Death by premature marketing

graveyard

There used to be a saying back in the day that “the best way to kill a bad product was to market the hell out of it.” Perhaps related to the Ulysses S. Grant quote, “The best way to get rid of a bad law is to enforce it.”

The Forbes article For Even Hot Startups Premature Marketing Can Mean Premature Death by Derek Lidow is a case study of how way too much VC money enabled companies like Munchery to overrun their headlights by marketing their services before they were fully baked.

I’ve referred previously to the firm CB Insights and how they analyzed 100 defunct startups to identify the top 20 reasons they failed. As noted, “no market need” was number one. That jibes with the findings of NSF (The National Science Foundation) that the number one reason post-docs’s startups failed was because they built products no one needed. The number two CB Insights’ reason was “ran out of cash.” Spending millions on marketing to try to buy marketshare and catch the elusive “first mover advantage” is a fast way to run out of cash.

Munchery raised $120 million in equity financing and more than $11 million in venture debt financing before declaring bankruptcy. In between they pivoted so often the employees all got motion sickness.

Mr. Lidow outlines what he sees are the three distinct stages that almost every successful startup must navigate: customer validation, operational validation and scale-up. Only in the scale-up stage does marketing come seriously into play. I’ll add my comments to his three stages. However, before I do that I should point out that he skips the all-important first stage: customer discovery. Before you can validate your customer you must discover them through dozens of interviews based on your initial hypotheses. Pivoting during customer discovery costs nothing! And as you work your way through various customer types and segments you will be setting yourself up to later validate your business proposition with your target customer. Skip this stage at your peril!

Customer validation Here’s where having a robust prototype can pay off as you wear out shoe leather going back to those customers you identified during the customer discovery phase to ascertain if your solution fits with the problem you discovered that your target customers all share. As Mr. Lidow says, “Stage one ends when you can describe, with a high degree of certainty, who will buy your product or service and how you will deliver it.” Though I believe “how you deliver it” better fits in the operational validation phase. Thus I’d change this to “… who will buy your product or service and why.”

Operational validation. Too much startup literature is focused on product and not enough on process. But if you do not build the proper processes: financial, distribution. customer service, technical infrastructure and administration you will fail to scale. The canonical example of this is Friendster, inventor of the social network. Friendster failed as it never built enough infrastructure to prevent its site from crashing due to the unforeseen tsunami of users. Like changing a product, once you have launched, it can be painful and expensive to change your operations well. Before attempting to scale you need to stress test all of your operations to shore up any weaknesses you find.

Scale-up. This is why the VCs invest – they want growth. Why do they want growth? Simple, because it’s  the only path to either world domination (very, very rare); an IPO, rare but doable; or an acquisition, the most common exit for VC-backed companies. Here’s where you take your foot off the brake and hit the marketing accelerator to drive demand. If you have kept your gun powder dry through the previous three stages you will be able to go after the business holy grail: economies of scale.  Which not only drives down your unit costs, but give you a pricing advantage over competitors.

This advice does not mean you wait under launch to hire your marketing and sales team! What it means is you don’t unlock their budgets until you are in a position to scale. Before that they are participating in customer discovery, validation, and operations – working on such mundane but critical issues as pricing and returns policies, and planning the traditional media and social media pr and marketing efforts. Trying to paste marketing onto an existing product is almost as dangerous as spending money on marketing before you are in a position to scale.

The key issue in marketing spend is timing. Too soon and you waste money; too late, and you will lose customers to competitors.

 

 

 

Elon Musk’s first principles thinking

emerson

I’ve been advising my mentees to minimize their assumptions about their businesses as much as possible.  In the case of their financial projections, their bedrock assumptions are more important than the actual numbers themselves. It turns out that I’ve just scratched the surface of First Principles Thinking.

