It’s Not How Big It Is – It’s How Well It Performs: The Startup Genome Compass

What makes startups succeed or fail? More than 90% of startups fail, due primarily to self-destruction rather than competition. For the less than 10% of startups that do succeed, most encounter several near death experiences along the way. Simply put, while we now have some good theory, we just are not very good at creating startups yet. After 50 years of technology entrepreneurship it’s still an art.

Three months ago I wrote about my ex-student Max Marmer and the Startup Genome Project. They’ve been attempting to quantify the art. They believe that they can crack the code of innovation and turn entrepreneurship into a science if they had hard data rather than speculation of why startups succeed or fail. Max and his partners had interviewed and analyzed over 650 early-stage Internet startups. In May they released the first Startup Genome Report— an in-depth analysis on what makes early-stage Internet startups successful.

Now 90 days later Max and his team have gathered data on 3200 startups and they believe they’ve discovered the most common reason startups fail.

Today you’re invited to benchmark your own internet startup and see how you compare to the winners.

———

Benchmarking Your Startup
I hadn’t heard from Max for awhile so I thought he took the summer off. I should have known better, it turned out he was hard at work.

Max and his team built a website called the Startup Genome Compass (their benchmarking web site) that allows an Internet startup to evaluate their business performance. The Startup Genome Compass uses a hybrid “Stage and Type” model that describes how startups progress through their business development lifecycle.

The benchmark takes 20 or so minutes to go through as series of questions, and in the end it spits out an analysis of how you are doing.

The benchmark is not perfect, it may even be flawed, but it is head and shoulders above what we have now – which is nothing – for giving Internet startups founders specific advice on best practices.  If you have a few world-class VC’s on your board you’re probably getting this advice in person. If you’re like thousands of other startups struggling to get started, it’s worth a look.

It’s Not How Big It Is – It’s How Well It Performs
If you’re interested (and you should be) in how you compare to other early stage ventures, they summarized their results in a report “Startup Genome Report Extra: Premature Scaling.”

One of the biggest surprises is that success isn’t about size – of team or funding. It turns out Premature Scaling is the leading cause of hemorrhaging cash in a startup – and death. In fact:

  • The team size of startups that scale prematurely is 3 times bigger than the consistent startups at the same stage
  • 74% of high growth Internet startups fail due to premature scaling
  • Startups that scale properly grow about 20 times faster than startups that scale prematurely
  • 93% of startups that scale prematurely never break the $100k revenue per month threshold

The last time I wrote about Max I said, “I can’t wait to see what Max does by the time he’s 21.” Turns out his birthday is in a week, September 7th.

Happy birthday Max.
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Hiring – Easy as Pie

Over the last few weeks I’ve gotten involved in hiring for two startups, a public agency and a non profit.  Part of each conversation was getting asked to help them put together a “job spec.”

I had them leave with a pie chart.

——–

There must be something in the air. In the last week I had four separate groups through the ranch all wanting to talk either about hiring a senior exec or a senior exec looking for a new job. Having sat through these job discussions as an entrepreneur, board member, and now an interested observer, here’s what I concluded:

  1. Decide whether you’re hiring someone to help search for the business model or to help execute a business model you’ve already found (same is true is you’re looking for a job – are you going to be searching or executing?) Are you looking for a visionary or an operating executive?
  2. The job spec’s for the same title differ wildly depending on whether the job requires search versus execution skills. Founders search, operating executives execute.

If you’re hiring an operating executive (CEO, VP, Executive Director, etc.)

  • Don’t start with the candidate (board member x has a great VP of sales he knows, founder y wants this CEO he met at a conference, etc.)
  • Don’t even start with the job spec

Since I’ve always been a visual guy, job specs with their long lists of job requirements always left me cold. My eyes would glaze over at these recruiter/board wish lists. I wished there was a way to see them at a glance. (Just to be clear this isn’t the entire hiring process, just a way to visually begin the discussion.) So here’s my suggestion: Start with a Pie Chart.

