Do you have what it takes to build a unicorn?

unicorn

Sean Wise has an eye-opening article on Inc.com This Study of 195 Billion-Dollar Companies Found 6 Counterintuitive Truths About Building a Unicorn, After 15 months, 300 hours and 100 charts, here is what researchers discovered about creating billion-dollar startups.

I’m going to list the six success factors in building a unicorn, adding a few comments of my own about how these findings relate to both mentors and founders. What is not addressed in the article, which I think is important for the vast majority of entrepreneurs who don’t build unicorn companies, is are these same factors key to creating a valuable company, just not one valued at a billion dollars or more?

Ali Tamaseb, a founder turned venture capitalist at Data Collective VC, gathered data on 65 key factors from all 195 unicorn startups based in the U.S. His work included all startups since 2005 that have publicly reached a valuation of more than $1 billion. The least surprising finding is that almost 60 percent of billion-dollar startups were created by serial entrepreneurs. In fact, he found that 70 percent of billion-dollar founders were “superfounders,” or founders with at least one previous exit of more than $50 million.

1. Industry knowledge isn’t required.

Certainly this is contrary to the received wisdom. But just as interesting to us mentors is that 80% of founding CEOs in healthcare and pharma had direct experience in their target market. Mentoring groups often reflexively bring in additional mentors with direct industry experience once a startup emerges from the very initial stages of company formation. From the study’s findings, this is only necessary in two verticals, which are closely related, healthcare and pharma. Unfortunately, neither Sean Wise nor the researchers speculate on what it is about these two verticals that requires domain expertise. My guess is that both are heavily regulated industries – see my post about the fourth risk – and that domain expertise is needed to navigate the complexities of government regulation. You don’t learn that in business school nor by doing a startup in an unrelated vertical.

2. Technical CEOs aren’t necessarily more successful.

I heard a great quote from an MIT VMS mentor the other day: “It’s not the technology, its the psychology.” Meaning that the customer and their psychology is what is decisive about a venture’s success, not the novelty or even value of the technology. This does not fly well at MIT, otherwise known as the Massachusetts Institute of Technology. Virtually every founding team is either all engineers or engineering dominated. So again, this finding is very helpful to mentors as we help founders build their team. This finding that successful tech founders vs. business founders are a 50/50 split was also found to be true of the author’s VC fund, Ryerson Futures.

3. You don’t need to be capitally efficient.

I was trained by the many VCs involved in my four VC-backed startups to “stretch the dollar” – they demanded capital efficiency, but only to a degree. As one vc told me, “Steve you’re going to waste a million dollars in this venture, but I don’t know which million, and that’s ok.”  According to the study less than 45 percent of unicorns were capital efficient. This certainly jibes with my reading about vc-backed startups – vcs are willing to put hundreds of millions into companies they believe will ultimately scale and go IPO, like Uber. This doesn’t mean that mentors should tell founders to be profligate in their spending, but only reinforces the “Nail it, then scale it” maxim. The function of external capital is growth and scaling, not creating product/market fit.” So I would say you need to be capital efficient until you reach product/market fit, after which you can focus on adding fuel to your rocket to gain escape velocity.

4. It’s (usually) not OK to be a copycat.

It’s no surprise that more than 60 percent of unicorns had a very high level of differentiation compared to incumbent firms. The worst strategy is copying what another startup is doing, especially if that startup is well funded. As a mentor I do preach differentiation and I believe that is the received wisdom.

5. You don’t have to be first to market.

Being first to market was a popular catch phrase and strategy in the dot com boom. Since that time few people I know see it as a formula for success. However, what the study found is that the best markets for billion-dollar startups already have a number of large incumbents, and often the startup uses the inefficiencies of these incumbents as a point of disruption. This is really important! What it tells me is that the size of the market opportunity is very important, but being first to  that large market is not. In fact this finding jibes with my belief in the maxim “No competition, no market.” Founders need to concentrate on large market and should not be discouraged by the presence of large incumbents.

6. You don’t need to be part of an accelerator to be successful.

The most dominant success factor in billion dollar market cap companies is that 70 percent of the founders were co-called “super-founders” – founders who with at least one previous exit of more than $50 million. This isn’t surprising. So if you aren’t a super-founder you may well want to apply to an accelerator. See my post Should you join an incubator or accelerator?

This article and the study upon which it is based provides very useful information for both founders and those that mentor them, regardless of whether the intent of the founder is to build a billion dollar market cap company or not.

 

Should you join an incubator or accelerator?

y combinagtor.jpg

We had a recent mentor session at MIT VMS where the founder was dead set on joining an accelerator for the summer. We spent most of our 90-minute session dissuading him from that decision.

