Vinod Khosla said yesterday at Techcrunch Disrupt that one of the hardest things for entrepreneurs is to figure out whose advice to trust on what topic. That is spot on because as an entrepreneur you will get advice from just about everyone all the time (including random people you have just met for the very first time who don’t know squat about your product or company). Unfortunately that terrific quote will get buried because of a bunch of other things Vinod said right then, such that a lot of VCs add negative value, that he doesn’t go to board meetings much anymore (because other VCs just talk) and that entrepreneurs should pretty much ignore what most VCs say (because they haven’t done enough themselves).
I am not going to argue that we VCs always know what we talk about as we clearly don’t. But unlike Vinod I don’t believe that you have to have done a lot of big things yourself in order to be able to give good advice. It also helps if you have observed a lot of things. The role of an advisor is different from the one of the entrepreneur. There have been many great investors who never built a large company themselves. Just as there have been many great coaches who never excelled at the game they were coaching. Or the best editors aren’t successful writers themselves.
Why is this? There are many reasons but the primary one is being able to see the big picture. The number one problem as an entrepreneur is to get enough distance from the business to be able to see the big picture. You are in it every day. And that narrows your view. Just like it does for the players on the field. This is true for all of us all the time. Stepping outside of your context and analyzing your own situation from “above” is really, really hard. And that’s where a good VC will help you. He or she will help you see the one or two things that are really holding back the company (among the million things competing for your attention).
You still have to determine whether you should trust a particular person on the big picture or not. There are unfortunately very few signals for this and success of companies is an incredibly noisy signal. Therefore my recommendation is: call your fellow entrepreneurs and get their feedback on the quality of advice they have received.
It’s been a while since I have written a post in my Scylla and Charybdis series. As a quick refresher, the basic premise of the series is that startups are hard because on pretty much anything you can do too much or too little and the path to success thus requires navigating a narrow straight with deadly obstacles on both sides.
Today’s post is about listening. As an entrepreneur you can do too much or too little listening. How can you do too much listening you may ask? Well, by listening here I don’t mean the time spent having sound waves hit your ears but rather how much you change what you are doing based on feedback. It is very easy to make too many changes and to make them too quickly. As an entrepreneur almost everyone you meet will have an opinion on your startup and what you absolutely should be doing. That will range from someone insisting that you must have a specific feature to wholesale changes in strategy. Of course much of the advice you will receive will be contradictory to each other. And so if you listen too much you will be jerking your company around and building a bloated product.
On the other hand you can also listen too little. We all suffer from confirmation bias and it is easy to ignore feedback that doesn’t fit with our own view of the world. That’s particularly true for entrepreneurs who often don’t realize how hard it is for one of their employees to disagree with them. Feedback from board members is also easily ignored by young entrepreneurs (what do the “old folks” know about the new ways of the world and/or the view that only other entrepreneurs have valid opinions and not investors). Finally, the feedback that’s most ignored is that of the customer — far too few entrepreneurs spend time observing customers first hand (thankfully my friend Mark Hurst has a book forthcoming that addresses this point). It is by listening too little that entrepreneurs wind up running out of money or falling badly behind the competition.
Let me give a sailing analogy to illustrate the challenge. The ideal entrepreneur is like a sailboat captain who has a strong sense of the proper course to steer so as to not be buffeted by every piece of new information and yet capable of listening enough to understand when the ship has gone off course or the wind has changed to make a new course better.
I have been meaning to write about “internet exceptionalism” since I read a post titled “It Always Comes Down to Math" but various political and economic events intervened. The key quote summarizing the post is "but at the end of the day, regardless of what business you’re in, everything comes down to the same math problem. Revenue minus expenses must equal a positive number." That is of course not much of an insight although it would have been useful to add something like "from some point forward" (and businesses differ a lot in when that point happens and how much capital is consumed before then). But instead, the author felt compelled to add the following: "Anyone who tells you business works in some other way or the rules are different on the Internet or any other claim of exceptionalism is an idiot."
Well, not only is that a bit of a strong statement in general but I also happen to think it is false other than with regard to the most basic premise that any business in order to be sustainable must eventually make a profit. Beyond that I think it is deeply flawed and I want to give just one example to illustrate my point. In bricks and mortar retail customers who come to the store and do *not* buy contribute meaningful expense, including time spent by sales people, physical space needed, cost for re-shelving items examines, breakage, etc. Also, in bricks and mortar retail the people who can access your store are inherently limited to people living in (or visiting) the geography of the store. If you combine both of these factors you will quickly understand why it is important to be obsessed with how many people who enter the store buy something and how much they buy: your top line is limited and non-buying visitors are costly.
