[00:00:00] Jonathan: Welcome to the Difference Engine, the show for tech founders, investors and innovators.
So let's find out what's coming up today. We'll take a look at the launch of a new big four spin out consulting firm. Unity. They're backed by $300 million of PE money, but are they different enough to cut the mustard? The first Grab a notepad pen 'cause we're breaking down Y Combinator. Co-founder Paul Graham's top tips for startup success.
So JJ Maxwell is the American founder of a firm called Double Finance something. He started up after claiming to sell his previous tech company for a hundred million US dollars. Well, well done jj. We're interested in anybody who's built a tech firm, but what caught our eyes was J'S interview with. Paul Graham serialized on X, and this is with at least some paraphrasing a checklist for anybody who thinks they could be on [00:01:00] their way to category success.
Well, y well, well, Graham is the man that built the world's number one startup accelerator, often imitated, but never surpassed. The Y Combinator's Founders advice has helped launch companies worth 800 billion. US dollars combined. Now that's a lot of money, so we should take notice. After all categories are built on firm foundations.
So here are Graham's reported 10 startup lessons. Now we start with number one, pick good co-founders. Well, you know why he thinks it's the number one startup killer. Co-founder disputes and Graham himself claims that co-founders are for a startup. What location is for real estate? Our take on that is, you know, you should choose partners with complimentary skills who share your vision.
You know, strong founding teams, do weather storms better. Even your, your, your vision has to be aligned. Even if your temperaments aren't, you know, if not a [00:02:00] breakdown, your relationship will, will finish your firm. Um, I think there also. A key reason why m and a processes fail.
[00:02:07] Paul: Yeah. Well, let's be clear about Paul Graham, right?
Paul is not an uncontroversial character. Uh, neither is why Combinators. So, um, we'll take Paul as a, as an honorary Brit, and he is certainly got some in written, some interesting books. Um, you know, talking about the power of programming and why, you know, coders should rule the world, et cetera, et cetera.
And that's really what. Took him to Y Combinator, but Y Combinator is not the only show in town. And there are, uh, some people who think that it takes a little bit too much equity from, its, rather than naive founders, there are some people who think it's a little bit too prescriptive in its advice. So, um, as the first piece of advice to pick.
Good, good, uh, co-founders. Maybe it's do, are you the right fit for yc? Um, so, yeah. So he's, he's right to say that co-founders though will be the reason that most startups, uh, can fail. [00:03:00] Um, but they themselves. Uh, dictate that any startup should have two or three founders. Uh, and what they're looking for is somebody with vision, basically a salesperson, and somebody who can code.
Uh, and in our hi, in our experience, those are two different. Beasts, those are two different animals. So whether somebody that is, you know, potentially quite introverted, amazing at, at, um, thinking through processes and fluent in a coding language gets together with somebody who gets a category, that's a big, uh, question mark.
So, yeah, I'm not really surprised that the number one issue is, uh, co-founders getting along.
[00:03:37] Jonathan: Funny enough, I'm thinking Gates and Wozniak from that, uh, that description there, Paul. Yeah. Anyway, um, the number two, uh, aphorism, uh, from Graham is launch Fast. Um, and, and he says you haven't really started working until I.
You've launched now. I think he means that the value creation work starts then at the point of [00:04:00] launch. You know, you just need to get out there and start learning. So the message there too is, is just don't wait for perfection and, you know, just prototype quickly and get your stuff used and, and. The reality is that user feedback exposes the flaws that you frankly can't predict.
Um, so, so ship sooner and learn what you should be really building rather than what you think you should be building. Um, quick launches, accelerate learning and engage those first users. These are the innovators who will be your champions and allow you to move on. From the innovators to the early adopters and then you hope to cross the chasm to the early majority.
[00:04:38] Paul: Absolutely. So I, not a lot to say I love this. Not a lot to say about Launch Fast. You don't know till you don't know. Um, and anybody who doesn't wanna find out, I. Is playing a very dangerous game. Find out as much as you can and, and yeah, as they say, launch fast.
[00:04:52] Jonathan: Yeah, and, and closely related to that is number three, which is let your ideas evolve.
