This is part 1 of the series: 5 Lessons from 150 startup pitches. Listening to first-time entrepreneurs talk about their competitive advantages is as predictably invalid as the local weatherman's 10-day forecast.

Between this blog and reviewing applications to Capital Factory I see hundreds of pitches a year. Every pitch has a section on competitive advantages, and quite literally 95% of the time the claimed competitive advantages are pathetic, unoriginal, and not really advantages at all. The first clue that your competitive advantages aren't actual advantages is that everyone else on Earth claims those advantages too! P.S. Next week I'll talk about what are real competitive advantages. The following are not competitive advantages: We have feature X. This is an advantage only until others copy it, so it's not long-term protection against competition. Indeed, the next company can observe what works well and what doesn't, and than improve on your innovation. End users don't care who thought it up, they just care how it works today. We have the most features. It's common for older products to compete on the fact that they have more features than the competition. Trouble is, customers don't want more features, they want the right features. As the competition also adds features, they reach a critical mass where they have all the features 80% of your customers want, and then just having "more" is no longer an interesting selling point. We're patenting our features. "No one can compete with my blog because it's copyrighted." Silly, right? That's what you sound like when you claim that getting a software patent will protect you from competition. Except in certain industries (e.g. food, drug, medical), I'm unaware of companies who stave off quality competitors through patent holdings. Software patents are especially useless for small, bootstrapped startups. It's even true in hardware: Every mp3 player uses zillions of patents, but that didn't stop Apple from winning. We're better at SEO and social media. 80% of Americans believe they are better-than-average drivers. Can't be true, right? Well 80% of the folks I meet tell me they're way better than average at SEO, Twitter, and "building communities" whateverthehell that means. Social media and SEO is ever-changing quicksand. You're on top of Google today, gone tomorrow. Other companies being good — or better — is completely outside your control, so claiming that you have a sustainable advantage is poppycock. We're passionate. Everyone has passion. What, you think everyone else quits their job, starts mowing through savings, works long hours, and yet has no passion? Passion is necessary but far from sufficient. This is like saying, "My children are going to be more successful because I love them more than you love yours." This makes investors roll their eyes and show you the door. We have three PhDs / MBAs. The landscape of successful startups is littered with people lacking post-graduate education. If you've lived in the software world for a few years you know the stuff they teach you in school is irrelevant, so who cares what degree you have? In all the interviews you've read about founders' success, how many credit their MBA program? How many even have MBAs? It's not bad to have a degree, but neither is it a significant advantage. We work hard. You hear about the 37signals guys working 30 hours per week and Tim Ferris just four hours (bullshit!), so you figure if you work a "healthy" 70 hours per week, you'll win! But working harder is not, in fact, smarter. And even you could work 70 on-task hours per week, that's still blown away by 10 developers at a funded company or even 10 passionate open source developers working part-time. We're cheaper. It's not bad to be cheaper. Indeed, at ITWatchDogs, the company I did before Smart Bear, being inexpensive was critical to our strategy. The key is that you cannot compete only on price, because then all a competitor has to do is lower their price. Established companies can destroy you with the "lost leader" strategy (e.g. when Microsoft put 1,000 developers on IE and gave it away for free, destroying the market for web browsers), newly funded companies can spend ludicrous amounts of money to get market share (even if it means taking you down with them), and anyone can implement a "freemium" model. In the case of ITWatchDogs, the reasons we were cheaper were that (a) we sold direct instead through a channel, so our product wasn't marked up 6x before it got to the customer, and (b) we used the newest, cheapest parts whereas our established competitors had stopped innovating and were using expensive 5-year-old parts. So where does that leave us? Haven't I just claimed that the fruits of intense effort and innovation and one-upmanship isn't enough? Yes. Innovative design and intellectual property are no longer long-term competitive advantages. You live in the era of the flat world where millions of people have access to technology, education, and a powerful sales, marketing, and communication platform (the Internet). You live in the era where the most powerful programming frameworks and tools are free, local broadband and high-availability servers are cheap, and world-class people are willing to work 60 hours/week in exchange for Ramen noodles and the chance to be a part of a cool new startup. There's too much energy, availability, intelligence and opportunity in the world to hide behind outdated notions of intellectual property. Almost anything can be copied. In fact, I'd claim that anything of any value will be copied. It should be part of your business plan that other people will copy you. Fortunately there's plenty of ways to have true advantages that competition cannot readily overcome. Unfortunately, they're difficult and rare. Of course they are! What, you thought creating and running a successful, untouchable startup was easy and commonplace? Next week I'll go into depth on some true unfair competitive advantages — ones that cannot be overcome even by a giant company, a funded company, a bootstrapped company, or an open-source movement. Are these assertions unfair? Do you have more false-advantages to add? Leave a comment and join the conversation.

