He who dares wins
He who dares…
Ever seen birds on a wire or a fence? They stand on the edge, perched, observing everything above and in front of them. They cluster and group, finding comfort in numbers. Each all face the same direction waiting for the next opportunity or threat.
If you look closer you will often notice in a large group, one, maybe two exceptions. They are the odd birds, the ones who dare face the opposite direction. They dare not to fall in line and behave like the rest of the brood. They dare to look in the opposite direction, chancing the risk of not being the first to spot the threat in the direction the brood faces. But, whether they know it or not, the odd birds have made the best choice.
Take for example, 20 birds on a fence. 18 face one direction, 2 face the other. This means 18 birds will spot a threat or an opportunity in one direction and immediately jump to compete for it or escape. Another way to think of this is in terms of mathematical angles. One side of the wire covers 180 degrees. If 18 birds compete for 180 degrees, by simple math they each could claim 10 degrees of opportunity without competing with one another. Now the odd birds, the two of them share the other side of the wires 180 degrees. They each get 90 degrees of coverage before they begin competing with one another for the opportunity. That’s 9 times more opportunity then the grouped birds! Since threats can come from either direction equally, the odd birds are better equipped to react to danger as they are able to spot threats coming from the odd birds direction and rely on the brood to alert them to threats coming from the brood facing side, while the brood is less likely to rely on a single bird flying away from the cluster and so vulnerable to threats from the odd birds direction.
How is this relevant? Be the odd bird. Don’t copy your competitors or follow the trend. Make trends, build markets. Walk without a rhythm and you won’t attract the worm. (Sorry had to throw in a Dune reference). Take chances and you may find the field is wide open, rich with opportunity and little competition. And if things go wrong, fly away and start over doing things differently and eventually you will win.
“He who dares, wins.” It’s the British SAS special forces motto, and you know something, they are right.
The reality of investing and exiting in the Internet age.
There has been a lot of discussion about building billion dollar vs <=$50MM exit opportunities. Everyone from Dave McClure, to Techcrunch’s Michael Arrington have weighed in on the debate. To quote Sarah Lacy from her Techcrunch post
There’s the obvious macro-economic answer: Everyone selling too early is bad, because no new tech giants are created. There’s the obvious micro-answer: A few million dollars is life changing for most people, and those entrepreneurs deserve to make a life-changing amount of money.
These are obvious answers, and very valid at that. The majority of the discussions have been back and forth on how these events change the consumer’s life later or the entrepreneurs life immediately. However, what’s not often discussed is the systemic changes to how businesses form and wind down and their subsequent impact on exit strategies. It’s why I believe the $50mm exit is more realistic.
The first corporation was founded around the 14th century when the only form of communication were written and delivered by hand, or word of mouth. The next major change in communication was the printing press, in the mid 15th century, which removed the need for hand written sources of data and made information much more accessible to the masses. Fast forwarding to the next significant iteration in communication, the telegraph facilitated data to be exchanged over longer distances in significantly shorter times, but to a narrow audience in the first half of the 19th century. The telephone opened up the first mass communication that facilitated information to be exchanged in real time at the pace that people could understand the spoken word first during the later half of the 19th century. Lastly, email and the Internet age has brought about mass communication at what will eventually be unrestricted levels of data exchange starting from the mid 20th century. Each iteration in communication technology has produced shorter and shorter leaps until the next major breakthrough in communication. This holds true until we discovered the Internet and it’s application theories that are still very much being iterated upon. This rapid growth in communication technologies has impacted the business life cycle in a similarly dramatic and ultimately disruptive fashion.
Businesses utilize people (human capital), and resources (industrial or financial capital) to acquire more resources (wealth). If the life blood of a business is employees and capital, then as communication efficiency increased, so does individual productivity. As individual productivity increased so too did the fruits of such labor produce better industrial and financial capital efficiency. This iterative process continues today and will tomorrow as communication and industrial capital continue to become further efficient. The problem however is that each iterative cycle continues to produce diminishing returns in productivity until the marginal utility gained from an iteration becomes ultimately indistinguishable and therefore irrelevant. It’s why when we talk about the value of infinity, a figure technically unobtainable, we say we approach infinity when applied to reality.