So, you know, Graham says it, it's a mistake to treat a [00:05:00] startup as implementing some brilliant initial idea. Um, and it's interesting, our, our recent, recent interview with, uh, um, Amber Vertigo, I'm thinking of in, in this case, um, before she really, you know, hit the pay dirt with, uh, pregnancy X, uh, she had already built two companies and had learned substantially from that.
So that when she got on the road to pregnancy, X things moved very, very quickly. And five years later she was acquired by Philips. Anyway, that's in another episode we hope you listen to. Um, but I guess the point Graham's trying to say here is. Business is just not a linear path to success. Uh, successful startups, when you get to the success, they look nothing like the, uh, initial concept.
Um, and, and again, the message here is listen to the users. Not your ego. Observe what actually works and, and pivot when needed. So flexibility always beats rigidly sticking to plans as, as a root success. And, and I'm, I'm really reminded here of the, uh, legendary [00:06:00] Prussian strategist Helmuth from Malka who famous.
Yeah, no plan of operations reaches with any certainty beyond the first encounter with the enemy's main force.
[00:06:12] Paul: Alright? So that's where Tyson got the idea that everyone's got a plan till they take the first punch. The point here is engage with reality, uh, as a route to success. So number four, uh, Mr.
Graham. Understand your users make something people want. Yeah. But no shit. Right? I mean, the question here is, you know, if you, if you are saying make something people want, the question is who are the people? See, you know, I mean, I think this was well said by, uh, Rick Waterworth and he's talking about the role of YouTube and the people there.
That wanted something were not known and they came up with a name for them and they call them creators. So you may not, you may want to make something people want, but that's difficult when. You don't know who they are, right?
[00:06:58] Jonathan: But that, but that's the principle of real innovation, [00:07:00] isn't it? If you can do that, then that gives you massive competitive advantage.
And of course, that idea was picked up by Rich's next employer after YouTube, which was TikTok, and you cannot argue that that has not been anything else but a massive success. Um. But I think that you have to understand that users may not be rational. You know, they have needs, they have problems, they have desires, um, which again, you know, uh, are often not quantifiable into, into numbers.
Um, so this takes empathy, you know, listening, constant engagement. Um. Uh, and it's about products solving real problems, and, you know, that's the basis of categorization. What is the real problem you're trying to solve? Or subtly, and very importantly, completely changing the way people think about their problems.
That's the foundation of a great startup, right? So number five, make [00:08:00] a few users love you for the few, not the many. Make a few users love you. So Graham says, better to make a few people really happy than many people. Semi happy. I think we'll go with that, right? Doesn't, doesn't mean mass appeal on day one, that's for sure.
You know, create, create something small that, that influential. An an influential group, love, those are the evangelists that are gonna give you the feedback and become your strongest advocates, if you get that right.
[00:08:27] Paul: Yeah, I mean, I don't think there's, um, there's a lot new, uh, in this one, and I think he's borrowing heavily from Jeffrey Moore, uh, specifically the bowling alley principle that he elicited in crossing the Chasm.
Right. Which obviously is where a lot of the, uh, software. Categorization thinking comes from, um, so with the bowling alley principle, you pick one, um, specific cohort of people that you think will really love your products, so make a few users love you. And, and I think the, if I remember correctly, the example, uh, mentioned is a company I.
Uh, from, uh, back in the midst of time called [00:09:00] Documentum, who had a document management, uh, solution, which they focused on healthcare professionals because they got a lot of documents and they're highly regulated. Make those guys love you and then generalize it. So I have no issue with this except it ain't the first time I've heard.
Make a few users love you
[00:09:15] Jonathan: and let's not forget that, uh, some companies get forced into the bowling alley that they, the best example of that being Apple. So Apple only survived at one point in its history by concentrating entirely on, on graphics arts and graphic designers as their user base, and that that allowed them to survive and then build out for a second go, uh, to more, more, um, consumer markets.
[00:09:38] Paul: Alright, into the back five then what do we got?
[00:09:40] Jonathan: Oh, got number six. Um, is apparently pgs, uh, most famous advice do things that don't scale. Um, so what, what he says is do manual and scalable things early. Uh, right. So our take on this is, is be a bit analog. Um, it's about personal [00:10:00] onboarding to the product.
You know, it's about loving handwritten notes. It's about direct. Direct support from the founders to the early adopting clients. Um, and the point of this is to build customer trust before the inevitable automation of, uh, whatever it is you're putting out into the marketplace. Um, and there is a, quite a good example of this was, you know, apparently Airbnb's founders went out and photographed the listings themselves.
