This summer I visited Russia, Thailand, the Philippines, Indonesia, and Mexico to see different markets and entrepreneurial perspectives. While I learned what it’s like to be a tech entrepreneur in other markets, I also realized I was frequently dispelling a lot of myths about Silicon Valley, the VC ecosystem, and the American tech industry. With the summer wrapping up, here are my top ten myths and counter-arguments from those recent travels:
Myth #1. Technology Makes It Possible to Start a Company Overnight
Technology is cheaper and more pervasive than ever. However, launching a product is just the beginning. Though you can build a product overnight, it takes about 18 months to become a market player — finding a problem worth solving, educating users, building traction, developing a viable business strategy, training a sales team, and securing long-term funding takes time. We started Meebo in 2003 and spent 18 months building entirely different products (online backup, document sharing) before we built the online instant messenger that launched in 2005.
Meebo’s story is far from unique. Twitter, PayPal, Instagram, and Pinterest were once Odeo, Confinity, Burbn, and Tote and required an average of 17 months of development to become today’s recognizable products. It always takes longer than anticipated. Though technology has become far more accessible and though there are countless 48-hour hackathons, company’s just aren’t built overnight.
Myth #2. You Only Pivot When Your Idea is Bad
A fast-paced market means there are more opportunities but it also means that the race doesn’t end once you launch. The Internet reinvents itself every two years. Even if you are successful today, technology changes so quickly that you can lose success just as quickly as you gained it. You may need to pivot proactively to stay relevant.
One of the hardest aspects of a startup is thinking long-term. There are so few resources that the bugs, meetings, and people issues tend to overshadow long-term innovation. It’s easy to seduce yourself into believing that explosive success is just one feature push away instead of surveying the market and developing a broader plan of attack for the future. Even when long-term innovation is a priority, you can conversely fall into the trap of pivoting, pivoting, pivoting until the funding runs out without giving any single pivot a long, hard, fair shot.
CEOs are defined by their long-term strategy. Is a CEO focused upon a singular vision and stubborn to a fault? Or is the CEO forever inventive, swinging on a whim between industries and praying something sticks? The average startup CEO’s tenure is only five years which means that most CEOs only get 2-3 market plays to find out.
Myth #3. Being a Founder is Glamorous
From HBO’s Silicon Valley, you’d think that being a founder entails VCs fawning over you and brogrammers over-thinking their dating odds. I haven’t seen the entire season but most of what I have seen rings true except that it omits what founders do most — hiring.
A VC once told me that most founders spend 40% of their time hiring. Looking back, that was conservative. Hiring is the cornerstone of culture. Founders dedicate absurd amounts of time to mundane interviews because they aren’t just building a team, they’re architecting a culture. During the hiring process founders tune the recruiting process, double-check how managers identify talent, articulate the organization’s values, detail how the team operates, and defend the company vision. Even once they’ve hired new team members, it takes the new folks 6-12 months to become dependable interviewers. Realistically, founders can’t loosen the reins until they’ve hired and trained the first 50 team members. Team-building takes a lot of time and as I’m sure HBO would agree, job interviews make really boring television.
Myth #4: Founders Don’t Have Bosses
Who doesn’t dream of living free of a boss by their own rules? Surely an entrepreneur gets to make the calls! Sadly, it’s just not true. My co-founder and CEO asked me for my annual self-review out of the blue and my dreams of never again penning a resume or performance review were crushed. Even outside the founding team, entrepreneurs are also accountable to the Board of Directors who determine whether the founders are fulfilling their roles.
More importantly, there’s one boss that trumps everything that no one can escape. Founders are always accountable to the market and the market is the craziest, most irrational, and unfair boss of them all. The market tells you when an earnest team member’s skillset is out of date. The market dictates when a downturn in the economy makes it difficult to give your team deserved raises. The market prefers your competitor for the most fickle reason. Even if entrepreneurs don’t have a traditional boss, they are still pawns of the market. That’s not fun.
