How A Restless Sewer Cleaner Became A Serial Entrepreneur – with Murray Smith 26 July, 2010, 6:28 am
After working for two years as a sewer cleaner, Murray Smith says he started noticing that the owners of the company he worked for weren't academically smarter than he was. If they managed to build a multi-million dollar business, maybe he could too.
That realization helped him go on to ...
How Groupon Bought The Domain Groupon.com [clip] 24 July, 2010, 8:38 am
Check out the way Groupon bought the domain Groupon.com. I excerpted the video & transcript from my Groupon Interview with Andrew Mason (which is one of my best, so I hope you check it out). The transcript (video is below) The guy who actually writes all the content had the idea for the name and [...]
iTeleport: How A Weekend Hobby Turned Into $1 Mil In Annual Sales – with Jahanzeb Sherwani 23 July, 2010, 9:59 am
Jahanzeb Sherwani just wanted an easy way to control his computer from the couch using his iPhone. What he launched was pretty basic, but it touched a nerve. Turns out there were lots of other people who wanted to do the same. Actually, they didn't just want to control their computers, they wanted to see their computers from their iPhones. And they had other ideas too.
So J, as he's often called, started...
How Ideal Bite Became A $20 Mil Company By Focusing On Email – with Jen Boulden 22 July, 2010, 2:20 pm
There's nothing technically revolutionary about the technology that Jen Boulden used to launch Ideal Bite, but what she did with it is impressive. She used Constant Contact to send out an email newsletter that a "designer slash intern" created.
Listen to the full interview to hear: How she grew that mailing list. How she got high rates for her ads. And why she sold Ideal Bite to Disney for $20 million.
How charity: water Is Using Social Media To Save The World – with Scott Harrison 21 July, 2010, 1:38 pm
charity: water, the non-profit founded by Scott Harrison, doesn't just give you facts like, "Unsafe water and lack of basic sanitation cause 80% of diseases and kill more people every year than all forms of violence, including war."
It has a blog with moving photos, like one of children in the developing world waiting for cows to finish drinking dirty water so they could have some too. Then, when you care, charity: water gives you...
DODOcase: How An iPad Case Generated Almost $1 Mil In Revenue Within 3 Months – with Patrick Buckley 20 July, 2010, 1:16 pm
A few months ago, Patrick Buckley’s company didn’t even exist. Now, he says it has already generated almost $1 million in revenue. His product is the DODOcase, a handmade iPad case that the New York Times says, “gives the iPad the look and feel of a luxury, hardcover notebook.” He and his co-founder came up with [...]
How A Child Who Loved Bugs Launched Pesticide Companies As An Adult – with Pam Marrone 19 July, 2010, 9:33 am
"Living in rural Connecticut, the gypsy moths would come through and denude the forest. And in the middle of summer, it looked like winter," Pam Marrone told me in this interview.
And I said, when I was about eight or nine, 'I'm going to learn how to control them. But, I don't want to use any chemicals and something that would harm the bees and the birds. And I'm going to make a career of controlling bugs naturally.' And, honest to God, I did. My whole career, that's what I wanted to do."
The Stunning Way A Younger Steve Jobs Landed An Investor [clip] 18 July, 2010, 7:00 am
This clips is from my interview with Chris MacAskill, who worked for Steve Jobs at NeXT Computer. Today, Chris is the co-founder of SmugMug, a family-owned photo sharing site that makes pictures look incredible.
How To Get The Meeting Of A Lifetime [clip] 16 July, 2010, 2:18 pm
I asked Christine Comaford, CEO of Mighty Ventures, for advice on how an ambitious person could land a hard-to-get meeting that could help grow her business. You can read or see her answer. (And you should grab the full interview.)
Some IPO speculation 15 July, 2010, 1:29 pm
Inspired by Steve Blank’s post today about the “lost decade” of IPO’s, I’d like to make some predictions. Let me be clear: Steve is the historian. His posts are born of tremendous research into the secret history of Silicon Valley, and if you haven’t read those essays, you should. By contrast, what I’m about to say is pure speculation.
The fact that IPO’s are disappearing makes intuitive sense to me. And the fact that the effects of this IPO vanishing act are being felt first and foremost in the software business also makes sense to me. In fact, I believe that the software business is the canary in the coal mine: increasingly, all businesses are going to look more and more like software businesses.
My belief is that the root cause of the IPO shortage is that successful startup companies cannot find productive ways to invest large amounts of money to scale anymore. For software companies especially, scaling distribution and development is comparatively cheap. The old ways aren’t working. Large capital investments simply don’t have the ROI they used to. The world is changing too fast. New products become commoditized too fast. Increasingly, the only profitable thing to invest in is innovation, which means investing in people. And we don’t yet know how to do that on a consistent, scalable, basis.
Ironically, the VC’s who depend on IPO’s and the CEO’s who are supposed to be creating them are struggling with the same basic problem. They do not have a comprehensive theory of entrepreneurship that allows them to consistently invest in innovation that can create long-term value.
The only way I can see to achieve sustained growth is to create an innovation factory. The modern CEO needs to build an organization that is truly diversified: it is continuously investing in successful sustaining innovation and disruptive innovation. Such an organization should be able to deploy large amounts of capital effectively, by investing in its people. But this is a very different kind of diversification from the old-school GE model. We can’t just diversify across industries or geographies. We can’t even rely on a suite of line-extension products. We have to continually invent new categories of products, new platforms, and new business models – all extremely risky bets. Oh, and by the way, we still have to execute flawlessly. (Even the smallest flaw with an antenna can derail the whole train.)
Today’s management reality is just plain harder than that of the past. General managers need to know how to manage the execution-oriented "twentieth century" general managers that work for them. But they also need to know how to manage the new entrepreneurial managers that, increasingly, are essential to their growth. In other words, the old “manager vs. entrepreneur” dichotomy is breaking down. You cannot be a competent general manager in today’s economy if you do not understand entrepreneurship.
We are living in a transitional moment. The last of the old-school IPO companies are behind us (at least in software), and yet we have not yet witnessed the new-style IPO companies. Despite Google’s reputation as an innovative company, they seem to me to be counted as one of the last of the old breed. Their entrepreneurial successes are mostly to be found outside the organization, in the form of ex-Googlers who became entrepreneurs. Their internal “startup” projects seem, at least to my eye, to have a success rate only marginally higher than Microsoft’s (perhaps with Android – an acqusition – as a major exception). Certainly a large proportion of them end in failure.
The new breed of company currently finds itself satisfied with private capital, and has no need for an IPO. I think Zynga and other games companies may be the earliest exemplars for us to look at. Game companies naturally lend themselves to a “studio” model, with semi-autonomous teams building out their own franchise of sequels and spin-offs. From public reports, it seems like Zynga has really mastered a formula for innovating repeatedly and relentlessly across segments, platforms, and genres. And there are plenty of imitators and fast followers on their way. Will that cohort of companies need an IPO?
When private capital is available in sufficient quantities to satisfy investor and founder liquidity needs, why go IPO? The only reason I can think of is when you need dramatically more capital to grow your business, at a magnitude only available on the public markets and therefore worth the loss of control that going public entails. Our leading crop of pre-IPO web companies apparently do not need that much capital – yet.
It’s a debatable proposition why they don’t need IPO levels of cash. I freely admit that I have no inside information, no unique insight into what they are thinking. But I am nonetheless confident in my prediction: they don’t yet have the ability to manage an innovation factory at that scale. That’s not a criticism; nobody knows how – yet.
We need a new generation of managers trained in a comprehensive management theory of entrepreneurship. Comprehensive means it has to address all aspects of a startups life: marketing and product development, especially. It has to address all stages of startup growth and development – especially including the evolution into a true innovation factory. Tomorrow’s managers will need to know how to build a learning organization (where progress is measured by validated learning) and an execution organization (where progress is measured according to traditional value streams). They will need to know how to combine those organizations into one coherent whole.
I believe that the Lean Startup is the first such comprehensive entrepreneurship theory. But these are still early days. We have much work to do. We face problems today that would have bewildered the earliest management theorists. Their struggle was to use management to create enough productivity to feed, clothe, and house the world. Our civilization has excess capacity everywhere. We can build anything we can imagine. But the ranks of highly educated unemployed and the abysmal failure rates of new products both speak to the same question that needs answering: not, “can it be built?” but rather, “should it be built?”
The sum total of all we know about entrepreneurship is just the tip of the iceberg. We need to be disciplined, to study what works scientifically, and – above all - to introduce scientific methods into the practice of entrepreneurship itself.
When we master that, I think we’ll know what to do with IPO’s again. At least, that's my speculation. In the meantime, it’s going to be fun.
Founder personalities and the “first-class man” theory of management 9 July, 2010, 4:42 pm
At any given time, something like four percent of the US population is engaged in some form of new-company-creation. And that narrow definition of entrepreneurship doesn’t count all of the managers inside established companies who are effectively engaged in the same process of building an internal startup (see What is a startup? for my more expansive definition).
What motivates all these entrepreneurs? Typical explanations tend to focus on the well-known anecdotes and larger than life archetypes we have in mind: the twenty-something college dropouts (men, of course) from Stanford inventing some radical new technology. The academic research tells a very different story.
What do entrepreneurs look like? Are they born or made? This is a hard question. I think the root cause of that difficulty is that we tend to conflate two different questions into one. First, what causes someone to attempt entrepreneurship instead of a more traditional career path? And second, what attributes make someone likely to be a successful entrepreneur?
The difficulty lies in this paradox: many of the attributes that increase the likelihood of becoming an entrepreneur actually impede startup success.
Let’s start with the startup personality attributes. The academic research here is extraordinary. Here are the personality traits that are positively correlated with likelihood to pursue entrepreneurship: extraversion, skepticism, need for achievement, risk taking, desire for independence, locus of control, self efficacy, overconfidence, representativeness (the tendency to over-generalize from small samples), and intuition.
I think most of those factors correspond to our shared image of what an entrepreneur is supposed to look like. But many other attributes (especially demographic realities) cut against that stereotype. For example, Vivek Wadhwa and others have shown that most entrepreneurs are much older than we expect. Career experience and industry expertise are both positively correlated with entrepreneurship: contrary to stereotype, most entrepreneurs are not young and inexperienced outsiders. And unlike some psychological factors, these experience-based factors also increase the odds of the subsequent venture being successful.
It is in the psychological factors that we find the most paradox. For example, consider the propensity for risk-taking. Research has demonstrated the obvious: that people who have greater tolerance for risk or ambiguity are more likely to attempt entrepreneurship. That’s not too surprising. But does a risk-taking attitude actually lead to more startup success? The studies that have looked at this question in particular have found a negative correlation between risk-taking behavior and startup success.
That doesn’t strike me as shocking. And, although this hasn’t been subjected to a great deal of study (yet), I believe this same pattern will be found in a variety of other entrepreneurial characteristics: overconfidence, determination to succeed, perseverance, and even the desire to be in control. All of these factors are helpful in getting people to take the plunge, but all of them cause serious impairment of decision-making down the road. Think of the startups you know who are caught in a reality distortion field, heading full-speed off a cliff. Most likely, you will find the above attributes in excess supply.
I believe this is also why breakthrough success stories in entrepreneurship often feature a “classic” zany entrepreneur paired with someone you wouldn’t expect to be taking those kinds of risks. We often talk about this as the “visionary” and “the quant” or the “leader” and the “manager.” But I’m not convinced those labels are right at all. I think it much more likely that we’re seeing the embodiment – in the form of personality - of the “problem team/solution team” organizational structure. One team is in charge of carrying out the vision as currently specified, and one team is constantly asking the skeptical questions: who is the customer? Are we solving the right problem?
Although we have historically viewed this structure in startups by focusing on the personalities of the founders, I think that reflects our current, relatively poor, understanding of how startups work. We can do better by focusing on process instead of personality. We can consciously organize startups to become much more resilient organizations. Otherwise, we risk having them degenerate into cults of personality.
In the early twentieth century, before the advent of scientific management, the overriding management philosophy was that of the first-class man (and they were always men). The idea was, for any job, if you can simply find an individual with just that right combination of virtues, talents, and experience, you could safely delegate all decisions to them. Sound familiar? This kind of reasoning is almost impossible to disprove. If you empower someone to make decisions and then something goes horribly wrong, does that disprove the first-class man theory? Probably not; it’s much easier to blame the particular person who made the mistakes. In fact, making mistakes is seen as “proof” of being second-class.
In management jobs related to operations – that is, the people tasked with actually making and distributing physical products – this kind of thinking is now considered ludicrous, thanks to a century of progress. Our modern philosophy of management has this core belief (taken straight from scientific management) at its heart: that the performance of companies is determined by the systems they create, not just the people they hire. No amount of individual superstardom can overcome a badly organized factory, because the weight of the system eventually overwhelms any well-intentioned but poorly organized resistance.
Yet we tolerate our modern version of the first-class man theory in the management of more “fuzzy” topics, especially innovation and entrepreneurship. When we look back on this period in history, it will seem just as ludicrous to future entrepreneurs as pre-scientific management looks to us.
I am determined to do everything I can to hasten the arrival of that day. If you’re part of the Lean Startup movement, then you’re actually making it happen. Thank you.
All of the academic research alluded to in this essay is drawn from Scott Shane’s General Theory of Entrepreneurship which is a fantastic and wide-ranging overview of the state of the art in academic research on entrepreneurship.