You know, it, it worked, it, you know, it shows that you care. The actual original renters met the founders. Um, and everybody loves that. The issue is you need to do that before scaling. Makes you run outta time.
[00:10:43] Paul: Yeah. Um, my, I have a slight issue with this one as well. I think time may have, uh, superseded this one with, with ai, um, there ain't a whole lot.
Especially on the content side that one can do, um, better manually that couldn't be done, at least assisted, let's say, with a little bit of, um, generative [00:11:00] ai. So, um, yeah, I don't think he, I don't think he really means do everything manually or do as much as possible. 'cause I think that that meter has changed.
There's a lot that still needs crafting after you've got the results. But AI has changed the, moved the needle on this completely, I think. Yeah.
[00:11:15] Jonathan: But I think you need, you do need to show up and sometimes the personal touch can make all the difference. People want to look into the whites of their eyes and realize that you are actually serious about what you're doing and what you want them to be involved in.
Yeah. So number seven. Uh, for a, for a couple of parsimonious northerners, this is a good one. Spend little. So Graham says, being cheap is almost interchangeable with iterating rapidly. Yeah. Oh, so unsurprisingly, frugality stands runway and keeps you agile. So what should you do? Avoid unnecessary costs. Keep the team small.
Focus every Euro pound dollar on learning what you are doing. And a thrifty culture should. Deliver a financial robustness that [00:12:00] adapts better to surprises and, and frankly gives you more options. Um, because you don't want to get into a situation where everything you do is dictated by the money rather than the strategy.
[00:12:12] Paul: Yeah. Again, I, I have some, I have my quibbles with this one. I think this is an over, um, this trope is a little bit overdone. We all know Bezos famously put together his, um, desks with Ikea doors allegedly. Um. And I've also heard top VCs, um, really, really top VCs talk about, um, some of their due diligence.
Slightly unusually, they would go round the valley, driving to the startup offices and just have a look how many really flashy cars were in the car park. That was a big no-no. So drive a drive a, a, a lemon or a, a beat up, um, car, that would be good. Uh, and the other thing they do is, um, drive at dusk. And find out if people were, were still in the office.
So I feel like this, you know, you have to suffer a lot in a world where, you [00:13:00] know, startups can be one or two people is a little bit overdone. That's all I'll say.
[00:13:04] Jonathan: Although, uh, I think, 'cause it was at Jensen, Wang was talking about suffering early on in the history of building companies. So there's, there's, there's maybe some good evidence for that.
Anyway, number eight. Pretty related actually. Um, it's a bit of a buzz phrase this, and I sort of quite like it. It's get ramen profitable now. Uh, Graham says, ramen profitable means making just enough to pay the founders living expenses. Uh, I'll take, take. I sort of love from I and profitable, but what sort of eat the cheapest food you can, prob probably not a good idea, but, but you do get the idea.
Now. Keep expenses down. Focus on getting profitable as soon as possible. Be, because the point is, is that even marginal profitability gives you leverage and independence. Uh, particularly if you've got external investors, you know, it'll keep, it'll keep them off your back. And lets you focus on building value.
[00:13:57] Paul: Yeah. You can spot them, checking out the cars in the car [00:14:00] park maybe, or, or at night, making sure the lights are still burning. Um, I think we need to update this 'cause ramen is a very California thing, uh, and I'm pretty disappointed with Graham as a Brit calling, uh, saying, get Ramen profitable. I think we should update this to get Greg's profitable.
Greg's,
[00:14:15] Jonathan: yes. Yeah, yeah. That's what you mean. So, uh. Yeah, cheapest food you can. Anyway, Greg's is a very, very successful company that's spread right across the UK and is the selected food stuff of much of the community.
[00:14:26] Paul: It is the category leader of hot crusty. Bad food with paste of some sort in the middle
[00:14:33] Jonathan: anyway, uh, onwards.
Um, avoid distractions. This is a good one. Graham says, nothing kills startups like distractions. The worst are those that pay money. Well, you know, our take. What does that mean? Well, I think that means side hustles, speaking of events and less fundraising, um, flashy marketing, all of which are apparently slow you down.
