“Disneyland will never be completed. It will continue to grow as long as there is imagination left in the world.” – Walt Disney

Thinking about Eric Ries‘ lean startup methodologies, it occurred to me that Walt Disney pioneered the form in 1955 with the creation of Disneyland. Let’s take a look.

Private Beta: July 17, 1955

Disneyland was officially launched in a private beta in July 1955 to 6,000 guests by invitation only. Unfortunately, those folks shared their invitation links and 22,000 extra guests showed up with forged tickets! Special guests Ronald Reagan and Art Linkletter helped Walt Disney put on a good show that was live-streamed on television.

But the park was anything but a success that first day. Ladies’ heels sunk into the asphalt slurry sidewalks in the hot July sun. A plumbers’ strike meant that only a few water fountains were operational. A gas leak closed several sections of the park.

These setbacks led Disney’s team to refer to this fateful day as Black Sunday. The opening day generated such negative publicity that Disney and his team took special care to invite the press back the next day and in the coming days to see “the real Disneyland” and see things as they had been intended.

But even if things had gone as planned, only 18 attractions were operational those first few days. Tomorrowland had just four attractions and was admittedly incomplete. Several other attractions would open later in 1955 and 1956.

When Disneyland opened in July 1955, it was literally the minimum viable product. With just $5 Million in financing, there was a lot that Walt wanted to put into the park, but there was only so much money and time.

They launched with what they had ready and took the hit for the stuff that was broken. Why? So they could learn from their customers.

Customer Development

Disney listened to his customers. This change log on the site Yesterland.com shows how much stuff opened in 1955 was eliminated or modified over the years.

New rides were added, old ones modified; others became simply obsolete or required updates. The awkward and failure-prone Flying Saucers ride was replaced in 1967 with the Tomorrowland Stage, which was in turn replaced in 1986 with the Magic Eye Theater. The “Rocket to the Moon” became the “Rocket to Mars.” The iconic Matterhorn Bobsleds ride didn’t open until June 1959, nearly four years after the park’s debut!

Disney’s guest relations department has had the benefit of hearing a huge volume of customer feedback – about which attractions people enjoy, which ones they hate, and which ones literally make them sick. With such a powerful mechanism for continually collecting feedback from millions of customers (who take pride in interacting with one of the world’s most prestigious brands), the Disney organization has benefited from a feedback cycle of continuous improvement.

If Disney and his team had gone into “stealth mode” for 55 years, could they ever have produced the park that we see today?

Build On One Success

After Disneyland was successful, and could benefit from a methodology of continuous improvement, they were able to obtain the financing necessary to build Disney World, Epcot, Euro Disneyland, Animal Kingdom, Disney’s California Adventure, and several other projects. You might think of each of these as several products in a portfolio, but they all flowed from the fundamental success of the original and the conviction that it was okay to launch with a halfway-there product in July 1955. They knew that customers would help them find the way forward.

Disneyland has always been the result of the interaction of management and customers to produce an experience that is valuable for its customers and profitable to operate.

Your software business should take the same approach. You don’t know what your customers are going to want. Launch with something workable, even if flawed. Then iterate with continuous improvements after that. Then, you and your customers will be building something valuable together.

Your product should never be completed, as long as there is imagination left in the world!

Entrepreneurs sometimes think that they are the ones “doing the work,” and that investors are but a necessary evil: parasites looking for a free ride on the back of the hardworking startup.

This false dichotomy blinds entrepreneurs to the reality that they, too, are investors and must always think like one. It deeply affects your decision-making process.

The Business Case

Why is your entrepreneurial endeavor a good idea? In a capitalist system, all entrepreneurial activity has just one purpose: to make money. Presumably, your business idea will require the investment of some of both your time and your money. Your time has opportunity cost associated with it (what you could be earning doing something else); and your money could be in the markets earning 5-7%. Over time, your business idea should return a value greater than 7-10% compounded in order to make it worth doing at all. Many businesses can yield several hundred percent returns, either in the form of free cash flow or an exit (selling that cash flow) later on.

You might argue 1) there are other reasons besides making money to start a business, 2) capitalism has flaws, 3) we don’t actually live in a capitalist system. These are fascinating, valid arguments, but let’s put them aside for now.

If you accept the idea that making money is the only reason to start a business, then why would you spend your time and invest your money in a business concept that you would not ask someone else to invest in as well?

Bad answer: Because you don’t think an investor will “get it” and you don’t want to waste your time figuring out how to convince people you don’t know that your idea and team are worthy of their cash.