I see incubators as for very early stage companies where the founders just have an idea and the goal of the incubator is to hatch that idea – turn it into a demo, prototype or even a product. Incubators provide peer-to-peer support, mentoring, outside speakers and other related services, often without charge, as is the case with academic incubators.

Accelerators help founders increase their rate of growth in building their business. Often these accelerators, such as Y Combinator, purchase 6 or 7 percent equity for about $100,000 to $150,000. If you’ve gotten past the idea validation stage, perhaps graduated from an incubator, you may want to join an accelerator like MIT’s Delta V (which has no requirement that founders sell their equity).

Often getting admitted to an incubator or an accelerator is very competitive. As I recall it’s harder to get into Y-Combinator than either Stanford or Harvard. Other things an organization like Y-Combinator or TechStars provide are connections and assistance in becoming investor-ready. The culmination of participation in many of these organizations is a demo day, attended by regional investors. The goal is to help founders get a seed round or Series A investment.

The brand power of Y-Combinator and TechStars is such that they lend a stamp of credibility to startups and are very well connected with the investment community.

So why were we trying to dissuade our mentee from spending the summer at an incubator or accelerator while his team mates worked on the business, which by the way, was outside the U.S. The answer was simple: the team had a well-defined target market, a well thought out business model, experience as customers in their market, and were on the cusp of running a pilot with a major customer this spring. So our argument was simple: why spend the summer with other founders who more than likely were not nearly as far along the business growth curve and perhaps also end up selling their equity at a bargain price. If he worked all summer to close customers what I call ROTI would be significant. ROTI is Return on Time Invested. Time is the major asset of founders, how they spend it is existential to their ventures. Yet it seemed that peer pressure had convinced this founder he needed to spend weeks learning a standardized curriculum when he could spend those weeks co-located with his team mates, pursuing leads and closing customers. And by the way, learning by doing.

Incubators and accelerators can add a lot of value and many have a proven track record of generating winners. But founders need to think long and hard about fit. Not product market fit, but the fit between their venture and its current status, and the model of value added by the incubator or accelerator they plan to apply to. If you see a good fit, but all means go for it, but if you have progressed far beyond the typical venture in an incubator or accelerator spending time with them may actually de-accelerate your venture.

There is one other value accelerators provide: that’s access to their alumni. In the case of Y Combinator that’s a community of over 4,000 founders. The value of those potential connections is hard to measure, of course. My rule of thumb for founders is that the earlier their stage of development the more value an incubator or accelerator can provide.

Unlike venture capitalists, who are very opaque about how they make decisions, whose value add can be very hard to determine, and whose investments vary all over the map, you can find out a lot about accelerators like Y Combinator by visiting their web site, reading their blog, and studying their application. The only cost to apply is virtually always zero – just your time. At the least, no matter where you are on the business development curve, there are valuable resources on these sites. Check out the Y Combinator Startup Library for example.

We may not know if our mentee takes our advice and works on this startup rather than spends the summer in an accelerator, but at the least we hope that we have catalyzed his decision process by taking a strong position that was contrary to his. Mentors often play the role of Devil’s Advocate, which can help founder teams who can sometimes be subject to group think or peer pressure.

Everybody’s talking about gender, but no one’s talking about class

aston martin

As the father of two daughters, I’m glad to see greatly increased awareness of discrimination against women in the startup world and some progress in leveling the playing field. A lot of focus is on the fact that there are far fewer female founders and it is far harder for those founders to raise capital than it should be. Research is demonstrating that more diverse teams make better decisions than the typical mono-cultures found in the startup world of young white males as founders and middle-aged white males as investors.

But what I haven’t seen addressed, and frankly I have to admit to not thinking too much about, is the very small number of founders who come from lower socio-economic levels. It wasn’t until the end of The Boston Globe article An upper-class mindset doesn’t make you classy that that the reasons for this surfaced:

…,the predominant US upper-class view of rules is that they’re made to be broken. Just look at popular books about success, like Marcus Buckingham and Curt Coffman’s “First, Break All the Rules” and Angela Copeland’s “Breaking the Rules & Getting the Job.” If we want to succeed, these books tell us, we’ll need to cast aside established social norms and chart our own path. This is sage advice for people who have little threat, but clearly bad advice for the working class.

Though they tend to shun rules, the relative looseness of the upper class offers several strengths: they tend to be much more creative, entrepreneurial, and open-minded. The working class, meanwhile, struggle with diversity: they are more suspicious of people who are different from themselves, who appear to threaten their sense of social order.

In today’s digital economy, several attributes of cultural looseness reinforce upper-class advantages. Whereas those from tight groups understandably tend to view change as a threat, loose communities see mainly opportunity. They have the cultural reflexes — socialized from a very early age — to adapt to disruptive changes, and the autonomy and independence to chart their own course.

