10 Have You Got What it Takes?
Can founders evolve with the needs of their business?
What does it take to be a founder? It’s hard to say since every founder is so unique. This video workshop (2 hours and 10 minutes) will walk through some of the difficulties of being a founder, while also touching on the characteristics we see in great founders and expectations to have along this tumultuous journey into entrepreneurship. Hear from some amazing founders about the ups and downs of their startup journeys.
Video Workshop: Have You Got What It Takes?
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Can Startup Founders Evolve Along with the Needs of their Business?
Contributed by Michael Skok
There is a belief in the business world that startup founders can’t scale. Put another way, a company’s growth curve will eventually outstrip the capabilities of its founder’s ability to remain CEO. And the statistics seem to bear this theory out: Only 50% of founders remain CEOs after being in business for three years, 40% after four, and a sadly low 25% of founders actually make it through their company’s IPO as CEO.
Why is this? And what makes startup founders like Mark Zuckerberg or Larry Ellison—CEOs who remained at the helm through their initial public offerings and way beyond—different than the rest?
The answer to this riddle lies at the heart of what being a successful entrepreneur is all about: adaptability. The startup founders who remain CEOs the longest are the best at evolving and growing with the needs of their business.
In order to achieve scale, startup businesses often go through many stages, from ideation all the way through predictability, while their value increases over time and while risk is reduced. This sounds neat, organized, and linear. In reality, it’s much messier, with overlap between many of these stages and skills, as well as iteration along the way.
Skill Sets of a Startup Founder
The best early-stage founders, for example, are born innovators who excel at generating ideas and testing them.
As product-market fit comes into play, the role evolves into being that of an entrepreneur engaging customers and partners to gain proof.
Entrepreneurial skills can apply throughout, though as the company’s business model evolves, and repeatability of revenue and systems becomes a premium, CEOs need to think and act more like builders.
Foundational blocks of distinct value need to shape and support the business for growth. Eventually, as the business creates opportunities to scale, a CEO should begin to adopt the mindset of an operator. Operators often formalize systems to ensure everyone understands their measures for success and provide predictable access to resources to scale predictably.
And finally, as the company begins to truly breakthrough to a point where it is earning stable profits and growth, the best CEOs function as enablers where their focus is more on empowering their organization to consistently beat expectations.
This is a very large range of skills that may need to be developed at a rapid pace in high-growth situations. Furthermore, it isn’t as simple as it sounds, because in reality, these skills are often needed in combination.
Yet, many of these skills are also at odds. For example, being an innovator and finding ways to make breakthroughs requires a willingness to break with routine, whereas operators need to build routine into processes that can be relied upon.
Learning to Scale
So, it can be tough for startup founders to scale as CEOs, and to evolve along with the needs of the position without feeling like they are giving up their very identity.
But founders clearly do not need to change their role in order to scale. It’s not realistic to know everyone in the company intimately or to have your fingerprints on every decision made. Evolving to a point where you will often feel removed from the day-to-day action at the front lines of the business is hard. All founders have to develop their own unique approach to it, but regardless it’s a tough transition for many innovators and entrepreneurs to make.
Yet, in many instances, the role of a founder is supremely important to ongoing value creation. So, it should not be looked at as a transition out, but rather a transition up. The title should be irrelevant!
Example: Stephan Schambach of Demandware
Stephan Schambach is the founder of Demandware, now a multi-billion dollar valued commerce leader that, last year alone, handled approximately 150 million registered shoppers and processed over 80 million orders, covering more than a quarter of a billion items sold, and billions more dollars in transactions. Stephan co-founded and built the company from the ground up into a leading commerce provider in the retail industry, and has steered Demandware with great vision. Today, he continues to add tremendous perspective as an active board member and has a strong executive team managing the business day-to-day and taking the company to the next level.