  1. Draw a pie chart.
  2. List all the job specs as slices
  3. Adjust the width of the pie segments by importance. (Extra credit if you get the current CEO or internal candidate to help you write/draw the slices and weight their importance. Everyone involved in the hire gets to have an opinion on the slices and weights, but the person/group making the hiring decision gets to decide which ones to include.)
  4. Now that you have this spec, evaluate each candidate by showing his/her competence in each slice by length
  5. Compare candidates
  6. Easy as pie!

Lessons Learned

  • Are you hiring for search or execution skills?
  • Show the job requirements visually as a pie chart
  • Prioritize each requirement by the width of the pie
  • Show your assessment of each candidate’s competencies by the length of the slices
  • Now with the data in front of you, the conversation about hiring can start

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The Four Steps to the Epiphany is Now in Russian

The Four Steps to the Epiphany (Четыре Шага к Озарению) is now available in Russian.

Thanks to Denis Dovgopoliy for making the Russian version happen.

It joins the French version: Les quatre étapes vers l’épiphanie

and the Japanese version アントレプレナーの教科書 [単行本(ソフトカバー)

Now in Japanese

Pay It Forward
What’s pretty remarkable is these translations are not from a commercial publisher, but rather a labor of entrepreneurial love. All these translations have been crowd-sourced.

Entrepreneurs from Japan, France and now Russia believed they could help startups in their country if the Four Steps to the Epiphany was available in their native tongue. They translated it at their own expense. These are the first three translations and more are underway.

These individuals are “paying it forward” for their communities and country’s. Thousands of entrepreneurs are better for their efforts.

Blame it On Eric
We can blame it all on Eric Ries. When Eric was my student in one of the first Berkeley Customer Development classes, he suggested that I take my class notes, which until then had been printed at Cafepress.com, and offer it widely on Amazon. He said, “I bet there are a few people outside the class who might like to read it.” I photoshopped a cover for my notes, called it the Four Steps to the Epiphany, and bet him he was wrong.  He won the bet.

What A Long Strange Trip It’s Been
I was going to end this post here, but it’s late at night at the ranch and the coyotes are howling in the distance and somewhere closer, out in the redwoods, there’s a barn owl hooting in the trees.

Seeing this book in Russian for me is more than just another translation.

As a child, my mother fled the Soviet Union smuggled out in a hay cart in the middle of Russian Civil war. Until she died, she reminded me that on the way to Ellis Island, her first view of the United States was the Statue of Liberty in New York harbor – and she never looked back. (As kids we memorized the poem inside the statue.)

When I was growing up the odds were pretty low that the Cold War war would end with a whimper rather than a bang. Both the U.S. and the Soviet Union trained daily to kill hundreds of millions of people. Entrepreneurship was a crime in the Soviet Union. In the 1970’s the Soviet military was on the ascendency and wasn’t at all clear that the 20th century would end as the American century (or with 15,000 targeted nuclear warheads, anyones century.)

I spent my late teens here and my early 20’s here next to the sharp end of the spear, and this was no videogame. (There’s equal part irony and satisfaction that Silicon Valley and semiconductor fabs had a role in the demise of the Soviet Union.)

When the Cold War ended I waited for the victory parade down Main Street.

We never did have a parade, but as a consolation prize there’s now a McDonalds in Red Square, entrepreneurship is trying to blossom in a place that had 60 U.S. nuclear weapons aimed at it, my book (a revolutionary manual for capitalism,) is in Russian, and I’ve been asked to give my Secret History of Silicon Valley talk when I visit Moscow for the first time in September.

Good enough.
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There’s Always a Plan B

Everyone has a plan ’till they get punched in the mouth. 
Mike Tyson

One of the key distinctions between an entrepreneur and an operating executive is an entrepreneur’s almost seamless agility in the face of changing circumstances versus an operating executive’s intense execution focus on a plan. World-class entrepreneurs learn how to combine both.