Unfortunately the article’s author, Michele Gelfand, a professor at the University of Maryland, and the author of “Rule Makers, Rule Breakers: How Tight and Loose Cultures Wire the World”  and Jesse Harrington, a research associate at Fors Marsh Group, don’t offer any solutions to this problem.

Their conclusion, We must recognize that it’s culture that we need to reckon with, not just our bank accounts is not actionable information

However, one of my VMS colleagues is a mentor at an accelerator called Smarter in the City. Their mission is to bring diversity to Boston’s tech landscape:

Our mission is to diversify Boston’s startup sector by providing support and resources for local minority-run ventures. Through our accelerator program, we draw investment to communities that have traditionally been left out of the high-tech startup scene.

Check out the stats on minorities in Boston on their home page, they are eye opening!

9.2% of tech industry employees are Latino and African American

0.2% of venture funding goes to black women

20% of firms are owned by minorities

$8 average net worth of African-Americans in Boston

Supporting incubators and accelerators in the lower socio-economic areas of high tech-centric cities like Boston is one way to attack the lack of diversity. But I think this problem needs to be addressed earlier in lives of potential founders. Why aren’t there classes in entrepreneurship in the Boston public schools? Clubs for budding student entrepreneurs? Business plan competitions in high schools? In other words, young people across the economic spectrum need support, training, and encouragement to explore creating their own businesses. Unfortunately our public schools are still stuck in the 19th century model of churning out compliant workers for industries’ assembly lines. But until there’s real change in the antediluvian public education system, investors who have made a lot of money betting on entrepreneurs who look like them should direct some of their massive profits to support organizations like Smarter in the City. I don’t see a single VC firm or angel group listed amongst the sponsors of Smarter in the City. Though kudos go to Microsoft as the sole tech sponsor.

 

 

 

 

Startup companies are archaic!

Libin

One of the major issues I’ve seen in mentoring over the past decade is the discomfort, pain and even confusion great engineers go through when they enter the dreaded “time to start a company” phase. As a serial entrepreneur, my product sweet spot was building the company. I enjoyed the entire process, from idea to idea validation, to forming a business entity with a partner, to recruiting. The thing I didn’t like and wasn’t good at was finance and I always had a CFO to handle that. But engineers are just the opposite. Engineers like building things, but things don’t include companies. It’s amazing to me how many teams form and never have a founder’s agreement, only to run into problems when they actually have to create a business entity. So how do engineers get their products to market without going through the pain, hassle, and major distraction of not just forming a company, but then running it?

Scott Kirsner, The Boston Globe correspondent who writes the Innovation Economy column weekly, has an excellent article entitled This former venture capitalist is reinventing the way a company works that focuses in on one former founder’s response to this problem.

Phil Libin, founder of Evernote and a former venture capitalist thinks he has the answer.

“The whole venture capital model is stupid,” Libin says. But “the stupidest thing,” he continues, “is the idea of a company. Companies are increasingly archaic, as a unit of organization in the world. What is it about companies that makes the most sense?”

People who are smart and skilled at creating products, Libin says, shouldn’t have to “raise money, have human resources drama, and run a small little fragile company.” Instead, they should “use their superpower to build a great product,” while having ownership in what it becomes

Libin has founded an alternative to creating companies for entrepreneurs. All Turtles. (All Turtles? Yet more proof that all the good names are taken!) I found the AI generated painting on their home page rather disturbing – not a great way to attract people to your venture. But don’t let that stop you!

I’m have a passing familiarity with two Boston-based attempts at solving this problem:
Paul English’s Blade Network and Joe Chung’s Redstar. I’ve met both founders and they are super smart, very experienced entrepreneurs. I wonder if Libdin has talked with them. I also worked in one of the region’s first incubators, HyperVest.  All Turtles is not an incubator nor an accelerator. The former incubates startups, the latter accelerates the progress as a company. The product of All Turtles is products, not companies.

What differentiates All Turtles from other attempts at taking ideas to market without the hassle of creating a company as the vehicle is that AI is the foundational technology. I can’t remember if this is an original idea or I read it some place, but I believe that AI will be like electricity – it will be everywhere, in everything, but rarely visible to consumers.  The competition for great AI developers is intense – they are more options than just about any other tech niche.

But Libdin is really aggressive.

Startup creation and venture capital funding, in Libin’s view, are too focused on “the 50 miles around Stanford University,” in the heart of Silicon Valley. All Turtles has already set up operations in San Francisco, Tokyo, and Paris. Libin says Mexico City is next, and his goal is to be active in 20 of the top 50 cities worldwide in the firm’s first decade. That is largely a strategy to tap markets where there is technology, design, and product development talent that are less competitive than Boston, New York, or the Bay Area.

While Libin seems to disdain VC money he’s accepted a $20 million investment from General Catalyst (a great name, by the way).