The Entrepreneur’s Guide to Customer Development 5 July, 2010, 11:25 am
Brant Cooper and Patrick Vlaskovits have written a new book, The Entrepreneur’s Guide to Customer Development, which builds upon the foundational work of The Four Steps to the Epiphany, while improving accessibility, updating the ideas, and making it more actionable. I believe it is the best introduction to Customer Development you can buy.
As all of you know, Steve Blank is the progenitor of Customer Development and author of The Four Steps to the Epiphany. I have personally sold many copies of his book, and continue to recommend it as one of the most important books a startup founder can read.
I used to give copies of Four Steps out to my employees, in the hopes that it would instantly indoctrinate them into the methodology of Customer Development. I just assumed that everybody would love the book as much as I did, and would instantly change their behavior based on what they read in a book. You can imagine how well that worked. Instead of that naive approach, I wish I'd had a book like this one, to help me figure out how to get started with customer development step-by-step.
When I wrote a review of Four Steps on this blog in November, 2008, I did my best to be candid and warn of a few shortcomings:And Steve is the first to admit that it's a "turgid" read, without a great deal of narrative flow. It's part workbook, part war story compendium, part theoretical treatise, and part manifesto. It's trying to do way too many things at once. On the plus side, that means it's a great deal. On the minus side, that has made it a wee bit hard to understand.Brant and Patrick undertook a difficult challenge: to provide a generally accessible introduction to Customer Development, without diluting its impact or dumbing-down its principles. I think they've succeeded.
The Entrepreneur’s Guide is an easy read. It is written in a conversational tone, doesn't take itself too seriously, and avoids extraneous fluff. It does a great job of laying out general principles and suggesting specific, highly actionable tactics. You can easily take from it whatever makes sense for your business, and leave the rest. And it's incredibly to-the-point: you can digest this book in a couple of hours.
While the customer development framework of Four Steps is universally relevant, The Entrepreneur’s Guide updates its practices for modern startups. Four Steps primarily centers its stories and case studies on B2B hardware and software startups. This new volume also tackles examples from the Internet and wireless startups of today, both B2B and B2C. And throughout, they maintain a thoroughly realistic take on the power - and limitations - of an entrepreneurship methodology:Successful implementation of Customer Development, let alone simply believing in it, will not guarantee success for your business. Customer Development will help you – force you – to make better decisions based on tested hypotheses, rather than untested assumptions. The results of the Customer Development process may indicate that the assumptions about your product, your customers and your market are all wrong. In fact, they probably will. And then it is your responsibility, as the idea-generator (read: entrepreneur), to interpret the data you have elicited and modify your next set of assumptions to iterate upon.Many “airport business books” urge entrepreneurs to never give in. They tell them to persist in their dream of building a great product and/or company, no matter what the odds are or what the market might be telling them – success is just around the corner. They tend to illustrate this sort of advice with inspiring stories of entrepreneurs who succeeded against all odds and simply refused to throw in the towel. While maintaining persistence and willpower is certainly good advice, Customer Development methodologies are designed to give you data and feedback you may not want to hear. It is incumbent upon you to listen.The Entrepreneur’s Guide to Customer Development includes four powerful case studies/interviews with successful entrepreneurs who have taken iterative approaches to their respective startups that very much resemble the spirit of Lean Startups and Customer Development. I found these to be particularly interesting and worthwhile.
At the heart of Brant and Patrick's interpretation of Customer Development is their belief that its fundamental teaching is to question assumptions. This gives them a hook with which to apply their ideas to a wide variety of situations. In other words, if particular examples in the book don’t apply to you directly, Brant and Patrick show you how to figure out what might work for you. This is important, since every situation is different. I'll give them the last word:You are already skeptical of Customer Development and Lean Startups and the slew of emerging buzzwords and supple-to-the-point-of-meaningless terms. That’s great, more power to you; we applaud your skepticism. But be philosophically consistent: periodically take the time to question your own expertise and that of your friends, partners and investors. Make the effort to test your assumptions.If there’s a shortcoming to this book, it’s that it focuses primarily on the Customer Discovery step in The Four Steps. Here’s hoping they soon tackle Customer Validation. Well done, Brant and Patrick. I can't wait to see what's next. In the meantime, go buy a copy of The Entrepreneur´s Guide to Customer Development right now.
What is a startup? 21 June, 2010, 12:01 pm
I think most people have a fairly specific image that gets conjured up when they hear the word startup. Maybe it’s the “two guys in a garage” made famous by HP, or the idea of Jobs and Wozniack walking barefoot and shaggy through the Homebrew Computer Club. Maybe it’s the more recent wunderkinds like Zuckerberg or Brin and Page. What all of these pictures have in common is a narrative that goes something like this: scrappy outsiders, possessed of a unique genius, took outrageous risks and worked incomprehensible hours to beat the odds.
But this cinematic view of entrepreneurs is flawed in many ways. Let’s start with the most basic. It leads people to mistakenly believe that any time they see two guys in a garage attempting the impossible, that’s a startup. Wrong. It also causes them to miss the numerous other kinds of startups that appear in less-glamorous settings: inside enterprises, non-profits, and even governments. And because both small businesses and startups have a high mortality rate, sometimes these images lead us to believe that any small business is a startup. Wrong again.
So let’s begin with a definition of a startup that captures its essential nature, and tries to leave behind the specific associations of the most famous startups.
A startup is a human institution designed to deliver a new product or service under conditions of extreme uncertainty.
Let’s take each of these pieces in turn. First, I want to emphasize the human institution aspect, because this is completely lost in the “two guys in a garage” story. The word institution connotes bureaucracy, process, even lethargy. How can that be part of a startup? Yet, the real stories of successful startups are full of activities that can rightly be called institution-building: hiring creative employees, coordinating their activities, and creating a company culture that delivers results. Although some startups may approach these activities in radical ways, they are nonetheless key ingredients in their success.
Isn’t the word human redundant in this definition? What other kinds of institutions are there, anyway? And yet, we so often loose sight of the fact that startups are not their products, their technological breakthroughs, or even their data. Even for companies that essentially have only one product, the value the company creates is located not in the product itself but with the people and their organization who built it. To see proof of this, simply observe the results of the large majorities of corporate acquisitions of startups. In most cases, essential aspects of the startup are lost, even when the product, its brand, and even its employment contracts are preserved. A startup is greater than the sum of its parts; it is an acutely human enterprise.
And yet the newness of a startup’s product or service is also a key part of the definition. This is a tricky part of the definition, too. I prefer to take the most expansive possible definition of product, one that encompasses any source of value for a set of people who voluntarily choose to become customers. This is equally true of a packaged good in a grocery store, an ecommerce website, a non-profit social service or a variety of government programs. In every case, the organization is dedicated to uncovering a new source of value for customers, and cares about the actual impact of its work on those customers (by contrast, a monopoly or true bureaucracy generally doesn’t care and only seeks to perpetuate itself).
It’s also important that we’re talking innovation, but this should also be understood broadly. Even the most radical new inventions always build upon previous technology. Many startups don’t innovate at all in the product dimension, but use other kinds of innovation: repurposing an existing technology for a new use, devising a new business model that unlocks value that was previously hidden, or even simply bringing a product or service to a new location or set of customers previously underserved. In all of these cases, innovation is at the heart of the company’s success.
Because innovation is inherently risky, there may be outsized economic returns for startups that are able to harness the risk in a new way – but this is not an essential part of the startup character. The real question is: “what is the degree of innovation that this business proposes to accomplish?”
There is one last important part of this definition: the context in which the innovation happens. Most businesses – large and small alike – are typically excluded by this context. Startups are designed to confront situations of extreme uncertainty. To open up a new business that is an exact clone of an existing business, all the way down to the business model, pricing, target customer, and specific product may, under many circumstances, be an attractive economic investment. But it is not a startup, because its success depends only on decent execution – so much so that this success can be modeled with high accuracy. This is why so many small businesses can be financed with simple bank loans; the level of risk and uncertainty is well enough understood that a reasonably intelligent loan officer can assess its prospects.
Thus, the land of startups is a unique place, where the risks themselves are unknown. Contrast this with other high-risk situations, like buying a high-risk stock. Although the specific payoff of a specific risky stock is not known, investing in many such stocks can be modeled accurately. Thus a decent financial advisor can give you a reasonably accurate long-term expected return for a set of risky stocks. When the “risk premium” is known, we are not in startup land. In fact, when viewed in retrospect, most startups appear like no-brainers. Probably the most famous example today is Google: how did we ever live without it? Building that particular product was not nearly has risky as it seemed at the time; in fact, I think it is a reasonable inference to say that it was almost guaranteed to succeed. It just wasn’t possible for anyone to know that ahead of time.
Startups are designed for the situations that cannot be modeled, are not clear-cut, and where the risk is not necessarily large – it’s just not yet known. I emphasize this point because it is necessary to motivate large amounts of the theory of the lean startup. Fundamentally, the lean startup is a methodology for coping with uncertainty and unknowns with agility, poise, and ruthless efficiency. It is a completely different experience from the equally hard job of executing in a traditional kind of business, and my goal is not to disparage those other practitioners – after all, most startups aspire to become non-startups someday.
Still, these differences matter, because the “best practices” that are learned in other contexts do not transplant well into the startup soil. In fact the most spectacular startup failures result when people were in a startup situation but failed to recognize it, or failed to recognize what it meant for their behavior.
This definition is also important for what it excludes. Notice that it says nothing about the size of the company involved. Big companies often fail because they find themselves in a startup situation but are unable to reorient in time to cope with this situation; this specific pathology is explored in The Innovator’s Dilemma. This kind of crisis can be precipitated by many external factors: macroeconomic changes, trade policy, technological change, or even cultural shifts. But most often, the entrant of a startup into a previously calm market precipitates this kind of crisis. This has significant implications for general managers in enterprise, about which you can read more at HBR: Is Entrepreneurship a Management Science?
No departments 17 June, 2010, 8:26 am
Big companies have departments. Startups are companies. Startups aspire to become big companies. Therefore, startups should have departments. Right?
Why do companies have departments? There are a lot of reasons: ladder of advancement, sharing of best practices, functional specialization. Each of these benefits also exists in startups, which is why most startups are also organized in departments. But I have come to believe that because of the unique context of startup land, the payoff is a lot smaller than it is for larger companies. Meanwhile the drawbacks of functional departments can cause real and lasting harm.
I once worked at a startup with an exceptional functional department system. The leaders of each department were world-class experts in their respective fields. The team hired only the best and the brightest. Looking back after a few years, it’s evident that many of the people who worked in these departments have gone on to do incredible things in industry. They are leaders, visionaries, founders and managers having tremendous success.
Yet talent organized improperly can lead to failure. I was an engineer on the engineering team. We had to work closely with artists on an art team. We sat in different parts of the building, ate lunch separately, spoke a different specialized jargon, and generally didn’t understand each other. According to the Waterfall methodology in which we worked, this shouldn’t have been a problem. After all, we rarely had to work on the same project at the same time. The art team would often be involved in the specification phase of a new feature, since they were responsible for the look-and-feel of the product. Then we’d build the feature, which would often include tools that were intended for the art team to use to build the parts of the product that they were responsible for (in video game parlance, this is the “art path” that allows artists to get their work into the production product).
Sure, some communication was necessary, especially as artists had to be trained on new tools periodically. But according to the theory, this should have been covered by the various specs and documentation we were rigorous about producing.
If anyone has ever worked in an environment like this, you’ll probably be able to imagine the things that can go wrong. For one, the engineers consider the artists stupid; the artists consider the engineers arrogant. Not a lot of trust builds up that can be used when real disagreements emerge. Instead, there’s a positive feedback loop of bad feelings. And like feedback on a simple microphone sound system, this would occasionally boil over into screeching.
I remember one such meeting vividly. I was the junior guy on a project team; I was called in to do some technical due diligence for reasons that were obscure to me, because the team already had much more senior engineers assigned to it. I was invited to a feature decision meeting, where the team was closing in on a detailed spec. The meeting was tense. The artists on the team had called in the big guns, and VP-level folks were there to explain the importance of certain aspects of the visual design that threatened to be cut. I eventually realized that I was there as part of the same plan – the art team has specifically requested someone technical but unimportant to be able to render opinions that might undermine their more senior opposition. Not to be outdone, the technologists on the team had also brought their big guns, and the meeting was packed with employees of every level – from VP’s all the way down to me.
As the meeting progressed, the temperature kept rising. At first, I couldn’t even follow the recriminations back-and-forth. Eventually, though, I realized what was at issue: the art team was insisting that the UI for this feature have rounded corners. Incredibly, they were willing to bring the company to a standstill to protest that this was an absolutely essential feature. Even more surprisingly, the engineering team was equally vocal about their contention that adding rounded corners would add weeks of development time to the project, which would have pushed it out way past its hard deadline, effectively killing it. On the surface, this was a ludicrous dispute – both sides were willing to kill the project rather than proceed with (or without) a minor UI tweak. Were they just crazy?
I don’t think so. This meeting was just the latest in a series of escalating skirmishes that had taken place over many months. The feedback loop looked something like this. The art team would create a spec for a feature, detailing the UI as best they could. The engineering team would then build that feature, mimicking the UI as close as they could using the current primitives supported by the system. When the art team would review the final product, they were inevitably outraged – it deviated from the spec in ways they considered major. So there would be a lot of scope negotiation at the very end, when it is most expensive. Sometimes, the art team would win the argument, and the engineers would pull a few all-nighters to make them happy, but feeling betrayed at the new additions to the spec. Sometimes the engineering team would win, and the art team would have to accept (and be held responsible) for a feature that didn’t really work the way they wanted, feeling betrayed at the violation of their agreement.
