Nesheim Online

DETERMINATION: Can you climb a 14,000 foot mountain in a wheelchair?

It takes a lot of determination to do a startup.

How much?

This is how a 52 year old guy answered that question:
Wheelchair hiker tops California's 3rd highest peak.

Here is what his friend said:
Bob wheels to the top, proving me way wrong.

BOTTOM LINE: If you think you have the determination of Bob, then you are ready to do your startup. Demonstrate that to VCs and they'll line up, with open checkbooks. It adds power to your personal unfair advantage.

WORD OF THE DAY: ENCOURAGEMENT

I spent a refreshing dinner last evening with a founder of a hot startup that can change the way the Web 2.0 era operates. As we cooked our Korean BBQ and savored the smells, we talked about how his tech team was doing amazing things, inventing and spurring each other to reach for the next level. This company is to be watched closely. (BTW: they are looking for a world-class VP of Marketing: email me if you know someone who would be interested).

I had seen AC recently emerge from a board meeting, entering the work area of the fledging company. He shouted out a special greeting to the tech team and they all grinned. Clearly they were in sync, soul and spirit. The VP Engineering is also outstanding, as is the CEO and others hired. It is a first-class group to be admired and envied.

That is what encouragement is all about. I told AC that I saw him as a "constructive encourager". Leaders like that are very special and very rare. They are the stimulus to greatness in people.

Contrast that with KS who is quitting his company after half a decade of devoted, very hard work. His CEO has the soul of tarmac, shouting with anger to get people to do the hard things. The boss is never satisfied, with himself or others. KS has learned a bitter lesson. He saw working for the CEO as a challenge. I doubt the CEO will ever change, unless God gets hold of his soul. I see KS as able to recover, however he has wasted a lot of half a decade learning the hard way.

But think about working with AC. What a breath of fresh air, by comparison!

That is your opportunity: to be an encouraging, constructive leader, someone who attracts the best people to join you in the hard work ahead of you. You are competing for scarce talent. You need to attract the best to your company, and not loose them to your competitors or to Google's global recruiting vacuum cleaner.

BOTTOM LINE: Examine how you are leading: how more encouraging and constructive can you be? If you don't know, ask your best friend. Or your mentor (If you don't have one, get one!). Better yet, ask your girlfriend or boyfriend. They can be brutally frank (and thereby lovingly helpful). When you get this part of leading right, it adds a priceless element to your unfair advantage! Ask any serial entrepreneur, they will agree.

WORD OF THE DAY: MIRACLES

Miracles?

Yes, God does them.

Startup miracles? Don't expect them. Instead be realistic. Plan that way. Not everyone wins the gold medal. Some days the fire-dragon roasts the knight. The market may not be as large as you hoped. Your technology may be slower than you dreamed. Your employees may not be what you thought they were capable of doing. You may have picked the wrong strategy. A competitor may leapfrog over you to the gorilla position.

Research shows the chances of your startup settling for the silver medal (being acquired) are twice as high as going IPO. Below is an example (reported on the free daily email news from Dow Jones' VentureWire Alert ):

"Sun Microsystems Inc. is buying the assets of SavaJe Technologies Inc., a developer of a mobile phone operating system built around Sun's Java technology.

The deal ends an eight-year ride that saw SavaJe spin off from Lucent Technologies Inc. in 1999 and raise more than $120 million from a large group of venture investors, including two recapitalizations in 2002 and 2006.

Sun Microsystems didn't release terms, only saying the deal is immaterial to its earnings per share. It said additional information regarding the acquisition would be disclosed at the JavaOne Conference being held in San Francisco starting May 8.

SavaJe built a large roster of investors over the years, including some of the world's leading cellphone-service providers, as it went head-to-head with Nokia Corp. and Microsoft Corp. in the cellphone-software market.

In 2005, SavaJe and business partner LG Electronics Inc. said they finished development of the first phone to run on SavaJe's operating system. The phone was scheduled to hit the markets in early 2006, but the technology never took off.