“Phil has a brilliant mind and has been able to attract incredible talent from all over the world,” says Niko Bonatsos, a managing director at General Catalyst. And Libin is “spot-on to notice that not every amazing product thinker loves or cares enough to do the company-building part of the equation.”

Depending on the value-added and T’s and C’s of working with All Turtles it may well attract great engineers and scientists, but I’m not optimistic, as it’s just one in a series of series of attempts to create a Ford-like assembly line for technology concepts that could turn into the next big thing.

My best guess is that All Turtles will go the way of the Blade Network and end up creating a company or two and putting all their resources there. But time will tell. In the meantime there’s at least one viable alternative for creators of great products who want to avoid the hassle of creating a company, while participating in the wealth a truly great product can generate. Check it out if you aren’t afraid of see the disturbing image on the home page.

Is the startup ecosystem getting overcrowded?

crowd

I’ve been a fan of startups for decades, first as a serial entrepreneur and now as a mentor. But I’m beginning to wonder if the size of the startup ecosystem in Boston/Cambridge has grown out of proportion to its resources.

Three recent incidents caused me to rethink my previous attitude that “the more the merrier” when it came to startups.

The first was learning that MassChallenge/Boston had 2,500 applicants for its 128 slots in their incubator! At 5.12% that makes MassChallenge harder to get into than Harvard or Stanford! Think of all the time and resources that went into those 2372 applications that were rejected.

I’d love to see an analysis of MassChallenge’s applicant pool. But irregardless I wonder what will become of those that failed to get in. Like a university, MassChallenge/Boston admits one class per year, so waiting a year to try again may be impractical for most founders.

Another incident that triggered my feeling that entrepreneurship has gotten too big was a mentoring session with a venture that had an inordinate number of mentors from a wide variety of sources, including MassChallenge. But they had no idea what to do, as their first idea didn’t prove to be viable. I asked them the question: “How many customers have you talked with?” The answer was less than the number of mentors they had!

The third incident was my involvement with the MIT Sandbox this summer. I was really looking forward to it, as Sandbox has adopted the VMS team mentoring model and I had a great partner last year who I learned a lot from and some very exciting ventures to work with. Well first I lost my partner for reasons that weren’t given to me and she was replaced by someone with no mentoring experience. That I could handle, though given a choice in the matter I would have preferred a seasoned mentor I could learn from. But what really troubled me was that out of five ventures we was assigned all but one dropped out!

I recently heard someone say that kids no longer dream of being rockstars, they dream of being venture stars like Mark Zuckerberg or Elon Musk!

As a mentor I’m at the small end of the funnel. It’s not my job to screen ventures or try to separate potential winners from losers. But I’m concerned as mentors are a finite resource. There are only so many of use who have startup experience and can afford to volunteer for the equivalent of a full day per month, as MIT VMS requires.

I don’t have the answer and many people might even disagree that it is even a problem. But as Shakespeare wrote, “For as a surfeit of the sweetest things, the deepest loathing to the stomach brings…”

Perhaps MIT should sponsor workshops on what it takes to be a founder and start a venture. Hearing first-hand from MIT ventures that successfully launched about all the blood, sweat, and tears invested might cause some would-be founders to realize they really weren’t cut out to start and run a venture.

Until then I will do my best to help founders to succeed and hope that my assignments are ventures that know what they are getting in for, how mentoring can help them, and want to be mentored. Because seeing a mentored venture build a sustainable business is the real pay-off for us mentors.

 

Virtual mentoring is key to scaling

vr

Mentoring is almost always thought of as a process that’s conducted face-face-face – f2f. In fact The MIT Venture Mentoring Service has a strict policy against virtual mentoring, with the occasional exception made for a founder who is traveling in Japan or otherwise indisposed. And then participation is always a via conference call, never a video conference. As a result the founders and mentors in the room tend to totally forget about the founder on the conference line. Likewise it’s very rare to get much contribution from the founder at the other end of the phone line.

Despite that I’ve long been interested in virtual mentoring, with the caveat that it means using WebX, Zoom or some other video conferencing platform so the remote founder can not just hear but also see who they are interacting with. And the mentors can see the founder(s) who only has a virtual presence.

I’ve done several virtual mentoring sessions through The MIT Sandbox Fund, which though focused on f2f mentoring is more flexible about virtual mentoring. I’m a big fan of Y-Combinator, so I tend to read any article featuring YC. Thus the article Y Combinator will accept 10,000 startups to prove there’s nothing magical about Silicon Valley by Michael J. Coren on Quartz captured my attention. As did the mildly snarky sub-title, Who needs the Valley [?].

Up to now YC has only turned out about 300 companies a year through its bi-annual program in Mountain View, California. Most of what it does remains analog and manual: mentoring in classrooms, weekly dinners, and a program requiring everyone to live in California for months at a time.