Example: Jon Hirschtick of Solidworks
Jon Hirschtick founded SolidWorks in 1993, with the goal of building 3D CAD software that was easy to use, affordable, and available on the Windows desktop. Today, the company has sold billions of dollars’ worth of CAD/CAM software and continues as a part of Dassault Systems, a company that acquired SolidWorks in 1997. Several years after the acquisition, Jon transitioned out of the CEO role and promoted his long-term partner in building SolidWorks, and a great business leader, John McEleney, as CEO after achieving a run rate of $100 million in revenue in 2001. In 2011, Jon Hirschtick decided to leave SolidWorks to begin the next phase of his career, founding another equally high-potential company, OnShape. Not surprisingly, he brought John McEleney with him as a partner from day one. This is a story of a thoughtful partnership that has endured and is repeating success.
Example: Gail Goodman of Constant Contact
Just because it’s tough, doesn’t mean that every startup founder will fail to scale up, especially if they are willing to acknowledge the harsh truths about what is actually holding back their personal development. By its acquisition in 2016, under CEO Gail Goodman’s leadership, the online marketing company for small businesses Constant Contact had grown to some $285 million in annual revenue since it was founded in 1998.
Gail was at the helm of her company for almost seventeen years, up until its acquisition, which is no small feat. During a Startup Secrets session, we asked her what her secret was to scaling herself at the rate that her business was growing. She shared this key piece of advice: “You have to face yourself. You have to be unbelievably ruthless about what’s working and what’s not working. As CEO, you will have to change hundreds of times to face the different challenges in the different stages your business will go through.”
The rub is that many startup founders share a common characteristic that is invaluable in a company’s early days: drive. However, “being relentless in your perseverance can eventually become an obstacle to change,” says Gail.
Gail played a key role in product management when Constant Contact was in its early days. She was good at, and comfortable in, that role. Only, as the company grew, she continued to be involved in the day-to-day product decisions. It wasn’t until one of her employees, the head of engineering, took her out to lunch and confronted her with the truth, that she needed to let other people step up, that she realized she had been neglecting other critical areas the company needed her to focus on. “The single biggest investment you can make as CEO is where you spend your time,” she says, “and spending time where I was comfortable was a mistake.”
The point of these stories is that while it’s rare to see innovators evolve into operators at scale, it is clearly possible to do, as Stephan and Gail show us. It means you need to be excited about the challenge of constantly changing and evolving. At the same time, there are plenty of examples of founders who have no interest in running a later-stage company, and there’s nothing wrong with that either.
Investors often care to see startup founders stay engaged in building the company, no matter their role or title. However, in the end, there’s no one-size-fits-all strategy out there. What matters is the choice YOU, as founder, want to make over time.
Entrepreneurs Don’t Need All the Answers
Contributed by Michael Skok
Many entrepreneurs think they need to have all the answers, even in the very early stages of their enterprise, when in fact they don’t. Instead, I often find myself drawn to entrepreneurs who ask the right questions around a central problem or idea, rather than assume they have to have all the answers. I cannot overemphasize this. No one has all the answers and the fact is market dynamics change, often rapidly. The average startup, in fact, has about four strategic pivots — which can be a soul-searching adventure — before they finally build the business to scale. Understanding how to ask the right questions during these inflection points can often help you through them more easily. The nature of starting your own company is high risk. Part of that risk is not knowing the answers before you start, and VCs are actually fine with that so long as the founders and early employees have the conviction to plow through the challenges and ask the right questions when problems come up.
When evaluating potential investments, I primarily look at the following three things:
- The Team (usually about 65% of my focus)
- The Market Opportunity (about 25% of diligence – because it always evolves)
- The Breakthrough (about 10% of my initial attention)
Contrary to what you might think, the reality is that we like one of these three things to be truly outstanding rather than just be covering the bases on all three. And the emphasis I suggest above is just a guideline to show that it’s so much about the team, because ultimately a great team can evolve with a market need, and will develop the solution that’s required.
Incomplete stand outs are often better than complete stand ups!