The Internet has placed us on the express train to quickly approaching infinity.
Now, here’s the real problem. While businesses continue to become more efficient, the wealth they strive for remains ultimately zero-sum, meaning there is a finite amount of real wealth available in our world for distribution. Since businesses are built upon the intersection of human, industrial and financial capital, in a world approaching infinity, the economic advantage of economies of scale provide significant advantages for large existing firms to capture an uneven percentage of real wealth. At the same time, smaller capital investments are capable of achieving significant results because of gains in efficiency of productivity.
Now here’s the irony. As these larger firms continue to expand to capitalize on economies of scale they become a victim of their very own success. In order to leverage economies of scale, larger firms must function as closely coupled in productivity as possible leading new innovation to smother within an environment that promotes uniformity in it’s creativity. This dilemma presents the opportunity for startups to innovate free of such constraints, and to iterate quickly to build something of value for which the world is willing to exchange their real wealth. This is the reason why large corporate entities become publishers of new innovation through acquisition and not through internal development. It’s why big pharmaceutical companies buy drug makers, and why Google has bought 23 companies 3 quarters into this year.
What does this all mean? Well, startups can always succeed by innovating free of the constraints larger businesses suffer. But as they grow from their initial innovation, they too become victims of success by accumulating their share of the finite real wealth willing to be exchanged for their innovation. So the startup must then innovate a new product in order to achieve further wealth. As this process iterates, it will eventually soon find itself needing to leverage economies of scale to compete with smaller startups that are able to innovate free of such constraints. In this manner, the cycle completes itself.
So why do I think smaller exits then larger are the new systemic reality? Because all resources, be they human, financial or industrial capital are ultimately finite and growing a startup beyond it’s initial innovation requires diminishing investment capital in a world where the incumbent large entities are already at an advantage against you in competing for those same exact resources. Whats worse is, ultimately to succeed under such conditions requires successful reiteration of new innovation over and over with diminishing returns with each iteration. And in a world where communication has pushed us to approach infinity faster, opportunity for significant gains in marginal utility has declined inversely. Even so, if the startup becomes larger, it becomes indigestible to many potential acquirers and therefore removes from the pool of chance acquirers whom provide exit opportunities outside of IPOs. This means the most marginal utility, or in this case, opportunity to be rewarded with real wealth, with the least amount of expenditure in resources (read risk) exists in capitalizing on singular innovations that larger corporations are unable to achieve. The entrepreneur’s goal should then be to iterate free of all constraints including the shell that holds the previous successful innovation. Lastly, when talking about successfully run acquisitions, a competitive bidding process will occur between the innovation publishers competing for your startup. The acquirer is then likely to fall victim to the winner’s curse, and because of the lack of data available about the profitability of such an innovation, over pay for your enterprise at the time of acquisition.
An entire generation of entrepreneurs are building dipshit companies and hoping that they sell to Google for $25 million - anonymous VC
Dipshit companies have the wind behind them in the new reality of investing and exiting in the Internet age. That doesn’t mean you can’t build something that’s more then just one product. It’s not at all impossible, it’s just harder and much more inefficient.
This post is likely a work in progress. I greatly welcome feedback.
The Way of the Samurai meets Entrepreneurialism
Entrepeneurialism and the lifestyle successful entrepreneurs lead are driven by a single concentration; Striving to make real, their desire to implement a vision and ultimately, for big or small, change the world. There is what I find to be, an interesting parallel in this goal to the single minded focus of the Samurai. Although clearly dated and not always applicable, many interesting lessons can be derived from the collection of Japanese samurai wisdom compiled by Yamamoto Tsunemoto’s “Hagakure”. Below are what I felt to be key take-aways, relevant to entrepreneurs, from just the first Chapter.
Heads up, this is a very long post. It is however structured such that you don’t have to read to the end to find value in it.