WTF?
Driving home over the mountains from a Coastal Commission hearing, I had time to ponder an email I received from a city official as the road wound through the Redwood trees. The Coastal Commission had found that a zoning change his city requested didn’t conform to the Coastal Act, and we denied it. I felt sorry for him because he had put together a project that depended upon the property owner, developer, unions, hotel operator, local neighbors, city council, weather, wind speed, phase of the moon and astrological sign all aligning just to get the project in front of us. It was like herding cats and pushing water uphill. Reading his email I was sympathetic realizing that if you substituted customers, channel, product development, hiring, board of directors, and fund raising, he was describing a typical day at a startup. I felt real kinship until I got to his last sentence:

“Now we’re screwed because we had no Plan B.”

Say what?

I had to read his email a few times to let this sink in. I kept thinking, “What do you mean there’s no plan B?” When I shared it with the other commissioners who were public officials, all of them could see that there could have been tons of alternate plans to get a project approved, and there were still several options going forward.  But the mayor just had been so intently focussed on executing a complex Plan A he never considered that he might need a Plan B.

By the time the mountain road unwound into rolling pastures and then flattened into the farmland just south of Silicon Valley, I realized that this was a real-world example of the difference between an entrepreneur and an operating executive.

There’s Always a Plan B
My formal definition of a startup is a temporary organization in search of a scalable and repeatable business model. Yet if you’ve founded a company you know that regardless of any formal definition, startups are inherently pure chaos. As a founder, keeping your company alive requires you to think creatively and independently because more often than not, conditions on the ground will change so rapidly that any original well-thought-out plan quickly becomes irrelevant. (It’s equally true for startups, war, love and life.)

The reality is that to survive requires a mindset which 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.  

To do this you are instinctually creating and testing multiple hypotheses which are creating an infinite number of possible future plans. And when the inevitable happens and some or all your assumptions were wrong, you pivot your model into the next plan and continue forward.  You do this until you find a scalable and repeatable business model or you die by running out of money.

Great entrepreneurs don’t just have a Plan B, they have Plans B through

Lessons Learned

  • A startup is initially about the search for a repeatable and scalable business model
  • Most of the time your hypotheses about Plan A, B and C are wrong
  • Searching requires agility, tenacity, resilience, curiosity, opportunism and pattern recognition
  • Execution requires a different set of skills. At times it means bringing an operating executive
  • Operating executives excel at focussed execution
  • World-class technology CEO’s learned how to combine Searching and Execution (Gates, Jobs, Ellison, Bezos, Page, et al)

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Going Out With His Boots On

He was a man, take him for all in all, I shall not look upon his like again
Shakespeare, Hamlet Act I, Scene 2

With 37 mllion people it’s remarkable that California has one of the most pristine and unspoiled coastline in the United States. One man and the organization he’s built is responsible for protecting it.

———–

California Dreaming
California Highway 1, (the Pacific Coast Highway) is a two-lane road that hugs the coast from Mexico to the town of Leggett in Northern California. It’s carved out of the edge of the California almost designed to connect you to the Pacific Ocean in a way that no other road in the country does. In some stretches It’s breathtaking and hair-raising and in others it’s the most tranquil drive you’ll ever take.

It goes through quintessential California beach towns right out of the 1950’s. It has hair-pin turns that have you’re convinced you’re about to fall into the ocean. It has open farm fields and hundreds of miles of unspoiled and undeveloped land. It’s the kind of road you see in car ads and movies, one that looks like it was built to be driven in a Porsche with the top down.  The almost 400 mile coast drive from Los Angeles to San Francisco is one the road trips you need to do before you die.

15 air miles away, the road parallels Silicon Valley (and the 7 million people in the San Francisco Bay Area.) In that 45 mile stretch – from Half Moon Bay to Santa Cruz – there’s not a single stoplight and less than 5,000 people.

