one-half market value instead of one-tenth, that would suggest Y Combinator invest $60,000 instead of $12,000.

Graham believes that $12,000 is enough to keep founders alive for three months, but I would argue is sub-par for early marketing and development. A good domain name alone can cost $2,000-$20,000+ and is painful to change after release. Getting good early design can cost another $2-5k.

I should note that I may be biased because I am not YC’s market. I have been doing startups for a while and am fortunate to have a decent entrepreneurial network. YC provides a faster lane for first-time founders than I had.

I do think an important metric is how Y Combinator alumni view the terms afterward. The majority seem quite happy with it. Y Combinator is empowering hundreds of entrepreneurs and some very cool startups, and for that, I cheer them whole-heartedly.

Update: I see Sarah Lacy makes a similar argument. It’s interesting to see the backlash.

Update 2: Tweaked some of the #s to be current.

Update 3: Two things happened since I first wrote this post:

a. Y Combinator announced the Start Fund to give an additional $150,000 to every YC company at very good terms.

b. I decided to apply to Y Combinator. The extra funding does make the equity calculation more compelling, but the biggest reason is that several YC friends and the thoughtful replies I received convinced me that I was underestimating the value of YC’s network and advice. We will see what happens. 🙂

Thanks to all who came! These are the slides and video (the audio is a little choppy).