But YC is now attempting to teach thousands of would-be entrepreneurs the ropes. The first cohort was made up of 3,000 companies from around the world. Obviously their traditional f2 model could never scale by a factor of ten. Thus ….participants are given a chance to “replicate much of the YC experience” through a virtual program with mentors, collaboration with peers and video lectures. This I believe is the largest virtual mentoring program ever! Unlike MIT VMS, which offers mentoring sessions in an on-demand model, Startup School holds group mentoring sessions using Google Hangouts. Note “group sessions”, probably a necessity to mentor 3,000 ventures, and a model I’ve been participated in with both MIT Sandbox and MIT’s Post-Doctoral Fellows Association. In both cases I’ve found the sessions far more difficult to manage than the typical team mentoring sessions of both VMS and Sandbox. While the number of participants grows linearly, the number of founder-mentor combinations grows exponentially. In group I felt that a lot more structure was needed to manage this plethora of founder-mentor connections.

YC provides online advice to startups in a ratio of mentors to ventures of 30:1 and YC even plans to increase this ratio, which will further stimulate the combinatorial explosion of mentor to venture relationships.

YC is pioneering not only virtual mentoring but group mentoring, both on a massive scale. I will be very interested to see how well these programs work and how YC may fine tune their mentoring of ventures in future cohorts.

In the meantime I’ve got a Google alert for “virtual mentoring” which I hope will snare news of interest to me and anyone interested in mentoring that goes far beyond the traditional singleton, one-to-one mentoring. VMS pioneered the practice of team mentoring. And it has been highly successful since its founding in 2000. My guess is that no matter how successful virtual mentoring sessions run by YC prove to be, f2f, mentor to founder mentoring will remain the standard model of mentoring – whether that be traditional career mentoring or the mentoring of entrepreneurs, my special interest. But if I were to start my own mentoring service I would bake in virtual mentoring from the get go, as I see it as the only way to scale and scaling is a necessity if you want to get beyond a boutique service. Perhaps in the not too distant future mentoring will take place in virtual reality. And when it does, sign me up!

 

Mentorship is key to an Indian accelerator

indian

My Google alert for “mentoring entrepreneurs” is not restricted to news from the U.S. so I occasionally gets stories from India which are quite interesting. The article from Yourstory starts with a great quote from Benjamin Disraeli, British statesman:

The greatest good you can do for another is not just to share your riches but to reveal to him his own.

What a fantastic motto for mentorship!

There are over 140 accelerators and incubators in India, ranked third after China and the U.S. NetApp, a global data storage and management giant, has its own accelerator, aptly named NetApp Excellerator.

If I have to pick one thing that sets aside NetApp’s accelerator programme from the rest, it is the quality of the mentors and its world-class mentorship,” says Ajeya Motaganahalli, Sr. Director and leader for NetApp Startup Accelerator. “With NetApp’s rich history of innovation and expertise in data management, we are providing startups working in this area with the right mentorship – both technical and business.

A mentor is not coming with any biases towards the business and has an outside-in perspective. Parag Deshmukh, Archsaber mentor. This is congruent with a guiding principle of The MIT Venture Mentoring ServiceParticipants are assured impartial and unbiased advice by a strict code of ethics. And of course congruent with my favorite
Alan Kay quote: Perspective is worth 80 IQ points. We all have our biases, but just like journalists we need to both be aware of those biases and endeavor not to let those biases interfere with our mentoring process.

Mentoring is an educational process and it is bi-directional, mentees learn from mentors but mentors also learn from their mentees. The learning was not one-sided. The mentors say they also in turn, learnt from the startups. “I learnt a lot in terms of the workflows in healthcare and the various insights they provide through their AI platform said Priya Sehgal, Sigtuple mentor. I’ve tended to not sign up for mentoring sessions for startups in medical devices and bioengineering, as I have zero education, experience, or expertise in those areas. However, while VMS offers its mentors a signup process, The MIT Sandbox Innovation Fund assigns mentor teams – no choices! But as a result of being assigned to a mentor teams for both medical devices and bioengineering I’ve learned a fair amount about those markets and now pay much more attention to developments in those fields.

Finally the question is asked, how is mentoring a business different than mentoring founders? Calling a consultant to evaluate a business and him putting in an elaborate report on the changes that need to be made to make the business successful and handing it over to founders for executing it, is very different from going along with the founders as a team on the path to realisation of their goal,” says Parag Deshmukh.

There’s much more to the article if you are interested in the mentoring process, which seems very similar to mentoring in the U.S. In fact if you go to the home page of Yourstory it may take you a while to realize it’s an Indian site, so similar are the stories to tech focused web news sites in the U.S. Entrepreneurship is truly a global phenomenon and I’m glad to see that mentorship is as well.

