Theory of Startups: a free book on mental models for startup founders

Hi, I’m Paras Chopra, founder and chairman of Wingify, a SaaS company known for its market leading A/B testing product called VWO. This freely accessible online book contains what I feel are the most effective mental models for startup founders and business leaders. There are a total of 63 of such mental models and even though you can go through the list in any order, I recommend going through them from top to bottom.

I will be posting one new mental model each week (along with an illustration of it made by Aakanksha Gaur).


Make sure you subscribe for email updates or follow me on Twitter if you want to be updated each time I publish a new one.

Understanding Markets

1. Capitalism rewards rare and valuable

2. Businesses exist to fulfil human desires

3. Evidence of desire is in people’s behaviour (and not in what they say)

4. Search for market-product fit, not product-market fit

5. Be in the desire market, not the solutions market

6. Don’t be a first-mover, be the first-one-to-get-it-right

7. Only two types of startups exist: technology-led and culture-led

8. Define your market as narrowly as possible

Building Products and Solutions

9. People don’t like using technology

10. All sophisticated solutions start extremely simple

11. Deliver value only on dimensions that customers care about

12. Habits prevent people from switching from the familiar to the new

13. One week rule to prevent failure

14. Steal successful ideas from everywhere

Partners, Ecosystems and Stacks

15. All startups belong to an ecosystem that makes or breaks them

16. Find partners who can grow their business by building on top of your business

17. Stack that you build your business on doesn’t limit how big it can be

18. Commoditize your suppliers and customers before they commoditize you

Building a Defensible Business

19. If your customers can switch easily, you don’t have a defensible business

20. Compete either on cost or on quality. You can’t do both

21. Your competitors are just like you: smart and hard working

22. Use all your unfair advantages

23. Do what’s hard (because everyone’s doing what’s easy)

24. Never stop discovering and inventing network effects in your business

25. Market leaders get killed by non-competitors

Marketing and Selling

26. Assume most people are lazy but market to those who aren’t

27. All new products compete with Instagram for attention

28. People evaluate emotionally and then rationalize their decision

29. Marketing needs to deliver more than it asks

Business Model and Pricing

30. Revenue requires investment, profit requires creativity

31. What people pay is determined by what they’re used to paying for

32. Price you set for your products determines your business playbook

B2C vs B2B

33. Consumers want to conform, companies want to differentiate

34. Consumers hate getting sold to, companies love it

35. Consumers want stuff for free, companies want to pay

36. It’s winners-take-all in B2C, while B2B is long tail

Making People Care About Your Business

37. Your 30 second pitch shouldn’t be about you

38. Get press by giving journalists something surprising

39. Raise funding by showing how you can raise even more funding

40. Recruit exceptional people by showing them a promised land

How Investors Value

41. Your business is worth all future profits it is expected to generate

42. Business quality is determined by one metric: return on invested capital

43. Your job is to return “risk-adjusted” returns to investors

44. Great entrepreneurs think like investors

45. Profit overpowers ethics, if left unchecked

Business Trajectory

46. What kills startups is lack of feedback

47. Study your most successful customers to set your direction

Incentives, Culture and Organization

48. Your team’s culture is defined by your behavior, not your words

49. Don’t hire for roles, hire for a change

50 . People don’t leave companies, they leave their bosses

51. Your number one job is communicating clarity

52. Aim to be a cult by hiring people who obsess about the same things

53. Your company’s org chart is more important than you think

54. You’re probably not a good leader (because being that is so hard)

Avoiding Cognitive Biases

55. Map is not the territory

56. Always seek disconfirmatory evidence

57. Never ask your friends or family if they like your idea

58. Ask people what they did, not what they will do

59. Stop assuming that your customers want things that you want

60. Think from first principles before you Google

Meta

61. Startups live and die in a multidimensional landscape

62. You can only succeed if you know how you can fail

63. Wealth is not money, it’s the things we use money for




Why should you read this book mental models

My first startup had a simple business model: put up free software on the web, wait for people to download it and then charge whenever someone wanted to customization it. I only had a few customers and I still remember the total revenue I earned by doing this: $100.

It wasn’t much but all of it was profit. After all, I was a 14-year-old living rent-free with parents (who also paid for the computer and the Internet connection).

Ever since my first brush with startups in 2005, during the last 15 years, I’ve done several startups, most of which failed but one succeeded. Fortunately, in entrepreneurship, all you need is one success to make all the failures worth the effort.

The last startup I founded, Wingify, is no longer a startup because today it’s a mid-sized company employing a few hundred people. I’ve enjoyed both successes and failures in my career because only through a contrast between the two, I was able to figure out what factors tilt the odds in which direction.