(One of my personal favorite startup secrets)
For example, I’m working right now with a standout team from MIT that is uniquely qualified to address a huge market opportunity, and we are developing the remaining aspects of the business. In general, we know starting a business is difficult and that there are tradeoffs. We don’t expect you to have everything set from day one – if you did, there would be no need for VCs or risk capital! The fact is, as a startup with limited resources, you’ll need to prioritize and iterate among developing these three areas. This will involve some strategic decision-making around which areas to pursue first while remaining open to moving quickly when challenges or opportunities arise.
So based on my experience both as an entrepreneur for more than two decades and as an investor for over a decade – the gaps that exist during the early stages come in the following areas:
- Value Proposition
- Business model
- And many others…
Great as it might be, we absolutely expect you NOT to have a fully built out team in the early stages. In fact, it may even be preferable to lower your monthly burn rate and ensure you have time to get to your MVP and MVS (Minimum Viable Segment) and validate/test it in the market. However, there are some fundamental requirements for the founding team to have:
- A uniquely qualified person to back – Usually this means the founder has had some specific experience in a prior position that gives her a unique perspective on a problem that needs to be solved. This can include domain expertise, but more importantly, this involves the individual’s thought process around the problem and the potential ability to execute.
- A great idea or insight into solving a real problem – This real problem should naturally correlate to the person’s area of expertise. Based on that expertise, they can be ready to build a business that’s designed to tackle a problem that is truly worth solving (e.g. one that allows you to get in front of a megatrend like cloud, big data or the quantified self-movement) and that you are passionate about.
Value Proposition & Product
As noted above — at the center of that value proposition is you. What problems do you understand uniquely well? What can you deliver uniquely well? One of the classic mistakes of building a value proposition is diving headlong into the solution definition phase before really understanding the problem you’re looking to solve. To be clear, it’s often better to have a really well-defined problem statement of a well-formed view of the market opportunity than to be too far down the track on product development, trying to prove you have all the technical answers in the solution. Startups rarely fail on technical challenges.
On the surface, value propositions seem incredibly straightforward, but they are critical to the formulation of a successful startup. Come with the right questions of things you know you’ll need to prove out, and show awareness of your competition, as there’s always competition for mindshare and dollars, no matter how unique your idea is.
The key question here is what segment can you get repeatability in and how will you reach that audience. It’s very unlikely you’ll know that until you test it and validate it repeatedly.
For more information on GTM see some of our workshops and case examples here, including one that I’ve been lucky enough to see breakthrough the billion-dollar valuation mark this year.
Just to get you thinking. Even if you have a huge and attractive Vision, the name of the game here is all about focus in the early days. Counter-intuitively, what you want to do in the early stages is to shrink the market, looking for ways to test just those features that allow the product to be validated, and no more. Here, Minimum Viable Product and Minimum Viable Segment are key strategies that will help you build products that customers need and target narrow slices of markets to allow for repeatable customer wins where the use cases are similar enough. In this way, entrepreneurs can maximize information learned about both their products and target markets. I’ve seen many entrepreneurs fail because they feel they have the answers to defend too big a vision and they try to cover that vision and be all things to all customers, rather than focusing in on a narrow set of potential users who have completely aligned needs in an MVS so your MVP remains on track and headed in the right direction.
Many great consumer businesses like Twitter, Facebook and now Pinterest grew up with questions around their business model long before they succeeded in monetizing it. Expect to have questions. There’s no point trying to monetize an audience until you have one, so go and find out what they value by asking questions before assuming anything. The opportunity for a great business model may come from something you least expect such as the data you’re collecting, not the product you’re selling. And when you can find value that others have not exploited in the field, you may have the potential to be truly disruptive and that’s where you start to make breakthroughs and establish potential leadership as Google did when it offered Apps free versus Microsoft Office (link to an example here).
In technology, it’s not uncommon for entrepreneurs to become so mono-focused on the novelty of product innovation that they forget to innovate equally around their business model. How can you change the game and rewrite the rules on potential competitors with a truly disruptive business model? Some helpful workshops and case studies can be found here.