One of the specific breakthroughs of many made by Elon Musk that I admired was his challenging of NASA’s practice of using one rocket per test – they assumed it was either too difficult or too expensive or both to do otherwise. But Musk challenged this assumption and developed a way to re-use his rockets from SpaceX, thus saving millions of dollars per launch and helping launch his firm SpaceX into commercial viability.

Now from reading Mayo Oshin‘s post on Medium, Elon Musks’ “3-Step” First Principles Thinking: How to Think and Solve Difficult Problems Like a Genius I have an understanding of how Musk arrived at this breakthrough and many others. Musk has built three breakthrough multi-billion dollar companies in completely different fields: first PayPal, in financial services; then Tesla, in electric powered vehicles; and Space X, in aerospace. This doesn’t even include Solar City, energy, which he helped build and acquired for $2.6 Billion recently.

Obviously Musk is brilliant and coupled with that he’s a workaholic, claiming to work 100 hours per week for the past 15 years! But during a one-on-one interview with TED Curator Chris Anderson Musk explained his “reasoning from first principles.”

Musk: Well, I do think there’s a good framework for thinking. It is physics. You know, the sort of first principles reasoning. Generally I think there are — what I mean by that is, boil things down to their fundamental truths and reason up from there, as opposed to reasoning by analogy.Through most of our life, we get through life by reasoning by analogy, which essentially means copying what other people do with slight variations.

First principles thinking is closely related to my dictum of minimizing assumptions, but it is more sophisticated, it means questioning every assumption about a given problem, challenging all your assumptions. Possessing Soshin, the Zen beginner’s mind, an attitude of openness, eagerness and lack of preconceptions even when studying at an advanced level – which is where Musk is 95% of the time.

The way I tend to explain concepts to my mentees is the flip side, reasoning by analogy. Mentoring founders based on my prior assumptions, beliefs, experiences and what I consider to be best practices of respected mentors, like Steve Blank.

Here are the three steps of first principles thinking from Elon Musk:

STEP 1: Identify and define your current assumptions

“If I had an hour to solve a problem, I’d spend 55 minutes thinking about the problem and 5 minutes thinking about solutions.”
— Albert Einstein

It’s important you write down your current assumptions, as the act of documenting them may well surface other, related assumptions. It also enables others on your team to review your assumptions.

STEP 2: Breakdown the problem into its fundamental principles.

“It is important to view knowledge as sort of semantic tree. Make sure you understand the fundamental principles, ie the trunk and big branches, before you get into the leaves/details or there is nothing for them to hang on to.” – Elon Musk

The best way to discover these basic elements is to ask questions. Mayo Oshin provides a good example of this in the way Musk challenged the received wisdom about the high cost of battery packs by breaking down the components of battery packs, pricing out each component, and recognizing that the BOM (Bill of Materials) for a battery pack only cost $80 per kilowatt hour vs. the cost of a battery pac at $600 per kilowatt hour. That left him with the design and engineering problem of finding a way to combine these materials into a battery pack, resulting in a much lower cost.

STEP 3: Create new solutions from scratch

Again, asking questions is the way to create new solutions. First define your goal, such as to raise enough capital to last you 18 months.  The first step is to question your goal. Why 18 months? If you only raise enough money for 6 months you won’t have to raise nearly as much money. By making the amount smaller you may open up other options, such as crowd-funding or revenue sharing or a convertible note (loan).

By using first principles thinking you keep asking questions and challenging assumptions by looking a various options and their trade-offs until you hit bedrock. When Musk challenged the assumptions that rockets were not “re-useable” that must have lead him to design a way to retrieve his rockets after they reentered earth’s atmosphere.

Everyone talks about “thinking outside the box” but what does that mean? First principles thinking comes from physics, where complex phenomena are studied by “reverting to first principles.”

In physics, a calculation is said to be from first principles, or ab initio, [from the beginning] if it starts directly at the level of established laws of physics and does not make assumptions such as [and] empirical model and fitting parameters.

For example, calculation of electronic structure using Schrödinger’s equation within a set of approximations that do not include fitting the model to experimental data is an ab initio approach.