Good answer: Because you don’t need additional cash and don’t want to give up equity right now. You might consider taking investment after your prototype is complete to make a couple of key hires.

This “bad answer” is a kind of exceptionalism: you think that you are special, that you have all the answers you need, that this time it will be different, and that you won’t ever need investors. But like most exceptionalist attitudes, this mindset is a self-deception.

Always Be Transactable

In economics, transactability is the degree to which something can be traded, usually for money. If you don’t think like an investor yourself, you are adopting a mindset of non-transactability early on. You’re essentially saying, “I don’t even want to think about trading equity for money because I am exceptional and I don’t care about what anyone else thinks of my business.”

The problem with adopting a non-transactable mindset is that it tends to persist and self perpetuate. When do you go from being non-transactable to transactable? When do you decide it’s okay to give up equity to key hires or partners? When do you decide it’s okay to accept a small amount of investment? What will I do when it’s time to sell the business?

Many early-stage entrepreneurs dismiss these questions, assuming that they will “figure them out when they get to them,” or they say that they’ll “never sell their business.” These are both flawed arguments: if you don’t think about how you would trade equity for cash (and vice-versa) from the start, you are likely to handle any situation that requires it poorly.

Your Business Has a Valuation From Day One

This morning, Apple has a market cap valuation of $184.64 Billion (more than Google, less than Walmart). Your business is probably worth less, but it still has a value!

The “valuation” of your business is, quite simply, what someone else would be willing to pay to own it. That is usually a combination of the depreciated value of your assets, less your liabilities, plus a multiple of whatever free cash the business might be available after operating expenses. Some businesses get really high exit multiples (product companies, 8-10X net) and others get lower exit multiples (service companies, 3-4X net). There are no “rules” for business valuation; it’s a lot like home prices. You can look at comparables and take some guesses, but it boils down to what a buyer is willing to pay. It’s nice to have a lot of buyers, too.

You should always be thinking about maximizing the value of your business. What would somebody else pay to be in your shoes? In the early stages, the answer is almost “not much” or even negative. That’s to be expected, but over time, if you succeed the answer will start to be $100K, or $1M, or $10M. You need to be thinking about that trade all the time, and at least have some sense of what your business valuation is and how you might maximize it.

Everybody Is an Investor

You may not think so at first, but you are always asking for investment. If you are hiring someone, they are evaluating your business plan, your chances of success and whether your company represents something they want to invest their time in.

Your trading partners are also evaluating you and determining if they want to enter a relationship with you. Your customers also evaluate whether they should bet on doing business with you.

By keeping transactability always in mind and caring what others think of your business, you will be more likely to appear viable to these constituencies. And being transactable helps you make better deals with partners and customers: you learn what can be traded and what can’t.

I’ll Never Sell!

Some people have no intention of ever selling their business, and instead just want to be their own boss and make some money. This is fine, and most people call this approach running a “lifestyle business.” It’s well suited for sole-proprietors and can offer great personal freedom.

But this can be a treadmill: most often, you’re trading money for your time. Even at a high hourly rate, your income is tied to how many hours you can bill. Take a month off and you lose a month’s pay.

Or, you may have built up a clientele that pays recurring subscription fees or other residual income. While this can free up your time somewhat, if those recurring revenues are not high enough to sell to an acquirer, you can still be stuck.

At some point, you will want to get off this treadmill. What then? Do you just shut down the business and throw it away? That’s a very bad idea. Ask again, what would someone else pay to be in your shoes? The answer might be $50K, or $200K, or $1M depending on your business. You can and should capture this and shop it around in the market.

Or, you might have a service company that you want to pass on to your family. What then? What’s that worth? How do you manage your estate planning effectively?

Any business where “you” are the face of the business can be tough to sell in the market. But even these kinds of businesses can be sold. I’ve seen this happen, and it’s usually for meagre amounts of money. (Think computer sales + repair, HR services, accounting.)

Precisely because of their low market valuations, I’m not big on lifestyle companies. But my point is that they too have valuations that someday need to be reckoned, and to start any company – even a lifestyle company – without thinking about business valuation, investors, and transactability is foolish.

Always Have a Pitch

The simple way to keep your head on straight is to always have a pitch. You should always think about how you would explain your business to an investor. It may well be that the only investor you are concerned about pitching early on is yourself, your partner, your friends and family, or even your spouse. But you should also be thinking about what other kinds of investors (angels and yes, even VCs, where and if applicable) might think too. Because you just might need them later.

You are your own lead investor. If you cannot articulate why you’re doing what you’re doing and why it might generate good returns in the long run, then why do it?