So in summary, as investors, we’d rather you be self-aware and understand where you need help and what you don’t know. The best entrepreneurs are those who ask the right questions and know how to listen and incorporate many different viewpoints in a way that advances her original vision. I’m sure there are many more areas where entrepreneurs should inquire and explore – since everyone’s path is different. In fact, an entrepreneur that “has all of the answers” is often more in the dark than they may think. I’d love to hear your questions and experiences in the comments below.
3 Examples of Why You Can Afford to Fail
Contributed by Michael Skok
Some of the world’s most significant problems, such as the projected need to generate 4 Quadrillion BTUs of new energy by 2020, will require breakthrough innovation to address. Should we expect to tackle these problems and get it right the first time? If not, how can we encourage learning from failure as opposed to burying it?
Being able to talk about failure – and learn from each other’s experiences – is a good first step. I’ll start the ball rolling by sharing three of my biggest mistakes and learnings as an entrepreneur and CEO for the first twenty-one years of my career.
1. Too Much Emphasis on Fundraising
As an entrepreneur, I was tempted by the availability of capital and found I was good at raising money and so sometimes it came easily.
Easy money isn’t always good money. It can be a mirage.
I used to be proud of the fact I’d raised over $100m. I now think at least some part of that was a mistake. Because at times, fundraising both consumed my time and the money sidetracked our business. It was a mirage.
In the end, the only money that really matters is the money that comes to you from repeatable customers.
VCs have no job if they can’t invest and their motivation may take you off track by convincing you to take more money than you may need. Instead, as an entrepreneur, think carefully before you embark on fundraising. Do you really need the money and for what and when? Or are you just being tempted by the Money Mirage (see the related article published here)?
And even if funding can be easily attained, do you have the discipline to prevent spending ahead of the understanding of what problem you are solving for whom? Or the actual market need? Or hiring too far ahead of the opportunity?
2. Misguided Hiring Focus
With a lot of cash in the bank and a big opportunity to go after, it was exciting to think of hiring the best and the brightest. But one of the greatest mistakes I made was to think about only hiring people who were incredibly talented. I was certainly lucky enough to do that and have gone on to see many of my early hires become great entrepreneurs, CEOs and huge contributors in the industry. But I’m sure they had that in them anyway and the question is how many people does one actually add any value to versus sidetrack, or worse still, burn out along the way?
While many people do this, hiring based specifically on skills doesn’t translate into happy or productive employees. Instead, I’ve learned to ask prospective employees questions like, “What are you passionate about?” It’s important to hire people who will not only be able to do the job but love and be passionate about their jobs for their reasons. This is critical to enduring motivation and organizational success.
Furthermore, if you can create a clear and consistent culture that not only attracts but retains and binds the type of individuals to a common purpose, everyone can work in a harmonious environment to turn your venture into a successful company.
3. Fear of Focus. Lacking a Clear Market Segment Focus
I love painting a big vision. But in the end, it’s meaningless without strong execution. And one of my first mistakes in that regard was jumping into building a product without first thinking about the very specific group of users the product was going to address. Even with the new lean startup methodology of MVP, if you address the entire marketplace, you will likely find that customers have a spectrum of very different needs.
The key is to find an initial segment where there is an identical set of needs that you can address in a repeatable way. This is what I like to refer to as the Minimum Viable Segment (MVS).
Like me, many entrepreneurs fear losing their bigger vision if they focus. However, it often plays a critical role in any venture’s success as you translate ideas into execution.
I’ve made and continue to make so many mistakes, there are hundreds more I could share with you. However, I don’t fear them and see them all as learning opportunities upon which to share and build. So my greatest Startup Secret is that fear of failure, while natural, simply needs inverting.
In my world, there’s room for this, as we want to make a difference in meaningful ways to solve big problems. If there’s room for this learning in your world, tweet the below hashtags, encourage others, and share your mistakes and learning in the comments section. Together we can make an even bigger difference.