Don Dodge on The Next Big Thing

The natural evolution of a startup and why it is bad

Successful startups are founded by product people, preferably engineers. Once the product is done the Sales and Marketing guys take over the company to push market adoption and revenue. Then the Finance guys take over to get operational efficiency and profit. Then the company declines and eventually dies. The time between these phases depends on how good the product guys were in the beginning.

This corporate evolution happens all the time as companies grow from a handful of people to a couple hundred people, to thousands of people. As revenues grow from millions to hundreds of millions, and even billions, the infrastructure expands, geography expands, and bureaucracy expands.

Most product oriented founders can't handle, or don't want to handle, the daily grind of growth issues. There are some exceptions like Steve Jobs, Bill Gates, Larry Page, Sergey Brin, and a few others. Mark Zuckerberg has done pretty well, and looks like he will continue to lead Facebook to the next level. But these are the exceptions.

More often the VC board members push out the product oriented founders and install "professional managers" to take the company to the next level. It even happend to Steve Jobs at Apple. I have heard the rationalization a hundred times. Many times the VCs are right...the founder doesn't have the skills or interest to take it to the next level. But, then many times they get the replacement wrong and head down the spiral path to Finance guys taking over and eventual death. The old cliche' "Finance guys know the cost of everything, and the value of nothing" comes into play when they are running the company towards the end of the natural evolution.

Startup entrepreneurs should study Steve Jobs, Bill Gates, Larry Page, and Sergy Brin. Follow their lead. Stay focused on the product. Make it "insanely great". Don't get defocused into building new features and products that don't fit the grand vision. Always ask yourself how this new product or feature will disrupt the market, or significantly change the user experinece. Don't build new things just because you can. Stay focused...or fail.

A few years ago I was mentoring a startup entrepreneur who had four or five ideas for new products. I suggested that he stay focused on his core business and make game changing innovation there. I repeated an analogy I heard years before. "When you are on an elephant hunt, don't shoot at the squirrels. It wastes ammunition and scares away the elephants". Stay focused or you could end up on the natural evolution curve and end up with the Finance guys running your company.

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Focus or Fail - saying no to great ideas

Focus is critically important to startups and large companies. Focus requires saying no to some great ideas. Having lots of smart people and lots of money in the bank can make it hard to say no. I was mentoring a startup, helping them sort through where to focus and how to prioritize the opportunities. I told them to choose their customers carefully. Huh? That's right, choose your customers carefully, and choose what you build / productize even more carefully.

Great ideas come from customers, partners, and employees. Big customers can have very specific needs, and demand those features in your product. Sometimes those customer demands align with your vision, but when they don't...just say no. For a startup that needs all the revenue they can get, saying no to a big customer is very hard. But, saying yes to customer requests that take you away from your strategic vision can paint you into a corner that you never get out of. Once you have those features and those customers you can't just kill them...you are stuck. Your product will never again be the universal, adaptable platform you intended it to be.

Saying no to great ideas from super smart employees is even more difficult. Startups need to focus or they will fail. Big companies have the same problem. Read this Q&A with Apple CEO Steve Jobs from a BusinessWeek interview back in 2004. 

Q: Apple has long been an innovative place with lots of smart, passionate engineers. But it seemed to fall off the map in the years before you returned in 1997. What happened?
A: Let's start at the beginning. Both [Apple co-founder] Steve Wozniak and I -- and I think I can speak for Woz -- got our view of what a technology company should be while working for Hewlett-Packard (HPQ ) in the late 1960s and early 1970s. And the first rule over there was to build great products. Well, Apple invented the PC as we know it, and then it invented the graphical user interface as we know it eight years later [with the introduction of the Mac]. But then, the company had a decade in which it took a nap.

Q: What can we learn from Apple's struggle to innovate during the decade before you returned in 1997?
A: You need a very product-oriented culture, even in a technology company. Lots of companies have tons of great engineers and smart people. But ultimately, there needs to be some gravitational force that pulls it all together. Otherwise, you can get great pieces of technology all floating around the universe. But it doesn't add up to much. That's what was missing at Apple for a while. There were bits and pieces of interesting things floating around, but not that gravitational pull.