As an isolated incident, this wouldn’t be a big deal. But scope negotiations between departments are an example of an “iterated prisoner’s dilemma” situation, where the same parties repeatedly negotiate, and rely on their previous experience to inform their choices in the current round. Unfortunately, the equilibrium in this particular setup has one overriding outcome: longer and more detailed specs. Here’s why.
The art team feels burned that they didn’t get what they asked for. Last time, the engineers weaseled out of their commitments by point out areas where the spec didn’t specify what was really important to the artists. So this time, they are going to spell out what’s important in even greater detail, to leave less wiggle room.
The engineering team feels burned too, and feels that they were blamed for deficiencies in the spec as if it was their fault that the technology doesn’t really support what the artists want to do. So they react in two ways. First, they actively encourage a more detailed spec, and are more aggressive about pointing out possible inconsistencies. This forces the art team to make concrete decisions about stuff they don’t really care about. Second, the engineering team starts to pad their estimates, knowing that each feature in the spec is not really done when they think it’s done – there’s going to be inevitable scope creep from the art team when they finally see the final result.
What are the consequences of this more detailed spec? For one, it takes a lot longer to create, meaning that the projects themselves get larger in order to rationalize the increased investment in planning. Second, the extra detail obscures the artists’ original intent in specifying the feature, so the engineers are even more likely to miss the big picture and build the wrong things. And lastly, it removes the engineering team’s ability to find breakthrough solutions that might deliver most of the value at a fraction of the cost. They can’t use any discretion for fear of breaking the spec’s contract, even if the changes would probably go unnoticed or even be in the company’s best interests. The lack of trust (and the procedure of the Waterfall methodology) makes it very difficult to ask for clarification or changes in the spec while the implementation is underway.
This feedback is a nasty trap, and it’s just how this room full of otherwise rational adults wound up in a screaming match about rounded corners. It was painful to watch. Now, part of the reason I remember this particular meeting so well is that I wound up doing something considered really radical at the time. I suggested that we change the underlying architecture of our UI system so that the artists would be able to build their own UI pieces themselves and then integrate them into the product without requiring new code every time. It took an incredible amount of politicking and arm-twisted, but I did eventually get the teams to agree to that solution. I’m proud of that contribution, but the reason I tell that part of the story is not to show off, but rather to be able to tell you what happened next. Although both teams got something valuable about the new system, neither was very happy. I had successfully defused the situation, and by reducing the feedback loop between the artists spec and its implementation, I was able to help them realize their goals better. As a technical fix, it was brilliant. As a solution to the underlying problem, it was useless.
Neither side liked me very much for having "fixed" their problem. In particular, the artists felt like I had created a lot more work for them – they were used to having other people grapple with implementation details for them, and now they had to do it themselves. They either had to hire a developer onto the art team itself (unthinkable) or learn those development skills themselves (which was, to be fair, really hard). The engineering team wasn’t happy either. Creating this new architecture was a fair bit of work, and they couldn’t shake the feeling that I had basically sided with the enemy, giving them tools that would require a lot of engineering support but basically deprive the engineering team of any credit for the resulting features.
I’ve now come to believe that this confrontation was a direct result of the partition between the departments in this company, and that rather than seek technical solutions to the disagreement, I would have been better off working to break down those walls.
Let me tell one more story from that same company. I mentioned before the art path, the set of tools the engineering team was required to build and maintain for the art team to be able to create content. Because the art team was considered an internal customer (and “friendly” to boot), we didn’t waste a lot of time making the tools easy to use. Instead, we spent time making sure the exact behavior of the tools were well documented – by engineers, naturally.
This led to some pretty bizarre situations. One time I remember in particular, an engineer fixed a bug that was causing artists’ creations to render in our 3D environment with a skewed rotation. The details aren’t important, but it turned out that under certain relatively common conditions, the objects would come out completely upside-down.
I’m sure this engineer was expecting to be treated as a hero by the art team, since he had just fixed a major bug. But instead he was reviled. Why? The artists had known about this bug for ages, but had just assumed it was a natural part of the system. They had learned that the best way to solve problems is through trial-and-error, doing whatever it takes to get the object to look right. So sometimes the object would come out upside-down, sometimes not. When it did, they’d just invert their original work so that after the upside-down transformation, it looked right. Sure, there was a lot of randomness in whether they would need to take this extra step, but this was nothing unusual. From their point of view, the tools were full of meaningless jargon and bizarre incantations that resulted in nearly random behavior. This bug was not even considered a major one, since at least it had a deterministic fix.
But now you can see what happened when the bug was fixed. A large, but mostly random, sample of objects started rendering upside-down! This required either that we leave the bug in place, or that the art team go back and rework all those thousands of upside-down objects. Neither solution is particularly alluring.
Again, this led to lots of mutual recriminations. Why didn’t the art team come to the engineers and tell them of this bug as soon as it manifested? Why aren’t they smart enough to figure out what the tools actually do? On the other side, why don’t the engineers just deliver tools that work like they’re supposed to? Other more established companies have tools that are intuitive to use, why can’t we?
The solution to this problem is actually really simple. Just create an art path team, composed of some artists and engineers. Force them to live and work in the same physical space, force the engineers to actually do some art production, and force the artists to actually learn what the technical limits of the tools are. As the team gets traction, simply rotate members from both departments through this team, so that the knowledge they gain is eventually diffused through both organizations. And hold the leaders of that team – artists and engineers alike – accountable for a set of clear goals for the tools that are important to the company.
There’s nothing intrinsically difficult about this problem, just as their was nothing intrinsically difficult with the “rounded corners” problem I discussed earlier. The barrier to doing the right thing is the entrenched ideas originating from departments. Who would lead this team? Who would they report to? How would we ensure that the team was faithful to the best practices of both the art team and the engineering team? And plus, do we really want to be cross-training engineers in art and artists in engineering? Isn’t that a waste of time? After all, both teams are already too busy, how can we afford to pull people off and waste time?
This is another variation of the time/quality/money fallacy – the very quality problems that a team like this would address are currently wasting time and causing the team to be “too busy” to invest in the solution. So: enough with functional departments at startups. Let's start holding people accountable solely for their contribution to the only thing that matters: validated learning about customers.
The Five Whys for Startups (for Harvard Business Review) 2 June, 2010, 9:50 am
I continue my series for Harvard Business Review with the Lean Startup technique called Five Whys. Five Whys has its origins in the Toyota Production System. I've written about this before in some detail, but this was an opportunity to try and frame it for a general business audience. After all, Five Whys is the most general, most transferable technique in the toolkit, because it can act as a natural speed regulator for any kind of work. (If you're curious about the theory behind this idea, see Work in small batches.)
The Five Whys for Start-Ups - The Conversation - Harvard Business Review
Root cause analysis and preventive maintenance are concepts we expect to see in a factory setting. Start-ups supposedly don't have time for detailed processes and procedures. And yet the key to startup speed is to maintain a disciplined approach to testing and evaluating new products, features, and ideas. As start-ups scale, this agility will be lost unless the founders maintain a consistent investment in that discipline. Techniques from lean manufacturing can be part of a startup's innovation culture.
One such technique is called Five Whys, which has its origins in the Toyota Production System, and posits that behind every supposedly technical problem is actually a human problem. Applied to a start-up, here's how it works....Read the rest of The Five Whys for Start-Ups.
You can view previous essays in this series here:
Is Entrepreneurship a Management Science?
Two Ways to Hold Entrepreneurs Accountable
Beware of Vanity Metrics
For Startups, How Much Process Is Too Much?
Speed up or slow down?
Thank you 31 May, 2010, 10:49 am
The past month has been an incredible roller coaster: #sllconf was a trending topic (briefly topping Justin Bieber before the wifi in the hotel gave out), the Web 2.0 Expo Intensive rocked, the mainstream media has started writing about the Lean Startup, and - most of all - the movement continues to grow and evolve. Having had a few weeks to recover from the adrenaline crash, I find myself full of gratitude.
First of all, the Startup Lessons Learned conference exceeded my wildest expectations. I could barely keep up with the reaction in the weeks leading up to it; the transition from cynicism to hype almost caused whiplash. Sean Murphy has an excellent and comprehensive roundup of resources about the conference: all of the slides, videos, summaries, notes and write-ups are listed on his blog here. I'd like to call special attention to Kurt Carr's perspective (let's hope he finishes his five-part series):
Now that I’m back in Ohio (I was one of the token foreigners in a room full of Silicon Valley residents), I have found myself reliving and rethinking much of what I saw there. It has taken me a while to integrate what I learned into my experiences but I think that I have gotten at least the MVP version of that integration completed. These posts are the result.
I went to the conference thinking that I was well grounded in the basics of the Lean Startup approach and that attendance would hone the edges of that understanding. As it turned out, my thinking was short sighted at best.
It’s not that I was ignorant of the fundamentals of Lean Startup thinking, but that hearing these fundamentals discussed by some very intelligent, experienced folks helped me transform and internalize that knowledge. I had really debated about whether there was any value in spending the time and money to fly to San Francisco when there was a perfectly serviceable simulcast going on in Cleveland. All I can tell the folks who attended the simulcasts is that I’m not missing either the time or the money.(You can read the rest of his posts on his blog: Introduction, Part 1, Part 2.) All video from the conference is available for free at Justin.tv here. It's in reverse-chronological order, so start with page 3 or just use Sean's handy reference..
I am grateful to everyone who helped make this event a success, especially my co-organizers Charles Hudson and David Sachs. Erin Turner helped organize the dozens of simulcast venues. All of those venues had their own local organizers who deserve our thanks as well (especially those in distant time zones who had the stamina to watch live). And a special thanks is due to all of our presenters, panelists, and mentors. You are the ones that consistently blew the audience away.
One of the themes of the conference was that we all stand on the shoulders of giants. I'd like to supplement that with some personal thank-yous.
Steve Blank has been a mentor to me for several years. He had the courage to speak out about the need for a rigorous theory of entrepreneurship long before that was a popular idea. When I first encountered customer development, it was considered pure lunacy by mainstream entrepreneurs and VC's. He inspired me to take a deeper look at what we all thought we understood about startups. We all owe him our thanks for persevering. His latest project, to reform the teaching of entrepreneurship worldwide, will have no less an impact. Do you know the difference between Durant and Sloan? If not, you'd better watch video of his talk ASAP. And then you can buy a t-shirt.
Kent Beck is deservedly famous for his many contributions in the software industry. His characteristic humility and clear thinking were on display as he casually demolished one sacred cow after another. Although many of the non-technical folks in the room didn't understand what was happening in the moment, plenty of hackers were on high alert. By the time he was done, he had launched a new Agile Manifesto:
Team vision and discipline over individuals and interactions (or processes and tools)
Validated learning over working software (or comprehensive documentation)
Customer discovery over customer collaboration (or contract negotiation)
Initiating change over responding to change (or following a plan)And he made it seem like no big deal. Of course ideas have to evolve and change. How often do you see that level of intellectual honesty on display? Thank you, Kent.
Randy Komisar is someone I am pleased to consider a friend and mentor. We were colleagues briefly at KPCB, where Randy has been working not just with individual companies, but also working to change the mindset of entrepreneurs everywhere. Unfortunately, the video of our sllconf conversation is not online (due to technical problems), but we have a physical tape backup which we are endeavoring to get online soon. In the meantime his two books, The Monk and the Riddle and Getting to Plan B are both a must-read.
There are so many more people to thank: Sarah Milstein and the Web 2.0 Expo team for their tireless efforts to give us a fantastic stage in San Francisco (my keynote and Steve Blank's are both online), Steve Lohr at the New York Times for two great pieces on the Lean Startup concept (The Rise of the Fleet-Footed Start-Up and What Start-Ups Can Teach Big Companies), Pui-Wing Tam of the Wall Street Journal for exposing the larger movement to a mainstream audience (with minus points for calling me a guru), Harvard Business School professor Tom Eisenmann who has helped behind the scenes, conference sponsors (especially Steve Anderson), Mark Graban and the Lean Enterprise Institute, my comrades-in-arms and fellow-bloggers (you know who you are, including David Binetti for correcting my spelling), and my family and friends who have supported/put up with me during this intense roller coaster.
Most of all, I wanted to say a huge thank you to all of you: readers, entrepreneurs, agents of change. I get more credit than I deserve for being in the right place and the right time, putting your aspirations and frustrations into words. Together, I believe we are changing the face of entrepreneurship. If that's true, it's primarily due to your hard work, building companies and testing new ideas. Entrepreneurship is the life-blood of our global civilization. We all owe you. Thank you.
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Philosophy Helps Start-Ups Move Faster (WSJ on the Lean Startup) 20 May, 2010, 10:13 am
The Wall Street Journal covers the Lean Startup movement in today's paper. Although the article is a bit me-centric, I think they did a good job capturing the fact that this is more than just the bloggers and writers, but represents a shift in thinking among entrepreneurs all over the world. The article includes comments from Kevin Dewalt and Drew Houston. Even Marc Andreessen weighs in. I think this means we've officially diffused our first major misunderstanding (that lean means cheap and small) - congratulations. Apparently, the article is in today's print edition (in the Bay Area section), but I'm in the wrong time zone to see it.