In the end, the competition may have been too much for the venture-backed company. Last summer, SavaJe recapitalized with a $13 million Series A round, that saw at least one investor - New Venture Partners, which originally seed funded the company when the firm was operating as Lucent's venture arm - opt out of SavaJe."

So plan wisely. Try to not block your doors to acquisition.

• If you are building the next great broadband network, think about buying Cisco products rather than less expensive things from Brand X. Cisco buys a lot more startups than Brand X.
  
• Weigh your trade-offs as you pick strategic partners. There is a family of friends surrounding Apple and its iPod. There are others that are arch rivals. Who should be your first customer?
• Murdock and gang are battling Branson and gang for share of market in the United Kingdom for digital content delivery. Whose side do you want to join? 

BOTTOM LINE: Yes, you know I want you to plan on getting the gold medal (go IPO). But I also want you to be wise. You are more likely to get the silver or even the bronze. So include that thinking in your strategic planning. Those moves are very important and should not be left to chance. When done well, this will add a significant element to construction of your unfair competitive advantage.

WORD OF THE DAY: TWO

During meetings in recent days I have been reminded how important the word "two" is to entrepreneurs and their investors. It can become one of your most valuable tools for checking on reality and managing your limited resources.

At the root of the emotions that motivate entrepreneurs and their investors is over-optimism. It is the kind of mental energy that urges them to take enormous risks and be confident of the best outcome. Inherent in such drive is the danger of becoming unrealistic. Thus a check-in technique is wise, highly recommended.

Here is a compendium of what I think constitutes "The Rule of 2":

• It will take you twice as long (as you planned). The hiring will be much slower. The first product will take much longer to finish. The first orders will be later than you hoped. The venture capital will take much longer to get into the bank.
• It will cost you twice as much. The expenses will double, for salaries, cost of marketing and selling, charges for services and outsourcing, and the percentage you have to give VCs for their money.
• It will perform at half of your expectations. Your gadget, gizmo, service, thing will operate with half of your dreamed features. It will run at half the speed you hoped for. It will consume twice the energy in its original specification.
• Sales will be half your forecast. The glee at shipping to the first customer will be quickly sobered by the slowness of follow-on orders.

And so on it will go. I think you now can better understand what this word is all about to entrepreneurs.

So what? How can you use this word to your benefit? Here are some suggestions I give to startups I coach:

• Delight in your dreams while expecting reality to be much slower than your fondest hopes.
• Recruit with twice the time and energy and innovation that you planned on.
• Conserve cash aggressively so you can survive while working to attract investors' cash.
• Adjust your delivery schedules weekly (to build the product/service, get the money, etc.).
• Review reality versus your plans and add the lessons learned to your next updated schedules.
• Get used to managing disappointment (avoid making promises to your board of directors).

BOTTOM LINE: The world of entrepreneurs is inherently overly optimistic. When you accept that you can remain realistic. Realism keeps you from making errors that can be fatal to a new enterprise. As you adjust weekly you will begin to settle down to a growth rate that is manageable. That predictability boosts morale of employees and investors. It makes your emotions move from dark to bright. Respecting the Rule of Two can add a powerful element to your unfair competitive advantage. Let your competitors live in their worlds of unrealism while you march ahead and take the lead in the real world. That is how you become a gorilla dominating a new market segment. I wish you the optimist best!

WORD OF THE DAY: ABSORB

Listen and learn. Absorb and file lessons learned from others. That is how entrepreneurs emerge and grow in wisdom. Finding people to listen to and learn from is what outstanding startup people do. They collect things from others, put them into their toolbox and are prepared to use the new tools when the time comes to do their startup.

Here is what a budding entrepreneur wrote after listening to a first time entrepreneur describe how he got the seed round for his new enterprise:

A.C.’s presentation about his experience gave me several mantras which I will cherish and inculcate in me as an individual.

A.C. clearly conveyed one of the most important things that most successful entrepreneurs always try to convey. Entrepreneurship is all about following your passion and your interest. As easy as it may sound, it is not that simple to clearly follow your ideas and pursue your dreams. More often than not, a person is led to do something what he thinks to be most beneficial to him. A.C. always had his interest in network and security. And his perseverance and pursuit for excellence in it in his own innovative way gave him new startups ideas. This passion was the foundation for building his startup.