The Peoples Coast
Yet there’s no rational reason most of the 1,100 miles of the California coast should look like this. 33 million Californians live less than an hour from the coast. It’s some of the most expensive land in the country. As our economy is organized to extract the maximum revenue and profits from any asset, you wonder why there aren’t condos, hotels, houses, shopping centers and freeways, wall-to-wall for most of it’s length (except in parts of Southern California where there already is.)

The explanation is that almost 40 years ago the people of California passed Proposition 20 – the Coastal Initiative – and in 1976 the state legislature followed it up by passing the Coastal Act, which created the California Coastal Commission. Essentially the Coastal Commission acts as California’s planning commission for all 1,100 miles of the California coast. It has a staff of ~120 who recommend actions to the 12 commissioners (all political appointees) who make the final decisions.

Among other things the legislature said the goals of the Coastal Commission was to: 1) maximize public access to the coast and maximize public recreational opportunities in the coastal zone consistent with sound resources conservation principles and constitutionally protected rights of private property owners. And 2) assure priority for coastal-dependent and coastal-related development over other development on the coast.

You Can Make a Difference
This week I had my public servant hat on in my role as a California Coastal Commissioner.

I don’t write about the commission because I want to avoid any conflict in my role as a public official.  But today is different. The single individual responsible for running the Commission staff for the last 26 years, it’s executive director Peter Douglas, just announced his retirement.

Unlike Robert Moses who built modern New York City’s or Baron Haussmann who built 19th century Paris in concrete and steel, the legacy and achievements of Peter Douglas are all the things you don’t see in the 1,100 miles of the California coast; wetlands that haven’t been filled, public access that hasn’t been lost, highly scenic areas that haven’t been spoiled and destroyed.

There’s an old political science rule of thumb that says regulatory agencies become captured by the industries that they regulate within seven years. Yet for the 26 years of Peter’s tenure he’s managed to keep the commission independent despite of enormous pressure.

The Commission has been able to stave off the tragedy of the commons for the California coast. Upholding the Coastal Act had it taking unpopular positions upsetting developers who have fought with the agency over seaside projects, homeowners who strongly feel that private property rights unconditionally trump public access and local governments who believe they should have the final say in what’s right for their community.

Peter opened the commission up to public participation and promoted citizen activism. He built a world-class staff who understand what public service truly means.

Over the last 40 years the winners have been 37 million Californians and the people who drive down the coast and can’t imagine why its looks like it does. In spite of opposition the commission has carried out the public trust.

The coast is never saved, it is always being saved.  The work is never finished. The pressure to develop it is relentless, and it can be paved over with a thousand small decisions. I hope our children don’t look back at pictures of the California coast and wistfully say, “look what our parents lost.”

As commissioners it’s our job to choose Peter’s replacement. Hopefully we’ll have the wisdom in finding a worthy successor. The people of California and their children deserve as much.

Godspeed Peter Douglas.

Update
Great interview with Peter Douglas on his retirement.


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Bonfire of the Vanities

When I was in my 20’s, I was taught the relationship between marketing and sales over a bonfire.

Over thirty years ago, before the arrival of the personal computer, there were desktop computers called office workstations. Designed around the first generation of microprocessors, these computers ran business applications like word processing, spreadsheets, and accounting. They were an improvement over the dumb terminals hanging off of mainframes and minicomputers, but ran proprietary operating systems and software. My third startup, Convergent Technologies (extra credit for identifying the photo on page 2) was in the business of making these workstations.

The OEM Business
Convergent’s computers were bought and then resold by other computer manufacturers – all of them long gone: Burroughs, Prime, Monroe Data Systems, ADP, Mohawk, Gould, NCR, 4-Phase, AT&T. Convergent had assembled a stellar team with founders from Digital Equipment Corporation and Intel and engineers from Xerox PARC.  And once we went public, we hired a veteran VP of Sales from Honeywell.

As the company’s revenues skyrocketed, Convergent started a new division to make a multi-processor Unix-based mini-computer. I had joined the company as the product marketing manager and now found myself as the VP of marketing for this new division. We were a startup inside a $200 million company. A marketer for 5 years, I thought I knew everything and proceeded to write the data sheets for our new computer.

