Risky Business Part 2: Vision and Startup Risk
My goals for Part 2 of this series on managing startups with an investors’ mindset are;
Provide insights about how creativity and vision that not subjugated to customer needs, will blind a startup to actual market truths and create startup risk.
Make you wonder why I am using a ring-toss image for this series, the rings of which keep increasing for each part of the series. (more later)
There is a sea of start-up advice offering untold amounts of wisdom, philosophy, best practices, lessons learned, methodologies and frameworks. It’s available across countless slideshares, meet-ups, webinars, incubator brown-bags, accelerators, webcasts and everywhere else industry consultants can think of marketing it. Thank God it is and thank God they do this for us.
You can become a disciple of Steve Blank’s Customer Development Methodology pivoting your way towards that ever-elusive Product-Market Fit. (I love his customer discovery process by the way). Peter Thiel’s Zero to One is awesome and true, and speaking of basic truths, do practice Elon Musk’s first-principles thinking… besides the fact it works, you can’t go wrong trying to understand the ways of an entrepreneur who has successfully (and decisively) disrupted four giant industries so far … with more on the way. Boring definitely isn’t (boring). These industry titans generously provide wisdom and truth so obviously gleaned by their hard-won entrepreneurial experiences that all are valid and essential to any entrepreneur’s playbook (at least until another brilliant future inventor changes the rules of the marketplace and perhaps the advice of these titans for starting up companies).
In speaking to Andreessen Horowitz about my social-local business, we learned about how they connect knowledge, creativity and risk. Perhaps you and your team have been lucky enough to meet with one of their investment associates and hear them state simply “We move forward acting like we know nothing at all, and let the market tell us” - the Zen life-practice of forgetting everything you know. It was a lesson I had learned the hard way, years before.
(This is the investor’s mindset part of my article, the product startup portion follows. Stay with me if you can I’ll try to make it interesting for you by sharing embarrassing moments about myself).
I’ll never forget the day I discovered that “knowing too much” in new investments in cool technology companies could be bad, in fact very bad. About the time Qualcomm’s stock was lifting off of a 10-year base and after Irwin Jacobs validated CDMA was real (and licensing it- really profitable), my trading mentor David Gordon told me forcefully one day, “Jim when I trade, I assume I’m always wrong and the market is always right”. At this time I had rotated much of my Qualcomm earnings (which I subsequently lost) directly into Gary Winnick’s Global Crossing and Asia Crossing.
After the demise of these two stocks which I rode most of the way to the bottom because of my flawed investment thesis, David said, “Do you know what makes a stock go up?” “Of course!” I excitedly quoted the company’s quarterly revenue, the quality of the management team, the sector, the market and everything else I had learned- in theory. David replied calmly and rather dryly, “The stock price goes up because there are more buyers than sellers”. David continued, “Do you know what makes a stock price go down?” (This one I could kind of figure out on my own given David’s first and painful answer ). “More sellers than buyers?” I responded sheepishly. David was giving me a lesson in first-principles thinking before anyone knew Elon Musk’s name. His closing statement; “Jim, to make money in the market, you have to stop being a Prophet and just Profit. Assume the market is usually right and you are usually wrong”.
That was really hard to do when like me, you had just heavily invested in a sea of expensive knowledge after a shiny new MBA on top of a lot of other engineering degrees, mixed in with some arrogance to really make things dangerous. Knowing too much was creating risk for me, not eliminating it because my (false) knowledge was creating blind spots that kept me from gleaning the market as it really was. Thank you David, “I am always wrong” is one of the most "right" things you taught me for investing in stocks and subsequently for investing in and driving innovative products and services.
Legacy knowledge and un-challenged vision built on top of an untested business model or product that is not validated will blind both entrepreneurs and intrapreneurs, to the very truths that will lead them to success. Steve Blank talks about this concept brilliantly in his video interview at the Commonwealth Club. The very creativity and vision that lets founders operate, even thrive in chaos, is what can do us in because our vision isn’t a business. As Steve rightly points out, our startup is nothing more than “a series of untested hypotheses”. Andreesen Horowitz recently posted a fantastic guest piece by Tren Triffen about Product-Market Fit. Salient excerpts for this article:
#6 “The number one problem I’ve seen for startups, is they don’t actually have product/market fit, when they think they do.” Alex Schultz
#7 “First to market seldom matters. Rather, first to product/market fit is almost always the long-term winner.” “Time after time, the winner is the first company to deliver the food the dogs want to eat.” … Andy Rachleff
Marc Andreessen writes: “In a great market — a market with lots of real potential customers — the market pulls product out of the startup.”
(Thanks for continuing to read and here is the product startup part of this article).
Yahoo's startup local ad search product
When I was hired to run Overture’s startup local search product, we had a great market that did indeed “pull” our (second) geo-targeting product out of us after a failed first attempt. (Overture later changed its name to Yahoo Search Marketing post Yahoo’s acquisition).