I now feel that the spirit of entrepreneurship is not about building startups. It is about building passion about a particular field. At the same time, I also learnt that although passion can induce entrepreneurship, passion alone cannot lead to successful startups. The difficulties and the hurdles A.C. faced clearly show that startups need much more than ideas and technology. To begin with, they need a good core team, funding, right people to guide it and lots more along the way. A.C. faced tremendous difficulties dealing with all those problems until he got the right guidance.

Speaking of resources, A.C.’s experience also taught me the importance of having a well established network. A well knit network of professional individual and friends is extremely important in both direct and indirect ways. Be it advice, help or partnership; knowing many people and having a good network is indispensible for being an entrepreneur.

Hence, I learnt quite a couple of things from A.C.’s presentation but the crux of his presentation I would say was “follow your passion”.

BOTTOM LINE: Seek people worth listening to. Listen and learn. Decide what you agree on and disagree on. Put those lessons into your toolbox. That will prepare you for doing your startup when the right time comes. Such wise preparation will add a powerful element to building your unfair advantage.

 

 

WORD OF THE DAY: PASSION

Last evening I finished reading essays from my entrepreneurship students. Their assignment was to reflect upon "One thing I learned from the guest speaker". They wrote after listening to the first time entrepreneur I referred to in yesterday's blog about "Marathon". In a nutshell, they were VERY inspired by A.C's passion for his work helping create a new enterprise aimed at solving a very big problem.

The students described A.C. as "courageous", "focused", and "determined."

They were impressed by his emphasis on choosing outstanding people for the core team of the company, especially the early tech team staff, and CEO.

The slogan that A.C. left reverberating was "Pick your hill to die on." Students understood that to mean "Find a BIG problem to solve," one so large that there is a lot of room for competitors, one with potential sales in the hundreds of millions of dollars a year. And they understood that meant they had to take a big risk in attempting to achieve the large goal.

The essays reflected the stunning realization that as young people studying entrepreneurship, they had yet to think as boldly as an entrepreneur does when he is aiming to create a world-class new enterprise. I find that common among first time entrepreneurs and that is one reason A.C. stands out. He has realized, wisely, that boldness under control leads to greater potential than the cautious approach. In fact, I believe there is less risk when focusing on solving a big problem than when aiming at being smaller and more careful.

For his 23 years, A.C. is already wise. He has learned from some big personal mistakes and gives himself credit for his outstanding technological accomplishments. He respects people with more experience, has courage to believe in himself even when others do not, and he is open to stepping aside when his leadership and technical skills are less than what others can deliver. That is a rare combination for so few years of life's experience.

BOTTOM LINE: When you listen to entrepreneurs speak, look for what is said that inspires you. In this case a young, first-time entrepreneur's passion for his startup got a class of very smart people very excited. That can boost your courage to address larger problems, more lucrative markets and seek to be more than you thought you could. Such passion can be a powerful addition to your unfair competitive advantage.

OVER-OPTIMISM IS EXPECTED: Be prepared to report a lot of disappointing news to the board of directors

Yesterday I received an email from a CEO who reported that a re-organization of a large corporation had resulted in cancellation of a large order for his startup. The new enterprise has recently gotten its first large orders and sales traction had begun. The disappointment was poignant for the company's engineers who had worked hard and long to prepare for delivery of the large order.

Such disappointments are expected for startups. They are never fun. But they are always there and always will be. It is in the soul of the entrepreneur to be optimistic, and it will experience a number of moments of bad news.

Optimism sets the stage for disappointment. When optimism gets excessive, it can rise to levels of unrealistic expectations, even what behaviorists call magical thinking. If that continues, the CEO will have to step aside. The board of directors will find someone with more realism to replace the CEO.

But optimism is in the soul of the entrepreneur and its investors. They thrive on trying to do the impossible, things never done before. It never goes away. It is expected.

