Why Startups Fail? Entrepreneurs Perspective – Keep the Founder Around

Why do startups fail? There are many reasons. Here is a post from a VC in Silicon Valley called VCDave – David Feinleib is a partner at MDV – Mohr Davidow Ventures – He invests in Internet-enabled companies.

This is a great post from VCDave, but I would add that the faster the market moves the more the founder needs to be in charge. Finding a founder with vision, product skill, and deal making ability is ideal. Venture capitalists need to let the founder run the ship. If VCs run interference with the founder then the entire venture slows down. Building a startup from nothing is difficult and navigating the market landscape with imperfect information is key. Entrepreneurs are good at dealing with ambiguities.

Once a venture enters the market the venture plan has to be in a constant state of reinvention to ‘hit’ the tipping point for the preferred business model for the proverbial ‘big opportunity’. One thing often over looked is the important objective of getting the new venture in a position in the market to seize the growth opportunity contemplated by the entrepreneur and the investor.

Entrepreneurs and VCs need to deal with change as a positive not a negative. If the ventures position in a growing market is good then the change is a normal characteristic. To me it’s about letting the founder stay in control until the venture hits calmer waters. Founders know best in the early stages. Creative, product, sales, and deal making skills matters the most. VCs shouldn’t just replace founders because a few waves crash on the ship.

If investors want a return remember that the founders know best. Don’t replace the founder to early.

http://www.usatoday.com/money/companies/management/2007-08-21-founder-ceos_N.htm

Update: Donna who tracks the NYC startup scene at StartupAlpha has a post on this. Here is 37Signals Jason Fried’s take at Signal vs Noise on this topic.

Two important points Donna and Jason make: 1) build a good sustainable venture and 2) if the market is slowly developing then there is no market.

Here is a good section from end of Jason’s post “If the entrepreneur finds themselves in a situation they can’t control it’s almost certainly because they put themselves in that position — either by borrowing too much, spending too much, rushing too fast, creating a false sense of urgency, hiring the wrong people, attacking a market that doesn’t exist, or not focusing on generating revenue early enough. Natural disasters are out of our control, bad business decisions are in your control.”

My advice to entrepreneurs: try to maintain control for as long as you can (control > 50%) at all costs. Only go over 50% dilution if you need to scale and never run out of money.

Update 2: An post from last year from Denny Miu who I have met and respect. He writes a great post that has lessons and observations.

Tech Entrepreneurship Recession – Microsoft Yahoo – Tea Leaves;

War! What is it good for! Absolutely nothing! – Say it again!

Are wars really good for business? Is tech entrepreneurship in recession heading toward depression? The battle between Microsoft and Yahoo is reaching it’s climax (if not already). However, there are some very interesting and unique perspectives come from two blog posts that jumped out at me – Kara Swisher and Fred Wilson. Kara has the funniest headline saying “Jesus is coming” with the storyline about the inside scoop on the ‘dance’ between the two. What strikes me with Kara’s post is that Yahoo might already be defeated in the ‘braindrain’ that they have been experiencing. Even if Yahoo survives is it already dead on the vine?

Fred Wilson only draws a reference to the battle in his post about liquidity – saying that with no IPO market we are in trouble and worse the tech giants are playing with assets like toys. I think that Fred is on to something with no liquidity (other than M&A by big firms). Is this really a robust market for innovation where the big guys are doing all the acquiring? Is this the ecosystem that produces good entrepreneurship?

What ties both these posts together is the trend that acquisitions might not be the best for innovation – Kara bluntly states that AOL’s acquisitions aren’t doing well. While Fred says it’s great to get the cash but Yahoo hasn’t done well with their acquisitions. Meanwhile the capital markets are a mess.

As an entrepreneur with four kids I’m concerned about the prospects for all entrepreneurs in this current environment. Maybe I’m just not feeling good today. Startups should have some friction, but not outright frustration. I’ve been doing early stage startups for 10+ years and never seen this much frustration since 2002-03. We are in a tech recession or at least a grinding halt.

I’m one of the most optimistic guys (all entrepreneurs are), but my mood on this startup market: Bear

VC Credibility and Founder Credibility – It’s a Marriage

Getting financed by a VC is a marriage.  When it doesn’t work out it’s a divorce.

Josh Kopelman writes a great post on entrepreneurs pitching him.  He talks about Founder Credibility.  It works the other way as well – VC Credibility.  Both parties (the founder and VC) are looking for partnership – founder: money/business partner and VC: investment partner so chemistry is key.

If the VC doesn’t understand or believe in the founders vision then it will never work out.  For VCs they do this all the time- they take hundreds of meeting until they find that chemistry.

Here is Josh’s post.