First principles thinking provides founders with a three-step process to “think outside the box.” And that’s the place to do your thinking if you are going to succeed in finding novel solutions to problems like Elon Musk has.

Sometimes advice columns don’t dish out the best advice!

 

businessMost of the ventures I mentor plan to raise capital at some point in their venture’s life, if they haven’t already. So being as I have been out of the capital raising game for the better part of a decade, I try to read as much as I can to keep up with current trends in startup investing. Thus I just had to read the article 4 Reasons Why Investors Won’t Invest In Your Business Model, sub-titled Approaching the private equity firms or investors and persuading them in [sic] the most daunting task for businessmen. A typo in the sub-title is not a good leading indicator, but I read on. And it’s repeated in the first paragraph! But this is from Entrepreneur.com, usually a reliable source … So let’s look at their “four reasons.” But first, always look at the author. In this case it’s not a person, it’s “BusinessEx Staff” not a named individual. So credibility goes down a few notches.

1.    Fail To Foresee The Future

I have the feeling this was written by a non-native English speaker, as the title would typically be “Failure to…” or “Failing to…”  First of all private equity firms rarely “scrutinize new entrepreneurs” because they rarely invest in new entrepreneurs. Private equity firms invest in on-going businesses or even buy them outright, with the goal of re-engineering the business and thus being able to sell it or even take it public at a significantly higher value than they paid for it.  Yes, “buy low, sell high.” Remember that! The only way one can know for sure if an entrepreneur can successfully foresee the future is to wait for the future to arrive … which can take years. But I do have to agree with the statement that “… it is vital as to how a business owner executes the plan and mould [sic] an emerging, nascent company out of it.” As Bill Gates has said, “Ideas are cheap, success is 99% execution.”

And I also agree with the statement: “The entrepreneurs, who lose this vision or get diverged by the money factor, fail to build concrete foundations of the business.” While again the English is tortured, the point is that entrepreneurs do need a lodestone to focus their attention. Having no vision or losing site of the vision results in companies thrashing – constantly pivoting. So no one can foresee the future, but you can execute your plan well, or not. And you need to build a plan to achieve your vision.

2.    Improper Cash Flows

Yes, the saying “cash is king in startups” is true. The worse thing an entrepreneur can do is to run out of cash. So being able to present a cash flow statement based on strong assumptions and early performance is indeed important.

3.    The Enormous Size Of C-Suite Executives

I’ve written before about the incredible growth in the size of the C-Suite. We now have Chief Design Officers, Chief Security Officers, Chief People Officers. You name it, there’s a Chief for it. Too many cooks do indeed spoil the dish. I am in violent agree with the message that startups should not have too many C-Suite executives. CEO and CTO should be enough for a raw startup. Having more CXXs is a red flag. Cliches prove true yet again: “Too many chiefs, not enough Indians.”

4.    Inability To Understand The Competitors

Back in the last century investors used to say in all my pitch meetings, “But what if Microsoft decides to copy what you are doing?” That got superseded by “What if Google decides to copy what you are doing?” I used to tell my mentees to ignore the “What if GiantCo enters your market?” question until I saw Instagram rip off the Stories feature from SnapChat, which fueled the growth of Instagram and hobbled SnapChat. So you better be sure that you aren’t hanging the entire fate of your company on one feature that isn’t difficult to clone – because success breeds many cloners, failures none.

Despite the inelegant English like “The business owners should further avoid these mistakes by planning strategized moves to entice funders and investors.” the advice is correct, but the idea the startups are going to be pitching private equity companies is just wrong. Where private equity does come in these days is in later rounds of companies growing rapidly that need a lot of capital, like Uber. The risk is much lower for these late round investors.  Let’s hope you are so successful that private equity comes knocking at your door! Until then execute, manage your cash tightly, keep the number of executives down to the bare minimum, and keep your eye out for competitors. Better yet build your company on a sound, sustainable competitive advantage.