So how should optimism be managed so the company is not mis-managed? Here are some things I have observed in serial entrepreneurs who have been successful:

• Accept your optimism as part of yourself. That is who you are. Agree it is okay to be that way. Do not try to change your stripes. A tiger remains a tiger, even if it dons a zebra striped coat.
• Acknowledge the dangers of being overly optimistic. This is the first step in moderation of a good thing. Becoming unrealistic can wreck a company and the lives of many people.
• Adhere to your dreams while constantly testing them against what the real world tells you. As you construct the prototype, survey your first potential customers and talk to possible investors, the idea for your cool startup will be tested.  Listening to feedback, harsh as it may sound, can enable you to alter your course before you crash on the rocks of foolish stubbornness.
• Avoid surprising your board of directors. The board should be the first to hear of signs of disappointment. Send them the first signs of fading sales, hiccups in the technical progress, trouble with employees. Waiting to announce the barn is burning beyond recovery is career shortening. Board members can often help you put out a small blaze. They don't want to suddenly be called to an emergency meeting to try to save the enterprise.
• Accept the need for large changes. That is most likely what you will have to do. Rarely is the initial plan for the company the plan that is followed to success. I cannot remember the last time in over a quarter century of doing startups that the first plan went to IPO.

BOTTOM LINE: Startup CEOs get very good at reporting disappointments. Optimism will lead to bad news. It cannot be avoided. The negatives come with positives, so you will not be only reporting lost orders and failed products. You are not failing when your news is disappointing to yourself and others in a startup. Progress is made with two steps forward and one backward. Mistakes should be small and large ones avoided. Keeping your management team realistic is important while the company continues its bold moves to try to do something great. With a realistic board and core management team you will have outstanding counsel that can make something good out of bad events. That is how to manage this wild world of startups. Such wisdom is a powerful part of your unfair competitive advantage.

STARTUP DREAMS? When should they end?

Today I read the following from one of my bright students. He is from Singapore and is in Silicon Valley working in a startup as an intern and taking classes about entrepreneurship. This is from the interview of his startup CEO who was commenting on the pros and cons of taking money from venture capitalists: "Many a time you pitch your prototype to the VC for more than just the money. A good VC could mentor your solution to a much higher level by bridging the gaps with his experience and contacts. A great VC gets to see the big picture of the industry and hence is in a better position to foretell the direction of the market. Sequoia played a significant role in getting Goggle to acquire YouTube, being on both boards. But then again, they could impede your dreams to go IPO and push for acquisition as an exit strategy. hence it is important to weigh the factors that will decide the need for VC funding."

That is a realist talking to a student studying the process of converting an idea into a world-class enterprise. Note carefully the pros and the cautions from the CEO. Then apply that to your dream.

• Are you ready to turn your idea over to VCs and follow their instructions?
• Have you found VCs able to work with you to execute your plan for your dream?
• When are you ready to sell the company? Are you determined to get only to IPO?
• Do you have the courage to abandon your dream and pursue one more practical (if that reality emerges)?

Those are some of the ways to probe your soul and discover how realistic you are about your dream. Asking such questions now can save you agony later. Most dreams pop when competitive forces attack. Then realism emerges and is what you have to work with. Experienced VCs are realists. They are not all bad. And for sure, they are not dreamers. They can be very optimistic, bold and determined, but they became experienced, even great ("icons") because they were realistic about the dreams of entrepreneurs.

BOTTOM LINE: Examine your dream for your new enterprise before seeking VC money. Then you will know what to look for besides the money. Some day your dream can come true and emerge as a working company. Then you will want by your side realistic people helping you manage the business, finance it and convert the dream into a fulfilling success. When you understand that, you will be well on your way to building an unfair advantage.

IMMIGRANT DRIVE DRIVES THE DRIVERS: Why 60 percent of startups are lead by immigrants

I read another news story about how so many Silicon Valley startups are lead by immigrants (40% to 60% depending on who measures how). Asked the question "Why are immigrants so successful?" the answer from Kazeon's Sudhakar Muddu was "It's their drive to reach the American Dream . . . to make a mark for ourselves. . . for your family and to the world."