This past week I had two distinctly different meetings with entrepreneurs.  They both were successful serial entrepreneurs.  Both were exceptionally smart.  Both had good ideas.

The first entrepreneur, however, thought that they were expected to know the answer to every question.  There wasn’t a question I asked that he didn’t have a definitive answer to.  He knew what their pricing model would be.  He knew why Google would never compete with them.  He knew what their consumer churn would be three years out (despite the fact that they hadn’t launched yet).  Whenever I tried to discuss the different risks in the business, he told me why they didn’t exist.

The second entrepreneur, had a different approach.  He definitively stated answers when he had them, but when he didn’t know he said so.  When asked about his pricing model, he said “well, we’re considering a few different options depending on the outcome of some tests we’re running…”  When asked about cost of customer acquisition, he said “well we don’t know what our numbers will be…but here’s our model based on other comparable companies.”  When asked about risks, he identified several — and then we discussed how to reduce/eliminate them.

I’ve come to believe that a key investment criteria is founder credibility.  And, I think the second entrepreneur was far more credible.  No one expects a pre-launch company to have all the answers.  (In fact, we get scared if you think you have them).  As I’ve previously discussed, rather than have an entrepreneur sell me on why they are 100% correct, I’d much rather understand how they are attacking the different risks facing the business.

And, by the way, the same applies for venture capitalists.  I often feel that during company pitches — and board of directors meetings — we’re expected to have an immediate opinion.  Should we double our marketing budget?  Should I hire this person?  Will this strategy work?  While it’s OK to offer opinions and thoughts, I think it is also appropriate to acknowledge uncertainty.    

One point in his post that is worth highlighting is how the second enterpreneur views the market. He looks at the market as a fluid dynamic – “running tests” with “base assumptions”. Many entrepreneurs have been scorned for this view (myself included) in being “not focused”. I hate that word. All early stage entrepreneurs are ‘very focused’ on the fluid market how to enter and plans based upon certain market conditions or scenarios. Key is the focus on the possible scenarios – for that there is no one answer.

Josh’s last point is important: VC Credibility – When VCs sit on 9 boards and shows up once a qtr for board meetings with ‘the answers’ then their credibility is on the line.

Early stage is about entering the market with a narrow value proposition that has the opportunity to take advantage of a massive growth trend when in market. For this the entry strategy should be very clear and the answers to the so called ‘billion dollar’ revenue plan should be scenario based.

HP Trying to Leverage HP Labs – A Good Strategy

Eric Savitz has a great blog post on HP Labs new focus.  According to a release the company is issuing today, HP Labs will zero in on 20-30 large research projects, rather than the 150 or smaller projects which marked the company’s approach previously.

This interests me because way back in the day when I spent 9 years at HP I interviewed for a job to commercialize new technology out of the labs.  My supporter was Dwayne Zitner who ran the server group at the time, but corporate development poo pooed it.  At that time HP Labs was out of touch with how innovation got done.  Now it looks like HP has a great vision. 

This announcment makes me think that HP could implement an ‘Amazon’ model of leveraging their core assets in IP and open it up.  Key to success is how they work with entrepreneurs like me.  If they can help me I’m interested in embedding their technologies in my ventures. 

Here is what I think are important points made today:

  • They have a plan to sharpen the focus on 20-30 big bets, away from the smaller projects they used to work on. Place entire resources of HP Labs on these big bets. Target is solving most pressing problems facing customers in the next decade.
  • Dynamic cloud service: based on location, preferences, calendar and communities. One approach: Cloud Print: store documents in the cloud and then retrieve and print on any printer in the world. Also Cloud View, which allows you view stock quotes, weather, sports scores without a browser on a mobile phone.
  • Content transformation: transforming analog to digital, from device to device, from digital to physical. Researchers working on technology to seamlessly transfer information from device to device. Also digital content to physical products.
  • Intelligent infrastructure: designing smarter, more secure devices, networks and architectures, that connect to rich content and services.
  • HP Labs is committed to “open innovation,” to work with VCs, startups, partner companies, etc. “We realize that not all the smart people work for HP Labs,”
  • Another: an entrepreneur-in-residence program. VCs in touch with the marketplace. Form partnerships with VCs. Know what the business trends and market development opportunities are.
  • “Everything as a Service.”
  • Merger between business intelligence and the Web. BI not just for top executive anymore. Prediction systems will be common places. Challenge is getting right information into the right hands. Business will use a radically different approach to reach business decisions. They have an approach they call BRAIN to make business predictions.
  • Speed is everything.

Kudos to HP for this approach.  Like Eric Savitz says “speed is everything”.  Lets see if HP can walk the talk.

Entrepreneur Psychoanalysis Report from INSEAD

Human Resource Management, INSEAD, Fontainebleau, France; The European Institute for Business Administration (INSEAD), Boulevard de Constance, 77305 Fontainebleau Cedex, France.