I came on board excited to help launch YSM’s local search keyword ad product for small and medium business owners. The product was 90% complete before I arrived. The young team (with very excited members including some freshly minted MBA’s) exuded confidence and excitement about their creation. Small business owners would flock to our local search product to expend their life energy, bidding on key word terms like “dentists in Pasadena” and “Los Angeles restaurants” and targeting “dentists” with a circular ad campaign region. Auto-mechanics would stop all of that hard auto-repair work, roll out from underneath those messy Ford F150’s to spend their day thinking about how much they would bid on keywords to have their local search ad appear above the ad of the mechanic across the parking lot, in the search ad inventory of website publishers they never knew existed. We’d make millions! (FYI successful products try not to make their customers think and auto-mechanics don’t want to spend their time bidding on anything).
Three million dollars expended and 12 months later we had a whopping five-digit annual revenue run-rate with about 5k customers for our local search product, the vast majority of which were not small and medium businesses. Our customers were actually large enterprises looking to spend their sales budgets geo-targeted locally. (Problem 1; We had the wrong target customers). In meeting with the lead engineer on our team (whose technology YSM acqui-hired from his company “Lasoo”) I was quickly informed the main local campaign targeting mechanism we were offering was a circular area defined by a point and radius. We were letting local advertisers target their local ad campaigns by selecting a point (their physical store presence) while defining a “lasoo” radius to create a circular ad campaign region. Nothing wrong with this cool idea except most local advertisers in the real world geo-targeted their offline ad spending using combinations of postal codes and polygons, like Nielsen’s DMAs (Designated Marketing Areas). Also many local advertisers that are service companies don’t even have a physical store presence. A plumber will have a phone answering service, a service area in which they advertise and a warehouse of trucks that serve their service area. They literally don’t have a physical store location from which to create a radius for a circular region.
Google had launched their geo-targeted local advertising product that let advertisers specify any polygon via latitudes and longitudes, which actually allowed advertisers to target the areas they serviced. Our excited young team thought this was “crazy”, “which local business advertiser is going to use complicated lat/longs to specify their area? Circle radius is SO much easier!”
Our first local ad customer (obtained via our internal sales force), gave us a file for their geo-targeting area and guess what it contained... the lat/long’s for a polygon service region. A few first discussions with big local advertisers like Caldwell Banker let us know Caldwell had $5M to spend in local advertising but spent almost none of it online because Caldwell’s local realtor franchises had to respect trade regions (service areas made up of polygons like postal codes). One realtor’s ad cannot show up in another realtor’s trade area. Circle radius-defined campaign regions caused their ad campaigns to overlap coveted trade areas which was bad. (Problem number 2; We had the wrong product feature).
Okay so we had the wrong product feature that served a bigger (local) business than we anticipated. Why not then just sell to the smaller business owner using our simpler circle radius geo-targeting product? Answer; our product was being sold through a self-serve online channel. Our go-to-market strategy assumed the channel to these local advertisers was PR, very light marketing and our Yahoo self-serve portal. Having been the 5th employee at SBC’s yellow page startup, SmartPages.com, I knew local ad products were sold to small and medium local businesses via the pressure of a large and very expensive local sales force. These sales forces were unionized, and all products were approved by their local union rep who had a 5-stroke handicap and a (protected) $150k/year annuity he called a salary from selling non-technical, very easy to understand $100-$250k ads in the print yellow page book. Problem 3; We didn’t have a viable sales channel to reach SMB's with our local search ad product.
Vision by itself = Risk
In short it became clear we didn’t do the customer research to validate our v1 local search ad product. We were short on customer discussions and very long on creativity and product development vision, both of which created a lot of (unknown) risk.
As Mark Andreessen noted though, we were in a great market that did “pull” the right product out of us after these hard-won lessons, but by this time our internal startup’s local circle radius product was doomed. We had used up the goodwill of our engineering team by promoting to them the perceived high value of an un-validated product that was failing in the marketplace. Engineering no longer believed our statements about why the product would succeed. We spent our allocated headcount budget marketing the wrong product to the wrong customer via the wrong sales channel.
We did listen to our customers eventually and pivoted to a new polygon geo-targeted ad product enabled by a geo-services technology company that reached out to me. After we acquired this UK-based company (WhereOnEarth, Inc.) and launched the new geo-targeted search ad product, we achieved product-market fit and $100M in geo-targeted revenue in about 12 weeks. It happened exactly as Tren wrote on Andreessen’s blog:
#4 “You can always feel when product/market fit isn’t happening. The customers aren’t quite getting value out of the product, word of mouth isn’t spreading, usage isn’t growing that fast, press reviews are kind of ‘blah’, the sales cycle takes too long, and lots of deals never close.
And you can always feel when product/market fit is happening. The customers are buying the product just as fast as you can make it — or usage is growing just as fast as you can add more servers.
In conclusion, creativity and vision and creating something from chaos are clearly the gifts that innovative entrepreneurs and intrapreneurs bring to the startup party. But if not grounded in or aligned with customer needs, market truths and a validated business model, these visionary gifts create risks that will destroy your startup. I can’t agree more with the prevailing startup wisdom from Steve Blank , Andreesen  and others:
“Your business model is not inside the walls of your office. No facts are inside your business. Get out and talk to 20 of your customers”.
After all there is indeed a fine line between being a visionary and a lunatic. The difference between these is the humility to subject your vision to the needs of real customers and the wisdom in assuming you know nothing and that you are always wrong… (until the market proves you right).