The Pmarca Guide to Startups

Why not to do a startup

In this series of posts I will walk through some of my accumulated knowledge and experience in building high-tech startups.

My specific experience is from three companies I have co-founded: Netscape, sold to America Online in 1998 for $4.2 billion; Opsware (formerly Loudcloud), a public software company with an approximately $1 billion market cap; and now Ning, a new, private consumer Internet company.

But more generally, I’ve been fortunate enough to be involved in and exposed to a broad range of other startups—maybe 40 or 50 in enough detail to know what I’m talking about—since arriving in Silicon Valley in 1994: as a board member, as an angel investor, as an advisor, as a friend of various founders, and as a participant in various venture capital funds.

This series will focus on lessons learned from this entire cross-section of Silicon Valley startups—so don’t think that anything I am talking about is referring to one of my own companies: most likely when I talk about a scenario I have seen or something I have experienced, it is from some other startup that I am not naming but was involved with some other way than as a founder.

Finally, much of my perspective is based on Silicon Valley and the environment that we have here—the culture, the people, the venture capital base, and so on. Some of it will travel well to other regions and countries, some probably will not. Caveat emptor.

With all that out of the way, let’s start at the beginning: why not to do a startup.

Startups, even in the wake of the crash of 2000, have become imbued with a real mystique—you read a lot about how great it is to do a startup, how much fun it is, what with the getting to invent the future, all the free meals, foosball tables, and all the rest.

Now, it is true that there are a lot of great things about doing a startup. They include, in my experience:

Most fundamentally, the opportunity to be in control of your own destiny—you get to succeed or fail on your own, and you don’t have some bozo telling you what to do. For a certain kind of personality, this alone is reason enough to do a startup.

The opportunity to create something new—the proverbial blank sheet of paper. You have the ability—actually, the obligation—to imagine a product that does not yet exist and bring it into existence, without any of the constraints normally faced by larger companies.

The opportunity to have an impact on the world—to give people a new way to communicate, a new way to share information, a new way to work together, or anything else you can think of that would make the world a better place. Think it should be easier for low-income people to borrow money? Start Prosper. Think television should be opened up to an infinite number of channels? Start Joost. Think that computers should be based on Unix and open standards and not proprietary technology? Start Sun.

The ability to create your ideal culture and work with a dream team of people you get to assemble yourself. Want your culture to be based on people who have fun every day and enjoy working together? Or, are hyper-competitive both in work and play? Or, are super-focused on creating innovative new rocket science technologies? Or, are global in perspective from day one? You get to choose, and to build your culture and team to suit.

And finally, money—startups done right can of course be highly lucrative. This is not just an issue of personal greed—when things go right, your team and employees will themselves do very well and will be able to support their families, send their kids to college, and realize their dreams, and that’s really cool. And if you’re really lucky, you as the entrepreneur can ultimately make profound philanthropic gifts that change society for the better.

However, there are many more reasons to not do a startup.

First, and most importantly, realize that a startup puts you on an emotional rollercoaster unlike anything you have ever experienced.

You will flip rapidly from a day in which you are euphorically convinced you are going to own the world, to a day in which doom seems only weeks away and you feel completely ruined, and back again.

Over and over and over.

And I’m talking about what happens to stable entrepreneurs.

There is so much uncertainty and so much risk around practically everything you are doing. Will the product ship on time? Will it be fast enough? Will it have too many bugs? Will it be easy to use? Will anyone use it? Will your competitor beat you to market? Will you get any press coverage? Will anyone invest in the company? Will that key new engineer join? Will your key user interface designer quit and go to Google? And on and on and on…

Some days things will go really well and some things will go really poorly. And the level of stress that you’re under generally will magnify those transient data points into incredible highs and unbelievable lows at whiplash speed and huge magnitude.

Sound like fun?

Second, in a startup, absolutely nothing happens unless you make it happen.

This one throws both founders and employees new to startups.

In an established company—no matter how poorly run or demoralized—things happen. They just happen. People come in to work. Code gets written. User interfaces get designed. Servers get provisioned. Markets get analyzed. Pricing gets studied and determined. Sales calls get made. The wastebaskets get emptied. And so on.

A startup has none of the established systems, rhythms, infrastructure that any established company has.

In a startup it is very easy for the code to not get written, for the user interfaces to not get designed… for people to not come into work… and for the wastebaskets to not get emptied.