Paul Kedrosky twittered about the Ananomy of an Entrepreneur today.  I found this article facinating because there has always been a debate “are you born an entrepreneur .. or can it be taught”.  This research suggests that you are born with it.   This was Paul’s comment which I had the same reaction …“Gosh, sounds like most of my friends — okay, and me for that matter. I’m particularly fond of the line about “difficulties in the regulation of self-esteem”. You mean we entrepreneurial sorts are often preening, irritating blowhards? What a surprise.”   

Here is the entire intro paragraph from the report written by Manfred F.R. Kets de Vries 

In psychoanalytic theory, studies of work behavior have been relatively scarce. Most of the existing literature concerns itself with cases of work inhibition or compulsion. Occasionally, one finds a discussion of people in the creative professions. No attention has been paid, however, to a major contributor to economic development in society, the entrepreneur. This contrasts sharply with the amount of attention given to entrepreneurs by other disciplines. The object of this study is to better understand the dynamics of entrepreneurship, and in particular the work behavior of entrepreneurs. First, there is a brief overview of the role of work in psychoanalytic theory. Then a number of factors important to entrepreneurship are reviewed from the perspective of economic, sociological, anthropological, psychological, and organizational theory. A case history is presented of one entrepreneur who chose to be treated through psychoanalysis. The intensity of this type of treatment means that continuity in observation is provided. This case study therefore offers a unique insight into the complex “inner theater” of one particular entrepreneur.

Previous research on entrepreneurship has identified a number of themes common among some entrepreneurs. In the entrepreneurial theater a need for control, a sense of distrust, a desire for applause, and resorting to primitive defensive mechanisms such as splitting, projection, denial, and the flight into action (“the manic defense”) appear to be common. The behavior of a number of entrepreneurs also seems to have a cyclothymic quality. Moreover, for many of them, their narcissistic development tends to be of a “reactive” nature reflecting difficulties in the regulation of self-esteem. This case history illustrates these themes, and furthermore, shows that running a business is not necessarily a rational process. On the contrary, in many instances, the process seems to be more a question of retrospective “rationalizing” of decisions already made. Finally, inferences are made about the person-organization interface by identifying some of the characteristics of the dramatic organization, a configuration typically created by a number of entrepreneurs.

Techonomics During War Time = Expansion – Impact on Entrepreneurs

Marc Andreessen wrote a post on the impact to Silicon Valley if Microsoft and Yahoo buyout happens.    I believe that this massive war is changing the landscape but in a positive way.   This tech war becomes a catalyst the urgency is now.   Marc has experience living the last war when he was a Netscape.  Some might have forgot but the Microsoft assault on Netscape actually validated the market and created the wave and bubble of Web 1.0. 

What Marc is trying to say is that this war might actually propel Web 2.0 up in a big way.   Nice post Marc – it’s a must read – inside baseball – post. 

I agree with his post that it will be a net positive in that other companies will have to ‘shore up’ their positions.  I like how he put it..Marc says “if the Microsoft/Yahoo deal does go through, those same companies in many cases will be looking down a very scary double-barreled shotgun of an ascendant Google and an armored-up Microsoft”.   

As I mentioned in my previous posts, entrepreneurs and big companies have to understand the mentality in a war time venture.   If a business big or small gets caught in the battle during wartime, they need to be a supplier or arms dealer.  

Here are a few strategies for business during tech war time:  1) be a supplier or arm dealer, 2) build value and cash flow positive and stay out of the way – bunker away, 3) pick a side and join their mission.  

Entrepreneurs Beware. Yahoo Buyout Could Kill Technology Startups? Advice: Be an Arms Dealer.

Entrepreneurs beware Microsoft buying Yahoo could shut down the tech startup scene.  It could send the startup climate back to 2001 levels – nuclear winter shut down.  I lived through 2001-2004.  It was ugly.  

Brad Burnham has hit on a narrow topic about the downside of the Yahoo buyout for Silicon Valley.  Brad’s story is very relevant with ‘macro’ implications to the tech world not just Silicon Valley.   This deal could cripple startup activity.

Efficiency for Microsoft means leverage with suppliers.  Translation:  Startups are suppliers and Microsoft just became Walmart.  This could have a chilling effect on the VC and tech investment community.  This new industry structure puts even more of an emphasis on ‘hits’ or category specific deals.   If the Venture Capitalists are confused today can you imaging what they will do going forward.   This could get ugly. 

Advice for Technology Startups and VCs:  Understand where your company is in the pecking order in this war.  If you’re not an arms dealer then you might want to rethink your strategy. 

Update:   others are thinking the same….  A VC -Fred Wilson; Opportunity for another big player to bid:   News Corp.