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It isn’t luck, it’s timing.
For years I’ve thought a secret ingredient to success for startups was luck. While I still hold that to be true, I think calling it luck is a definite misnomer.
In my last post “Now is the time to invest” the subject was broached in the comments that one of the primary keys to success for a startup was the marketplace and that the current economic climate is not a friendly marketplace to most if any market. I’d like to explore this idea further. A marketplace is the collective goods and services of an economy, while the market is a particular economy for a good or service. This dichotomy means a startup can succeed even during economic recession or depression as long as the markets it participates in grow or fail to compete against a startup with a new innovation. We’ll talk about the later form of success in another post.
So what does this all mean relative to today? Well, during times of economic prosperity, the marketplace thrives and results in systemic, wide spread, success to all markets. This is the result of what amounts to be a collective of excess producer surpluses and rents. A sort of inflation of consumer wealth, that is being redistributed in the form of profit-subsidies to companies that would not thrive had it not been alive to exist during this time and place. And, when the economy does poorly, then as expected, the opposite takes place. There is a widespread redistribution of producer surplus as consumer demand falls. The same companies that depended on the profit-subsidies from their customers can no longer afford to exist, and they either learn to cut overhead and be lean to survive, or fail. However, in actuality, most companies try and adapt to become leaner to survive, but ultimately fail because organizational culture and structure take time to genuinely reform.
Okay, so, again, what does this all mean relative to today? Well, it means startups should be built to run lean and agile always. It should always run near to the bone; the bare essentials. A startups sole purpose is to survive until that exact moment when, luck, time, an unique inflection point offers the company the rarest of opportunities to move forward with great success.
The company that can retain the structure and culture of lean and agile through prosperity are the companies that grow to become great. The one that gets fat and lazy too much overhead from expanding poorly during successful times, struggle and or fail when the next inflection point downward happens. This means, if you’re building for a quick exit, run lean, mean and agile and survive until you are at the right time and place. When it hits, you’ll want to start looking for an acquirer to sell before the marketplace deflates. The easiest would be in the middle of a boom. The most dangerous but highest premiums are towards the end of a boom. But, that being said, companies built for acquisition exits often manifest their destinies with failure. If you’re building to last a great company, run lean, mean and agile and only scale variable costs during times of great economic prosperity. This means when things go south you’ll be able to survive and retain those rich earnings to become even bigger and better the next time and place your up to bat. Do this enough times and you can build enough reserves to even survive mistakes that would crush a lesser company.
The reality is, when success will happen will never be a time line you have control over. When success is ready for you, being there at the right time and place to react is when success is granted. Companies forged in hard economic times are tempered with the philosophy of lean and agile, naturally improving their chances of surviving for when success is ready to be granted. That is why I feel the time for investors to invest is now. So, build to be there for when success calls and you will succeed. Lucky you.
Do you agree or disagree? Join the discussion and comment below!
Six things successful startups do.
We believe a successful startup must excel in these six points and more:
- Surrounds itself with the best and the brightest of ambitious, dedicated and passionate people; the best give the expertise and experience needed, the brightest will always find innovative solutions and the ambition & passion will give the courage required to pick yourself up when you fail.
- Understands that it will, baring incredible luck, likely fail catastrophically at some point and is always planning for this.
- Has the patience, courage, conviction, and irrational faith to persevere even when there are better alternatives in the market and when the going gets tough.
- Recognize a significant and genuine market pain. Provides a cost effective and adoptable solution to an undiscovered need or problem that exists and is better than any present, emerging or conceivable alternatives.
- Knows how to successfully market and monetize their solution. Validates their market pain and monetization plan by lining up potential customers for their solution early on.
- Executes, executes, and executes. Makes sure to do the right things and to do things right. Thomas Edison is known to have said “Genius is 1% inspiration and 99% perspiration” he is also known to have said “There is no substitute for hard work.”
Do you agree or disagree? Please feel free to comment and suggest what you feel makes successful startups!