Here's an excerpt:
Philosophy Helps Start-Ups Move Faster - WSJ.com
Silicon Valley entrepreneurs and venture capitalists often churn out how-to business books and fancy themselves as management gurus, but few see their methodologies adopted. Eric Ries is experiencing something different.
..."Eric is espousing a different way to build companies," says Kevin Dewalt, 40, an entrepreneur in Arlington, Va., who has organized three Lean Startup meetings for Beltway entrepreneurs since October 2009. All the events sold out, says Mr. Dewalt, adding, "We've realized entrepreneurship is a unique management science.'
Mr. Ries's Lean Startup philosophy aims to help new companies make speedier decisions by taking a more disciplined approach to testing products and ideas and using the resulting customer feedback.
The Lean Startup Intensive is tomorrow at Web 2.0 Expo 2 May, 2010, 12:26 pm
I'm extremely excited that tomorrow is the Lean Startup Intensive at Web 2.0 Expo. This is basically your last chance to sign up, and if you do so, the fine folks at TechWeb have offered me a last minute 25% discount code that you can use: websf10lean25.
The agenda for the day is below. As you can see, this is a new collection of speakers and case studies, in an intimate venue, which should allow maximum dialog between presenters and attendees.
Session 1 9:00-10:15
Eric Ries: Welcome & Introduction to Lean Startup 9:00-9:30
Steve Blank: Customer Development 9:30-10:15
AM Break 10:15 - 10:45
Session 2 10:45-12:00
Sean Ellis: Product/Market Fit & the Startup Pyramid 10:45-11:30
Matt Brezina: Xobni case study, "The 5 stages of Xobni's growth and 5 pivots along the way" 11:30-12:00
Lunch 12:00 - 1:00
Session 3 1:00-2:15
Dave McClure: Startup Metrics 1:00-1:35
Dan Martell & Ethan Bloch: Flowtown Case Study 1:35-1:55
David Binetti: Votizen Case Study 1:55-2:15
PM Break 2:15 - 2:45
Session 4 2:45-4:00
Panel: Investing in the era of the lean startup 2:45-3:45
- Moderator: Dave McClure
- Panelists: Ann Miura-Ko, Josh Kopelman, Jeff ClavierHiten Shah & KISSmetrics team: Case study 3:45-4:15
Joint session with the Applied Communilytics Intensive (including Q&A with Eric Ries, Sean Power, and Alistair Croll) 4:15-5:00 I hope you'll join us. If you do, please come say hello.
PS. For those of you planning to attend the full Web 2.0 Expo, I'll also be presenting a keynote on the main stage on Tuesday at 4:45pm: "The Lean Startup: Innovation Through Experimentation. Not Just for Startups Anymore."
Video update on the Startup Visa Act 29 April, 2010, 10:58 am
The Startup Visa Act continues to gain momentum on Capitol Hill, thanks to grassroots support of all of you. Without lobbyists or PACs, we're getting the word out in DC and nationwide that we have an opportunity to act - this year - to create jobs right here in America by supporting entrepreneurship and innovation. As bills in both chambers of Congress pick up supporters and co-sponsors, it's more important than ever for citizens who care about this issue to call, write, and tweet their representatives.
On our most recent trip to DC, the Startup Visa team produced two new videos to encapsulate our work to date, and hopefully inspire future action. They feature two of the rock stars of the Startup Visa team, Shervin and Brad, looking like, well, rock stars. Please take a look and, if you're as inspired as I am, please take a moment to help spread the word, embed these videos, or take another action outlined below. Thanks!
Shervin Pishevar, activism at 30,000 feet.
"My big belief in the Startup Visa Act: Entrepreneurship is very much representative and symbolic of what America's all about."
Brad Feld, the Startup Visa Act.
"When you think bout the economic stress and economic crisis we've been going through in this country, and you think about future economic growth, there's no question that entrepreneurship and innovation is a huge driver of future success."
Want to get involved? We have a list of ways on the StartupVisa website:
Go to our campaign page & tweet your support NOW! (
Graphs 22 July, 2010, 10:13 am
It has become customary to use “graph” to refer to the underlying data structures at social networks like Facebook. (Computer scientists call the study of graphs “network theory,” but on the web the word “network” is used to refer to the websites themselves).
A graph consists of a set of nodes connected by edges. The original internet graph is the web itself, where webpages are nodes and links are edges. In social graphs, the nodes are people and the edges friendship. Edges are what mathematicians call relations. Two important properties that relations can either have or not have are symmetry (if A ~ B then B ~ A) and transitivity (if A ~ B and B ~ C then A ~ C).
Facebook’s social graph is symmetric (if I am friends with you then you are friends with me) but not transitive (I can be friends with you without being friends with your friend). You could say friendship is probabilistically transitive in the sense that I am more likely to like someone who is a friend’s friend then I am a user chosen at random. This is basis of Facebook’s friend recommendations.
Twitter’s graph is probably best thought of as an interest graph. One of Twitter’s central innovations was to discard symmetry: you can follow someone without them following you. This allowed Twitter to evolve into an extremely useful publishing platform, replacing RSS for many people. The Twitter graph isn’t transitive but one of its most powerful uses is retweeting, which gives the Twitter graph what might be called curated transitivity.
Graphs can be implicitly or explicitly created by users. Facebook and Twitter’s graphs were explicitly created by users (although Twitter’s Suggested User List made much of the graph de facto implicit). Google Buzz attempted to create a social graph implicitly from users’ emailing patterns, which didn’t seem to work very well.
Over the next few years we’ll see the rising importance of other types of graphs. Some examples:
Taste: At Hunch we’ve created what we call the taste graph. We created this implicitly from questions answered by users and other data sources. Our thesis is that for many activities – for example deciding what movie to see or blouse to buy – it’s more useful to have the neighbors on your graph be people with similar tastes versus people who are your friends.
Financial Trust: Social payment startups like Square and Venmo are creating financial graphs – the nodes are people and institutions and the relations are financial trust. These graphs are useful for preventing fraud, streamlining transactions, and lowering the barrier to accepting non-cash payments.
Endorsement: An endorsement graph is one in which people endorse institutions, products, services or other people for a particular skill or activity. LinkedIn created a successful professional graph and a less successful endorsement graph. Facebook seems to be trying to layer an endorsement graph on its social graph with its Like feature. A general endorsement graph could be useful for purchasing decisions and hence highly monetizable.
Local: Location-based startups like Foursquare let users create social graphs (which might evolve into better social graphs than what Facebook has since users seem to be more selective friending people in local apps). But probably more interesting are the people and venue graphs created by the check-in patterns. These local graphs could be useful for, among other things, recommendations, coupons, and advertising.
Besides creating graphs, Facebook and Twitter (via Facebook Connect and OAuth) created identity systems that are extremely useful for the creation of 3rd party graphs. I expect we’ll look back on the next few years as the golden age of graph innovation.
It’s not that seed investors are smarter – it’s that entrepreneurs are 5 July, 2010, 11:03 am
Paul Kedrosky recently speculated that there might be seed fund “crash” looming. Liz Gannes followed up by suggesting seed investors are a fad akin to reality-TV celebrities:
In many ways, what [prominent seed funds] are saying is that they’re just smarter, and as such will outlast all the copycat and wannabe seed funders as well as the stale VCs with a fresh coat of paint. But then — Kim Kardashian is the only one who can make a living tweeting. At some point it will be quite obvious whether the super angels’ investments and strategy succeed or fail.
Here’s the key point these analyses overlook: It’s not the seed investors who are smarter – it’s the entrepreneurs. Consider the case of the last company I co-founded, SiteAdvisor. We raised our first round of $2.6M at a $2.5M pre-money valuation. After the first round of funding, investors owned 56% of the company. Moreover, the $2.6M came in 3 tranches: $500K, another $500K, and then $1.6K. To get the 2nd and 3rd tranches we had to hit predefined milestones and re-pitch the VC partnerships. Had we instead raised the first $1M from seed funds, we would have been free to raise the remaining money at a higher valuation. In fact, after we spent less than $1M building the product, we raised more money at a $16M pre-money valuation. We never even touched the $1.6M third tranche even though it caused us to take significant dilution. This was a very common occurrence before the rise of seed funds, due to VCs pressuring entrepreneurs to raise more money than they needed so the VCs could “put more money to work.” When SiteAdvisor was eventually acquired, we had spent less than a third of the money we raised. Compare the dilution we actually took to what we could have taken had we raised seed before VC:
Professional seed funds barely existed back then, especially on the East Coast. And even if they did, I’m not sure I would have been savvy enough to opt for them over VCs. I thought the brands of the big VCs would help me and didn’t really understand the dynamics of fund raising.* Today, entrepreneurs are much savvier, thanks to the proliferation of good advice on blogs, via mentorship programs, and a generally more active and connected entrepreneur community. For example, Founder Collective recently backed two Y-Combinator startups who decided to raise money exclusively from seed investors despite having top-tier VCs throwing money at them at higher valuations. These were “hot” companies who had plenty of options but realized they’d take less start-to-exit dilution by raising money from helpful seed investors first and VCs later.
Will there be there a seed fund crash? Seed fund returns are highly correlated with VC returns which are highly correlated with public markets and the overall economy. I have no idea what the state of the overall economy will be over the next few years. Perhaps it will crash and take VCs and seed funds down with it. But I do have strong evidence that prominent seed funds will outperform top-tier VC funds, because I know the details of their investments, and that their portfolios contain the same companies as top-tier VCs except the they invested in earlier rounds at significantly lower valuations. So unless these prominent seed funds were incredibly unlucky picking companies (and since they are extremely diversified I highly doubt that), their returns will significantly beat top-tier VC returns.
* Note that we have nothing but gratitude toward the SiteAdvisor VCs – Rob Stavis at Bessemer and Hemant Taneja at General Catalyst. They offered what was considered a market deal at the time and supported us when (almost) no one else would.
Competition is overrated 26 June, 2010, 6:46 am
Your #1 competitor starting out will always be the BACK button, nothing else. – Garry Tan
Suppose you have an idea for a startup, and then do some research only to discover there are already similar products on the market. You become disheartened and wonder if you should abandon your idea.
In fact, the existence of competing products is a meaningful signal, but not necessarily a negative one. Here are some things to consider.
1) Almost every good idea has already been built. Sometimes new ideas are just ahead of their time. There were probably 50 companies that tried to do viral video sharing before YouTube. Before 2005, when YouTube was founded, relatively few users had broadband and video cameras. YouTube also took advantage of the latest version of Flash that could play videos seamlessly.
Other times existing companies simply didn’t execute well. Google and Facebook launched long after their competitors, but executed incredibly well and focused on the right things. When Google launched, other search engines like Yahoo, Excite, and Lycos were focused on becoming multipurpose “portals” and had de-prioritized search (Yahoo even outsourced their search technology).
2) The fact that other entrepreneurs thought the idea was good enough to build can be a positive signal. They probably went through some kind of vetting process like talking to target users and doing some market research. By launching later, you can piggyback off the work they’ve already done. That said, you do need to be careful not to get sucked into groupthink. For example, many techies follow the dictum “build something you would use yourself,” which leads to a glut of techie-centric products. There are tons Delicious and Digg clones even though it’s not clear those sites have appeal beyond their core techie audience.
3) That other people tried your idea without success could imply it’s a bad idea or simply that the timing or execution was wrong. Distinguishing between these cases is hard and where you should apply serious thought. If you think your competitors executed poorly, you should develop a theory of what they did wrong and how you’ll do better. Group buying had been tried a hundred times, but Groupon was the first to succeed, specifically by using coupons to track sales and by acquiring the local merchants first and then getting users instead of vice versa. If you think your competitor’s timing was off, you should have a thesis about what’s changed to make now the right time. These changes could come in a variety of forms: for example, it could be that users have become more sophisticated, the prices of key inputs have dropped, or that prerequisite technologies have become widely adopted.
Startups are primarly competing against indifference, lack of awareness, and lack of understanding — not other startups. For web startups this means you should worry about users simply not coming to your site, or when they do come, hitting the BACK button.
Builders and extractors 19 June, 2010, 8:22 pm
Tim O’Reilly poses a question every entrepreneur and investor should consider: are you creating more value for others than you capture for yourself? Google makes billions of dollars in annual profits, but generates many times that in productivity gains for other people. Having a positive social contribution isn’t limited to non-profit organizations – non-profits just happen to have a zero in the “value capture” column of the ledger. Wall Street stands at the other extreme: boatloads of value capture and very little value creation.
I think of people who aim to create more value than they capture as “builders” and people who don’t as “extractors.” Most entrepreneurs are natural-born builders. They want to create something from nothing and are happy to see the benefits of their labor spill over to others. Sadly, the builder mindset isn’t as widespread among investors. I recently heard a well-known Boston VC say: “There are 15 good deals a year and our job is to try to win those deals” – a statement that epitomizes the passive, extractor mindset. The problem with VC seed programs is they not only fail to enlarge the pie, they actually shrink it by making otherwise fundable companies unfundable through negative signaling.
The good news is there is a large – and growing – class of investors with the builder mindset. Y Combinator and similar mentorship programs are true builders: their startups probably wouldn’t have existed without them (and the founders might have ended up at big companies). There are also lots of angel and seed investors who are builders. A few that come to mind: Ron Conway, Chris Sacca, Mike Maples (Floodgate), Roger Ehrenberg, Keith Rabois, Ken Lehrer, Jeff Clavier, Betaworks, Steve Anderson, and Aydin Senkut. There are also VCs who are builders. Ones that I’ve worked with directly recently include Union Square, True, Bessemer, Khosla, Index, and First Round.
