Lessons for Entrepreneurs
Over the course of their careers, veteran venture capitalist Randy Komisar and finance executive Jantoon Reigersman continue to see startups crash and burn because they forget the timeless lessons of entrepreneurship. But, as Komisar and Reigersman show in their new book, Straight Talk for Startups: 100 Insider Rules for Beating the Odds, you can beat the odds if you quickly learn what insiders know about what it takes to build a healthy foundation for a thriving venture.
“Apprentices work furiously to learn the rules; journeymen proudly perfect the rules; but masters forget the rules.” -Randy Komisar
Randy Komisar recently shared his perspective:
How did this book come about? Have you been compiling these rules for years?
We wrote this book because we were distressed by the growing frequency of missteps by entrepreneurs, many of whom are notoriously splashed across business pages and websites. Jantoon Reigersman brought fresh eyes to the situation as the CFO of a Silicon Valley rocket ship gone awry. We had been having a dialogue for years about what was really going on in the Kabuki Theaters of startup boardrooms and venture capital firms. And we felt that entrepreneurs and investors, professors and students, and frankly anyone curious about the startup game could all benefit from our conversations regarding the time-proven best practices for building successful companies. I have been part of the scene since the mid-1980s, and Tom Perkins, founder of Kleiner Perkins, was one of the original Silicon Valley venture cowboys. I had been compiling and sharing these insights with entrepreneurs since I co-founded my first company. These are the insider rules that the random hero stories heralded by the press conveniently leave out. In Straight Talk for Startups we address the nuts and bolts of choosing investors, raising money, building boards, achieving liquidity, and mastering the fundamentals by distilling decades of frequently forgotten wisdom about how to beat the odds.
“Venture Capitalists have one of the greatest jobs in the world. They get to sit across the table from passionate strangers who hallucinate the future for them.” -Randy Komisar
Rule 1: Starting a venture has never been easier; succeeding has never been harder. You’ve had an extraordinary vantage point in your career, and I’d like your perspective on the why behind Rule 1.
It’s all about capital. Privileged places like Silicon Valley are awash is excess capital. The recovery from the Great Recession has left interest rates at record lows. Investors have been looking for ways to juice their returns, and venture capital’s black swans are a siren song. Forget the low odds of winning; the size of the pot is mesmerizing. So investors have been ignoring risk and plowing money into long-shot bets.
This may seem great for entrepreneurs. And on its face it is. But there is a downside. Too much capital means that too many companies are being funded in any single market. With easy capital comes reckless spending on scaling—often times resulting in highly uneconomic growth, that is the acquisition of customers who pay less than the cost of providing the product or service and who have little loyalty to the business. This “all or nothing” mentality leads to wasted dollars, talent and effort. And when one competitor makes the leap to noneconomic growth, the rest are left with little choice but to follow.
The cornucopia of money and startups also affects the job market. Salaries are inflated. People are quick to move from perceived losers to winners. In the Bay Area, for instance, the price of housing, the suffering infrastructure and the breakdown of communities makes building businesses much harder, even if starting them is easier than ever.
Startup Rule: Starting a venture has never been easier; succeeding has never been harder.
I’ve seen many entrepreneurs aim to change the world, but it seems they underestimate the difficulty of getting people to change their behavior. Rule 3 zeroes in on this. When you’re evaluating an investment, how do you determine whether the proposed solution is significant enough to drive behavioral change?
We suggest aiming for an order-of-magnitude improvement in whatever the innovation is. For instance, if your innovation is a lower price for greater value, strive for a 10X increase in value/price. If the innovation is a more cost-effective distribution network, try to achieve a 10X performance advantage.
This is very hard to do, but if you set your sights lower you incur significant risks. Getting customers to jettison their current solutions to sample a fledgling startup’s alternative confronts tough inertia. You need the early adopters to validate you. And they are looking for big improvements, not small ones, to reward their pain.
Additionally, if you set your target lower with years to go before you get to market, your competition will not stand still. They may well achieve a 2X, 3X or 5X improvement before you ship. Your value gap shrinks accordingly.
And finally, if you aim for an order-of-magnitude improvement and fall short, you can still achieve sufficient improvement to effectively compete. If you aim lower and miss, you may simply be out of luck.
Startup Mistakes to Avoid
What are a few of the mistakes you’ve seen startups consistently make?