Many of my mistakes can be traced back to a failure to recognize and appreciate "sunk cost."

The term comes from economics: "Sunk Cost" is money you've already spent and cannot get back no matter what. A "rational actor," as economists say, will completely ignore sunk costs when making decisions because the money is gone no matter what action is taken next. Of course we carbon-based life forms can rarely be described as "rational," especially when it comes to ignoring sunk costs. It's hard to abandon projects in which you've poured time and money, especially when you've also attached your ego and reputation. Sometimes it's easy to do the right thing. For example, let's say you designed a banner ad for a certain website (cost: $1000) and paid to run the ad for three months (cost: $2000). At the end of the three months, you look at the results and they're horrible — barely anyone clicked the ad and none of those people made a purchase. Clearly you won't spend any more time or money on that ad. Yes you spent $3000, but that's a "sunk cost" — you cannot get that money back. Whether you had spent $30 or $30,000, it still wouldn't be worth continuing this project. Obvious! And yet, throwing good money after bad is exactly what we do in many other situations. Here's a typical business example. A company is building a new $20 million manufacturing plant. They burn through the $20m, but it now it's clear that it will take another $10m to complete the project. In the meantime, an opportunity has appeared where they could take over and retrofit a different manufacturing plant for only $2m. From a completely rational perspective, they should abandon the original project. The $20m they've spent can't be recovered (let's say), so it's now just a choice between spending $2m or $10m. Duh. Of course the correct decision probably won't be made. You can imagine the internal politics of someone standing up and staying "I'm responsible for this hugely wasteful endeavor, and now I want you to trust my judgment as I pull the plug and do something completely different." Here's where you expect me to say how stupid big-business is and how little startups are smart and agile and never make mistakes like that, but that's crap. It's not just politics, it's human nature. Depending on which way you approach it, the term is "Loss Aversion" or the "Endowment Effect," subtly different but close enough for our purposes. In short: We place excessive value on that which we own, or which we perceive we own. There's all sorts of fun experiments demonstrating this:

At Duke University there are far more students wanting to attend games than there are tickets, so a complex lottery system determines who gets the precious few. Experimenters posing as scalpers determined that those who lost the lottery would on average pay $170 for a ticket. When they approached students who won the lottery, they were willing to part with the ticket for an average $2,400. Both students went through the same effort to get tickets, but those who own these (randomly-assigned) tickets ascribed a much larger value to them. Horse bettors who have already placed their bets (a sunk cost, "owning" a particular outcome) are more optimistic about their chances of winning then those who are still in line to place bets. Most people will not walk out of a movie they hate, because that would "waste money," even though the money cannot be recovered and they could be doing something more enjoyable. Just touching an item in a store makes you more likely to purchase it.

It's one of those things so deeply ingrained that it's hard to change your gut reaction even when you're aware of the problem. But that's exactly why you have to be especially vigilant. So where in my life of startups has this crept up and bit me? And possibly you too?

You've created an awesome feature. It was hard to implement and you're proud of it. Problem is, it turns out your customers don't care about it, and it's starting to create confusion and cause bugs. It's hard to kill your pet feature, especially after all this effort, and after all customer XYZ agrees that it's super neat-o. But that effort is sunk whether or not it's the right fit for your product; kill the feature. After hours of brainstorming, arguing, and banana daiquiris, you've finally come up with a clever, fun, catchy marketing slogan. Problem is, it doesn't quite fit the business. You don't want to "waste" this great concept; surely you can use it somehow, somewhere? No. As with all writing, you have to learn how to throw things out. Your newest hire isn't working out. You did everything you could during the interview; he passed all the tests. Still, he's not a culture fit, he's not picking things up as fast as you'd like, and everyone else is having to pick up the slack, which they resent. But, you think, it was so much work finding him and we've put all this effort into training him; maybe he'll change? But he won't, and deep down you know that. You can't get that time back, and yes this is one of the most expensive mistakes you can make, but even worse is prolonging the inevitable. (It's bad for the employee too — he deserves a chance to find a job where he can be successful.) You try a marketing effort and it doesn't work. That's OK, that's what A/B tests are for! So you test a pair, and the second one is a little better but not much. And then you iterate again, and again, and .... again .... When will you stop and realize that sometimes incremental iteration isn't enough? You're trying to land a 500-seat sale with a big-name company. The trial has gone on for 9 months. They keep finding reasons they can't buy — "deal-breaker" features they need, "critical" bugs they can't work around, budget allocations that never materialize. But that sale would mean so much, and besides you've already spent hundreds of hours with them and added all these special features so surely they'll buy from you eventually! But in my experience they often won't, or they'll buy just 10 seats so you can't claim they're "still trialing." All this is just an indicator that you don't have a good fit; this time-suck isn't going to vanish once they buy. Let it go. You need profitable customers, not just customers. You went to school for Biology, so clearly you have to have a career in Biology! Nevermind that you made that career choice when you were a teenager and hadn't really discovered who you were, what makes you happy, or where your talents lie. Your friends and family expect you to get a job as a lab rat and regale them with stories about diseased bovine spleens while everyone's eating meatloaf. Should you really throw away all that work and all those expectations to follow your true dream of becoming a caterer?