Given that there is a surplus of venture money, entrepreneurs and seed investors now have the luxury of choosing to work with builders and avoid extractors. Hopefully over time this will weed out the extractors.
Pivoting 14 June, 2010, 6:18 pm
My Hunch cofounders and I frequently ask ourselves: “If we were to start over today, would we build our product the same way we had so far?” This exercise is meant to counter a number of common cognitive biases, such as:
1. The sunk costs trap. People tend to overvalue past investments when making forward-looking investment decisions. From the rumors I’ve heard, Joost was a company that fell into the sunk costs trap. In the beginning, their p2p architecture was their main differentiator. Thus they invested a lot in building p2p infrastructure and required users to download a software client. When browser-based web video companies like Hulu and YouTube surpassed them, Joost switched to a browser-based client but still required a special plugin so they could maintain their p2p architecture. In fact, the problem the p2p architecture was solving – reducing bandwidth costs – had, in the meantime, become a secondary basis of competition. By the time Joost finally discarded the p2p model, it was too late.
2. The Bridge on the River Kwai syndrome. This is when entrepreneurs fall so in love with their engineering project qua engineering project that they lose site of the larger mission. Former engineers (like me) are particularly susceptible to this as we often get excited about technology for its own sake. Many products can be built much more quickly and cheaply by settling for good technology plus a bunch of hacks – human editing, partnerships, using 3rd party software – versus creating a perfect technology from scratch. At my last company, SiteAdvisor, we made the decision up front to build a non-perfect system that did 99% of what a much more expensive, “perfect” technological solution would have done. The software wasn’t always pretty – to the annoyance of some of our engineers – but it worked.
3. Solving the wrong problem. Location-based social networks have been around for years. Foursquare came along just a year ago and has seemingly surpassed its predecessors. The other companies built elaborate infrastructures: e.g they partnered with wireless carriers so that users’ locations could be tracked in the background without having to “check-in”. Foursquare built a relatively simple app that added some entertaining features like badges and mayorships. It turned out that requiring users to manually check in was not only easier to build but also appealing as users got more control over their privacy. Foursquare’s competitors were solving the wrong problem.
Ask yourself: if you started over today, would you build the same product? If not, consider significant changes to what you are building. The popular word for this today is “pivoting” and I think it is apropos. You aren’t throwing away what you’ve learned or the good things you’ve built. You are keeping your strong leg grounded and adjusting your weak leg to move in a new direction.
Designing products for single and multiplayer modes 12 June, 2010, 9:42 am
The first million people who bought VCRs bought them before there were any movies available to watch on them. They just wanted to “time shift” TV shows – what we use DVRs for today. Once there were millions of VCR owners it became worthwhile for Hollywood to start selling and renting movies to watch on them. Eventually watching rented movies became the dominant use of VCRs, and time shifting a relatively niche use. Thus, a product that eventually had very strong network effects* got its initial traction from a “standalone use” – where no other VCR owners or complementary products needed to exist.
I was talking to my friend Zach Klein recently who referred to products as having single player and multiplayer modes. I like Zach’s terminology because: 1) it is borrowed from video games where a lot of thought has gone into making these modes compelling in distinct ways, 2) the word “mode” reminds us that people can switch from moment to moment – that even when a product is primarily social or networked and has reached critical mass it might still be useful to offer a single player mode.
Many products that we think of as strictly multiplayer also have single player modes. In many cases this single player mode helped adoption in the early stages when the network effects were not yet strong. For example, you could use Flickr just to store photos privately if you wanted to. I thought of Foursquare as strictly multiplayer until my Hunch cofounder Tom Pinckney told me he uses it solely to keep track of restaurants he’s gone to so he’ll remember which ones to go back to. For some products it’s really hard to imagine single player modes. This is true of pure communication products like Skype and perhaps also social networks like Facebook (although apps like games seem to have provided single player modes for Facebook).
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* Products with so-called networks effects get more valuable when more people use them. Famous examples are telephones and social networks. Network effects can be your friend or your enemy depending on whether your product has reached critical mass. Getting to critical mass in network effect markets is sometimes called overcoming the “chicken and egg problem.” More here.
Inside versus outside financings: the nightclub effect 8 June, 2010, 4:01 pm
At some point in the life of a venture-backed startup there typically arises a choice between doing an inside round, where the existing investors lead the new financing, or an outside round, where new investors lead the new financing. At this point interesting game-theoretic dynamics arise among management, existing investors, and prospective new investors.
If the company made the mistake of including big VCs in their seed round, they’ll face this situation raising their Series A. If the company was smart and only included true seed investors in their initial round, they won’t face this issue until their Series B.
Here’s a typical situation. Say the startup raised a Series A at a $15M post-money valuation and is doing pretty well. The CEO offers the existing VCs the option of leading an inside round but the insiders are lukewarm and suggest the CEO go out to test the financing market. The CEO does so and gets offers from top-tier VCs to invest at a significant step up, say, $30M pre. The insiders who previously didn’t want to do an inside round are suddenly really excited about the company because they see that other VCs are really excited about the company.
This is what I call the nightclub effect*. You think your date isn’t that attractive until you bring him/her to a nightclub and everyone in the club hits on him/her. Consequently, you now think your date is really attractive.
Now the inside investors have 3 choices: 1) Lead the financing themselves. This makes the CEO look like a jerk that used the outsiders as stalking horses. It might also prevent the company from getting a helpful, new VC involved. 2) Do pro-rata (normally defined as: X% of round where X is the % ownership prior to round). This is theoretically the best choice, although often in real life the math doesn’t work since a top-tier new VC will demand owning 15-20% of the company which is often impossible without raising a far bigger round than the company needs. (When you see head-scratchingly large Series B rounds, this is often the cause). 3) Do less than pro-rata. VCs hate this because they view pro-rata as an option they paid for and especially when the company is “hot” they want to exercise that right. The only way to get them down in this case is for management to wage an all out war to force them to. This can get quite ugly.
I’ve come to think that the best solution to this is to get the insiders to explicitly commit ahead of time to either leading the round or being willing to back down from their pro-rata rights for the right new investor. This lets the CEO go out and find new investors in good faith without using them as stalking horses and without wasting everyone’s time.
* don’t miss @peretti’s response.
Steve Jobs single-handedly restructured the mobile industry 6 June, 2010, 1:44 pm
With the introduction of the iPhone, Steve Jobs achieved something that might be unique in the history of business: he single-handedly upended the power structure of a major industry. In the US, before the iPhone, the carriers (Verizon, AT&T, Sprint, T-Mobile) had an ironclad grip on the rest of the value chain – particularly, handset makers and app makers.
Ask anyone who ran or invested in a mobile app startup pre-iPhone (I invested in one myself). Since the carriers had all the power, getting any distribution (which usually meant getting on the handset “deck”) meant doing a business development deal with the carriers. Business development in this case meant finding the right people at those companies, sending them iPods, taking them to baseball games, and basically figuring out ways to convince them to work with you instead of the 5,000 other people sending them iPods and baseball tickets. The basis of competition was salesmanship and capital, not innovation or quality.
The carriers had so much power because consumers made their purchasing decisions by choosing a carrier first and a handset second. Post-iPhone, tens of millions of people started choosing handsets over carriers. People like me suffer through AT&T’s poor service and aggressive pricing because I love the iPhone so much.
I’ve talked to a number of mobile app startups lately who say their former contacts at the carriers are shell shocked: no one is knocking on their doors anymore. I guess they have to buy their own iPods and baseball tickets now.
Yes, Apple has rejected some apps for seemingly arbtrary or selfish reasons and imposed aggressive controls on developers. But the iPhone also paved the way for Android and a new wave of handset development. The people griping about Apple’s “closed system” are generally people who are new to the industry and didn’t realize how bad it was before.
There are three New York Cities 4 June, 2010, 4:42 pm
There are roughly three New Yorks.
There is, first, the New York of the man or woman who was born here, who takes the city for granted and accepts its size and turbulence as natural and inevitable.
Second, there is the New York of the commuter—the city that is devoured by locusts each day and spat out each night.
Third, there is the New York of the person who was born somewhere else and came to New York in quest of something. Of these three trembling cities the greatest is the last—the city of final destination, the city that is a goal. It is this third city that accounts for New York’s high-strung disposition, its poetical deportment, its dedication to the arts, and its incomparable achievements. Commuters give the city its tidal restlessness; natives give it solidity and continuity; but the settlers give it passion. And whether it is a farmer arriving from Italy to set up a small grocery store in a slum, or a young girl arriving from a small town in Mississippi to escape the indignity of being observed by her neighbors, or a boy arriving from the Corn Belt with a manuscript in his suitcase and a pain in his heart, it makes no difference: each embraces New York with the intense excitement of first love, each absorbs New York with the fresh eyes of an adventurer, each generates heat and light to dwarf the Consolidated Edison Company.
Here is New York, E. B. White, 1949
Money managers should pay the same tax rates as everyone else 1 June, 2010, 9:50 am
Steven Schwarzman is the CEO of the Blackstone Group, a multi-billion dollar money management firm. He is worth billions of dollars, and isn’t afraid to spend his money lavishly:
He often spends $3,000 for a weekend of food for Mr. Schwarzman and his wife, including stone crabs that cost $400, or $40 per claw.
Mr Schwarzman pays a lower tax rate than police officers, firefighters, soldiers, doctors, and teachers. This is the due to the fact that money managers’ “carry fees” are treated as capital gains instead of ordinary income.
Last week the House passed a bill that would partly close this loophole. Sadly, with few exceptions, VC’s are lobbying against this bill, arguing it would hurt innovation, small businesses, and lots of other good stuff. As one prominent VC recently said:
[H]aving those higher taxes be levied against venture capital investments in small businesses strikes me as self-defeating when it is the single largest job growth area.
The argument seems to be that this tax will hurt small businesses. The phrase “small business” is chosen deliberately by VC lobbyists: most people, when they hear it, think of hard working immigrants pursuing the American Dream. In reality, the only thing this bill will hurt are money managers. As Fred Wilson says:
Changing the taxation of the managers will not reduce the amount of capital going to productive areas. The sources of the capital; wealthy families, endowments, pension funds, and the like, will still put the capital in the places where they will get the highest after tax return. And these sources of capital, if they are tax payers, will still get capital gains treatment on their investments in hedge funds, buyouts, and venture capital. And the fund managers will still have to compete with each other to get access to that capital and their incentives will still be to produce the highest returns they can produce, regardless of whether they are paying capital gains or ordinary income on their fees.
As Fred also argues, removing this tax break will encourage more people to go into jobs that produce tangible goods:
We have witnessed financial services (think asset management, hedge funds, buyout funds, private equity, and venture capital) grow as a percentage of GNP for the past thirty years. The best and brightest don’t go into engineering, science, manufacturing, general management, or entrepreneurship, they go to wall street where they will get paid more. And on top of that, we have been giving these jobs a tax break. That seems like bad policy. If we force hedge funds and the like to compete for talent on a more level playing field, then maybe we’ll see our best and brightest minds go to more productive activities than moving money around and taking a cut of the action.
Fred is absolutely correct. For me, though, removing this loophole just comes down to basic fairness. A fireman who runs into burning buildings shouldn’t pay a higher tax rate than a financier sunbathing on a yacht eating $400 crabs.
How to protect your digital assets for a server based software when your software is installed within a third party Data centre 28 July, 2010, 2:37 am
We have developed a software which is server installable and is accessed by browser. We have just got our first large client which wants to use it, but wants to install it within their data center, for use by their employees.
Apart from the legal step we can take, what are the technical steps we can take to minimise chances of the code being pirated.
Our software stack is
Python + Django as the app backend.
Mysql DB
Frontend uses
Html, jquery + some flash and java for some pages.
Server: Linux based system, with Adobe FMS
We can give them complied pyc, swf and .jars but decompiling any of them is not particularly hard, and anway the complied assets can be used as they are.
In particular, can we use a hardware dongle to solve this problem?
How do I start a sole proprietorship and when does it start? 27 July, 2010, 9:55 pm
I see a lot of information about starting an LLC or other corporation, but very little information about a sole proprietorship. I am a freelance web developer and programmer and right now I am small and I mean SMALL. I want to take advantage of the tax benefits afforded to small businesses and I think that a sole proprietorship is the way to go...
However, I don't know exactly what I have to do to "become" a sole proprietorship. I've seen lots of information on starting an LLC and know where to find the paperwork and all that. But what about a sole proprietorship? are there any forms or registrations I need? I know I need to submit a DBA (doing business as) for my company name, as well as get an EIN, which I have already done... but how do I "officially" become a sole proprietorship company?
And a related question would then be, when does that sole proprietorship begin? I have been doing some freelance work earlier in the year but didn't do it officially through my business because it didn't exist... So when am I supposed to begin to log that income as going through the business, as well as cataloging the expenses required to run my business?
I'm kind of new to this so forgive if these are obvious questions, but thank you kindly in advance for your help!
Has anyone used www.prweb.com 27 July, 2010, 1:56 pm
I have just learned about this service: http://www.prweb.com/
I have a product which is targeted at people living in Toronto, Canada who are looking for homes. I'm thinking of using this service for our public launch which is soon and was wondering if anyone has experience using it and what their results were.