Myth #5. The Best Product Wins
Peanut, the winner of the 2014 World’s Ugliest Dog Contest at the Sonoma-Marin Fair in Petaluma on Friday, June 20, 2014. (Rachel Simpson/For the Argus-Courier/Press Democrat)
Product design can be a formidable advantage. But if you introduce something people really want, you can get away with product murder. Twitter’s fail whale initially eclipsed its bird logo. Facebook’s photo uploader & tagging features are still iffy. And when was the last time that Apple launched a major product without an antenna, map, or battery snafu? If you’re in second place, you have to do everything right and more to catch up. But if you’re #1 with product-market fit, users are surprisingly tolerant and excited to be part of the new, shiny thing.
So why focus on product? First, there are different types of companies. Companies that differentiate primarily on product are usually higher-end companies like Apple, BMW, Square, Nest, or Dandelion Chocolate (<-- yup, shameless name-dropping). Getting the product right is an essential part of these brands and customers expect a curated experience. But these companies are the minority. Most companies excel at experimentation rather than product execution. For instance, Rovio, the creators of Angry Birds, recently expanded into book publishing. Other gaming companies have a strategy of immediately copying popular games and letting others do the product experimentation. And then there's Amazon who does everything from MyHabit to Kindle to AWS to Amazon.com. Amazon does an amazing job stretching themselves across different genres and while they have good UX, it's not their core differentiator. The product can't be neglected all together however. If you dominate the market with a half-hearted product, users will eventually feel exploited. Though their usage might continue, it’s only because there’s no alternative, not due to loyalty. Users are savvy enough to pick up on exploitive monopolies and to know when innovation is overdue. Why were Uber and Lyft able to gain traction so quickly? How long had it been since users felt any Yellow Cab love? Yelp, OpenTable, LinkedIn, and other companies built a decade ago by locking in the market — watch out! When network effect companies crumble, they crumble fast!
Myth #6. VCs Throw Money at you
Image courtesy flickr: Cayusa.
Even in a frothy environment, you have to break a sweat fundraising. VCs differentiate themselves through investing strategies such as big markets, strong founding teams, product execution, technological innovation, and industry genres. When there are more VCs, there are more meetings to identify the VC where your startup fits their strategy.
Entrepreneurs outside the U.S. envision VCs sprinkling money on American entrepreneurs like fairy dust. But the average American startup team reaches out to approximately 60-120 VCs and angels to raise the first $1M. That’s work! There’s no doubt that it’s harder to raise capital outside of the United States but some VCs also look abroad to emerging markets where they don’t face such stiff competition.
Myth #7. An Acquisition Means You’re a Multi-Millionaire
Founders don’t pocket the incredible dollar figures in headlines. It’s possible for an acquisition in the hundreds of millions to leave nothing for the founders depending upon how much has been raised, how much was allotted to employees, the number of founders, whether the exit included stock or cash, and the liquidation preferences.
Given how important they are, it’s surprising that liquidation preferences aren’t discussed more. Liquidation preferences have two variables: 1) the multiple and 2) the preference type (preferred, non-preferred, and capped). When a company folds or is acquired, liquidation preferences protect the investors’ investment. At minimum, a liquidation preference simply specifies that the investors receive their money back (1x non-participating). At the other extreme, investors might have a 2x multiple (meaning that investors want double back) and if there’s anything left over, they are also entitled to a cut of the remainder based upon their ownership (2x participating).
With a 2x participating liquidation preference, it’s possible for a company that raised a total of $50M for 50% ownership to sell for $100M and for the team to have nothing. Participating also means that the investors always get more than just 50%. When the exit is huge, the liquidation preference matters less. But huge exits are rarer. Sometimes headlines will speculate on the company’s valuation but news reports never mention the liquidation preference.
As an entrepreneur, it’s easy to get squeezed: work hard, have a modest exit, have no substantial upside, and lose the loyalty of a team that you might have worked with again.