Incubators, accelerators, and studios. What’s the difference?

incubator

Just as we have sorted out the differencea between incubators, accelerators, and co-working spaces, now comes yet another term related to very early stage ventures:
the startup studio.

Co-working spaces, of which by far the best known and most successful is a startup itself, WeWork. WeWork provides a desk, office suite or now even an entire corporate HQ (headquarters). They create an environment, what they call space as an experience which aims to foster connections and interactions amongst the many startups

Incubators and accelerators are run by investors in very early stage companies for founders who have little more than an idea. The goal is to provide them with all the typical co-working environments that increase productivity, innovation, and collaboration. Back in the last century if you were just starting a company and didn’t have the funds to rent a typical office – say 2,500 square feet – outfit it with desks, chairs and office equipment like photocopiers, computers, and a phone system you rented a fully furnished office from a firm like Regus, which were called executive offices. When we started Course Technology we rented an executive office for the two of us before we raised our series A from MIT and Greylock. There was another startup in the same executive office building, they were called Golf Technology. I used to joke that we should merge, forming a company to be called Golf Course Technology.

Regus is still around, as are much newer and hipper co-working spaces, like Workbar. What’s interesting is that both co-working companies both tout that they have meeting spaces in addition to desks and offices. This is a very smart idea, as they are capturing very, very early stage startups who would normally have to have meetings in places like Pandora and Starbucks. And access to conference rooms is a great feature of co-working spaces because even early stage ventures should be having meetings with prospective hires and partners, neither of which you’d want to have in a public place like Starbucks or Pandora.

Here’s what Workbar provides to startups:

  • A private team space with dedicated desks, ergonomic furniture and white boards
  • 24/7 access to any Workbar location in Massachusetts
  • Access to Workbar meeting rooms, phone booths and common spaces
  • Fast and secure wifi
  • Private storage space and mail services
  • Printer services and office supplies
  • Unlimited organic coffee and snacks

Incubators provide all the services of a co-working space, plus access to mentors and usually very small amounts of capital. Incubators run by early stage investors usually take a small slice of equity, usually 6% for an equally small investment, in the range of $100,000. The goal of an incubator is idea validation and customer discovery – going from just an idea to at least a demo if not a prototype or MVP (Minimum Viable Product).

Ventures that are further along in the development process and have a product, likely an MVP, may go into an accelerator. Years ago my partner and I had a handful of companies we ourselves had germinated in The Mill, the legendary building where Digital Equipment Corporation, commonly called DEC in obedience to Zipf’s law, was started. Today no venture would be named digital equipment corporation – it’s a string of generic terms, a nightmare for a digital marketeer using the web, as a Google search for the company would result in about 5,120,000 links! A nightmare for SEO (Search Engine Optimization) or SEM (Search Engine Marketing). I started one of these years startup studios with a partner well before anyone used the term incubator or accelerator, it was called HyperVest. We had venture capital funding from Morningside, but despite what we thought were strong concepts, we didn’t succeed into turning any of my partner’s many ideas into companies. As usual for me, I was way too early!

Now we have a new concept for startups to ponder: the startup studio. A startup studio is a company that aims to start an entire series of companies.This is actually an old idea getting regenerated today.  Idealab, founded in 1996 by Bill Gross, was one of the first and most well-known. The concept of the startup studio is to test many ideas at once, learning from failures and spinning out the best of the rest into standalone companies. Of course Idealab now calls itself an technology incubator!

Now according to Techcrunch not only are startup studios becoming more prevalent there’s a new type of startup studio. The article FCTRY wants to be a new type of startup studio is about a different model from the foundry model:

where studios come up with their own ideas in conjunction with smart serial entrepreneurs and build them from scratch in house. Rather, FCTRY will help existing early-stage and mid-stage companies with their creative strategy, processes and culture

If you are confused by now, you’re not alone. But FCTRY posits a problem to which it offers a solution. Their leader, Jules Ehrhardt doesn’t think that money is always the best way to help startups grow.

“The typical advisory system is broken,” said Ehrhardt. “Usually the advisory structure comes from a one to five percent equity pool and usually ends up in disappointment, where the advisor was supposed to make introductions or provide actionable insight that never comes through.”

FCTRY goes beyond the hard offerings like office space, equipment, conference rooms, and WiFi to the soft side: mission, culture, and corporate frameworks. Instead of advisors, FCTRY will provide it own coterie of experts in their respective fields, many coming from creative agencies, others from fields of expertise, such as machine learning, design, engineering, etc. This model is very close to my former colleague Andreas Randow’s new venture, ProperOrange.

Definition:Proper Orange is comprised of a dozen business & technology experts who deliver company building as a service (CBaaS). Each with years of C-level experience, the company’s principals never lost their passion for doing the work or the desire to delve into the nitty-gritty.