Since this new computer was very complicated – it was a pioneer in multi-processing– I concluded it needed an equally detailed data sheet. In fact, when I was done, the datasheet describing our new computer, proudly called the MegaFrame, was 16 pages long. I fact-checked the datasheet with my boss (who would be my co-founder at Epiphany) and the rest of the engineering team.  We all agreed it was perfect. We’d left no stone unturned in answering every possible question anyone could ever have about our system. As we typically did, I printed up several thousand to send out to the sales force.

The day the datasheets came back from the printers, I sent the boxes to the sales department in Convergent’s corporate headquarters, a separate building across the highway, and sent a copy to our CEO and the new VP of Sales.  (I was thinking it was such a masterpiece I might get an “attaboy” or at least a “wow, thanks for doing all the hard work for our sales organization.”)

So when I got a call from the VP of Sales who said, “Steve, just read your new datasheet. Why don’t you come over to corporate.  We have a surprise for you,” I smugly thought, “They probably thought it was so good, I’m going to get a thank you or an award or maybe even a bonus.”

Fahrenheit 451
I got in my car to make the five minute drive over the freeway. Turning into the parking lot, I noticed smoke coming from the far end of the lawn. As I parked and walked closer I noticed a crowd of people around what seemed to be an impromptu campfire.  “What the heck??” As an ex Sales and Marketing VP, our CEO had a Silicon Valley reputation for outrageous stunts so I wondered what it was this time –  a spur-of-the-moment BBQ? A marshmallow roast?

Heading to a meeting with the VP of Sales, I almost walked past the crowd into the building  until I heard the VP of Sales call me over to the fire. He was there with our CEO feeding things into the fire.  In fact as I got closer, it looked like the campfire was being entirely fed by paper.  “Here, toss these in,” they said as they handed me a stack of…

Oh, my g-d they’re burning my datasheets!!!

The Bonfire of the Vanities
I stood there stunned as I realized that my 16-page carefully constructed, brilliantly written, technically accurate datasheets were being destroyed en masse. I guess I was speechless for so long that the VP of Sales took pity on me and asked, “Steve, do you know we have a sales force?” I managed to stammer out, “Yes, of course.”  He asked, “Do you know how much we pay them?”  Again, I managed to answer, “A lot.” Then he got serious and started to explain what was going on. (In the meantime our CEO watched my reaction with a big grin on his face.) He said, “Steve, I’ve never seen such a perfect datasheet. It answers every possible question a prospective customer could have about our product. The problem is that our computer sells for $150,000. No one is going to buy it from the datasheet. In fact, reading these, the only thing your datasheet will do is give a prospective customer a reason for saying “no” before our salespeople ever get to talk to them.

“Do you mean you want a datasheet with less information?!”  I asked, not at all sure that I was hearing him correctly. “Yes, exactly. Your job in marketing is to get customers interested enough to engage our sales force, to ask for more information or better, to set up a meeting.  No one is going to buy our computer from a datasheet, but they will from a salesman.”

Marketing to Match the Channel
It took me a few weeks to get over the lesson, but it stuck.  When selling a physical product through direct sales, Marketing’s job is to drive end user demand into the sales channel.  Marketing creates a series of marketing activities at each stage of the sales funnel to generate awareness, then interest, then consideration and finally purchase. 

Ironically, over the last decade, I’ve seen web startups have the opposite problem. For web sites with an ecommerce component, the site itself is supposed to both create demand and close the sale. Web designers have to do the work of both the marketing and the sales departments.

Lessons Learned

  • Marketing materials need to match the channel
  • Marketings job in direct sales channels with consultative sales need to drive demand to the salesforce
  • Indirect channels require marketing material with more information than a direct channel
  • Web sites that sell products combine sales and marketing
  • Confusing these can get you your own bonfire

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