Things you should know about VCs

vcThere are lots of myths out there about VCs, about how they will take over your company and replace you as CEO or that getting a VC investment paves the way on your path to riches. But Jason Lemkin of SaaStr, the world’s largest community of SaaS executives, founders, and entrepreneurs, has an excellent article on some facts you should know about VCs – forget about those myths!

  1. Entrepreneurs tend to think about VC firms, but in reality VC firms don’t do investments, individual partners at VC firms are the ones making the investments. Just like medical device makers don’t sell to hospitals, they sell to the individual financial decision makers in departments in hospitals that need those devices. And the hard truth is that partners at VC firms do very few investments per year, typical just one or two. So as a collective firm they may do a significant number but the individual partner who’s a potential fit for your firm only one or two. So you need to have a really compelling fit for that VC and you better know from your research which partner in the firm might invest in your firm. That knowledge should be based on their track record, blog posts, social media presence, and G2 you can gather from their portfolio companies.
  2. As the Bob Dylan song goes, “Everybody gotta serve somebody” and in the VCs case it is their limited partners, those pension funds, college endowments, and wealthy individuals who invest in venture capital as part of their diversified investment portfolio. So check out the limited partners, for example, when we were talking to Greylock about funding Course Technology it turned out they had six or seven limited parters which were college and university endowments – so they were excited to invest in our educational software and publishing company.
  3. Partners are diversified, you aren’t. Unless you are Elon Musk or Jack Dorsey, chances are very high that the only company you are fully invested in is your own. Not so for partners in VC firms. In essence they are portfolio managers; your firm is just one amongst several in their portfolio. So they will tell you that their interests are fully aligned with your’s but in fact they are not. Resources – money, connections, and their attention – will go to only those firms in the portfolio that they perceive as the winners.
  4. VCs don’t just make money on exits, they make money on management fees. And to make a lot of money on management fees – typically 2% of funds invested per year – they need to raise multiple funds. And they raise those funds by getting step ups on the valuations of the companies in their portfolios. Yes these are paper gains but they can show their LPs strong IRR on their current investments. So VCs always have one eye on the next fund and how they will raise it.
  5. Small VCs Align With You, But Lowball You.  Big VCs Don’t Align As Well, But Can Pay More. Big VCs can write big checks and they also can hold funds in reserve, so they can participate in multiple rounds without getting diluted. But small funds will probably have to syndicate their rounds – share the investment and any returns – with other firms. Big VCs can write very big checks, but then they need to have a big return to impact the fund. And partners can only serve effectively on just so many boards – typically no more than seven to nine – so if you only need a small amount of funding they can’t afford the opportunity cost of taking the time and attention to invest in you, let alone serving on your Board.

Entrepreneurs have learned about product/market fit, but investor/venture fit is equally important. The amount you need to raise, the market you are targeting, how you play with the partner’s portfolio, and your need to raise multiple rounds to get to breakeven are all factors you need to take into account before you even start contacting VCs. As Sun TZu wrote in his work The Art of War, “Every battle is won before it’s ever fought.”

“I am what survives me.”

 

live forever book

Jane Brody, who has been writing about personal health and nutrition for The New York Times for years, might seem an odd source for a blog about mentoring entrepreneurs. But, of course, the title to her New York Times article Want to Leave a Legacy? Be a Mentor sub-titled How to make a positive impact that would keep you alive in the memories and lives of others caught my attention.

Her reading of Marc Freedman’s new book, How to Live Forever: The Enduring Power of Connecting the Generations inspired her to write this column about mentoring. Mr. Freedman, the founder of Encore.org and co-founder of Experience Corps, both dedicated to helping older adults find purpose later in life, calls himself a social entrepreneur. Mr. Freedman’s latest endeavor, now in its second year, is called Generation to Generation, a foundation-supported nationwide project that aims to “build a movement of older people focused on the well-being of future generations.”