It's perfectly natural to feel attached to your sunk costs. It sucks to acknowledge that you've wasted time, money, energy, and reputation. But it's even worse to irrationally prolong the waste. Do you have stories or advice about sunk costs? Leave a comment and join the conversation!

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Nothing clarifies things quite like a hyperactive, all-knowing, all-seeing, real asshole of a devil's advocate beating the living crap out of you. (Cartoon by Andertoons)

Baseball players swing heavy bats before going up to the plate; acclimating to difficult working conditions makes it easier to hit the ball out of the park. What's the equivalent of the heavy bat for honing your skills at pitching your product and raising money for your company? For years I've been a fan of Scott Berkun's concept of Rude Q&A: What would the meanest, nastiest, but smartest people in the world grill you on when you show your work? A Rude Q&A is a list of questions [about your work that] you don't want to hear. When you're contemplating an exciting new idea, you don't want to hear questions that might contradict your concept. And of course, that's exactly when you need the biggest, baddest, smartest, devil's advocate to challenge all your assumptions. It's not just about testing the mettle of your ideas, it also forces you to refine and clarify your marketing messages, your target customer profile, and your feature set. When you're being grilled there's no room for being generic about how you're different from the competition, no leniency for not knowing exactly what customer pain you solve, and no clemency for wavering on your company values and what compromises you're willing to make. Scott goes on to explain just how unfair the questions need to be: Make sure to include questions that are unfair or based on erroneous information. Reporters, clients, and the public all have their share of unfair questions and erroneous information, and you want to be ready for them. These answers take more time as the responses need to be more polite and mature than the questions. They also need to carefully refute assumptions in the questions without being dismissive. I love it; now we're deep into "heavy bat" territory. So how do you go about writing your Rude Q&A? Oddly, the hardest part can be coming up with the questions. To get you started, I've assembled a laundry list of questions common to many startups:

Your biggest competitor just dropped their price to $0. How do you continue to justify your price point? If your idea is any good, you'll have competition from multiple players, both funded and bootstrapped, both smart and stupid, both large and small. How will you persevere? If the economy stays bad for two more years, how will you survive? The last thing anyone needs is another damn tool. What's the overwhelming reason I should even bother looking at you? Technorati reports one million new blog posts appear every day. Why should I read yours? What are the top three features your competitor has that you lack? How do you address that today, and what are you doing about it in the next six months? How can you call yourself an expert when you've only been at this for a year? What are three tangible, undeniable ways in which your product/company saves more money than you cost and saves more time than you consume? Truly great products and companies are rare, even when smart people are at the helm. What makes you think you have what it takes? There are thousands of consultants who make the same basic claims you make: high-quality, on-time, on-budget, good service, happy customers. What makes you any different?