Now contrast that with selling online. The entire country or potentially the entire world can be your customer. And someone visiting your online store but not buying will tend to result only in negligible cost (unless you invest heavily in realtime online consultation). So now what should you obsess about? Top line growth suddenly becomes hugely important. Unless your are huge already, if you are not at least doubling year over year you are likely to have a problem. Sure, you need conversion rate (if nobody buys you don’t have a business), but generally obsessing about conversion rate if top line growth is lagging is wrong. Why? The difference between growing 2% month over month and 7% is the difference between growing 27% per year and more than doubling! Try doing that with you conversion rate.
So yes — eventually you have to make more money than you spend but how you get there is often the exact opposite on the Internet from what it was in the physical world. It is therefore critically important to understand those differences if you want to succeed. Or put differently: Internet exceptionalism is a requirement not a flaw.
At the height of the re-engineering craze there was one fantastic HBR article titled “Re-engineering Work: Don’t Automate, Obliterate.” In light of the changes in the labor market the choice of “obliterate” may now seem unfortunate, but the basic point of the article was spot on: don’t implement your existing processes in technology, come up with entirely new ones that simply weren’t possible before.
Much the same applies to building net native businesses. It is not about building a smoother version of what already exists in the market. That is a transient advantage as existing companies (in banking, insurance, healthcare, etc) adopt technology. If you want to build something big and lasting you have use the internet/mobile to do something that simply was not possible before (at least not at any meaningful scale).
I am quite optimistic about the long term potential of augmented reality. But I question whether now is the right time for a top down adoption strategy with a polished consumer product. It seems to me that we are at the hacker and early adopter stage instead.
By going with an immediate mass market strategy and embracing celebrities I think Google is taking a very big gamble. Let’s keep in mind that the iPhone was far from the first smart phone. A lot of software and application tinkering had happened on Blackberries and other predecessors most of which had niche use cases.
I often find myself saying to entrepreneurs that you “can’t push on a string.” It may be a tired cliche but it seems highly relevant for consumer products. If people aren’t ready for it, no amount of hype or spending will make the product stick. The people who are ready now are the hackers and tinkerers. So why not embrace them instead?
First time entrepreneurs often ask me what they should do to maximize their chances of raising venture capital. To which I invariably answer: “Not need it.” Why? Because raising capital or selling your company is all about having a credible alternative. If you have a credible alternative you will arrive at a good deal — if you don’t, then bad things will happen. This is true for raising capital and it is true for exits. In both cases the best credible alternative is not needing the capital and not needing to sell. What about having multiple possible investors or buyers bidding each other up? By all means do, but having the ability to get that kind of multiple bidder process going depends crucially on the real alternative of not needing the transaction at all. And as it turns out when you have a credible alternative you don’t even need multiple bidders.
That’s why people who don’t want to quit their day job until they raise money rarely succeed in doing so. They are signaling that they have no alternative to raising the money. The investors feel that whether or not this startup happens depends on them. Who would want to invest in that? Instead investors need to feel that this startup will happen with or without them. The train is leaving the station. It’s also why having a burn rate so high that your existing investor(s) can’t easily fund you for another 15-18 months is dangerous. New investors conclude that the company doesn’t have an alternative and often won’t invest at all (rather than propose a low price). This also explains the expression that you want your company to be bought, not sold. Selling means you have no alternative. Being bought means you decide whether or not you like a deal.
So always keep having an alternative in mind. It applies incredibly broadly. Not just to deals with investors but also to hiring, suppliers, etc. If you have a sole supplier and your contract comes up you may find yourself on the wrong end of the deal. Or a customer who accounts for a large fraction of your revenues (or profits, or network). And so on.
Yesterday we had our portfolio company summit with the CEOs of most of our active investments in our office. It is always a really fun day because there are great discussions about a far ranging set of topics from hiring to business models. This year as an opener we went around the room and everyone talked briefly about a lesson learned in the last 12 months. There were a ton of really good insights there and some really funny ones, such as “it is better to have a hole than an asshole” (about having the courage to fire a key contributor with an attitude problem).