People always ask me why did Apple really fail for those years, and it's easy to blame it on certain people or personalities. Certainly, there was some of that. But there's a far more insightful way to think about it. Apple had a monopoly on the graphical user interface for almost 10 years. That's a long time. And how are monopolies lost? Think about it. Some very good product people invent some very good products, and the company achieves a monopoly.

But after that, the product people aren't the ones that drive the company forward anymore. It's the marketing guys or the ones who expand the business into Latin America or whatever. Because what's the point of focusing on making the product even better when the only company you can take business from is yourself?

So a different group of people start to move up. And who usually ends up running the show? The sales guy. John Akers at IBM (IBM ) is the consummate example. Then one day, the monopoly expires for whatever reason. But by then the best product people have left, or they're no longer listened to. And so the company goes through this tumultuous time, and it either survives or it doesn't.

Q: Is this common in the industry?
A: Look at Microsoft (MSFT ) -- who's running Microsoft?

Q: Steve Ballmer.
A: Right, the sales guy. Case closed. And that's what happened at Apple, as well.

Remember, this interview with Jobs was back in 2004. He is referring to the time at Apple when he was ousted and John Sculley (sales guy) took over Apple. Jobs says the same thing happened at IBM and Microsoft. 

John Battelle wrote an interesting post today about Google's brand. His point was that Google is moving beyond being just a search company to being a software company with many products, and that this changes the brand identity. Good point. This graphic jumped out at me.

 

John Battelle's article, my experience mentoring that startup, and the Jobs interview, crystallized for me the importance of product focus. Yes, it is good to have multiple features and even multiple products, but they must, as Jobs would say, "add up to something". Every new feature and new product should support the company vision. It should leverage what you are doing and create real synergy. If it doesn't...just say no.

Hard to say no - It is easy to say no when you don't have the people, or the cash required, to do the job. It is much harder to say no if you are a startup that needs every customer you can get, or a big company with lots of employees and plenty of cash. Focus or fail. Focus on building great products, or fail with too many features that "don't add up".

Remember the Peanut Butter Manifesto by Brad Garlinghouse, former VP at Yahoo? Here is an excerpt that captures the essence;

We lack a focused, cohesive vision for our company. 

We want to do everything and be everything -- to everyone. We've known this for years, talk about it incessantly, but do nothing to fundamentally address it. We are scared to be left out. We are reactive instead of charting an unwavering course. We are separated into silos that far too frequently don't talk to each other. And when we do talk, it isn't to collaborate on a clearly focused strategy, but rather to argue and fight about ownership, strategies and tactics.

Our inclination and proclivity to repeatedly hire leaders from outside the company results in disparate visions of what winning looks like -- rather than a leadership team rallying around a single cohesive strategy.

I've heard our strategy described as spreading peanut butter across the myriad opportunities that continue to evolve in the online world. The result: a thin layer of investment spread across everything we do and thus we focus on nothing in particular.

Focus or Fail - It happens at startups, and it happens at big companies. It sounds easy, but it is much harder than you might imagine.

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Open Angel Forum - Silicon Valley cool startups

Jason Calacanis started the Open Angel Forum to give entrepreneurs a free forum to get in front of experienced Angel investors...without paying for the privilege. Jason also teamed up with Mike Arrington several years ago to create the Techcrunch50 conference for the same reason...to give entrepreneurs a free forum to demo their products and ideas in front of the press and investors.

Open Angel Forum came to Silicon Valley last Friday night. Dave McClure and Shervin Pishevar are the Silicon Valley chapter leaders for OAF. Jeff Clavier, Andrea Zurek (XG Ventures), Cyan Banister, Pejman Nozad, Chris Yeh, and others attended the first meeting. This is an invitation only group, and these Angels all write checks. Each Angel listed some of their most recent or notable investments to start out the meeting. Some of the biggest names in tech were mentioned, and many of the current hottest startups. It is an impressive group.

There was a lively discussion about how to make the investment process flow more smoothly, and specifically around how to structure convertible notes that are simple, fair, fast, and inexpensive to put together. Earlier I wrote about convertible notes and some of the necessary provisions to protect Angels and align interests with entrepreneurs.

The startups were all early stage, raising their first money, and I hadn't seen any of them with the exception of AppWhirl...which I saw at DEMO a few weeks ago.