So be serious about what you're doing. Ruthlessly prioritize your core mission and [00:15:00] get the right product into the hands of a small group of evangelical users.
[00:15:04] Paul: Yeah, I can't really fault this. Avoid distractions cover so much. Um, you know, a, a lot of these do spend a little, get rama profitable, but avoid distractions is a good one.
Um. Then again, so many companies, and I'm thinking way, way, way back in the midst of time with a company called Cognos that IBM bought up in the business intelligence space. You know, that started off lovely
[00:15:23] Jonathan: Canadian company.
[00:15:23] Paul: Canadian indeed. Uh, that's sort of consulting for, um. You know, shoe shoewear manufacturers and then it became its own software category.
There are so many pivots here. You know, slack was a pivot of a of a, of a games company is my understanding, Roblox, et cetera. So many things that started as one thing and ended up as another. So I think avoid distractions. I. Isn't the best advice, but I do like avoid distractions in a slightly different way in that he's saying Avoid, avoid distractions that pay you money.
I would say, and this is to the marketing people out there, avoid distractions that cost you a lot of money because it's very easy [00:16:00] to mistake the value that you think you're going to get with the price that's being asked for something. And my classic example is our good friends at Gartner and their lovely.
Reassuringly expensive events that everybody spends months and months concentrating on their magic quadrants, where you, you get hundreds of customers to say nice things about you. Is that really a distraction worth having in the early days? Clearly, no. No, no, no, no.
[00:16:24] Jonathan: Don't do it. So number 10, what you should do is don't get demoralized.
So Graham says, most startups fail because founders give up, not because the idea was bad. All right? So anybody knows, any firm building journey is filled with setbacks and disappointments, but you gotta stay in the game and. Resilience undoubtedly beats brilliance. If you want to be in there for the long haul.
Yeah. I mean, and that's one thing I've learned about, about business and it took, it took quite a while to learn, in fact, is just don't give up. Just keep going. [00:17:00] You know? And as they say, probably in some country and Western song, uh, the Darkest Hour is just before dawn. Just as you think you're gonna finally fail, you break through.
And all is good. So what do you think we should learn from this, Paul? Unless you've got something to think about, not getting demoralized.
[00:17:14] Paul: I think the only thing about not get more demoralized, and again, I'm being a bit controversial, um, because of, because of the, uh, author here is, you know, I. It might be worse knowing when to stop on the flip side, but, um, don't get demoralized.
It's a good moral for life. So I'll take it
[00:17:30] Jonathan: so quickly. What is worth learning from these 10 points? Well, I guess one, keep things simple. Two, keep your head down. Three, stay focused. Four, choose your partners wisely. Five, stay frugal and give your chances, your customers every chance to guide you, not your ego.
Um, and, you know, just keep going. Um, you know, unless you are heading for some catastrophic failure, um, it is likely to pull [00:18:00] through for you. Um, and we think that's a, a pretty good mantra for aspiring category creators.
According to the ft, that's the Financial Times, the, uh, London based revered financial news sheet. Um, the former head of. E EY and PWCs former Chief Operating Officer are launching a rival accounting and consulting firm with a backing from private equity and apparently are vowing to attract British clients and partners for the from the Big four.
Now we noticed the new venture called Unity Advisory has been in stealth mode, um, recruiting for a launch expected by June of this year, uh, under the chairmanship of Steve Ley. Now it was Ley that ran EYU UK and Ireland for nine years until 2020. Now, this boutique advisory firm, well, of course it'll be boutique until it grows a bit, will be backed by as much as 300 [00:19:00] million US dollars from Warburg Pincus, the private equity group.
Now Ley is the chair also of law firm DWF, which also has private equity backing. No surprises there. Then I think there might be a theme built here. Keep it in the family. Absolutely. Now his opposite number, uh, at Unity is the chief executive will be Marissa Thomas, who was one of the UK's most senior female executives at PWC.
Until last year, that was when she was passed over for the role of senior partner after failing we here even to make the shortlist for a partner vote. So, so she left the firm in February in a, a bit of a huff, we presume, not surprising, as she spent 31 years at PWC running its UK m and a advisory business and its tax unit before becoming chief operating officer.
Now this plot thickens, you know, the pair of pitching their new venture is an alternative to the big four that can offer tax and accounting services, technology [00:20:00] consulting, and mergers and acquisitions. Advice to the chief financial officers in the UK that with none of the conflict of interest, worries that plagued their former firms, oh dear.