Had I been successful with my first startup, I would have never known whether what I did was replicable by other entrepreneurs. Similarly, had I never seen success, all I could tell others is what not to do. But since I’ve tasted both success and failure, I feel confident of doing introspection into my experience to derive (hopefully) generalizable and replicable insights into the art of doing startups. 

After 10 years of working nonstop and growing Wingify, I took a month-long sabbatical and started writing a series of essays on this blog (Inverted Passion). Gradually, a small community of entrepreneurs and enthusiasts developed around the blog and they encouraged me to expand them into a book. While the essays I wrote had no particular structure or organization, this book is written from the ground up to methodically cover different aspects of startups. From understanding markets to product design to building teams to business ethics, I’ve tried covering everything that an entrepreneur may need while doing a startup. 

There are many excellent books on startups and I didn’t want to put out yet another book that’s similar to existing ones. After all, a book is a product that competes for attention with other books. So in the spirit of following my own advice (something that’ll become obvious in the very first chapter), what I’ve tried to come up with is a different and unique book on startups.

This book is organized around simple but powerful ideas and mental models that illuminate how the world of business and startup is structured. Even though it is informed by my experience, it is not a story of my company. The focus is on core ideas that work in many contexts rather than only in specific situations I encountered. My hope is that once you intuitively understand these deep principles of the startup world, your chances of success will be higher as you’ll be able to recall the appropriate mental model applicable in different situations and get immediate clarity on what to do and what not to do.

So consider this book as analogous to an entry level physics textbook in college. Just like a physics textbook introduces the eternal laws of our universe, this book introduces the eternal laws of startup and business. But, of course, business is a domain of social sciences and deals with humans who’re broadly predictable in large groups but extremely fickle individually. Hence, unlike physics, you may discover that the laws in the book contradict with each other. But this is expected because contexts in which such laws are applicable are different and hence my request to you would be to not reject contradictory mental models altogether, but interpret and apply them in depending on what context you are dealing with. 

You may wonder where do these mental models come from? Is it from my experience? Or is there a more objective basis of them? A successful entrepreneur needs to understand what motivates humans and only then can she sell to customers, raise money from investors, and build a driven team.  So, the laws of business are ultimately the laws of human behavior. Since human behavior is shaped by millions of years of evolution, we’re able to derive generic principles that more or less hold true in a variety of contexts. For example, evolution has shaped us to be skeptical of offers from strangers because our ancestors who weren’t skeptical were taken advantage of by others and as a result were less successful reproduction-wise as compared to the skeptical ones.  So, skepticism is ingrained in us and an entrepreneur needs to understand how this deep instinct gives rise to all sorts of timeless principles such as people requiring social proof, the importance of early influencers in product adoption, and the necessity of face to face sales interactions for expensive products. 

Ultimately, most of the mental models in the book are a result of one or more behavioral patterns of humans that are broadly true. However, human behavior isn’t an exact science like particle physics and hence you’ll always find counterexamples to such general patterns. A single counter-example is sufficient in physics to falsify a theory but it doesn’t work that way in social science where a counter-example does not negate a broad principle, rather it illuminates the context in which such a mental model shouldn’t be applied. So do not reject a particular mental model if your past experience doesn’t fit with it. 

Who is this book written for? The primary audience of this book is someone who wants to start a company or someone who is in the early stages of doing so. Growth and later-stage entrepreneurs may also benefit from it as their experience will help them internalize the mental models in a much deeper way. 

Read the book slowly, reflecting on each mental model with whatever relevant experiences you can recall from your own life. Also, my recommendation is to re-read the book at different stages of your startup journey. Each time you read, you’ll find yourself understanding the same mental models in a more illuminating light than previous instances because you’ll have more examples from your own life that you can match with various mental models.

Finally, I can’t help but mention the role of luck in business and startups. No matter how smart you are and how much you know, startup success isn’t algorithmic. You may do everything right by the book and yet fail. This is because for a startup to succeed, many things have to go right simultaneously and because the world is so large and complex, there’s always a big chunk of variables that are beyond an entrepreneur’s control. That’s why a big part of startup success depends on luck. But, unlike what many think, luck is partly manipulable. The more often you try, the better your odds of success. Also, experience and skills accumulate with each try so subsequent attempts have higher odds than the previous ones. Before my current company succeeded, I failed three times. So you can either say I got lucky the fourth time, or you can say I didn’t give up until I succeeded. Either way, the fact is that eventually things did work out for me and I hope things eventually work out for you as well.

That’s it for the introduction.

Have an opinion on this essay? You can send your feedback on email to me.