These are generic; you'll need to come up with more specific attacks. For example, if I were defending this blog and answering the question about why anyone should read it, I would make the question more specific: There are already too many blogs about startups, especially high-tech startups. Those blogs are far more popular than yours, their authors far more famous, and their advice is excellent. Smart Bear is a success but it's nothing like the success earned by someone like Steve Blank. Why should anyone listen to you? And here's my answer: I read those blogs; they're great! But the world needs more perspectives, not fewer. For every Jason Fried who says "simple design is better than complex features," someone else needs to point out that they've (I've!) made millions with poor graphic design and too many features. For every Seth Godin who says a tribe of 1,000 followers is all you need, someone else needs to point out that it's not true in practice. The biggest reason to read is that my advice and perspective, while not a massive thought-revolution in the universe, is "unique enough" that I constantly meet intelligent, capable, thoughtful entrepreneurs who haven't heard it before, haven't thought of it themselves, and whose lives and companies are improved after they've heard it, even when they disagree with my point of view. I know this because of the comments and wonderful emails I receive. As long as people keep saying that I've lifted a burden off their chest or produced invaluable customer feedback or prevented them from wasting time and money, or even if they just get a laugh, that's my answer to why anyone should listen. Don't get discouraged if you're not happy with all your answers. That's a good sign — it means you're being honest about the exercise and you're not yet satisfied. Keep it in the back of your mind and look for answers while you forge ahead. Discuss the hard ones with other people to get more ideas. This is all just another way of being introspective, but it's a technique I've found to be particular useful. Do you have more Q&A to contribute? Leave a comment!

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In the last post I beat you to death about ditching your business plan but failed to provide an alternative. Okay okay, "Planning == Bad," but the supposed benefits of planning are still important: designing for profitability, understanding your customers and competitors, focusing your attention, deciding what's worth doing next, changing directions, and ensuring the founders agree on important issues. To help you, I'm stealing a trick from therapists.

Cartoon by Andertoons Therapists don't tell you what to do. Rather, they ask probing questions that get you to discover for yourself what is true for you, your situation, and what you want. You're smart. You'll make good decisions. But you also get bogged down in daily minutiae and putting out fires, meanwhile missing the big picture. That's where this article comes in: To splash cold water on your face, forcing you to face reality and continue to defend or change the important choices inside your business. What follows is your startup therapy session. Having to think through and answer these questions forces you to identify what you need to do today to seek profits and growth.

In one sentence, what does your product do and who buys it? In one sentence, why does someone buy your product? These are surprisingly difficult. The shorter and more precise your answers, the more you understand why you exist. If the answer is, "I honestly don't really know why people give us money," that's something to remedy immediately. If you have an answer, is it because you have hard evidence that this is how your customers perceive you and why they give you money, or just because you believe it? "Evidence" means emails and Tweets and testimonials that use those words exactly; otherwise you're likely interpreting their feedback to match your expectations. (I find myself constantly guilty of this disconnect.) If you don't have evidence, it is OK to have a hypothesis but you should be concerned about collecting proof and disproof. If you do know the answer, these two sentences should drive your marketing efforts. If these sentences aren't on your home page, why the hell aren't they? Is there anything else more compelling to potential customers? At the least, these represent the themes that drive your marketing campaigns. What one thing is most responsible for preventing sales? (e.g. people not knowing you exist, pricing, not enough product features, unorganized sales strategy, look-and-feel of website, haven't identified pain points, ...)

Cartoon by Andertoons Most little companies aren't honest about this, yet it's possibly the most important question you could ask. For example, I'm an engineer, so my first answer to "Why don't you have more customers?" is almost always:  "Because we need this feature." You hear some potential customer say "we will buy if you do XYZ" so you conclude that if you implemented XYZ people would start breaking your door down. But is that really the case? If you added one feature and maybe satisfied that one customer (assuming they wouldn't ask for a second thing, and in my experience they usually do), would that get you 100 more sales? For those hundreds of people who downloaded your software and never bought — is the reason "not enough features?" For the hundreds of thousands of people who never came to your website in the first place, or hit the front page and left after three seconds, is the solution "more features?" When you honestly ask yourself this question, it will naturally lead into things you can do right away to get more people to the site, into a trial, and/or into a sale. Don't just rest on what comes easiest. What's one thing you could do to get more feedback from customers, potential customers, or sales you've lost? You already know that external feedback is the only way to empirically determine how to build products people want to buy. Maybe you can't drop everything to solicit feedback (although folks like Eric Ries say you should), but surely it's worth one day every month to go out of your way to collection information from the field. To get the ideas flowing, here are eleven ways to get more feedback, most of which take less than a day to implement. If you had zero revenue from now on, on what date would you run out of money?