Alternative, that's not even better level or indifferent. Alternative seems to mean unity. Will not have an audit business, which Big Four Partners often claim is a key for heavy regulatory scrutiny and can tie them up with complicated compliance procedures. It's all, that's also a dull as ditch water statutory obligation and loads of firms do it.
[00:20:31] Paul: But I think the issue is, um, often. These audits end up in big fines. Right?
[00:20:36] Jonathan: That's the worry about the heavy regulatory scrutiny.
[00:20:39] Paul: Right? So, uh, and these are very public and, uh, you know, audit firms are often asked, uh, to move on and not re-pitch. And these are very, if you look at some of those other. Pieces of, uh, services they offer tax advice, tech consulting, m and a.
These are much more discreet. You know, you don't get to say that was a terrible [00:21:00] m and a and acquisition and take your money back after they've advised you. Um, even if you are as bad as the post office horizon, uh, project, and hundreds of millions have been spent, you don't get to go back. And have a go at the advisors that you can easily get that wrong with very little consequence.
Whereas in audit, it's pretty clear. What I think
[00:21:20] Jonathan: is interesting here is, you know, if this is a just a, a great idea, um, and nobody's thought of it before. Um, why aren't they telling that story? Because, you know, instead they appear to be doing a standard professional services startup pitch. You know, it's a proposition that's super client centric, you know, has really low administrative costs and has no conflicts.
Well, so what, so has any new firm with foundation clients
[00:21:47] Paul: and also I would quibble. You know, because I personally have been there before, I, I worked for a, uh, an alternative, if you will, management consultancy, a company called SC back in the year 2000. So I remember it Well, you left [00:22:00] me a ago. You left me for them.
Oh, I'm sorry about that. I'm back now, but a quarter of a century ago that this was all there. And I can tell you that was made up of a lot of people who were formally. At some of the large consultants, PWC and EY amongst them. Uh, Bain I seem to remember as well. Uh, a lot of folks from they all, uh, after that blew up spectacularly in the.com dot bomb era.
They all fled back to Mummy. So yeah, I'm a bit skeptical.
[00:22:25] Jonathan: So, you know, one of the things about dealing with management consultants is, is you'll quickly find that you get a whole load of MBA speak. So the firm is claiming lower central cost base and absence of audit clients would allow other. Fee models such as a large proportion of performance based fees or value sharing from advising on efficiency gains, offering substantial market opportunities for disruption.
Okay. Right. Let's see how that goes when the realization that cartel. Based professional fee structures for regulated work are [00:23:00] so much nicer than the uncertainty of constant business pitching fee negotiations and competition from more players.
[00:23:07] Paul: Yeah. Let's just figure out what's at risk here. Right? So I did a little bit of, uh, Googling as one does, uh, the average EY partner.
In 2024, stumbled and, and just managed to break their net above the service and, and survive on a mere 723,000, uh, pounds of partner fee. Nice. Yeah, but I mean, they are mere pulpa compared to the, uh, guys at pwc. Uh, and they, um, you know, got out their begging bowls and, and scrubbed around for a mirror.
862,000 pounds here. So you're right, there's a fair bit, a fair bit at risk here,
[00:23:43] Jonathan: but really having a go here at, at, at the, the lack of proper differentiation. And, but you know, to be fair, some attempt at Fundamental Declaration for Unity is made with, and I quote, uh, AI led rather than based on legacy infrastructure.
Mm. Okay. But, but no, I mean, [00:24:00] no kidding. You know, again, brand new firms have defacto no legacy. And as for the AI led bit, it's a bit. Sake, it's the yardy yard and modification that everybody's using it. Now, if you happen to be a veterinary surgeon, I'm not sure many of our listeners are veterinary surgeons barking up the wrong tree there.
Yep. If you have any veterinary surgeon friends, you might, you might find they're in the grip of a private equity driven screw. Patient care, just keep charging more money frenzy. You'll be painfully aware of the trend for P to put its money into premium services business.
[00:24:35] Paul: Yeah. And I, I am so, so I've got, uh, friends of the family and, uh, parts of the family that work in, uh, were vets.