AppWhirl is to mobile apps what Blogger is to blogs, or what GeoCities was to web sites. AppWhirl makes it easy to assemble mobile apps from preformed templates and services. TekTrak is in semi-stealth mode, but they developing some cool technology to make it easy to track your cell phone in case it gets lost, and wipe it of data if you can't find it. MightyMeeting makes it possible to present from anywhere from a mobile phone or iPad. Rapportive puts simple CRM right inside of Gmail, in context with reading your email. BackYard is also in stealth mode and doesn't have a web site, but think Yelp meets CitySearch for local businesses. EditRing, also in stealth mode, is a real time collaboration tool for for Microsoft Office.

See Open Angel Forum for news on future meetings and locations. Jason Calacanis never thinks small. He wants to take this nationwide...and global. 

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Google Apps redefining office productivity and RT collaboration

Google Docs and Spreadsheets have always been cloud based making it easy to share with others and collaborate in real time. Today at the Atmosphere Conference Google announced many new improvements. Google has always taken a different approach to solving customer problems. Everything at Google starts from a web based Software as a Service (SaaS) approach that solves the 80% problem without all the complexity and overhead of client based applications.

Erick Schonfeld at Techcrunch says; "Slowly but surely, Google keeps trying to chip away at Microsoft’s core Office productivity suite with Google Docs, its free online word processor, spreadsheet, and presentation software. Today, Google Drawing is being added to the mix and Google Docs and Spreadsheets is getting a major realtime update."

David Berlind at InformationWeek is much more aggressive. "Make no mistake about it. Google is going for Microsoft's jugular. The deathmatch is on and, at the very least, it's for bragging rights to what we at InformationWeek are calling the "collaborative backbone." It becomes a battle that's less about Google Docs versus Microsoft Office and much more about the collaborative infrastructure behind Google Apps versus Microsoft's SharePoint and Exchange."

Google Apps including Gmail, Calendar, Docs, Spreadsheets, Presentations, Sites, and Groups are easy to use, free to consumers, and very inexpensive for businesses. They are what Clayton Christensen, author of The Innovators Dilemma, would call a "disruptive technology" that changes the competitive landscape. When the entrenched leader over shoots customer needs, it opens an opportunity for a competitor to come in on the low end with a simpler, cheaper, faster alternative.

This competitive positioning chart illustrates where Google is coming from, and where it hopes to go in the future. It is the classic Innovators Dilemma competitive curve. Time will tell how it shakes out. The move to the cloud seems to be pretty clear. Only the slope of the curve and speed seems to be in question.

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AOL dumps $850M Bebo acquisition - Why big M&A rarely works

AOL acquired Bebo for $850M two years ago. Today AOL said they will sell it or shut it down. What went wrong? Like many M&A deals, the Bebo deal factored in synergies and strategic leverage that never materialized. The AOL / Time Warner merger was the biggest bust in history destroying more than $140B in investor value. It is not so much that the acquisition was wrong, but that the valuation was so wrong that nothing made financial sense post acquisition.

The public stock markets tend to value companies dispassionately, on a stand alone basis, valued at some multiple of earnings or cash flow. M&A buyers ignore the financial fundamentals and look at strategic synergies. The difference in value is enormous...and devastating. Take a look at these "Worst Billion Dollar Acquisitions in History" Lots of different companies...all made the same mistake.

Spread The Risk - My philosophy has always been that I would rather acquire 20 companies for $50M each, than acquire one company for $1B. Either way you spend a billion, but by acquiring many smaller companies you;

1. Spread the risk over 20 companies. One winner can pay for all the mistakes.
2. Integrating a $50M company is much easier than a $1B company
3. Smaller acquisition mistakes can be redeployed on other projects and still retain some value
4. Acquiring smaller companies earlier enables more upside potential than later stage deals
5. Smaller companies don't have ingrained management and cultures making the transition easier.

Don't pay product valuations for feature companies - It is a good strategy to acquire small companies to gain super star employees, cool new features, and access to new market segments. But, the acquiring company needs the discipline to only pay a valuation commensurate with a "feature" not a "product". Don't add lots of valuation for synergies that probably won't happen, or for revenue streams that may not materialize.

