Six myths about tech entrepreneurship

From what it means to be an overnight success to why business people don't start companies

My good friend Drew Curtis, founder of Fark, invited me to speak at the Haas Business School the other day. Since I've been covering entrepeneurship for years, and have become one in the last several years, he thought I should talk about entrepreneur myths. In other words, what I've learned from entrepreneurs and from being one that aren't so obvious at first.  

Some of these will seem apparent, but when you're an entrepreneur in the process of building a start-up, you often find yourself going down a different path.     

Venture funding is the finish line. Not! Venture funding is the starting line. 

When I first started out, Mark Cuban (owner of the Dallas Mavericks and Internet pioneer) said to me, "Don’t look at VC funding as an end goal. Most first-time entrepreneurs and those intrigued by raising millions of dollars see this feat as a big crowning achievement in and of itself." I thought, "Well, of course I don't see it as that. What kind of advice is that?" Well, turns out it was and is good advice. 

While many people may think that venture financing enables them to build their dream, more often than not, they make decisions based on those funding milestones. Sure, it's a milestone and it's material. But it serves a purpose. That purpose is to pursue and build a product that’s game changing.

Venture financing should be seen as putting you on the starting line. It’s your ticket to get on the track and run the race. And, while you’re on that track, don’t think of another financing as the goal you have to reach. 

Often when entrepreneurs raise money, they tend to build up their companies too quickly. In the Internet bubble years, they also spent their funds on lavish parties. Today, they don't have enough money to do so, but they still have a tendency to over hire and celebrate too early. In other words, they start acting like they've hit success, when they've basically just gotten started.

I speak a lot from experience as well. It happened with my start-up. Additionally, here’s the other challenge of looking at VC financing as an end goal or goal in and of itself, you start making decisions to position yourself to get that funding, at the expense of making the right decisions about building your product. And, much like the public markets where companies often make crazy decisions to meet quarterly revenue, earnings and progress expectations, in the private sector, entrepreneurs make decisions to meet the traction that investors are seeking.

Here's my own example: In 2008, we almost had a deal with a couple major news publications about licensing our company profiles. I can’t remember how many we had at the time, but these potential customers were looking for tens of thousands.  So we began seeding the profiles in hopes users would claim them. I had probably five people working on seeding these profiles. Long story, short: We couldn’t seed them fast enough; Seeding them took us off our focus of creating a great experience for people who were actually signing up themselves. And, we weren't building a product that was useful. We wasted a year and eventually had to take all those profiles down.  

We moved away from our mission in order to bring in revenue so we could raise more funds.  
Remember: Venture financing is a starting point to get you into the race. Don't pop the cork too early.

 

Business people start companies. Not. Product people start companies. 

It’s amazing how many smart, brilliant business people I know who think that having business acumen, and most likely a business degree from a very reputable school, and a great idea is enough to get them funding, or to start a business. 

But this is just not the case: Business people know business. Business people don’t know product. Knowing business is not the key to getting a company off the ground, knowing technology and how to build a product is. (Note: I'm referring to consumer Internet companies).

You need a product in order to have a company.

We do a lot of competitions on Vator where we judge probably 100 start-ups a year, or 20 in each semi-finalist round across five competitions. When we see a start-up with a bunch of business founders, such as MBAs, and no technical founder, we (me and investors evaluating these start-ups) tend to give them a pretty low score. MBA's just aren’t a selling point. They’re not the key assets to get a product off the ground. My husband’s sister says this about an MBA degree. “An MBA degree is for people who want to be in charge of something they don’t know anything about.”

Here’s the challenge for MBAs or mid- to upper-level executives in sales, marketing and business development positions: They spend more time trying to leverage the existing relationships they have and existing sales/marketing/distribution channels and paradigms. If you’re truly disrupting, you’d be blowing up these relationships and making them irrelevant.

That’s why Paul Graham of Y Combinator or Ron Conway and David Lee of SV Angel would say they fund people who are building products for themselves. That’s because they know – particularly if it’s a consumer software company – that the marketing and distribution can be free. 

The added benefits of backing a product person are 1) it’s cheaper 2) it’s faster to get a product off the ground.

Today, while I don’t code, I do understand the logic of a website. I spend a lot of time as a product manager. And, I know how to put together a wireframe to design and lay out my idea so the engineer just has to code and not also have to think through the logic or design. 

So eliminate bureaucracy! Business people have a tendency to add in a lot of undue exponentially expensive layers.

 

Product and marketing are two separate things. Not. Great products build their own shelf space.

This is a controversial topic. There are two separate camps. There’s one camp that believes that a great product can always find an audience. There’s another camp that believes without marketing, a product/service falls into obscurity pretty fast. I believe there’s truth to both. But when it comes to consumer Internet products and services, I believe the product and marketing are one.  

Firstly, the Internet has essentially eliminated marketing and distribution costs, at least in the very beginning. Of course, you can’t just build something and they will come. But if you build an exceptional product, it is possible to get unprecedented scale that could have never been achieved prior to today –where there’s two billion people online. 

Great products build their own shelf space.

When I look at the potential of start-ups, again mainly Web-based consumer Internet ones, I care more about the prototype and what it will look like than what the theoretical concept and go-to-market strategy is.  

Secondly, there is a bit of “inbound” marketing that can be created around your product. And, a lot of this has to be built or thought through as you build the product.

Overnight success happen in start-up land. Not. Overnight successes are years in the marking. 

There are always outliers in business and in life. Instagram was purchased by Facebook for $1 billion only 17 months after launching. YouTube sold to Google for $1.6 billion when it was only 21 months old. Groupon was founded in 2008 and went public in 2011.

But these are asterisks in the history books.