Thank you in advance,
Rokham Fard
Review this idea and MVP: Sell your Flickr photos 27 July, 2010, 2:16 am
Quick Summary:
Saas app allowing Flickr users to create a portfolio site automatically and Charge for them via Paypal.
MVP Site:
www.flickrcommerce.com
More details:
We(agiliq.com/whoweare) built it over a period of 24 hours, for the Yahoo Hack Day, Bangalore event. All code for this is open sourced at http://github.com/agiliq/yahoo-hack-day-2010 . I cant think of licences so we can keep this opensource, but still keep a reasonable competitive advantage, so I am open to suggestion there as well.
I am looking for feedback mostly on the idea, as we have a lot to work for the site. (But it should be usable anyway).
API's used.
Flickr API with flickrpy Paypal Website standards payments (until we can get our Paypal app approved) Paypal adaptive payments.
Also this looks a very obvious idea to me, so I cant think of why this has not been done before. :)
(Also, if you have not looked at Paypal Adaptive Payments API, you should look at it. Its much saner than their older API, and allows some neat things like chained payments, which means you accept payments from a single user to a single user, and transparently split it, which means we can make a simple cost structure with percentage of Photos sold, without having an upfront charge.)
[Full disclosure: Have also asked this question on Hackernews at news.ycombinator.com/item?id=1550696 ]
Effective ways to build a community on your site 26 July, 2010, 12:43 pm
Hi,
I'm trying to find out about startups who were successful in building a community around their product/market. I believe that you don't just build a product these days but you also need to build a community around it and cater to them. I'm trying to find out about successful scenarios who may have shared the reasons they were successful.
On a second note, which sort of ties into my first question (at least with regards to my startup www.TheRedPin.com), how can I find out where my target audience is. I am interested to find out about people looking for homes in Toronto, Canada and like to know where these people would be so I can target them and bring them under one umbrella in the community mentioned above.
Thank you in advance,
Rokham Fard
How do you launch a "startup" singer? 26 July, 2010, 12:27 pm
A bit of a different question than the norm...a good friend of mine just came to me asking for my feedback on his marketing plan for his daughter. She's a fantastic singer. I've marketed all sorts of products and services but never an individual.
Suggestions on what to focus on for someone launching their singing career?
Appreciate it,
How can I combine asking questions on the Internet with money making? 26 July, 2010, 10:35 am
My biggest hobby/interest is to ask questions on the Internet. I have to admit this hobby brings me a lot. I feel I am an innate asker.I'm asking questions on the Internet always every day. I have asked probably over 5000 questions over the past 5 years.Now I think it is my personal habit. My question is, how can I combine asking questions on the Internet with money making? Can you figure out a business or money making formula that can take advantage of my habit?
Preparing for my international trade business. Didn't make any big inroad during the past 3 weeks 26 July, 2010, 7:21 am
I quitted my job and started to preparing for my international trade business at the beginning of this month. But now almost one month passed, I have not gotten things into shape. I have not make a big inroad. I feel I was quite unproductive during the past 3 weeks.I'm anxious, but I don't know how to speed up the process. Do you have any advice?
You Can’t Take It With You 26 July, 2010, 6:00 am
If you’ve had a great career what happens to all your knowledge and experience when you retire?
Great Suit
My wife and I had dinner last night with a friend of hers from high school. Tom, her husband whom I had never met before joined us as well. I took one look at his suit and guessed “high-powered lawyer. “ (I was right, the suit probably added another $250 per billable hour.)
Over dinner we got chatting, and I found out that besides the great suit, Tom was actually a pretty remarkable guy. He was a trial litigator, one of the guys that slug it out in court in front of a judge and jury. And Tom wasn’t just any trial lawyer. He was the hired gun that Fortune 100 companies and hedge funds bring in when billions are at stake. Listening to some of his stories over dinner was entertaining enough, but after awhile I realized I was hearing something else – this guy played strategy while his opponents were using tactics.
Chess and Military History
It turns out that Tom was a student of military history and a chess player. He described preparing for cases like war. “Most trial lawyers play defense. I’m on the offense from day one. In depositions and filing motions I’ll use misdirection to get the opposing counsel thinking I’m heading in one direction, and I’m heading in the other. When I file for a Summary Judgment, it’s usually from a direction my opponents never expected.” He then went on to give me a tour of 30 years of trial lawyer experience.
So I asked, “Did you learn any of this in law school?” He laughed. “I went to Harvard. They didn’t teach war there.” “Do any of your junior partners in your firm know how to do what you do?” “Well they watch me, and I guess they learn by osmosis.”
Then I asked my favorite question.
“When you retire, what happens to all the knowledge and experience you’ve acquired?”
You Can’t Take It With You
I think the question caught him a bit by surprise. I explained, “You have a record in winning trials that’s based on a strategy and methodology you developed and you’ve likely have moved the state of the art in your profession – and it’s all going into the trash bin of history – unless you pass it on.
Teach It or Lose It
I asked Tom to think about writing down a longer version of the stories he told me over dinner, almost like an autobiography but focused on his career. And for each big trial or milestone summarize it with a “Lessons Learned” section. I observed that at the end of this exercise, he’ll come to one of three conclusions: 1) he has a great collection of war stories to tell while he’s skiing or playing golf or 2) he can make a book out of those stories or 3) buried in the stories and lessons learned was a strategy that was new, unique and worth teaching to future generations of lawyers.
I suggested that he volunteer to guest teach in someone else’ class at a local law school (and where he lived there were plenty) to see if he enjoyed it. His war stories would certainly keep students on the edge of their seats. (If you were a law school student having him come in to your class and say, “The first time you run into me, I’d make you wet your pants” might get your attention.)
But more importantly this would help him decide if he wanted to teach as an Adjunct Professor after he retired. If as I surmised, he actually did push the state of the art in his field forward and his teaching went beyond war stories to a theoretical framework, most schools would be happy for him to develop and teach a class.
Why Do It?
I suggested that there were four reasons he ought to take teaching seriously. First, his accumulated knowledge will disappear when he does. Second, it’s incumbent on all of us to make those who come after us smarter than we were. Third, having students question your assumptions makes you smarter (and at our age growing new neurons are helpful,) and finally fourth, for those of us whose career was on a stage, teaching is just another stage with an appreciative audience.
Not Just For Lawyers
Driving home for dinner, I realized that the same advice for Tom and lawyers would work for professionals in any domain; doctors, engineers, venture capitalists, CEO’s or even entrepreneurs. Don’t let your knowledge and experience die with you.
Lessons Learned
If you don’t teach it or write it down, the accumulated knowledge of your career is gone.
War stories about your career can be entertainment, or even better if you want to teach, make them the basis of a strategy and methodology worth passing on.
Retirement doesn’t have to be only about golf and skiing.
Filed under: Teaching
The Phantom Sales Forecast – Failing at Customer Validation 22 July, 2010, 6:00 am
Startup CEO’s can’t delegate sales and expect it to happen. Customer Validation needs to have the CEO actively involved.
Here’s an example in a direct sales channel.
Customer Development Diagnostics over Lunch
A VC asked me to have lunch with the CEO of a startup building cloud-based enterprise software. (Boy did I feel like Rip Van Winkle.) The board was getting nervous as the company was missing its revenue plan.
These lunches always start with the CEO looking like they had much better things to do. Before lunch even came the CEO ticked off the names of forty or so customers he talked to during the company’s first nine months and gave me a great dissertation on the day-in-the-life of his target customers and what their problems were. He went through his product feature by feature and matched them to the customer problems. He talked about how his business model would make money and how the prospects he talked to seem to agree with his assumptions.
It certainly sounded like he had done a great job of Customer Discovery.
Sales Process
Next, he took me through his sales process. They had five salespeople supported by two in marketing. (They had beta customers, using but not paying for the product.)
Over lunch the CEO told me he had stopped talking to customers since he had been tied up helping get the product out the door and his VP of Sales (a successful sales executive from a large company) had managed the sales process for the last six months. In fact, the few times he had asked to go out in the field the VP of Sales said, “Not yet, I don’t want to waste your time.”
Too Good to Be True
For the first time I started squirming in my seat. He said, “I insist on getting weekly status reports with forecasted deal size and probability of close. We have a great sales pipeline.” When I asked how close any of the deals on the forecast were to getting closed, he assured me the company’s two beta customers—well-known companies that would be marquee accounts if they closed—were imminent orders.
“How do you know this?” I asked. “Have you heard it personally from the customers?”
Now it was his turn to squirm a bit. “No, not exactly,” he replied, “but our VP of Sales assures me we will have a purchase order in the next few weeks or so.”
I put my fork down. Very few large companies write big checks to unknown startups without at least meeting the CEO. When I asked if he could draw the sales road map for these two accounts that were about to close, he admitted he didn’t know any of the details, given it was all in the VP of Sales’ head. Since we were running out of time, I said, “Your sales pipeline sounds great. In fact, it sounds too good to be true. If you really do close any of these accounts, my hat is off to you and your sales team. If, as I suspect they don’t close, do me a favor.”
“What’s that?” He asked, looking irritated.
“You need to pick up the phone and call the top five accounts on your sales pipeline. Ask them this question: if you gave them your product today for free, are they prepared to install and use it across their department and company? If the answer is no, you have absolutely no customers on your forecast who will be prepared to buy from you in the next six months.”
He smiled and stuck me with the tab for lunch. I didn’t expect to hear from him ever again.
What If the Price Were Zero?
Less than two weeks later, I got a call and was surprised to hear the agitated voice of the CEO. “Steve, our brand-name account, the one we have been working on for the last eight months, told us they weren’t going to buy the product this year. They just didn’t see the urgency.” Listening, I got the rest of the story.
“When my VP of Sales told me that,” he said, “I got on the phone and spoke to the account personally. I asked them your question—would they deploy the product in their department or company if the price were zero? I’m still stunned by the answer. They said the product wasn’t mission critical enough for their company to justify the disruption.”
“Wow, that’s not good,” I said, trying to sound sympathetic.
“It only gets worse,” he said. “Since I was hearing this from one of the accounts my VP of Sales thought was going to close, I insisted we jointly call our other ‘imminent’ account. It’s the same story as the first. Then I called the next three down the list and got essentially the same story. They all think our product is ‘interesting,’ but no one is ready to put serious money down now. I’m beginning to suspect our entire forecast is not real. What am I going to tell my board?”
My not-so-difficult advice was that he was going to have to tell his board exactly what was going on. But before he did, he needed to understand the sales situation in its entirety, and then come up with a plan for fixing it. Then he was going to present both the problem and suggested fix to his board. (You never want a board to have to tell you how to run your company. When that happens, it’s time to update your resume.)
The Phantom Sales Forecast
The implications of a phantom sales forecast meant something fundamental was broken. In talking to each of his salespeople, he discovered the sales team had no standardized sales process. Each was calling on different levels of an account and trying whatever seemed to work best. This was just a symptom of something deeper – while they thought they understood the target customer their initial hypotheses from Customer Discovery were wrong. But no one had told the CEO.
He realized the company was going to have to start from scratch, Pivot back to Customer Discovery and find out how to develop a sales road map. He presented his plan to the board, fired the VP of Sales and kept his best salesperson and the marketing VP. Then he went home, kissed his family goodbye, and went out to the field to discover what would make a customer buy. His board wished him luck and started the clock ticking on his remaining tenure. He had six months to get and close customers.
Customer Validation
The CEO had discovered what happens when you do a good job on Customer Discovery but get too “busy” for to personally get involved in Customer Validation. It wasn’t that he didn’t need a VP of Sales, but he had entirely outsourced the Validation step to him. Until a scalable and repeatable business model is found the CEO needs to be intimately involved in the sales process.
Lessons Learned
Ownership of Customer Validation belongs to the CEO.
A VP of Sales can assist but the CEO needs to answer:
Do I understand the sales process in detail?
Is the sales process repeatable?
Can I prove it’s repeatable? (Proof are multiple full-price orders in sufficient quantity.)
Can we get these orders with the current product and release spec?
Do we have a workable sales and distribution channel?
Am I confident we can scale a profitable business?
Filed under: Customer Development, Customer Development Manifesto
The New Deal – A Founding CEOs Value is Non Linear 19 July, 2010, 6:00 am
As a founder I fought with VC’s over vesting as they brought in a new CEO and walked me out the door. As a board member I negotiated with founding CEO’s over vesting when I thought it was their time to go. At best this is an argument where no one wins, at worst it’s like a nasty divorce.
I’ll offer that both entrepreneurs and VC’s have the wrong model for founding CEO equity compensation. The customary vesting model has founders vest their stock over 4-years, and when the founding CEO gets in over their head the VC’s bring in professional management. More often than not the founding CEO leaves the company. The fallacy is believing that a founders value is evenly distributed over four years. We now have three decades of experience that says otherwise.
Preparing For Chaos
Every VC knows that the founding CEO is the individual you throw into the chaotic battle of a startup. Investors are praying they’ve backed a founder who can think creatively and independently, because more often than not, conditions on the ground change so rapidly that the original well-thought-out business plan becomes irrelevant. They’re hoping they funded a CEO who can manage chaos and uncertainty, is biased for action and isn’t waiting around for someone else to tell them what to do. They’re betting that the founding CEO can quickly separate the crucial from the irrelevant, synthesize the output, and use this intelligence to create islands of order in the all-out chaos of a startup. And that they’ll emerge from this fog of war with a scalable business model.