Some of the facts are documented in a fresh report, "America's New Immigrant Entrepreneurs" written by researchers from Duke University and the University of California-Berkeley. Nationwide about 25 percent of tech and engineering startups have founders who are immigrants. More than 50 percent of Silicon Valley tech startups had at least one immigrant as a founder.

That is one source of people with "fire in their belly" which is what the entrepreneurial drive is all about. It is very powerful and fueled startups like Intel, Sun Microsystems, BEA Systems, Google, Nvidia, eBay and Yahoo.

When I reflect on this special form of drive, I realize it can be misunderstood. Some will assume high energy is what it means. Others will say starvation or no money are the meaning. While I think those are relevant I also such reasons missing the point.

The kind of drive is in more people than immigrants. The other half or so of startups are founded by non-immigrants and also succeed. Experienced venture community leaders can spot it in a few seconds of meeting a stranger. It is what investors are eagerly looking for most.

I think central to this special form of drive is determination (see my post for 2006 December 29 ), plus a realistic understanding of the risks and rewards of doing a new enterprise. This makes for a very healthy mixture, one whose ingredients give something extra, something special to the person who has this drive. I am currently coaching a young founder who has it. He has already achieved a great deal in spite of his youth. Age adds to the time to gather wisdom, yet many with this drive have acquired wisdom much more advanced than seen in others of their age.

BOTTOM LINE: For you first-time entrepreneurs, spend some time meditating on why you want to do a new enterprise. Then try explaining that to your best friend. As you do, you will begin to connect with what is driving you. If your drive turns out to be this special form of drive that powers so many immigrants in Silicon Valley to success, then you are well on your way to building an unfair advantage.

DEATH AND WISDOM: Learning lessons of reality before your test comes

As I watched today's television coverage of the funeral of President Gerald Ford, I saw people reflect on the life of a man who was wise. Then I opened the newspaper of Silicon Valley and read a story about a business that specialized in shutting down startups that had "run out of runway" Startup Liquidator. I was reminded of the importance of becoming wise before the big time of testing comes. And it will come.

Startups are often founded by youth. Compared with us old guys, youth have advantages of energy and enthusiasm and a lot more. Yet the gray hair group has the advantage of time, enough to gather wisdom and learn more by applying what we have learned. So let me make a few points, hoping that will assist your learning and help you avoid some of the startup land mines.

• Most startups fail. Sorry, but that is how life is. From Silicon Valley to anywhere in the world, the new enterprise is most likely not going to succeed, i.e. meet or exceed expectations. The data continue to come in: After you get your money, your chances of not succeeding are over 90 percent. That is how it is. That is reality.
• You can succeed. There is no law of gravity that says you cannot be the next Google. Even if you live in Mongolia or in a city unknown to most of the world. This Internet era makes knowledge available to all of us. It is the era of exploiting know-how to create a successful business in the global market. Yes, you hope you will be one of the rare few who are "lucky." I don't believe in luck, so let me suggest that common sense applied with wisdom is a recipe that can produce a great company. You do not have to have stumble across luck or get an MBA or PhD from an arrogant school in Boston in order to succeed.
• Understanding your unfair advantage is key to your success. Do you know your personal unfair advantage? If not, it is time to figure out what it could be, start building it and then put it to  good use, helping you succeed. With that you can do amazing things. Otherwise you are just an eager entrepreneur, one of the naive, eager millions of  startup hopefuls. Part of your personal unfair advantage is what you have learned and has become part of your wisdom. You can learn it by reflecting on your failures and successes. And by spending time with older people, one of which may be a mentor to you. Try reading classic books by Dickens and writers from ancient times. Spiritual books are also deep sources of wisdom. My favorite is Ecclesiastes.

BOTTOM LINE: Focus on finding reality. As you do, you will gather wisdom and avoid dangerous naivete. Then you will discover your personal unfair advantage emerging. Wisdom will prepare you for the big challenges you are going to encounter when you do your startup. Begin now for the inevitable. Let wisdom be your guide.