Frankly, I am always shocked at how entrepreneurs become so caught up in their innovative vision that they overlook the lessons of the past. They become convinced that what they are doing is novel and ignore the inexpensive lessons of other people’s experience. The cheapest and fastest answers can be found in drawing analogies from the success and failure of those that came before. Stand on their shoulders and make new mistakes; don’t repeat mistakes from the past or reinvent the wheel.
Furthermore, so many entrepreneurs are clueless when it comes to boards. They don’t understand what the role of a board is, or how to select directors. They don’t manage their boards or conduct effective meetings. You wouldn’t settle for a second-rate management team, why settle for a second-rate board? A good board should elevate entrepreneurs and remove risk for the venture; a bad board can sink a good company.
And startups need to understand the role that luck plays in success. Being excellent reduces the risk of failure, but by-and-large success results from something or things outside your control. This does not mean you should resort to taking unnecessary risks in order to try and make it rain, but it does mean you should be prepared with buckets for an unexpected downpour. Great business leaders welcome luck and master the ability to recognize it when it appears, seizing that moment for success.
“Experience attests to the fact that all the brilliance and hard work in the world will not matter without something happening that is outside of your control. To find a self-made man, you need a very narrow field of view.” -Randy Komisar
10 Keys to the Perfect Pitch
Let’s talk a little about pitching. What are the characteristics of a perfect pitch presentation?
First and foremost, the perfect pitch should address all the key questions that any investor will ask about your business. Don’t try to avoid the hard issues, tackle them head on and build credibility. When you don’t know the answer, don’t fake it, show them how you will figure it out. Here is a summary of what to include.
- VISION AND MISSION: Describe your vision for success. Why are you passionate about doing this and why should an investor care enough to join you?
- PROBLEM: Present the problem or pain point your venture is solving and how others may have addressed this in the past. Why is this a big, important problem worth solving?
- SOLUTION AND VALUE PROPOSITION: Discuss your solution and show examples of its effectiveness for potential customers. Why is your solution compelling to customers and what is it worth to them?
- MARKET OPPORTUNITY: Present a detailed description of the ideal customer and the aggregate size of the market, including your total addressable market, your beachhead market, and your aspirational share of each. How big, ripe, and accessible is the market for your product?
- CONTEXT AND COMPETITION: Review the historical evolution of your target market: your competitors and their respective strengths and weaknesses, as well as what advances your venture’s solution offers. Why is this the right moment for you to succeed and beat the competition?
- PRODUCT: Present the product’s unique value and features, including any protectable intellectual property or other competitive moats, as well as your product development road map. Why will your product disrupt the existing market and where does it go from here?
- UNIT ECONOMICS AND BUSINESS MODEL: Show your target unit economics; the amount each discrete transaction will contribute to your operating profit. Share your assumptions on pricing, cost of goods, supply chain costs, and your economic value chain. Why will this be a profitable and thriving business?
- TEAM, LEADERSHIP, AND ORGANIZATION: Introduce the founders, senior management, board, and advisers, and include your view on any significant gaps in the team and how you plan to address them. Why is this the right team to make this venture a huge success, and how will your organization scale over time?
- FINANCIALS AND EXECUTION PLAN: Provide a historical and forward-looking profit-and-loss statement, balance sheet, and cash-flow analysis, sources and uses of capital, your future capital requirements, and your future financing plans. Why should investors have confidence in your plans, and as a consequence everything else you have told them about you and your business?
- INVESTMENT OPPORTUNITY: Outline your funding history (investors, invested dollar amounts, percentage ownership, prior valuations), current capitalization table, and proposed deal structure. Why is your venture going to be a black swan, providing extraordinary returns for your investors?
Additional advice. Have two financial plans, one that is high probability with line of sight that you can manage costs to, and an aspirational plan you hope you can achieve if things go your way. And don’t get lost in the weeds. Investors ask lots of questions, make sure you focus on the salient points and respond to more arcane questions off-line with detailed white papers.
Rule 59 is about consistent communication with investors. Many entrepreneurs seem so focused on the idea that they miss the importance of communication – with everyone from customers to employees to investors – or they just don’t think they have the time. I’d love to hear your perspective on the importance of excellent, consistent communications. What does it look like?
