Three levels of enthusiasm for technology

Most businesses today believe that technology can dramatically improve the way they operate. But they embrace technology with varying levels of enthusiasm.

The lowest level of enthusiasm is to adopt technologies made by other companies – email, customer services software, etc – and perhaps create an “IT department” to manage those technologies but nothing more. The next level of enthusiasm is to create an internal technology organization – a senior executive position like a CTO, a technology department, etc – and develop proprietary software. The highest level of enthusiasm is to have top management with technology backgrounds who see technology as core to every organizational function. For them, having a technology department would be like having a business department – redundant and strange.

A lot of recent Silicon Valley startups look at first glance like non-technology companies, doing things like food delivery, home services, transportation, etc. The difference is that the founders often grew up with technology, have backgrounds developing software, and can’t imagine anything other then a technology-centric worldview. They’re betting that by putting technology at the core, they’ll be able to create dramatically better products and services.

“There’s just a tremendous amount of craftsmanship in between a great idea and a great product”

Steve Jobs in 1995:

There’s just a tremendous amount of craftsmanship in between a great idea and a great product. And as you evolve that great idea, it changes and grows. It never comes out like it starts because you learn a lot more as you get into the subtleties of it. And you also find there are tremendous tradeoffs that you have to make. There are just certain things you can’t make electrons do. There are certain things you can’t make plastic do. Or glass do. Or factories do. Or robots do.

Designing a product is keeping five thousand things in your brain and fitting them all together in new and different ways to get what you want. And every day you discover something new that is a new problem or a new opportunity to fit these things together a little differently.

This is why almost all successful startups have founders who understand business, design, and technology. Product development is the process of navigating a maze – not three separate mazes, but a single maze that intersects all these functions. The people navigating the maze need the full authority of the company behind them.

Vanity milestones

Eric Ries uses the phrase “vanity metrics” to refer to metrics that founders cite to demonstrate progress but that are actually false signals. A related concept is “vanity milestones”: achievements that are more about making you feel good than helping your company. Vanity milestones include:

– Raising money from famous people/firms who aren’t really going to help your company (e.g. Hollywood celebrities).

– Partnerships with brand name organizations that aren’t really going to help your company.

– Getting press (e.g top lists) that focuses on founders and not your company.

– Almost all tech press (unless your product targets developers or tech companies).

This doesn’t mean it’s bad to hit vanity milestones. Good companies hit lots of vanity milestones along the way, and sometimes they can be a morale boost for employees. What is worrisome is when founders equate vanity milestones with success. The attention will go away very quickly if your company fails.

Ten million users is the new one million users

Entrepreneurs and investors have been enamored with consumer internet startups for the last few years. But there are signs this is ending.

Some observations:

– Thousands of early-stage consumer web/mobile companies were started and funded in last 24 months.

– There are only a few dozen VCs who actively write consumer Series A checks, and those VCs will only do a few deals a year.

– Facebook’s market cap is about half of what most tech investors expected before the IPO.

– A few breakout early-stage consumer hits (Instagram, Pinterest) have reached tens of millions of users in record time.

– Internet users have tens of thousands of services/apps to choose from but limited time and attention.

Some consequences:

– For consumer startups with non-transactional models (ad-based or unknown business models), you need something closer to 10 million users versus 1 million users to get Series A funded.

– For consumer startups with transactional models, e.g. e-commerce, the number of users required is often far lower because revenue is the more important metric. Hence, many early-stage consumer startups are switching to transactional models.

– It’s becoming increasingly common for early-stage consumer startups to do bridge financings (raising more money from past investors, usually on terms similar to the prior round) instead of Series As.

– VCs are increasingly focusing on B2B for early-stage investments.

– There will be a lot more consumer talent acquisitions.

Some advice:

– If you are thinking of starting a non-transactional consumer startup, be aware that you are entering what is perhaps the most competitive sector in tech in the last decade.

– If you can raise more money, do it. (Especially pre-launch: remember, there’s nothing like numbers to screw up a good story).

– Be prepared for lower valuations for non-transactional early-stage consumer startups (breakout later-stage companies, on the other hand, will likely continue to command high valuations).

Different types of risk

The idea that founders take on “risk” is a misleading generalization. It is far more informative to separate the specific types of risks that founders assume, including:

– Financing risk: You can’t raise money at various stages because you haven’t hit accretive milestones or your space isn’t appealing to investors.

– Product risk: You can’t translate your concept into a working and compelling product.

– Technology risk: You can’t build a good enough or, if necessary, breakthrough technology.

– Business development risk: You can’t get deals with other companies that you depend on to build or distribute your product.

– Market risk: Customers or users won’t want your product.

– Timing risk: You are too early or too late to the market.

– Margin risk: You build something people want but that you can’t defend, and therefore competitors will squeeze your margins.

At the early stage, the main way to mitigate these risks is to recruit great people as cofounders or early employees. You shouldn’t recruit people that will give you a high likelihood of reducing these risks. You should recruit people that give you an unfair advantage. You should try to win the game before it starts.

Startups are hard, and risky. But if you lump all the risks together, you are playing the lottery. Talented entrepreneurs identify specific risks and do everything they can to overcome them.