But if one paid close attention there was also a fascinating pattern. One CEO would say something like “we learned that AB testing really works.” And then a couple of people later, another CEO would say “we learned that building what we ourselves wanted in the product gave us the best results.” Or more starkly put, one CEO learned to do more AB testing and the other to do less. Can both be right?
The answer is yes and it is exactly why startups are hard! You can do too much AB testing and you can do too little AB testing. I have to come to think of this as Scylla and Charybdis problems. And there are a great many of them. You can be too early to a market or too late. You can raise too much money or not enough. You can hire too fast or too slow. You can spend too much time on corporate culture or not enough. And so on. Navigating between the two is hard and also means that someone else’s lesson may not apply to you!
The challenge to find the right course will become a new mini series here on Continuations. I will pick one of these and explain how you can go wrong on either side. Please let me know your own favorite examples to be included in this.
Once in a while I find myself in a product or strategy or biz dev discussion at a startup which goes something like: “we are doing xyz to defend against <name of other startup or big company>”. My reaction is to ask whether xyz is also part of what the startup was trying to build in the first place. If the answer is no, then I will argue strongly that they shouldn’t do it at all.
Why? Startups have very limited resources. They succeed by putting all of those resources into a singular effort. That means being on the offense and building the product or service that they believe will succeed in the market. So it’s OK and sometimes even necessary to double down on offense based on a perceived or real threat by another player. For example, if you are web only right now but a mobile client is on your roadmap you may want to accelerate that.
But it’s not a good idea to expend resources on something that you weren’t planning to do just to attempt to stall a potential competitor. For instance, spending time on a partnership with a large company to prevent them from working with someone else is a serious misallocation of resources. Same goes for developing features because someone else has them or is talking about having them if these features aren’t part of the vision for the product.
Here is another way to think about this. As a startup you don’t really have anything to defend yet. You don’t have some large customer base or revenue flow that is supporting your cost structure and organization. That is exactly what gives you the freedom to pursue something disruptive. The second you start acting defensively you are throwing away that very freedom and acting more like an incumbent with all of the attendant problems.
I started out in business selling development services. OK, so that’s hugely glorified. I was a teenager desperate to get my driver’s license in Germany where that is a costly process (lots of mandatory lessons). So I figured out how to make money programming custom applications for people, including a driving school. Ever since then I have had a love/hate relationship with sales.
The hate portion is easy to understand for any engineer. The things you have to do in selling run counter to a lot of things you care about as an engineer. For instance, you need to spend a lot of time explaining stuff to people that should be, well, obvious. And most importantly, time spent selling is not time spent creating. The same reasons for hating sales seem to apply to product and design folks.
But I also love sales and not just because it helped pay for my driver’s license. People paying for your product is what enables you to grow your business without giving up (more) equity. And selling is what provides critical feedback about what you should build, making your product better. If you have the right kind of product or service (one with network effects), then selling has the additional benefit of making the product/service better for everyone. Finally, selling is about educating users who otherwise wouldn’t know how or why to use the product or service.
Unfortunately, I see all too many product and/or engineering led organizations that are in thrall to their hate or disdain or at a minimum personal dislike for sales (and by extension sales people). That’s highly unfortunate because it dramatically reduces the overall chances of success for these organizations. And one of the grand ironies is that many of these organizations think that they are in some way emulating Google, which has somehow managed to create a myth that Google got big without sales (nothing could be further from the truth). A similar myth seems to be in the making about Facebook.
Incidentally, I don’t mean sales here just as in having sales people. I also mean selling as in convincing endusers explicitly of the value of a product (ok, so technically that’s marketing but it has many of the same aspects). I haven’t figured out yet how to help people to learn to love sales. But maybe a starting point will be to point at how important selling has been to the success of companies such as Google. And of course selling has been critical to the company currently so beloved by many engineers, designers and product folks alike: Apple.
When Larry Page became CEO, I set out my hopes for how Google might evolve its role in the Internet marketplace under his leadership. In particular, I was hoping that Larry would be:
While the purchase of Zagat is a rounding error for Google it still shows that Google is going in the exact opposite direction. As I tweeted yesterday: this acquisition continues the march from “organizing the world’s information” to “owning” it.
I guess at the end of the day it is hard to help yourself when you have massive profits and a powerful infrastructure that you can point at will at a new target. Nonetheless, this now represents an opportunity for one ore more disruptive startups and some very patient investors to build businesses based on Google’s original vision which is as needed today as it was 10 years ago.