For a software startup, having a good idea is important, but a good team is essential.

Good ideas are easy to find; I keep a list of interesting business and tech ideas that I constantly update and probably have a couple hundred at the ready.

What’s hard to find, and is much more important for success, is a good team. What are the ingredients of a good team?

Go All In: Look for “Crazy Eyes”

It’s tough to go it alone. While you might succeed nurturing an idea as a side project, your chances of success go up dramatically when you band together with people who complement your skills and are willing to do what it takes to get something to market as quickly as possible.

I call it “crazy eyes.” You need to be able to look somebody else in the eyes and catch that wild-eyed glint of insane dedication – and truly commit to each other as collaborators. If you can’t find people to take risks with, you probably won’t be able to bring your idea to fruition.

Proper Casting

Putting together a good team is all about having the right people in the right roles. First, that means choosing the right people to collaborate with. Second, it means knowing and being honest about the strengths and weaknesses of each individual on your team.

All too often, I have seen people call themselves CEO that really ought to be “Chief Software Architect.” Or people in operational roles who clearly can’t stand being around other people. While it’s tempting to label yourself and your cofounder as COO and CEO, you need to be honest (and educated) about whether you are really right for these positions.

When you go to talk to potential investors, they will sniff out this kind of bad casting right away, and they will just assume you have bad judgment. If they think you have bad judgment about a simple thing like properly casting yourself, then they think you will have bad judgment about everything else; they certainly won’t trust you with investment funds.

Proper casting is a sign of honesty, clarity, and good judgment. It’s key to connecting with investors. Even if you don’t think you need investors, prospective partners and employees pick up on your casting judgment also. Do it right.

A Good Team Always Survives

What may seem like a great idea may turn out to be a bad one, or one that needs to be changed to be successful. Maybe it turns out that kids don’t want to play with horses in your 3D virtual world. Maybe instead, 50 year old men want to play war there. A good team figures that out and capitalizes on it. A bad team spends ever greater sums of money trying to embellish the pretty horses and advertise in kids magazines.

Even in the worst case, a good team that knows its strengths and weaknesses will know how to salvage assets and return value to investors (license the tech to others, etc). A bad team gets mired up in personality conflicts, personal crises, falls apart and becomes toxic to everyone.

This is why investors will almost always bet on a good team with an unproven idea over a sure-fire idea and a so-so team. Good teams deliver returns no matter what.

Good Teams Make Markets

I’ve seen lots of ideas that sound impossible on the surface turned into great businesses through the skills, connections, and experience of their teams. Want to sell WiFi in airports? Sounds impossible, but not if your COO spent 10 years as the director of purchasing for HMS Host. Want to sell an avionics upgrade to the Air Force? Sounds tough, but not if your CEO spent 10 years on contracts at Lockheed.

What a team brings to an idea is more important than the idea. Good ideas are a dime-a-dozen. Finding the people to make a good idea work is incredibly difficult.

Stay Calm and Open to Change

It’s easy for partner relationships to become emotional and strained. Often, partnerships form as a handshake and a promise of 50-50 equity. Operating agreements and buy-sell arrangements often come later, breed resentment, and then become set in stone as people invest increasing amounts of sweat equity.

Don’t let relationships get in the way of execution. While you may be passionate and emotional about your idea, you should be calm and cool about your relationship with your team members. Remember, it’s all about proper casting. Do whatever it takes to put people into the right roles and immediately address any questions regarding equity, hurt feelings, and the like.

There’s no better way to turn a good team bad than to let equity and casting issues fester.

Know a Lot of People

The best way to insure proper casting is to choose the right teammates to begin with. The best way to do that is to know lots of people with diverse skills. This will keep you from going into business with your college roommate and instead partner with people who have the skills that round out your team.

Just Say No

“No” is the most powerful word in business. The pressure to be “moving forward” in our society is intense. But if team is so important and you also believe in your idea, it doesn’t make sense to move forward with the wrong team or the wrong idea. Just say “no.” Instead, wait it out and find the right team, or at least part of the right team before moving forward. Or change your idea.

Every day I see smart entrepreneurs, under pressure to “move forward,” squandering their time by pursuing an idea with a “halfway there” team. I don’t mean to belittle any entrepreneur’s efforts, and I certainly wouldn’t bet against them. But there’s a difference between doing something just to be doing it (and not really believing in it) and going all-in with people who have what it takes to succeed.

And yes, many entrepreneurs don’t really believe in what they are doing: if they did, they’d quit their day jobs. Building up and then tearing down a half-baked startup takes time as well as real and emotional capital. Why waste all that? Life is short. Find the right teammates (if you need anyone beyond yourself to begin) and then go all in. Your support network will rally around you.