They also know that most founding CEO’s don’t scale past the early stage.
That’s the source of the trouble. Most founding CEO’s don’t know that they’re cannon fodder in the search for a business model.
It’s My Idea and Hard Work
Some founding CEOs believe the value they bring to their startup is their idea and the time and energy they put into their company. In their mind, since they thought of the idea of the company, spec’d the product, found the first customers and worked their tails off, they are entitled to vest all their stock over time and run their company.
Where’s My Liquidity Event
Some VC’s feel that if a startup has grown past the founder’s ability to manage and scale (and hasn’t had a liquidity event,) they should be able to remove the founding CEO and (at best) walk them out the door with only the stock they vested to that day.
It’s About Finding the Business Model
I’ll posit that both views are wrong. Lets start with what the real job of the founding CEO’s job is: to find a repeatable and scalable business model. The goal of your business model can be revenue, or profits, or users, or click-throughs (or even just to get the technology into production) – whatever the founders and their investors have agreed upon.
If you don’t find this business model there is no company.
The odds are if the founder is going to find the first business model it’s going to be in the first few years. Yet the traditional vesting model ignores this. It assumes that founders contributions are linear over 4-years. Not only is this unfair it has the founding CEO focussed on the wrong goal – hanging on as long as they can to vest their stock. Why on earth would investors want to have the incentives set up this way? 30 years of accumulated experience says these perverse incentives actually diminishes the value of their investment.
It’s time to rethink how we vest stock for founding CEOs.
The New Deal
The founding CEO vesting model should start with a new deal between VC’s and founders. Recognize that a founders value is non-linear over 4 years and heavily weighted towards the chaotic first few years. Agree that the founder is being rewarded not just for the idea or technology of the company but rather for finding a way to make money.
Founding CEO’s need to agree that it’s rare that founders are the right people to take a startup through the transition to build and scale it into a company. Instead, it’s likely that after they do the hard work of finding the business model, the company will need to hire their replacement to grow the company to the next level.
The New Founding CEO Vesting Model
Therefore, if the founding CEO gets the company to a repeatable business model they deserve to vest all their stock if they are removed. If they fail to find a business model, by taking investors money they’ve implicitly agreed they can be walked out the door. (But can keep the stock they’ve vested to date.) Specifying what the metrics are for a repeatable business model is what the board and founders should be doing in the first place. This new deal would keep everyone focused on the search for the model.
I’ll suggest that this new deal more accurately reflects the time-weighted contributions that founding CEO’s make and more accurately aligns founders and investors interests.
Lessons Learned
The job of the startup CEO is to find a repeatable/scalable business model.
The contribution of the founding CEO is not linear over 4-years.
If the founding CEO gets the company to a repeatable business model they deserve to vest all their stock if they are removed.
Accountants shouldn’t be putting together the vesting schedule.
Filed under: Venture Capital
Welcome to the Lost Decade (for Entrepreneurs, IPO’s and VC’s) 15 July, 2010, 6:00 am
If you take funding from a venture capital firm or angel investor and want to build a large, enduring company (rather than sell it to the highest bidder), this isn’t the decade to do it. The collapse of the IPO market and dysfunctional math in the venture capital community has stacked the odds against you.
Here’s why.
The Golden Age for Entrepreneurs and VC’s
The two decades from 1979 when pension funds fueled the expansion of venture capital to 2000 when the dot-com bubble burst were the Golden Age for entrepreneurs and venture capital firms. VC’s were making investments every other financially prudent institution wouldn’t touch – and they were printing money.
The system worked in predictable and profitable ways. VC’s invested their limited partners’ “risk capital” in a portfolio of startups in exchange for illiquid stock. Most of the startups they invested in either died by running out of money before they found a scalable business model or ended up in the “land of the living dead” by never growing (failing to Pivot.)
Startup lifecycle in an IPO Market
But a few startups succeeded and grew into profitable companies. Their venture investors made money by selling their share of these successful companies at a large multiple over what they originally paid for it. One of the ways most predictable ways for an investor to sell these shares was to take a company “public.” (Until 1995 startups going public typically had a track record of revenue and profits. Netscape’s 1995 IPO changed the rules. Suddenly there was a public market for companies with limited revenue and no profit. This was the beginning of the 5-year dot-com bubble.)
During the decade between 1991 and 2000, nearly 2000 venture backed companies went public. Take a look at the chart below. (It includes venture funded startups in all industries, from software to biotech. Source: NVCA.)
Number of Venture Backed Liquidity Events 1991-2000
The size of the red bars (IPO’s) versus blue (mergers and acquisitions) illustrates that while venture-backed startups did get acquired, the IPO market was booming.
Free At Last
Going public did two things for your company. Your company had money in the bank to expand your business, scaling the company from the “build” stage into the “grow” stage. But even more important, your VC’s could sell off their ownership of your company. This changed their interest from managing your board for their liquidity to managing the board for all shareholders. Most VC’s would get off of boards of companies that went public.
Success Means That You’re Acquired
The public markets for venture-backed technology stocks never really recovered after the collapse of the dot-com boom. Fast forward to today and take a look at the last ten years of IPO’s and M&A’s in the chart below, and you’ll see why life is different for entrepreneurs.
Number of Venture Backed Liquidity Events 2000-2010
Depending on your industry, in this decade it’s 5 to 10x less likely that your company will have an IPO as an exit. And what the chart doesn’t show is that the dollar amount of the deals are significantly smaller than the last decade.
Since there’s no public market for the shares your venture investor has bought in your startup, the most reasonable way for a venture firm to make money is to have you sell your company to another company. But unlike an IPO where you sold stock to the public and got to run your company, in an acquisition your company is gone, and the odds are in a year or so you will be too.
Startup Lifecycle Today
VC “Plan B”
None of this has gone unnoticed by the venture community. Some of the old-line venture firms have changed their strategy, but some are still locked into last decade’s model while the partners are living off of their management fees and go through cargo cult like rituals. You can tell who they are by how often they remind you “this is the year the IPO market will come back.” (If the limited partners of these VC’s acted like real fiduciaries rather than waiting for the end of life of the fund, more than half of old-line venture firms would have shut themselves down today.)
New, agile and adroit venture firms with new business models have emerged to deal with the reality that 1) web 2.0 startups require significantly less capital to start, 2) exits for venture firms are predominately acquisitions, and 3) a venture firm with a smaller fund
Nuke’em ‘Till They Glow – Quitting My First Job 12 July, 2010, 6:00 am
I started working when I was 14 (I lied about my age) and counting four years in the Air Force I’ve worked in 12 jobs. I left each one of them when I was bored, ready to move on, got fired, or learned as much as I can.
There was only one job that I quit when I feared for my life.
Life Is Good
The Vietnam War had just ended and I was out of the Air Force back in college living in Ann Arbor Michigan. Colors other than olive green or camouflage slowly seeped back in my life as “Yes sir, and no sir” faded away. Unlike my previous attempt at college as a pre-med, four years working with electronics convinced me that perhaps I ought to study engineering.
Civilian life was good, the government was paying my tuition and I got a college work/study job in the University of Michigan physics department. After a few weeks, the Physics lab staff realized I knew something about repairing electronics (you try fixing a sodium-iodide scintillation detector without a manual.) I got asked, “Would you like to work at the nuclear reactor?” I thought they were joking. “The university has its own nuclear reactor?”
Oh man, something really new to learn. “Heck yes, sign me up.”
Nuclear Reactors on Campus
Starting in 1953 the U.S. built over a 150 research reactors. Much smaller than the ~500-1,500 megawatt nuclear reactors that generate electricity, by the late 1960s these 1 to 10 megawatt reactors were in 58 U.S. universities. In addition, 40 foreign countries got research reactors in exchange for a commitment to not develop nuclear weapons. (But these reactors used weapons grade Uranium-235 for their cores, and by the late 1970’s we realized it wasn’t a good idea to be shipping highly enriched uranium overseas.)
My first day in the reactor electronics lab I got a lecture from the health physics department. I was given a film-badge (a dosimeter to measure whole body radiation) and taught how to use the hand and foot monitors (to prevent radioactive contamination from spreading outside the containment dome.)
Scram
Lots of things could go wrong in a nuclear reactor – loss of cooling, power failure, jammed control rods, reactor power excursions, etc. While a reactor failure can’t create a nuclear explosion, if its core is uncovered long enough it can generate enough heat to melt itself, with all kind of nasty consequences (see Three Mile Island and Chernobyl.) To “scram” a reactor means an emergency shutdown by inserting neutron-absorbing control rods into the core. This stops the nuclear chain reaction. My job in the reactor electronics lab was to rebuild the reactor “scram system.”
Ford Nuclear Reactor at the Phoenix Lab
The scram system had three parts: the mechanical part (the control rod drives and electromagnetic latches), the electronic part (comparators circuits and trip logic), and the sensors (to measure neutron flux, core temperature, pool water level, etc.)
The 20-year old electronics in our existing scram system were based on vacuum tubes and had the annoying habit of scramming the reactor every time a thunderstorm was nearby. And summertime in the Midwest has lots of thunderstorms. The Nuclear Regulatory Commission had approved a transistorized version of the electronics. My job was to build the approved design, retrofit it into the existing power supplies and integrate it with the existing mechanical systems and sensors.
But first I was going to see the reactor.
Cerenkov radiation
Over time I would get used to visiting the reactor, but the first visit was awe-inspiring. Entering the containment building through the air lock, my eyes took a few seconds to adjust to the dim light. The first thing I saw was a gigantic mural of the earth rising over the moon painted on the side of the dome. After another few seconds I realized that the mural was illuminated by an unearthly blue glow coming from what looked like a swimming pool below it. My eyes followed the source of the light down to to the pool and there I first saw the 2 MW nuclear reactor in the bottom of the swimming pool – and it was generating its own light. When I could tear my eyes from the pool I noticed that in the far end of the building was a glass wall separating a room bathed in red light, where the reactor operators sat at their console. The lab manager let me stand there for a while as I caught my breath. Hollywood couldn’t have set the scene better.
As we walked towards the pool I learned that the bright blue light was Cerenkov radiation from the reactor core (electrons moving faster than the speed of light in water polarizing the water molecules, which when they turned back to their ground state, emitted photons.) We briefly walked across a bridge that spanned the pool and stood directly over the core of the reactor. Wow. They were going to pay me for this?
Dose Roulette
Over the next few weeks, as I began work on the scram system, I got to know the control room operators and others on the staff. Most of them were ex-Navy reactor technicians or officers. They had been around nukes for years and were bemused to find an ex Air Force guy among them.
One of their weekly rituals was to read the bulletin board for the results of the dosimeter readings. Since most of my time was spent outside the containment dome my radiation exposure numbers were always zero. But there was a bizarre culture of “you’re not a real man until you glow in the dark” among the ex-Navy crew. They would celebrate whoever got the highest dose of the week by making them buy the beer for the rest.
After spending the last four years around microwaves I had become attuned to things that you couldn’t see but could hurt you. In the Air Force I had watched my shop mates not quite understand that principle. On the flightline they would test whether a jamming pod was working by putting their hand on the antenna. If their hand felt warm they declared it was. When I tried to explain that the antenna wasn’t warm, but it was the microwaves cooking their hand, they didn’t believe me. There were no standards for microwave protection. (I always wondered if the Air Force would ever do a study of the incidence of cataracts among radar technicians.)
You Buy The Beer
In a few months I had the new scram system ready for debugging. This required connecting the new electronics to the neutron detectors in the pool that monitored the core. We timed this for the regular downtime when used fuel elements were swapped out and they had lowered the pool water level for easier installation. I remember standing on the bridge right over the reactor core watching as the reactor techs remotely connected up the cables to my electronics. I leaned over the bridge to get a better look. By now the reactor was so familiar that I didn’t think twice of where I was standing.
A week later as I was about to enter the dome, I heard someone congratulate me and ask when I was going to buy the beer. They were pointing to the Health/Safety printout on the wall. In one week I had managed to get close to my annual allowable radiation dose (~5 rems?).
In my mandatory talk with the the safety officer to figure out where I got exposed, I remembered hanging out over the core on the bridge. The heavy water in the pool was both a moderator and a radiation shield. With the pool level lowered I shouldn’t have been on the bridge. I had been in the wrong place at the wrong time.
“Don’t do it again” was his advice.
Career Choices
That week I finished up the installation and resigned from the lab. While the radiation dose I received was unlikely to effect my health, the cumulative effect of four years of microwaves and the potential for more unexpected “winning the dosimetery lottery” convinced me to consider alternate jobs in electronics.
In some sense my career in startups was steered by deciding to avoid future jobs with gamma rays or high-power microwaves.
But I sure learned a lot about nuclear reactors.
—————–
Postscript: a year and a half after I left, the power reactor at Three Mile Island had a core meltdown. For years I would worry and wonder if I had wired my scram system correctly.
Lessons Learned
Things you can’t see can hurt you (microwaves, gamma rays, toxic bosses.)
No job is worth your health.
If it seems dangerous or stupid it probably is.
Rules and regulations won’t stop all possible mistakes.
No one but you will tell you it’s time to quit.
Filed under: Air Force, Technology
Nature versus Nurture in Entrepreneurs 8 July, 2010, 6:00 am
Taking Sides
Are you are born with innate entrepreneurial talent or can you can be taught to operate like an entrepreneur?