Pay more later for reduced risk - Some big acquirers are willing to pay more for a company later after the market has been proven, and the company delivers product and revenue. I have seen big companies pass on acquisitions early when they could have been bought for $20M, and later pay $200M or more. They justify it by looking at all the startups that fail and the emerging markets that turn out to be fads that go out of style in a year or two. Hard to argue with that...many times they are right.

Integrate or Isolate? - When acquiring a company the question is, should the new company be deeply integrated, and perhaps disappear, within the acquiring company? Or, should the acquisition be allowed the autonomy to be independent and grow at its own pace? I think it depends on the size of the acquisition, stage of the company, and strategy for the acquisition.

If the strategy is to leverage synergies than tight integration makes sense. If the acquisition is a fast growing startup in a new market it is probably better to leave them alone. Provide the capital they need, and let them leverage the big company brand. Many times the big company culture and brand smothers the startup to the point that they disappear. The big company can still get a lot of value from an acquisition that has "disappeared" into the fabric of the company...as long as they didn't overpay.

It all comes down to price -  The Bebo acquisition, like all acquisitions, made sense at some price. The problem comes when the price gets way out of line. Once the financial guys start looking at it...nothing will ever make sense. Oddly, rather than look at it as a sunk cost, and try to turn it around, they will just dump it for peanuts or shut it down, and move on.

The best billion dollar acquisitions? - There are lots of small acquisitions that have turned out really well for the acquiring company. Microsoft and Google have been very successful in acquiring small companies that went on to form the basis of huge new products or businesses. However, there are very few examples of billion dollar acquisitions that have paid off. 

Can you name any billion dollar acquisitions that were very successful?

UPDATE: Great comments here and on Twitter, Facebook, and LinkedIn. I will do a future post on great $Billion+ acquisitions. So far readers have suggested the following successes;

• IBM acquisition of Lotus, Rational, PWC
• EMC acquisitions of RSA and VMware
• HP acquisitions of Compaq and EDS
• Oracle acquisition of Peoplesoft
• Ebay acquisition of PayPal
• Google acquisition of YouTube
• Microsoft acquisition of Great Plains and Navision
• Others?

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Apple vs Microsoft - Steve Jobs vs Bill Gates - Can elephants dance?

Apple is 34 years old, Microsoft is 35. Can elephants dance? Apple today feels like an innovative startup, Microsoft a corporate behemoth. MSNBC says "Apple, Microsoft hit midlife as fresh, frumpy". Steve Jobs is the driving force behind the iPod, iPhone, iTouch, iPad, devices that have changed the world. Bill Gates started disengaging at Microsoft 10 years ago. Apple (AAPL) has a Market Cap of $215 Billion, while Microsoft (MSFT) is at $257B. Apple has nearly $25B in cash, Microsoft has $36B.

Enterprise vs Consumer - For years Apple competed against Microsoft in the desktop / laptop computer market. Windows had over 90% of the market, while Apple had between 5% and 8%. Apple took pride in delivering a seamless end-to-end experience, but in the process controlled the hardware and software themselves. Microsoft focused on software and made it available to any company that wanted to build hardware. Microsoft engaged partners to build applications and do consulting or system integration. The strategy worked great for Microsoft.

Apple shifted focus to consumer electronics with the iPod, iPhone, iPad and other devices. There was no competition from Microsoft in these markets. In fact, Microsoft is struggling to catch up with Apple. Imagine what would happen if Apple decide to focus on games? Hmmm...Xbox could have some serious competition.

Founders Matter? - Founders are the heart and soul of startups, but do founders matter 20 or 30 years later when there are tens of thousands of employees? In a word, yes. Look at what happened at Apple when Steve Jobs left...and when he came back. The transformation was amazing. Look at what happened to Microsoft when Bill Gates starting disengaging and focusing more on philanthropy. Some would argue that the pace of innovation slowed, the killer instinct subsided, and Microsoft lost its soul. I don't agree with that generalization, but certainly comparing Apple and Microsoft over the past 10 years points out some very different approaches.

The comparison can't be complete, or the conclusions verified, until Steve Jobs leaves Apple for a few years. Then we will see if the presence of the founders is what makes Apple different from Microsoft. Perhaps Steve Jobs will be able to influence and effect the culture of Apple long after he leaves. Bill Gates influence and killer instinct is hard to find today at Microsoft. Steve Ballmer is the unquestioned leader at Microsoft. Ballmer is amazing...but very different than Bill Gates.