Entrepreneurs need to be an excellent sales people and communicators. They must convince stakeholders, from investors and employees to customers and partners, to take a chance on them before they have anything more to show than a plan built on a mountain of untested assumptions. If they can’t effectively communicate their vision, purpose, and a path to success, it doesn’t matter how good their idea is. This does not mean hyping, though there is a history of great entrepreneurs faking it till they make it. What it means is honestly addressing the challenges and your plan for overcoming them—being direct and open without sacrificing optimism and creativity.
Success is not just about achieving goals; it’s about beating expectations. Setting those expectations and then surpassing them depends largely on effective communications. And inconsistent communication erodes trust and confidence. Don’t constantly change stories or facts. Without results to show yet, trust is more essential than ever. Don’t risk buyer’s remorse by disappointing investors or partners with shifting goal lines. Remember, your ecosystem is small, and they compare notes. Don’t get caught speaking out of both sides of your mouth. Finally, in the boardroom, be sure not to over-sell. Your directors are on your side, and they can spot a hard sell a mile away. Treat them like partners, not strangers.
“Success is not just about achieving goals; it’s about beating expectations.” -Randy Komisar
One of your rules is about making it personal, and you pick this up in the epilogue as well. The personal why and what makes you tick. Would you share your perspective on this?
Too often business leaders think that their audience is only interested in one thing, the bottom line. Don’t get me wrong, the bottom line is very important, after all this is business. But in ignoring the bigger picture they underestimate their stakeholders. A good investor has a multitude of opportunities. All of them present rosy pictures of huge success and big returns.
The old hands look for something more. Someone special they want to invest in. Sure, it’s cliché that great investors invest in people not businesses, but there is a good deal of truth to it. Without a team, product, customer or dollar in revenue, even the best plan is unlikely to survive the first encounter with the enemy. So, what do you look for as an investor, or employee, or strategic partner? You look for character, work ethic, tenacity, vision, intelligence, creativity and a purpose you can believe in. If you dream the dream with the founder, what will your legacy be?
At the end of Straight Talk for Startups we pose what we consider to be the “Cardinal Rule: Always Ask Why.” Why this, why you, why now? Don’t wrestle with these questions simply because you don’t want to be stumped by an investor, answer them because they are fundamental to choosing the entrepreneurial life. If most ventures fail, you need to be certain that you don’t risk feeling like you wasted precious time but rather that you fought the good fight.
“There is joy in mastery and pride in excellence. There is satisfaction in success, but there is true meaning and fulfillment in creating value for others and helping them reach their potential. In the end, successful entrepreneurship is the triumph of human potential.” -Randy Komisar
The 100 rules you provide are an A-Z list of best practices. I can imagine you listening to an idea, watching someone mess up a rule, and holding up a number of the rule they violated before you walk out (laughing). Will the book be required reading before you hear a pitch?
Ha! You gave me a very disturbing vision of a panel of VC “judges” behind a dais holding up cardboard scorecards rating how well the entrepreneur has stuck the landing after a leap of faith pitch. Ugh.
A quick story. In my last book, Getting to Plan B, I argue that in early stage ventures business plans aren’t worth the paper they are written on. That instead you need to follow a methodical, “test and measure” approach to discovering rather than declaring your business. For years afterwards, entrepreneurs would pitch me without a plan. They were always shocked when I asked for one. They pointed out that in my book I had been dismissive of detailed business plans. I had to explain that while I never rely on a plan from an early stage venture, the plan nevertheless is the lingua franca of the business, and I want to test their assumptions and their thinking. They returned sheepishly with plans.
I think this book should be required reading because it gives entrepreneurs a leg up. It provides them with precious insider insights and best practices that are often lost or disregarded in today’ startup frenzy. And especially for entrepreneurs who lack access to experienced advisors, it evens the playing field.
Startups move too quickly for entrepreneurs to learn everything on the job. They need to be armed with know-how. If you teach someone to drive in a beat-up Honda, it will come back dinged. We shouldn’t be surprised if when we teach someone to drive in a Ferrari, the car comes back dinged as well. And the damage is much more expensive and consequential. Entrepreneurs deserve every advantage.
We understand that circumstance may require bending the rules. That is why we painstakingly explain the basis for each: so you can apply them as needed. But don’t ignore them; learn the rules by heart so you know when to follow them, and when to break them.
For more information, see Straight Talk for Startups: 100 Insider Rules for Beating the Odds.