Nice, um, nice little local business until the chain, the pe uh, backed chain came and took them up. And now I quote from one conversation, they may as well be doing minimum wage. Well, that's not true, but there clearly there's a cap on earnings.
[00:24:58] Jonathan: Yeah. So the reality here is, [00:25:00] is that this, um, Warburg Pincus backing of this new, new venture, um, and its build out really underscores a growing influence of financial investors and sectors that that used to be dominated by partner owned business models.
And, you know, the, the, this precedent here, you know, grant Thornton in the UK Yeah. Sold a majority share to the private equity group vet. And that was, that was following a whole series of similar. Deals for accounting firms overseas. Um, and actually, you know, Warburg, uh, Pinkus had got previous on this back in 2019.
They, they backed a really, you know, old style insurance brokers called Steve McGill creating an yeah. Independence. National risk insurance business.
[00:25:42] Paul: I mean, they're all over the place in, in accounting these days. Uh, if you look below the four at like, let's say the next four to eight, there's a lot of private equity money in there.
We, um, we know a lot of people that are working for 'em, interestingly enough, and this does make me think there's a real [00:26:00] change going on. The people that we. No, have been recently recruited to those, let's call them Midtier. There's, you know, there's a, a mid-tier of accounting firms that, that used to be regional.
Now they're somewhat bigger thanks to PE money s those folks are, um, interviewing and taking on people from the software world, um, which has all sorts of cultural interest because, um. You know, a solution in the world of accountancy is a, an un management consultancy is of course a proposition. So if they can con, if they can successfully convert what used to be, you know, rather, uh, ponderous, but very nicely, um, you know, moted, um, private.
Partnership model and make it more, uh, innovative with some of this, uh, software thinking there might be something in this.
[00:26:49] Jonathan: Yeah. And I, I think there's other reasons too as, as to why they're, they're doing this. You know, I mean, after all, you can make, as you say, a very nice living from being a big fall like partner.
Um, but if you have. [00:27:00] Bigger ambitions. The problem is that partner-based businesses don't do well at medium to long-term investments and, and that is essential to any tech proposition, and that's because each partner typically chases this year's usually very substantial as you have demonstrated remuneration at the expense of investing for the future.
Anyway, apparently in its ambition to be, that's what we call alt four, uh, unity hiring staff with experience in those firms. Now, that's never done, been done before, has it? Um, including those that have left the big four for jobs actually in the clients and in industry, um, and is targeting mid-size corporate clients with revenues in the 500 million to 1.5 billion range and absolutely no surprises here, particularly those backed by.
Private equity. Now, I wonder how many of the initial clients will be owned by Warburg Pinus. [00:28:00] I bet there'll be lots of NBA speak about alignment going on there.
[00:28:04] Paul: Yeah. And, and I just, you know, it makes you, I'm very curious is how this is, uh, gonna go on because one, one version of the future is that all of this amazingly focused private equity, um, let's say, uh, revenge.
Folks coming out of, coming out of the big four. Maybe they didn't make partner like one of the founders, and they've got, you know, the, they've got the, the, uh, fear of God or the, or the, um. The kaons to go out and, and show the guys that they didn't make partner to what they can do. Maybe that will be absolutely brilliant.
Or maybe these are the losers who didn't make it at the big four who have come in and can't really make success even in this new model. I
[00:28:45] Jonathan: mean, the reality is, I mean, I mean, running a big partnership is, is a, is a, you know, a pretty meaty business challenge, but. Nevertheless, it, it's sort of amusing watching people who have done consulting business at 30,000 feet suddenly discovering the reality of life in the startup [00:29:00] trenches could be
[00:29:00] Paul: interesting.
Yeah.
[00:29:01] Jonathan: Even though $300 million of private equity money might make for some very luxurious dugouts, um, you know, these are very smart people, but surely they can do better in coming up with a series of betters for their new business that, that they're no different from any new consulting business. Any sector, assuming that it's gonna cause disruption, you know, and it, it might cause a few perturbations around the partner tables of other firms and encourage them to join the rush into the arms of pe.
But otherwise, unless there's something here they're not telling us right now. Unity is one massive category leadership opportunity missed, which is leads to the big question. Would we like to help them? Of course we would.
Thank you for listening. If you wanna learn more about category design, head to be categorical.com. If you need help designing and dominating your category, then [00:30:00] get in touch. Contact details are in the show notes.