Cartoon by Andertoons The first thing this does is force you to nail down your monthly expenses and accounts payable. Second, you know the length of your fuse even in event of disaster (if you have revenue) or if you never manage to land a customer (if you're just starting out). More than that, knowing your "padding" as I used to call it is helpful in making decisions like "Can I afford to try this Risky Expensive Thing," such as making your first hire or trying a $20,000 media blitz. Whenever you're contemplating a new expensive idea that could be awesome but could be setting money on fire, your fuse date helps you know how much time you're risking — time to recover if your bet doesn't pay off. Finally, knowing "The day my business could die" helps focus your attention on activities that bring in revenue. If someone handed you $100,000 today, how would you spend it to maximize future profits? This gets you to crystallize what cost-centric activities would most help your business. We get caught up in free-but-takes-tons-of-time marketing and development activities — and most of the time that's a good way to think — but sometimes it's still true that "you have to spend money to make money." Sometimes the "thing you could do" is so compelling, it might mean you should raise a small angel round or consider debt. Typically it's best to get by with minimal debt and investment, but if the "thing you could do" is transformative, you might reconsider. If you were forced to hire someone today, how would you define her job such that she would contribute enough revenue to cover her expense? I know, you can't afford anyone right now, no one can do as good a job as you, and you don't even know that you'll ever hire someone. That's OK, that's not the point of this question. This gets you to ferret out what tasks are being dropped by the wayside because you've got higher-value things to work on, because you're having to fight fires, or maybe because you've got your priorities wrong. If you honestly can't imagine that there's anything a full-time person could do that would generate enough revenue to cover their salary, that's not a bad thing. But often this churns up one or two very-part-time tasks which really ought to be done but aren't. No need for a new employee of course, but maybe you should re-prioritize those tasks next month. Sometimes you come up with a good answer, which means you should contemplate help. "Help" doesn't necessarily mean a proper, 40 hours/week (OK, who are we kidding, 60 hours/week) employee. It could be a part-time consultant. It could be an intern.  It could be an outsourced office assistant. It could be a new partner willing to work for stock. Which of your business operations do you hate? Do you like creating new features but hate tech support? Enjoy product demos but hate cold-calls? Need to have your arms around company finances but hate bookkeeping? Love writing ads but hate dealing with ad sales agents? Get excited about your field of expertise but hate writing blog posts and Twittering? Part of why you're in business for yourself is creating something from scratch and delighting customers, but the fact is that most business operations just suck. You can't justify avoiding important tasks because they're not fun. I know — I'm the worst procrastinator when it comes to those things! It's useful to identify these undesirable-but-necessary tasks because you can do something about it:

If you shut off email, Twitter, chat, and the phone, and just buckle down, you might be able to get through some of these tasks in under 15 minutes. Bookkeeping is like that. Get it off your plate; you'll feel better. Mundane tasks might be outsourceable. I've found that "virtual assistance" services (like Four Star Service in Austin) are surprisingly affordable if you have a lot of little time-consuming tasks. See if your existing vendors are willing to do some of your tasks for a small fee. For example accountants often provide bookkeeping services at a lower hourly rate. Consider an intern or consultant. Before you argue that the cost is too great, factor in the lost revenue due to you working on those tasks. Can you share the burden with your co-founder or employees? Maybe they don't hate it as much as you do; you can trade hated activities. Or switch off.

If you're still stuck on not wanting to spend any money to save time, remember what Dharmesh says: Act as if someone is paying you $1000/hour for any activities that improve sales (making, selling, and your customer's happiness), and for everything else they're paying you $10/hour. It's accurate.  (Before you argue, don't forget about the cost of lost sales.)

What initiatives could be done half-assed without significant impact? I know, this is a shitty question. If you're like me, you are that aggravating combination of perfectionist and control-freak that on the one hand leads to stellar work but on the other hand means some things take too long. Some parts of your business are core to your success: Which features you implement, how you present yourself and interact with customers, discovering how and why people give you money. But the fact is your to-do list is infinitely long and you have to pick your battles. Your "Contact Me" page has to exist but it doesn't matter what it looks like. Every blog post doesn't have to be a work of art. Your Google Ads need variety (for testing), not hours of wordsmithing. It's better to have an eBook about anything than to have no eBook at all. If it can be done half-assed, and it's not going to impact revenue, maybe it should be half-assed. Allow yourself to delegate (because it's OK if it's not done exactly how you would do it). Push more out the door. If you could get one solid hour of advice from a guru you respect, what would you discuss and what would be the goal of the meeting? This is a fun way of asking: "What knowledge/feedback/direction is critical to your business right now, and which you're uncertain about, and which you feel other people are expert in?" Phrasing the question this way also leads to solutions. For example, maybe you should set aside 4 hours to get your hands on that guru's materials (blog, book, podcasts) and immerse yourself not just in advice but in their mindset. Or email them and see if you can get some advice! Or find other people that guru respects and who might be more accessible. Or hell, ask me! I publish my email address you know.

What tips do you have? Leave a comment!

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