Myth #8. Raise as Much Money as You Can
Any business can succeed if given enough time. Why wouldn’t you raise as much money as possible to stay afloat as long as possible?
When you raise money, you’re expected to spend it. VCs want to put cash infusions behind companies with potential reoccurring revenue, not to pay for a company’s rainy day fund or creative projects. If you haven’t vetted a product or figured out a core business model before taking funding, you’re trading flexibility for cash. Meebo’s first product in 2003 tackled online backup. After spending a year building the product, we realized how much capital we’d need to raise to build out an untested idea. We switched to document collaboration and another year later, to online instant messaging. If we’d taken cash upfront, we wouldn’t have had that kind of flexibility or we would have been diluted later. It’s easier to change a strategy and experiment when you’re smaller and don’t have promises to keep.
Second, a big bank account changes the way you operate. When your team knows that you have money to spend, they ask for more. When contractors know you have funding, they don’t grant favors. When patent trolls look for companies to target, they sniff out money trails. Frugality is frequently a characteristic of great businesses. The easiest way to be frugal is to only take the money you need (with some cushion) to prove the next stage of your business.
Myth #9. If You Do Everything Right, You Will Be Successful
Web 2.0 companies that are alive or have exited as of today
There is no magic formula. Many smart startups will fail and many foolish ones will somehow succeed. Luck plays a huge hand in a startup’s ultimate outcome. What determines whether a company has a billion-dollar exit or a modest success frequently falls far outside the company’s purview to timing, perceived competitive threats, even executive vacation schedules. When companies exit for huge figures, folks flock to reverse engineer the acquiring company’s process and then extrapolate what they need to change to bolster their own acquisition odds. It’s an interesting thought-exercise but many companies just get lucky. It’s far better to continuously plan for the long-term and if the stars magically align for a favorable acquisition, consider yourself very lucky (not necessarily gifted).
In 2013, 37 out of 511 YCombinator companies were worth more than $40 Million. That suggests a 93% failure rate. Within a startup, instead of hoping for success, you are constantly mitigating potential failure. There are a few practices that help (great team, frugality, strong brand) but the most important factor is sheer resilience.
Myth #10. We’ll Always Have These Opportunities
Desert Bus, a reality-based driving mini-game circa 1995
Technology changes. It means computing today but it meant steam engines, Hollywood films, agriculture, industrialization, and printing presses in the past. While I’m optimistic that technology will continue to present more opportunities for everyday folks to change the world, I don’t take it for granted. The economy, government regulations, access to capital, and what society needs will evolve. Who knows whether a new wave of robotics, biotech, 3d printing presses, or new energy storage mechanisms will be nearly as democratic as computer programming?
Even when the odds are stacked against the entrepreneur, I can’t imagine a better time in history to be alive and to have the chance to change the world at such scale. Even if it may not last forever, it’d be such a shame not to try.
Final Bonus Myth! Only Crazy People Do Startups
Tricked you! This is absolutely true. Most entrepreneurs are a little (or a lot) crazy. And sometimes that prerequisite craziness makes it especially hard for entrepreneurs abroad to garner support from their communities. Some Asian cultures ask family members to support their elder’s later years. Taking a financial risk to be an entrepreneur can seem disrespectful to their family. And some European communities aren’t terribly forgiving of failure. Being an entrepreneur is a tough slog and doing it without a support network is absolutely brutal. I cringe a little when VCs and entrepreneurs assume that entrepreneurs abroad are lacking know-how or bravado. It’s far more complex. The entrepreneurs I see abroad may not be as loud and boastful but they’re plenty talented and self-assured.
Albert Einstein coined insanity as “doing the same thing over and over and over again and expecting different results.” For me, that’s the definition of a startup. You’re continuously adapting to a mercurial market with no promise of a successful outcome — that’s a little insane. There are thousands of better ways to make a more dependable income. If anyone embarks on a startup solely for monetary gain, they’ll quit when they realize what a crazy, unpredictable journey it is. You have to be an entrepreneur because you believe that if you don’t solve a problem, no one else will.