Fred Wilson of Union Square Ventures, Jason Calacanis, founder of Mahalo.com, and Mark Suster of GRP Partners, have all weighed in on the nature side – you’re born being an entrepreneur or you’re not.
Vivek Wadhwa, Director of Research, Center for Entrepreneurship at Duke, the Kauffmann Foundation for Entreprenuership and others have the opposing view – you can teach people to be entrepreneurial.
I weighed in on the subject in a previous post.
Mark Suster, Vivek Wadhwa and Patrick Chung, Partner of New Enterprises Associates debated the subject on April 21st at Stanford. I’ll was the moderator (referee).
Take a look at the video below.
I thought it was a pretty good talk and worth listening to.
Filed under: Customer Development, Venture Capital
How I Spent My Summer Vacation 6 July, 2010, 6:00 am
My summer has circled around serendipity and three presentations I’ve given.
Full Circle from Yosemite
Nine years ago I took my young daughters on a 7-day pack trip riding mules at 10,000 feet to the Yosemite High-Sierra camps. Granite mountains and alpine green meadows during the day, unblinking stars in the frigid August nights. At a campsite almost two miles high our daughters adopted a young couple, and over the campfire I found out they were Stanford MBA’s and entrepreneurs. Instead of ghost stories they were the first to hear the ideas of what would become Customer Development.
Fast forward to today. One of those students, Shawn Carolan, is now a partner at Menlo Ventures. When we were looking for funding for IMVU (the company where Eric Ries first implemented Customer and Agile Development and where the Lean Startup was born,) I thought of Shawn. He became the first venture investor and “present at the creation.” If you’re doing Customer Development/Lean Startup, Shawn is a great guy to have as an investor. He’s lived it and gets it.
Recently, Shawn invited me to share the Customer Development story at Menlo Ventures annual CEO conference.
(I’ll show you the slides a bit later in this post.)
Let’s Get Together Every 15 Years
About a month ago I got a phone call from Alan Patricof of Greycroft Partners who saw the article about Lean Startups in the NY Times and invited me to talk at their CEO conference. After a few minutes on the phone, Alan and I realized that we had met 15 years ago when his firm looked at investing in my last startup, E.piphany.
It’s kind of hard not to know who Alan Patricof is. He built APAX Partners into one of the largest VC firms on the East Coast and in Europe. He started a new venture firm when he realized that that the rules had changed for the venture business – VC’s could no longer expect the same kind of returns they got in the past through an IPO. Instead, he realized that most VC-backed startups would exit through a merger or acquisition- at a sale price of $20 to $100 million.
One of the benefits of speaking at this conference was getting to know VC’s on the east coast and LA. The Greycroft team and Mark Suster of GRP Partners provided lots of local color. (Mark had an amusing summary of the conference here. Mark is the guy I would call if I was doing a deal in LA and his blog should be on your reading list.)
You are Here
When I was in a startup, I remember being so focused on my daily tasks of getting customers and running the business that I had no time to consider “why” I was doing what I was doing. I had even less time to consider how to differentiate what were the right things to do in startup versus a larger company. The talk I gave to the startup CEO’s at both Menlo Ventures and Greycroft Partners was a big picture perspective about how startups differ from large companies and where customer and agile development fit. The talk integrated a series of posts I’ve written since the beginning of 2010: “What is entrepreneurship? The Four types of entrepreneurial organizations, Innovation and entrepreneurship in large companies and The role Pivots play in Customer Development.
18-Hour Flight for a 45 Minute Talk
Truth be told, I went to NY for the Greycroft conference because I was already heading east to Tel Aviv for a 45 minute talk. While flying 18 hours to give a 45-minute talk might not seem rational, in fact it provided the rationale to visit a part of the world my wife and I had never seen. I turned the 45-minute invitation into a three week trip. New York to Cairo, Aswan, Abu Simbel, Luxor, Tel Aviv, Haifa, Tiberias and Jerusalem.
As a country, Israel has the highest ratio of scalable startups per capita. A high percentage of Israeli startups are founded by entrepreneurs who served in Unit 8200 and military intelligence. They are agile, resourceful and aggressive. In the dot-com bubble Israel had more technology companies listed on the NASDQ exchange than all of Europe. Today Israeli companies solve technology problems then typically sell out to a larger U.S. firm.
While this is an enviable track record, my talk observed that solving just the technology problems and selling out meant that Israeli companies did not become adept at understanding customer needs. (And in Israel you can’t just get out of the building to understand customers, you need to get out of the country.) Given the current Israeli economic and venture climate having great technology is no longer enough. I observed that this may be the time for Israel to take entrepreneurship to the next step and teach their startups the skills needed to grow from flipping technology startups to building enduring companies.
I used the metaphor of fighter pilots (who have to constantly adapt in real-time) versus military intelligence (who have time to analyze and debate the right answer.) John Boyd of OODA Loop fame got a starring role in the talk.
It went over like a lead balloon.
(Slides 43-49 and 81-89 are the ones that differ from the Greycroft presentation.)
BTW, the schedule of my future talks are now on Plancast.
Filed under: Customer Development, Durant versus Sloan: Startups Verus Companies, Venture Capital
On The Road 29 June, 2010, 7:30 am
I’ve been traveling – New York/Cairo/Tel Aviv – for the last three weeks.
Posts will resume in July.
Egyptian Fallujah on the nile at Luxor
Filed under: Uncategorized
Is Your VC Founder Friendly? 15 June, 2010, 10:22 am
The role of a founding CEO in a startup searching for a business model is radically different than a CEO building and growing a company. Some VC’s get it, others may not. So if you’re the founder of a startup, you may want to consider who you take money from.
Is Your VC Founder Friendly?
How do you figure out which VC firm is best for you? Here are five questions to consider.
What startup stage do they typically invest in?
Do they “get” Customer Development?
Who do they have as advisors?
How many of their founders are still with their company?
Will they tailor your vesting to your contribution as a founder?
What Startup Stage Do they Invest In?
Ask potential investors which stage they invest in.
Certain VC’s like the new class of Super-Angels and small VC funds specialize in the early stage of a startup where you are searching for a business model. And some larger funds that specialize in later stage deals may have a partner or two who likes to invest at this stage. (Some VC’s invest solely on technology breakthroughs and assume they’ll find a market later.)
Early stage investors have different insights then those investing in a later stage. They understand that now’s not the time to hire a senior VP of Sales to start to scale the sales force or to look for a finance department to create income statements that say zero each month. These VC’s are skilled in helping you search for the business model.
If they haven’t done many early deals before a business model is found, ask them why they are interested in you? Is it for your technology? Your potential business model?
Do They Get Customer Development?
For a founder there’s nothing worse than searching for a business model day after day and then sitting in a board meeting with a VC who asks about some detail of year 5 of your revenue plan.
Ask potential investors, how will they measure progress for the company and you as a CEO? Do they have metrics and a methodology they use for early stage companies that differs from companies that have already found a business model? Have they heard about Customer Development? Lean Startups? Can they tell you what you should be doing in Customer Discovery and Customer Validation? If not, do they have a better methodology?
Who Do They Hang With?
Investors who have successful ex-founders who you can call for advice, grab a coffee with or get on your advisory board is a good sign. (And a sign that their ex-founders still like them.)
VC’s who have ex-CEO’s who took over from the founder and built the startup into a multi- $100 million company can give great advice about your growing company’s infrastructure, but if you are still searching for your first customer, they may not be much help. (In fact, unless they’ve been founders themselves they usually provide bad advice.) VC’s with formerly high-ranking government officials and Fortune 1000 CEO’s as advisors may be wonderful to help you grow your company in a later stage but not helpful now. (Unfortunately the odds of you being the CEO at this future stage are pretty low.)
How many of their founders are still with their company?
Most early stage VC’s are betting on the founders to both deliver the product and to find the business model. At this stage, firing the founder is not a strategy, it’s an act of desperation.
By the time the company gets to the build-stage (the Transition) what differentiates VC’s is how many turn the founders into builders versus relying on bringing in new, more experienced management to lead the transition. As a founder, you should ask: What percentage of the firm’s companies still have founders as the CEOs? In any active role? If the number is less than 25%, you may want to think twice. Ask to talk to some of the founders who are no longer with their startups. I’ll bet you get some interesting stories.
Will The VC Tailor Your Vesting to Your Contribution?
Most founders don’t make it past the build stage in a startup. Almost invariably the new CEO will comes in and complain about how disorganized the place is and then does a wonderful job in putting policies and procedures in place. Yet none of this would be possible if the founder hadn’t created the company in the first place. Typical vesting of your stock is over a four-year period, yet the founder’s contribution is heavily weighted to the first few years.
Over the years I’ve become a bigger and bigger believer in some sort of accelerated vesting for the founders tied to finding the business model. There have been suggestions of a different class of stock for founders here and good general advice in VentureHacks here.
———
All these suggestions are written as if you had a choice of who to take money from. Most of the time you’ll take whosever check will cash. But if you do have a choice, asking these questions will keep you from being surprised in a board meeting.
Lessons Learned
What phase of the company lifecycle are you?
What phase do your VC’s typically invest in?
What type of advisors does your VC have?
What percentage of this firm’s former founders are still running their companies?
What metrics are they going to use to measure progress in a board meeting?
Filed under: Durant versus Sloan: Startups Verus Companies, Venture Capital
You’re Not a Real Entrepreneur 10 June, 2010, 6:00 am
Who is an entrepreneur really? It turns out that there are four distinct types of entrepreneurial organizations; small businesses, scalable startups, large companies and social entrepreneurs. They all engage in entrepreneurship. Yet entrepreneurs in one class think that the others aren’t the “real” entrepreneurs. This post looks at the differences and similarities and explains why there’s such confusion.
Small Business Entrepreneurship
My parents came to the United States through Ellis Island in steerage in sight of the Statue of Liberty. As immigrants their biggest dream was opening a small grocery store on the Lower East Side of New York City, which they did in 1939. They didn’t aspire to open a chain of grocery stores, just to feed their family.
My parents were no less of an entrepreneur than I was. They went on an uncharted course, took entrepreneurial risk and only made money if the business succeeded. The only capital available to them was their own savings and what they could borrow from relatives. Both my parents worked as hard as any Silicon Valley entrepreneur but with a different definition of a successful business model; when they made a profit, they could feed our family. When business was bad they figured out why, adapted and worked harder still. They were only accountable to one and other.
Today, the overwhelming number of entrepreneurs and startups in the United States are still small businesses.
Scalable Startup Entrepreneurship
Unlike my parents, Fred Durham and his partner Maheesh Jain started the now $100+ million CafePress, knowing they wanted to build a large company. Founded in offices smaller than my parents grocery store, Fred and Maheesh’s vision was to provide a home for artists who made personalized products assembled in a just-in-time factory that today delivers a customized gift each second. Once they found a profitable business model they realized that scale required external venture capital to fuel rapid expansion. With venture capital came accountability to board members, forecasts, and other people’s agendas. Success for a scalable startup is a three-times (or more) return on the investor’s money – either by a public offering of stock or by selling the company.
Scalable startups in technology centers (Silicon Valley, Shanghai, New York, Bangalore, Israel, etc.) make up a small percentage of entrepreneurs and startups but because of the outsize returns attract almost all the risk capital (and press.)
Large Company Entrepreneurship
At the end of 1980, IBM decided to compete in the rapidly growing personal computer market. They were smart enough to realize that IBM’s existing processes and procedures wouldn’t be agile enough to innovate in this new market. The company established their new PC division (called Entry Systems), as a Skunk Works in Boca Raton Florida a 1000 miles from IBM headquarters. This small group consisted of 12 engineers and designers under the direction of Don Estridge. Success for this new division meant generating substantial revenue and profit for company.
The division developed the IBM PC and announced it in less than a year. Three years later the division had sold 1 million PC’s, had 9500 people and a billion dollars in sales.
Don Estridge’s paycheck and funding for the division came from IBM and he reported up the organization, but in his own division he was no less entrepreneurial than Michael Dell or Steve Jobs – or Fred Durham or my parents.
Social Entrepreneurship
Irfan Alam, a 27-year-old from the Indian state of Bihar started the Sammaan Foundation to transform the lives of 10 million rickshaw-pullers in India. Irfan got banks to finance rickshaw-pullers and designed rickshaws that can shelve newspapers, mineral water bottles and other essentials for rickshaw passengers. These rickshaws carry ads and the pullers get 50% of the ad revenue, the remainder going to Sammaan. The rickshaw-pullers end up as owners after re-paying the bank loan in installments. Irfan started off with 100 such rickshaws in 2007 and have 300,000 today.
Irfan doesn’t take a salary but he is as focused on scalability, asset leverage, return on investment and growth metrics as any Silicon Valley entrepreneur ever was.
Summary
If you put the four entrepreneurs in the room you would understand what they had in common- they were resilient, agile, tenacious and passionate – the four most common traits of any class of entrepreneur.
Also in common, each of their businesses initially were searching for a business model, and each was instinctively executing a customer discovery and validation process.
Yet there are obvious differences in each type; personal risk, size of vision and goal.
More on this later.
Lessons Learned
Four different types of entrepreneurship: Small Business, Scalable, Large Company, Social.
All searching for a sustainable business model.
Regardless of type, entrepreneurs have common characteristics: resilient, agile, tenacious and passionate.
Differences include level of tolerance of personal risk, size and scale of the vision and their personal financial goal.
Filed under: Durant versus Sloan: Startups Verus Companies