Transformational Change - The MSNBC article has some very interesting quotes from people in the industry. Here are a few of them;

“The difference between the two companies is that Apple has been fearless about transformational change while Microsoft has been reluctant to leave its past behind,” said Casey Ayers, president of MegatonApps in Jacksonville, Fla. His company soon will release its first iPad app, “Multitaskers” which includes a calculator, ruler, lantern, stopwatch and five more functions.

“Microsoft has always been loath to change and risk alienating some of its customers, but its inability to leave the past behind has left their product line bloated and dysfunctional,” Ayers said. “Yet iPhone completely changed the mobile space forever. Apple doesn't blink at making unpopular decisions if it believes they will result in a better end product. ... It's just a matter of time now before Apple blows past Microsoft's market cap.”

Transformation Continued - Microsoft is a great company. Over $60B in annual revenue, with $36B in cash, and Steve Ballmer driving the company forward. Yes, they lost a little when Bill Gates disengaged, but the real question is what will happen when Steve Ballmer rides off into the sunset?

The next leader of Microsoft will make or break the company. IBM faced a similar crisis about 20 years ago. They brought in Lou Gerstner from RJR Nabisco. Gerstner totally changed IBM and put them on an entirely new path. Mr. Gerstner wrote a very interesting book "Who Says Elephants Can't Dance?" about the transformation of IBM. That was nearly 20 years ago, but some history lessons are timeless.

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University technology transfer - why so difficult?

Universities produce lots of research, patents, and base technologies. Few of them ever make it to the commercial market. Yet, lots of recent college grads start companies that bring amazing innovations to market. Why the disconnect? The obvious conclusion is academic versus business thinking. Not so fast. If that were true, corporate research labs would transfer most of it's research into new and existing products. The truth is a very small percentage of corporate research ever makes it to market. 

The biggest factor seems to be the fundamental differences between research and product development. Research focuses on advancing technology without being constrained by business requirements. Product development starts with examination of customer needs and business requirements, and matches existing technologies to the problems.

University Research & Entrepreneurship Symposium - Today I attended the URES 2010 conference in Cambridge, MA. I saw 10 new startups that are spinning out of university research labs. These startups represent the best technologies and teams that have commercial viability. The technology was impressive, and the teams presenting were like any other tech startup team. The startups included;

• HydroGen Technologies - Boston University
• Hestia - Purdue University
• CoSi - University of South Florida
• Orthogonal - Cornell University
• FloDesign Sonics - Western New England College
• BioFilm Sciences - Harvard
• ReThink Energy - University of Waterloo
• i-Matsh - Dartmouth College
• The Imagination System - Penn State
• Cence-Me - Dartmouth

There were 10 more companies on the Life Sciences track that I did not see. Most of these do not have web sites yet since they are still inside university labs.

Last year four of the 20 companies that presented were funded by VCs. That 20% funding rate is far higher than the normal 1% to 2% of companies most VCs fund. Of course these startups have been screened by a panel of VCs before presenting, so we are only seeing the best.

Technology Licensing Office - The big universities have Technology Licensing Offices that handle technology transfer on behalf of the university. MIT in Cambridge has one of the best TLO's in the country. VCs are constantly looking at technologies from MIT and other universities, but my guess is they represent less than 5% of the companies they fund, probably much less. What are the issues with TLO deals?

• Disagreement on value of technology
• No proven customer/market fit for the technology
• Key technology researchers will not transfer with the technology
• Complicated Intellectual Property (IP) ownership issues
• Long term royalties that may not make sense for the product evolution

Its All About The People - VCs invest in people not technologies. Entrepreneurs have a balance of business sense and technology smarts that is very rare. Matching entrepreneurs to technology wizards is where VC firms add a lot of value. They have a list of serial entrepreneurs that they know and trust. Magic happens when they match these entrepreneurs to cool new research.

We need more events and conferences like this that bridge the gap between university research and entrepreneurs. Thanks to Boston based Flybridge Capital, Atlas Venture, General Catalyst, and Goodwin Procter for organizing and sponsoring this event.