Now is the best time ever to start a company. The barriers to entry are orders of magnitude lower than in the first wave of highly successful Internet companies like Google, Facebook, and Amazon roughly 20 years ago. Access to capital, access to business services, and access to expert advisors has never been more widespread. You don’t even have to go to Silicon Valley!

However, as an entrepreneur you will face a new challenge, one that I never had the opportunity to face: choosing amongst all the business service models – co-working spaces, incubators, accelerators, and studios. As a mentor my advice would be to take your raw idea to a co-working space where you can begin the customer discovery process at minimal cost. Once you have climbed up the company development curve and have created value by validating your idea, and if you have a truly hotshot team, start applying to the best of the incubators, such as Y-Combinator or TechStars. They have a track record of building very successful companies and can offer something few other business service entities have: a large network of successful alumni whom they very cleverly leverage to nurture their startups. Choosing where to go with your embryonic venture will just be one of the first of the thousands of decisions that will make up a successful company.

The top reasons startups fail – redux

acceleratorWhy startups fail seems to be a perennially popular subject both on the web and judging by page views, on my blog.  And with good reason – most startups do fail. But the reasons vary, and not everyone agrees.

If you are in an accelerator or planning on entering one you might want to pay particular attention to the article The Top 4 Reasons Startups Fail, According to 14 International Accelerators,The only mystery about startup failure is why founders keep making the same mistakes. This article by Michael Houlihan & Bonnie Harvey is based on Entrepreneur magazine’s December, 2017 study of 14 international accelerators.

While I’m impressed with the results of the study, I wish they had not introduced two separate variables: being in an accelerator and being in multiple countries. Why not just being in a U.S. accelerator instead of confusing the data by adding foreign accelerators to the survey, there certainly are more than 14 accelerators even in just the Boston area. Well that being said, the results are worth reviewing, so I recommend you read the full article, even if you aren’t in an accelerator.

Here are their top four reasons, which per my usual practice have my comments appended in place of their commentary.

Inadequate Testing

Testing of what you may say? At least I did. But when you read it you’ll see that what is meant is testing of hypotheses about the business. Too many startups don’t practice the scientific method, but rather proceed on assumptions. Failure to test and validate hypotheses and assumptions and it’s corollary premature scaling, ramping up the company before achieving product market fit.

I’ve certainly been guilty of this and it can happen when you have too much venture capital money rather than too little. But I would be more specific as some respondents were, and say poor customer discovery is the major reason for failure. Which is another way of saying the company’s hypothesis about who their customer was and why they would buy the product were just plain wrong.

Team Incompatibility

I’m starting to see more and more of this at MIT where teams are built in an academic setting then attempt to commercialize their product while skipping the all important step of writing a founder’s agreement and making sure the intentions of the founders are aligned. I remember founder alignment being something that
Bill Warner, founder of Avid Technology, was very much focused on, and for good reason. He openly stated that while some people might consider his second startup, Wildfire, to be a success based on its significant sales price, he did not. Lack of alignment amongst the founders resulted in his founding vision becoming lost along the way. If this can happen to a wildly successful founder on his second try it can certainly happen to you!

Lack of Persistence

This is a tricky one, as is pointed out by one of the survey’s respondents. You can give up too early on a viable idea or you can persist too long with a failing one. Perhaps this is why I’m perturbed by the constant use of the term pivot in today’s startup culture. I’d like to hear the word persist at least as often. Again it’s back to running your company by the scientific method: constantly running experiments to test your hypotheses, gathering and analyzing data. But you have to be careful, just as any scientist has to be, to gather enough of the right kind of data. Otherwise your results will not be valid. The other scientific parameter you must achieve is reliability, meaning if you run the same experiment multiple times you will come to the same conclusion. Experimental results must both be valid and reliable.

Everything Else

I’d say it’s cheating to consider this as a fourth top reason. And frankly I don’t find the hodgepodge of other respondent reasons very compelling. The one I do find common amongst engineer-driven companies is lack of respect for sales and marketing. Too much of a build it and they will come ethos. And far too little respect for the suits who actually go out and convince customers to buy their product. There’s even a form for entrepreneurs, and won’t embarrass the institution by naming them, that asks all the right questions except the most important one: how will you acquire customers? 

And, of course the one that should be obvious, building something that not enough people want to build a business. I’ve been guilty of that one myself. I was so enamored of the theory that the best product was built by an entrepreneur building a product to solve his own problem that I assumed that lots of people had the same problem I did: keeping track of new releases from the hundreds of musicians, actors, directors, authors, and other creatives. Nope, there were a few, but far from a sufficient number to make us feel justified in persisting.

