Halvar’s Guide to Entrepreneurship – Thomas Dullien

Download the original PDF. Introduction I founded two companies — zynamics, which I ran from 2004 to March 2011 and which I sold to Google (GOOG), and optimyze, which I ran from 2019 to November 2021 and sold to Elastic (ESTC). The first company was bootstrapped, initially with no cofounder (an early employee received a big equity stake later), the second company had a cofounder and was venture-backed. Neither of these exits were “successes” by Silicon Valley standards, but they were definitely impactful and possibly life-changing for founders and most employees. I learnt a few things, and after talking to founders or would-be founders, I decided to share my lessons more broadly. This document contains information, anecdotes, and insights. I hope that they will be useful for other founders. It will also contain a number of falsehoods that I believe to be true. Please make me aware of where that is the case. Warning: I only have experience in software/SaaS B2B and know nothing outside of that. With only two companies as experience, nothing in this document should be taken uncritically as truth. I also have no experience with a company between size 15 and 3000 employees. Reasons to become an entrepreneur If you think about becoming an entrepreneur, think about the “why”. Do not expect to find a simple answer, but doing introspection is a good idea. I never really aspired to become one; I stumbled into my first company by accident: I wrote a piece of software that people liked, and then needed a legal entity so I could sell it. I realized afterward (during my time at Google) that beyond 4-5 years, I have real trouble fitting into very large organizations run by someone else. Your reasons will be idiosyncratic to you. I certainly did not understand my reasons very well until after my second company; I only embarked on more introspection at that point. My reasons were: Some say work happiness is achieved by the triad of Autonomy/Mastery/Purpose. This is true for me for technical work, but when working in an organization, I also need a lot of agency to be happy. This means having the ability to fix things that I perceive as broken without running a long political campaign.

In many large organizations, fixing even relatively trivial brokenness gets hard unless you’re extremely high up. Having my own company gives me a ton of agency. The hiring process seems broken? Great, let’s do a new one. There’s poor code hygiene? Great, let’s build a company that writes great code. I love working with great people on problems just on the verge of the possible. This can be hard in large organizations, as large orgs tend to (unintentionally) avoid having too many good people on one team (the value for the large org is maximized by spreading out great people to guide many teams - so most teams will only have 1-2 great members). It is often easier to assemble a great team in a small company. Great people are sometimes oddly-shaped — perhaps they don’t have the right academic credentials, only work three days a week, live in strange places, work strange hours, interview poorly, etc. - but they are great. Not being able to hire great people due to some bureaucratic obstacle grates on me, and I love the flexibility of just being able to hire them. Large organizations need standardized components, and small orgs can work with “nonstandard parts” that are often unusually great at multiple things. In order to function well in a hierarchy, I need to respect my immediate manager, and the majority of people above me in the hierarchy need to appear to me to be both competent and of high personal integrity. This isn’t always easy to achieve in large organizations. Concretely at Google, I found Sundar an extremely uninspiring CEO, and the trend in upper management was a steady decline in both competence and integrity. I have a(n un)reasonably high opinion of my own value, and that perception does not always agree with job ladders, salaries, promotion processes, and company politics. Alignment of technical, economic, and ideological interest: I really love to work on things that manage to align my technical interests, my economic interests, and my ideological interests. Ideally, I want to work on something that I perceive as being super interesting, something that is economically valuable, and something that has an impact in the broader world that I perceive as positive. This can be very difficult to achieve in a large company.