Here’s the quote that hit the heart of the matter for me:

“The real fountain of youth is the fountain with youth,” Mr. Freedman said. “It’s spending less time focused on being young and more time focused on being there for the next generation.” As the developmental psychologist and psychoanalyst Erik Erikson said nearly 70 years ago, “I am what survives me.”

The bulk of the article is about how older people, like me, benefit from staying engaged with others and ways to do that. Certainly it’s been a privilege to be a mentor at MIT in several different programs, The Venture Mentoring Service, The MIT Sandbox Fund, and the Post-Doctoral Program. As a mentor I’m sure I get more out of it than I give: the brainpower, creativity, and drive of the students and alumni I mentor are energizing. I tell people that I’m like an RFID chip. Alone, I’m can be passive. But the powerful rays of energy radiating from an entrepreneur energize me just like an RFID chip is energized when struck by radio waves.

Mr. Freedman sees older people as uniquely suited for a mentoring role:

“The critical skills for nurturing relationships — emotional regulation and empathy — blossom as we age.” And, of course, those who are retired also have more time to devote to younger people, be they grandchildren, neighbors or strangers.

This is probably why I see so many gray haired heads at the monthly VMS mentors meeting!

But we do have some younger mentors, and there is no reason why young people can’t be mentors. In fact my 98-year old mother has been mentored in the use of her Apple iPad by Babsonn College students, who visit her at her continuing care retirement community. She raves about them all as being knowledge, patient, and helpful.

The key to mentoring is what I consider the purpose of life: gain personal satisfaction through helping others. It only took until age 60 for me to realize this! And ever since I’ve found that mentoring entrepreneurs is the best way I have to help others.

Through my successful ventures and the many more failures, I’ve learned a lot about mistakes to be avoided by founders and tell my mentees, “Please be creative, don’t  repeat my mistakes, invent your own!”

What survives us is the impact we have on others. There is no point in being the richest person in the cemetery, but having been the most influential would be worth striving for.

 

The first mover’s advantages vs. fast followers’ advantages

 

footraceBack in the late ’90s during the dot.com boom everyone was trying to be first to market to gain first mover advantages. But what are those advantages?

  • Media relations – if you are first to market you are bound to garner more press and other media’s attention than being seen as an “also ran”.
  • If your market is not growing, then market share becomes a zero-sum game. Thus by being a first mover you may able to grab more market share, or at least grab the low hanging fruit first. Those following you will have to fight harder to gain share in a static market.
  • Attracting talent. Engineers like to be with “hot” companies, as they assume those companies will grow the fastest, exit the fastest, and make them richer than a following company.
  • Partnering – by being first to market you will have the pick of distribution, marketing, and other types of partners.
  • Exclusivity – you may be able to forge exclusive agreements with suppliers, partners and even customers, thus shutting out companies that follow you.
  • Intellectual property – if you can both file first and apply your patent first you may well get that patent or patents granted, potentially shutting out or slowing down competitors.

Going first seems like the smart strategy. But why is that behemoth companies like Apple and Microsoft are fast followers? For example, the iPhone was not the first smart phone, but it was the first to elegantly integrate the touch screen UI into a sleek form factor that enabled users to surf the web, send messages, take photos, listen to music and even make phone calls. So what are the advantages for fast followers?

  • The saying that “pioneers are the ones that get the arrows in the back” has some truth to it. There are all sorts of issues that a first mover can’t foresee that can trip them up, from government regulations to new technical standards.
  • Fast followers can sit back and see if there’s actually a market for the first mover’s product. Perhaps it is too small to bother with. Or it may be the wave of the future, as the cloud is. Amazon gained first mover advantage with AWS, but Microsoft, is closing fast from the fast follower position.
  • Fast followers can observe customer behavior: what do customers like about the first mover’s new product? What don’t they like? What features aren’t even used? What features are missing? Is it performance or a slick UI that attracts customers?
  • Determining the right business model is one of the toughest problems innovators face. By being a fast follower you can study the market and see if the pioneer’s business model is working. Perhaps the first movers try to price their product a la carte, but the fast follower sees that a subscription model would work better. First movers are then faced with having to change their business model, which may upset customers, whereas the fast followers can launch with the right business model in place.
  • Setting pricing is another one of the tough problem the first mover’s face with their new product. Perhaps they have priced the product too high, which leaves room for fast follower’s to undercut the market leader. Or perhaps the first mover looks like they have left money on the table, enabling fast followers to start with higher prices without having to deal with customers who object to price increases.
  • What’s the USP (unique selling proposition) for customers? Fast followers can observe the market and see if the pioneers had an effective USP or if that prize is still up for grabs.