What Investors Look For

You may think investors read your idea first. They don’t. They look at where you live. They look at who your attorney is. They look at your background. They look at your team. Smart investors know that your network says more about you than anything else.

Once they’ve figured out “who you are,” then they consider your idea and determine if you have any hope in hell of delivering what you’re promising. Investors know ideas are cheap; they see them all the time, and usually have many ideas of their own. What they are looking for is why they should bet on you to deliver on your particular idea. And frankly, they are looking to see if you are delusional!

If you are realistic about your chances, have spent time building a good team, and have cast your team members in appropriate roles, most investors will look at any plausible idea favorably. It doesn’t hurt if you share some common acquaintances, either; shared social networks and shared values help ensure long term commitment to the investor and the community. This is why angels almost always invest close to home.

Local Is Best

It’s both tempting and possible to put together a “virtual” company with folks spread around the world. However, investors see this as a sign of team weakness. It means video conferencing instead of face-to-face meetings. It means slower response times. It means travel costs and weaker relationships. In the end, it lowers your chances of success and is just a pain in the ass.

In the context of larger established companies, having some remote workers can make lots of sense. But if you’re trying to launch a startup, do it with the people in your own backyard. Can’t find the right people? Keep digging; see below.

Build Your Network

The single best thing you can do to as an early stage startup is to build up your network of potential team members. And don’t just collect business cards at networking events. Build real relationships. Figure out what makes people tick. Spend time in environments where you take risks with people and try out new things. They will become your casting pool, now and in the future.

One of the best ways to do that is to get involved in your local tech community. Here in Baltimore, we have Beehive Baltimore, which lets freelancers and entrepreneurs spend time working together. From Beehive, TEDxMidAtlantic was born. That event brought over 100 amazing entrepreneurial thinkers together in organizing a 500 person, very complex event. Go to events like Ignite Baltimore; listen to the people around you and think about how you can collaborate with them. Grab lunch and beer with people!

These are just a few observations I have gleaned from my work with Baltimore Angels and with starting and observing many companies over the last 23 years. I welcome your comments!

You’re smart. You went to the right schools and got good grades, and that’s paid off with a nice job with a decent salary, a healthy upside, and some decent perks. Let’s say you make $125,000 per year.

Now let’s say you quit that job and spend three years founding a technology startup. At first it goes slowly, and things seem desperate. Then you get a break; then you hit it big. At year 5, your startup is worth $3 Million and attracts the attention of a bigger firm. They acquire your company.

So, if you stay in your job, you make $625,000 guaranteed, but you’re turning down a potential shot at a $3 Million exit. So your job is costing you $2,375,000 over the next 5 years. Worth it?

Think I’m wrong? What are you building in equity for the shareholders of the firm where you work? If it wasn’t a good deal for those shareholders, would they want you there?

Think it’s too risky? Sure, a ridiculous number of entrepreneurial enterprises fail, but failure cannot be counted strictly as downside. There is recoverable value in failure.

Too often people cite general statistics about entrepreneurial failure that include all entrepreneurs everywhere and in every sector; these metrics are all but anecdotal in nature. Be realistic in evaluating your chances. Not being stupid helps (we already established you’re smart), and your position in social networks likely has more to do with success or failure than any other factor (read this book).

And please don’t counter that I’ve inaccurately accounted for the capital required to create a startup, how “impossible” it is to get funding, and how doomed you might be for whatever reason before you start: startup capital requirements are lower than ever before – you can get started for as little as $10-$50K with a seed of an idea and the right partner.

Or is it that you’re “too big to fail?” Has your dependence on the lifestyle that The Man has meted out to you eclipsed your willingness to pursue something more valuable? Family, relationships, cars, mortgage payments, kids, restaurants, travel – call them what you will, but these responsibilities often become excuses for inaction.

Getting started young with entrepreneurial activity is a great way to avoid this trap; young people really have nothing to lose, especially teenagers, and it’s easier than ever for a teen to start something today.

While it’s perfectly possible to nurture a side project and wait for it to show signs of life before “quitting your day job,” the real opportunity for success comes in becoming a part of a network of entrepreneurs who are willing to take calculated risks together and that requires a full time commitment. Otherwise, you’re making a calculated decision to expose yourself to a much smaller chance of success. Why?

For every day that you accept payment in exchange for doing your employer’s bidding instead of something you’d rather be doing, you become less likely to take the bold steps necessary to succeed on your own.

What are you waiting for?