 

 

Partnering – how to keep the band together

 

heartbreakers

I was reading obits for Tom Petty who died this week and came across a great quote from Tom: It’s easier to form a band than keep it together. Having worked with dozens of bands as a sound engineer in my 20’s ,I saw a thin slice of band life, basically how bands get along during their sound checks. Aerosmith, for example, were incredibly professional. They were extremely particular about their drum sound. In live sound reinforcement the hardest instruments to mike up are acoustic: drums, acoustic guitars and the human voice. Steve Tyler, the lead singer was a former drummer so he would sit in the drum chair while Joey Kramer, Aerosmith’s drummer supervised the sound mix. Then Joey would take over the drums and Steve would listen and perhaps ask for some slight adjustments. Only when they were both satisfied did the full band start their sound check. Other bands, whose names have been omitted to product the guilty, spent their time bickering over set lists, the relative loudness of their instruments, and how the stage should be setup.

So what does this all have to do with founders? Well first of all, musicians who form bands are founders! And they are certainly entrepreneurs as well. And like all talented people they have outsize skills and personalities to match. So much of what I learned about dealing with big egos in the music business helped me with big egos in the high tech world.

I often see startups racing to set up partnerships without thinking through the key strategic and tactical issues involved in partnering. So here’s a few principles to keep in mind.

  • It’s not a real partnership if money doesn’t change hands. In my first startup I tried hard to get IBM as a strategic partner, as at that time they dominated the personal computer market. But all I managed to get done was to have an IBM executive write the forward to one of our texts on how to use a spreadsheet in business. If your partnership is just about co-marketing and not helping the partners actually make money it’s unlikely your “partnership” will last too long or help your venture succeed. The pressure to generate revenue for both startups and establish companies is too strong.
  • Startups can’t help startups. There’s no doubt that incubators and accelerators like Y-Combinator and TechStars have proven that their networks of successful startups can help each other. But if you aren’t a member of one of these powerful keiretsu then it’s unlikely your fellow startup venture can help you make money. Why? Because they are too busy trying to stay afloat themselves. And partnering with another startup can end up being a major distraction for both parties. So while all rules have exceptions, focus on established companies that have capital to spend and credibility to share.
  • Have a company champion. The bigger your partner the more you need a single individual as contact point. But more importantly that single individual needs to believe in your company and be personally motivated to help you succeed. At Course Technology, an educational technology publishing company, we found that the directors of educational marketing at companies like Lotus Development were are obvious product champions. The champions will help you navigate the organization, get in front of decision makers, and get corporate attention – all very hard to do on your own.
  • Figure out what’s in it for them.  This is my basic rule of all business relationships, it’s not just applicable to partnerships. But without understanding what benefits will accrue to your partner you won’t be able to craft a mutually beneficial relationship. We always created partner presentations that closed with two slides: Financial Benefits and Strategic Benefits. The former is obvious, how we would help the partner generate more revenue. But strategic benefits may be more important for a big company. Your efforts may hardly move their revenue dial, but if they can learn something that they don’t know that they need to know that can be very valuable to them. For example, if you are a company that is using AI to improve some aspect of finance you may be an attractive partner for banks, private equity, and other financial players who may lack any in-house AI expertise, but who realize this is the hot trend today and you can help them get up to speed.
  • Set measurable goals. You need to have a written document that sets up what each party will be responsible for – who does what, when – and most importantly, how results will be measured. It is critical to manage expectations and the best way to do that is to agree on goals and metrics from the get go.
  • Communicate early and often – in writing. There are so many great communications tools today that there is no excuse for miscommunications. But if you have a meeting or phone call with a partner, make sure you follow up immediately with a written summary that includes todo’s for both parties. It’s far too easy to get into “I thought you said… but I thought you said!” type disagreements if you don’t document what you might consider casual conversations. There’s no such thing when it comes to partnering.
  • Keep Tom Petty in mind. The hard work in a partnership is sustaining it. If you don’t have the resources to keep up a partnership you are better off not entering into it. Partnerships take time and effort to provide fruit. Often big companies move much more slowly than startups. So you need to be patient, but persistent. Don’t over run your headlights. And make sure you are responsive to their needs.
  • Date before you marry. Partnering can be a great path to being acquired, as it gives you a opportunity for a test drive. The most important factor in making an acquisition successful is corporate culture and a partnering test drive will enable you to learn if your partner’s corporate culture is compatible with your’s. Likewise it gives the potential acquirer the time to truly understand your value and how your venture will fit in to their culture successfully.

Last night I watched the two-part series on Netflix, History of the Eagles. It’s a great documentary that will show you just how hard it is to keep a band together. And there are lessons to be learned about how to keep your startup together, as well as how to keep a partnership together. Even if you are not a fan of their music it is still worth watching to see two powerful founder/entrepreneurs in action.