You see that the list of advantages for fast followers is longer than that for first movers. But don’t be fooled by the number of bullet points. Analyze your market and your customers’ behavior. Typically it is large, established companies like Apple and Microsoft that are the fast followers. The bigger the company the slower they tend to move, and they are typically risk-averse. This is why startups often defeat large companies with more resources. As Kris Kristofferson sang, “If you ain’t got nothin’, you got nothin’ to lose.”

Whether you chose to be a first mover or a fast follower, be aware of the advantages you may have, but also the disadvantages and make the trade-offs strategically. Too many startups just assume they need to be first movers, only to establish a market that bigger companies then enter with more resources and market power. And whatever you do, if you are successful you will have imitators. You need to build a sustainable competitive advantage, such as patents or exclusive distribution agreements. While there can only be one first mover, there can be dozens of fast followers!

How a strong, clear vision can help you focus

focus

I find founders have a lot of trouble focusing. For one, on their target market. Everyone wants to boil the ocean; start by trying to boil a teaspoon! For another, startup founders often seem to think they can support two different products at the same time. No you can’t, as Scott MacNealy said, “Put all your wood behind one arrowhead.” As a founder you need to be ruthless and ruthlessly focused, that can mean killing your babies, as in backburning a pet product to put 100% of your focus on the product with the best chance of getting near term traction.

But like so much mentor advice, focusing is so much harder for the founder to enact than for the mentor to say.

Inc has a great Q & A on focus with Jeff Bezos, who has done an incredible job of first focusing on a single beachhead market, books, then moving to adjacent market, CDs; then another adjacent market, DVDs; and so on, as Amazon conquers the world of retail.

In a world that’s filled with more distraction than ever, how can you achieve greater focus?

That’s a question Amazon CEO Jeff Bezos touched on in a recent interview in New York. At a private event for The Wings Club, a global society of aviation professionals, Bezos spoke primarily about his private aerospace company, Blue Origin, and its plans for the future.

 

Towards the end, the moderator asked Bezos how he manages to stay focused on such a tremendous, long-term vision, to which he replied with the following:

“Vision is absolutely important, but it doesn’t deserve your day-to-day attention. You need a vision, then, that’s a touchstone: It’s something you can always come back to if you ever get confused. But mostly, your time should be spent on things that are happening today, this year, maybe in the next 2 or 3 years.”

Bezos then concluded with these two powerful sentences:

“So I would always encourage people to hold, powerfully, [to] a vision and be so stubborn of it. Don’t let anybody move you off of your vision.”

So there you have it from one of the world’s greatest entrepreneurs. I strongly recommend you read the entire article, by Justin Bariso entitled It Took Jeff Bezos Exactly 2 Sentences to Teach a Major Lesson in Achieving Great Focus subtitled Whether you’re running a company, working for yourself, or leading a team, there’s a lot to be learned from this simple advice.

You need a mission as well as a vision. And what’s the difference?

Your vision should be the overarching goal, the established purpose and objective of an organization (or an individual).

While vision could include a company’s mission, it goes further. Mission generally describes what you are currently doing; vision goes into the future and describes what you hope to accomplish.

For people buying a house or condo, what’s are the three most important factors to consider? Location, location, location, goes the old real estate saw. For startups, it’s focus, focus, and focus.