Overnight success actually takes years. I like to bring up Mark Pincus, mainly because I’ve known him for 10 years, and well before he became famous and his company Zynga became a household name. We used to bike with each other at least once a week and we’d ride for miles – often 100 miles at a time.  There was never a day that we didn’t talk about innovation and products.

I remember in 2003, Mark started Tribe, one of the very first social networks. While at the time, I thought he was late to the social networking game because Friendster and MySpace were already born. In hindsight, he was actually very early. The point is that he started thinking about a world in which people would be connected online. He started to realize that if you connected enough of them, they could be a distribution channel in and of themselves. He thought about this for years. It wasn’t an overnight insight. In fact, it took the failure of Tribe to help him figure out what didn’t work.

In 2008, he founded Zynga and the company was the first to leverage Facebook’s social graph to get insane traction.

It took Mark five years of thinking of a problem before launching something that worked. If you proscribe to Malcolm Gladwell’s 10-thousand hour rule, you’ll see that this was just the amount of time he needed to have the expertise he needed to build such a great company.

In Gladwell’s Outliers book, he says that the key to success is a matter of practicing a specific task for a total of 10,000 hours. At a 40-hour workweek, that’s about five years of doing the same thing over and over again to get good.

In the start-up world, the successes come from people who’ve had a maniacal focus on one problem and a solution and iterating on those solutions for years.

The path to success is filled with unicorns and rainbows. Not. Failure is the path to success.

 If your life were filled with unicorns and rainbows, you’d probably not be a lot of fun to be around. Or you’d be tough to relate to.  

I try to teach my sons all about appreciating struggle and knowing that pain and heartache makes us stronger and wiser. And, for them, this lesson has been reinforced by the movie Megamind. Megamind is genius supervillain alien who kills his nemesis, Metro Man. But once he does he realizes that life lost its meaning without anyone challenging and stopping him. My kids will tell you they don’t want a life that comes easy. They want to be challenged.  

In many ways, entrepreneurship is like this. You need struggles. As Vinod Khosla has said about “vision” – there’s no such thing. Vision is bumbling around. The path to success involves struggle, bumbling and failure. 

It’s no wonder that right on Khosla Ventures’ website, it quotes Michael Jordan who said: “Our willingness to fail gives us the ability and opportunity to succeed where others may fear to tread.”

Indeed, Silicon Valley is littered with entrepreneurs scarred with failures before hitting it big.

Some famous examples include Twitter, which started off as Odeo. There’s Turntable.fm, which started out as StickyBits and whose founders opted to call it quits on StickyBits while they still had $400,000 in the bank. They parlayed those funds into creating the popular music site.  

While many people know OMGPOP for its Draw Something game, which reached 50 million downloads in 50 days since its February inception, beoming the fastest-selling game on iTunes and sold to Zynga in March for $200 million, what people forget is that OMGPOP started in 2006. It had raised $16M in financing and essentially had under $2000 in the bank to operate this year.

There’s also Angry Birds. Rovio, the maker of the popular franchise, generated $100 million in sales last year. The company was nearly bankrupt in 2009, when it first launched its game on the iPhone.

Some lesser-known start-ups like Angel’s List started as Venture Hacks Dealflow Network five years ago in 2007. It re-launched in 2010 as Angel List with a better understanding of matching investors and entrepreneurs

Pandora started off with the intent to sell music from kiosks at Best Buy back in 2000.  That didn’t work and now it’s one of the most popular music sites online, making money through advertising.  

Angie’s List went IPO after 16 years and LinkedIn IPO’d after 9 years.

 

 

First-mover advantage matters. Not! Being right matters. 

This dogma took off during the Internet bubble years. And, it’s often still considered an unquestionable truth.

My friend Don Dodge just wrote a piece titled: “I could build Instagram in a week.” And, in the piece he argues that the first-mover advantage is “real.” He says that there are a number of photo-sharing apps – Path, Oink, and Hipster – in the marketplace but they failed to get traction where Instagram did.  If a product is awesome and it’s first, it can get big fast and no other company will be able to compete. 

First of all, I think there are outliers. Amazon and PayPal have dominated in their respective spaces vs. 8% of fast followers. But more often than not, first movers fail. There was a study conducted in 1993 by Peter Golder and Gerard Tellis. In their analysis they found that 47% of first movers failed.

And, if you look at history, there are a number of famous examples where the first mover paved the way for another company to dominate.  And, markets aren’t static, so in the case of the browser, IE dominated for 15 years before Google Chrome just overtook it as the No. 1 browser.

First movers risk a number of things: 1) Making expensive mistakes 2) Not knowing how consumers will respond to a product , which comes from not really knowing the problem 3) Guessing wrong at what business model works 4) Being too early to market. 

So catch your breath. You have time.

If you think about what’s happening in the last couple years, social commerce has taken off. There’s a plethora of fashion sites. Why is this happening today when social commerce and the idea of it (think “Wish Lists” and the ability to share them) really started five years ago?

Social commerce needed a few things to take off. First, there’s more bandwidth to deliver images. Back in 2000, about 20% of Americans were on broadband. That means four out of five people were still stuck on dial-up. Secondly, there are now two billion people online today vs. 50 million people back in the mid-90’s. Thirdly, there’s a plethora of channels to get access to the Internet from smartphones and PCs. Fourthly, imaging technology has greatly improved. Back in 2000, there were no cameras on phones. 

Back in 2000, recommendations came from a person who purchased X and also brought Y. Today, with 900 million people on Facebook, recommendations are made instantly. As an example, about 25% of purchases on Fab – the popular fashion site - were a result of people sharing. 

Final thoughts: These are just some thoughts that came to mind. It's not exhaustive to say the least. But it was enough to talk for 45 minutes.