Alignment of customer, company, team, and personal interests: As a middle manager in a big company, I often found it difficult to align “what’s best for the customer”, “what’s best for the company”, “what’s best for the people reporting to me”, and “what are my own interests”. In a startup, if done right, these things are auto-aligned. There’s a part of me that loves building a product that delights users, that makes eyes light up with a mixture of “wow this is easy” and “I didn’t know you could do that”. I have a child-like joy in demo’ing “look what we have built!”, and I take great personal satisfaction in seeing a customer happy. In my heart, I am a people pleaser, and a good product is a win-win — the customer happily pays for it because it helps them. Finding that direct feedback from customers (and building delightful products) is hard in big orgs. Your reasons may be very different. Mine changed — when I started my first company, #8 and #2 were paramount because I had no experience in large organizations. That’s normal. Either way, it is important to think about “why do you want to start a company”, and also “why do you want to start this company”. The process of running a company has stretches where it really isn’t fun - in those moments you need to know why you’re doing this (to yourself). Weigh the alternatives carefully — “would I rather do this for the next 7+ years, or …”. Starting a company and having second thoughts 18 months into the journey is not a great situation. (The pros and cons here can be a good basis for your pitch deck if you need to raise funding.) In the end, the first thing you need to do is “figure out what you want” - imagine yourself in 2, 5, 7, 10 years, and think about where you want to be at each of these points. Figuring out what you want is crucial, because everything else follows from that - and first and foremost the choice of your target market. The choice of your target market More than anything else, your target market will dictate a lot of things about your company, perhaps the majority of things. You should think carefully about your target market before you start, and it should be a very conscious choice.

My first company was built in an extreme niche market (because I never thought about choosing a market, and just built where I was standing), and that had many drawbacks. My second company was in a carefully-chosen market, and a lot of things became much easier. Broadly speaking, target markets come in 4 forms: No target market. The market is so small that it’ll amount to less than 1m a year if you saturated it. This isn’t a company, it’s a shop. A growing niche: Any market between a few million and less than 50m, with a sensible growth rate. My first company was built into such a market (it amounted to perhaps 6m when we started, and grew to 30-50m today - 20 years later). Sometimes a niche can explode into an enormous market, so a “good” niche can become (4) - but be careful, because many hyped niche markets never became huge. A healthy specialized market: A market somewhere between 50m and a few billion — big enough to build a large mid-sized company (the German “Mittelstand” thrives here — these are privately-held businesses serving some specialized part of an industry). A huge market: A market size that in 6-7 years will have dozens or even hundreds of billions, where even getting a few percent of the market will yield annual revenue in excess of 200m. This market can be tiny today if it is clear that growth will be explosive. The type of market you’re entering will determine how you will (need to) finance the company. One note: Your target market can be much bigger than your market for your initial product. It is very common to use a much narrower slice of a market as a wedge into a larger market. Funding, Fundraising, Investors etc. This chapter is longer than it should be, largely because I made so many mistakes in this area - and as a result accumulated a very long list of “things I should’ve known before raising funds”. Bootstrapping? VC? What other options? Market type 1 (“almost no market”) is a trap, and almost certainly to be avoided. 2 Market type 2 (“growing niche”) is a good niche market to bootstrap into. The market is too small to attract aggressively-funded competitors, and competition in this market may be moderate.

If … … you have special insights into the market … can make customers happy … are OK with spending many years building a commanding position in this market … think you can hire and retain enough good-enough people on the meager prospects of that market (some markets are very interesting/fascinating which can compensate some of the financial aspects) then go for it. The benefits of bootstrapping into a fascinating niche market are many, but you need to be aware of a few caveats: Exit options can be limited — you won’t IPO, and any acquisition will be either a technology or a team acquisition. Even if you decide to never exit, you will eventually need a succession plan. 2 Caveat: If you’re happy to work alone or in a team of two your entire life serving that market, it might work for you. Bootstrapping means you’ll have to work with constrained resources, and you’ll compete with many other opportunities in the world that draw away talent. The big risk of a bootstrapped business is becoming a trap - demanding excessive energy from founders while generating just enough revenue just to stay afloat. “Too little to live, too much to die” is the failure mode here, which will risk eating a lot of your remaining life time with little payoff. On the plus side: There are many such markets, and the outcome for the founder can employees can be pretty great - an interesting example is the history of IDA Pro, the industry standard disassembler: Starting into a market of perhaps 3-4m, the founder grew his product and with it the market to 20+m in revenue and ultimately sold most of it to a PE fund, while both keeping control of his destiny and a commanding near-monopoly position in the market. It was a 25+-year journey though. Market 3 (“healthy specialized”) is a tricky one: The market will have healthy competition, but the comparatively small market size might spook traditional venture investors. This is a realm for certain types of angel investors or some VCs that call themselves “capital efficient”; in essence investors that prefer a different risk-payoff tradeoff than traditional VCs (who are in it to chase power-law exceptional outcomes - see next chapter). Often, owners of existing larger mid-size companies are partial to investing in such endeavors.