You as the founder have to put all of these systems and routines and habits in place and get everyone actually rowing—forget even about rowing in the right direction: just rowing at all is hard enough at the start.

And until you do, absolutely nothing happens.

Unless, of course, you do it yourself.

Have fun emptying those wastebaskets.

Third, you get told no—a lot.

Unless you’ve spent time in sales, you are probably not familiar with being told no a lot.

It’s not so much fun.

Go watch Death of a Salesman and then Glengarry Glen Ross.

That’s roughly what it’s like.

You’re going to get told no by potential employees, potential investors, potential customers, potential partners, reporters, analysts…

Over and over and over.

And when you do get a “yes”, half the time you’ll get a call two days later and it’ll turn out the answer has morphed into “no”.

Better start working on your fake smile.

Fourth, hiring is a huge pain in the ass.

You will be amazed how many windowshoppers you’ll deal with.

A lot of people think they want to be part of a startup, but when the time comes to leave their cushy job at HP or Apple, they flinch—and stay.

Going through the recruiting process and being seduced by a startup is heady stuff for your typical engineer or midlevel manager at a big company—you get to participate vicariously in the thrill of a startup without actually having to join or do any of the hard work.

As a founder of a startup trying to hire your team, you’ll run into this again and again.

When Jim Clark decided to start a new company in 1994, I was one of about a dozen people at various Silicon Valley companies he was talking to about joining him in what became Netscape.

I was the only one who went all the way to saying “yes” (largely because I was 22 and had no reason not to do it).

The rest flinched and didn’t do it.

And this was Jim Clark, a legend in the industry who was coming off of the most successful company in Silicon Valley in 1994—Silicon Graphics Inc.

How easy do you think it’s going to be for you?

Then, once you do get through the windowshoppers and actually hire some people, your success rate on hiring is probably not going to be higher than 50%, and that’s if you’re good at it.

By that I mean that half or more of the people you hire aren’t going to work out. They’re going to be too lazy, too slow, easily rattled, political, bipolar, or psychotic.

And then you have to either live with them, or fire them.

Which ones of those sounds like fun?

Fifth, God help you, at some point you’re going to have to hire executives.

You think hiring employees is hard and risky—wait until you start hiring for VP Engineering, VP Marketing, VP Sales, VP HR, General Counsel, and CFO.

Sixth, the hours.

There’s been a lot of talk in Silicon Valley lately about work/life balance—about how you should be able to do a startup and simultaneously live a full and fulfilling outside life.

Now, personally, I have a lot of sympathy for that point of view.

And I try hard in my companies (well, at least my last two companies) to do whatever I can to help make sure that people aren’t ground down to little tiny spots on the floor by the workload and the hours.

But, it’s really difficult.

The fact is that startups are incredibly intense experiences and take a lot out of people in the best of circumstances.

And just because you want people to have work/life balance, it’s not so easy when you’re close to running out of cash, your product hasn’t shipped yet, your VC is mad at you, and your Kleiner Perkins-backed competitor in Menlo Park—you know, the one whose employees’ average age seems to be about 19—is kicking your butt.

Which is what it’s going to be like most of the time.

And even if you can help your employees have proper work/life balance, as a founder you certainly won’t.

(In case you were wondering, by the way, the hours do compound the stress.)

Seventh, it’s really easy for the culture of a startup to go sideways.

This combines the first and second items above.

This is the emotional rollercoaster wreaking havoc on not just you but your whole company.

It takes time for the culture of any company to become “set”—for the team of people who have come together for the first time to decide collectively what they’re all about, what they value—and how they look at challenge and adversity.

In the best case, you get an amazing dynamic of people really pulling together, supporting one another, and working their collective tails off in pursuit of a dream.

In the worst case, you end up with widespread, self-reinforcing bitterness, disillusionment, cynicism, bad morale, contempt for management, and depression.

And you as the founder have much less influence over this than you’ll think you do.

Guess which way it usually goes.

Eighth, there are lots of X factors that can come along and whup you right upside the head, and there’s absolutely nothing you can do about them.

Stock market crashes.

Terrorist attacks.

Natural disasters.

A better funded startup with a more experienced team that’s been hard at work longer than you have, in stealth mode, that unexpectedly releases a product that swiftly comes to dominate your market, completely closing off your opportunity, and you had no idea they were even working on it.

At best, any given X factor might slam shut the fundraising window, cause customers to delay or cancel purchases—or, at worst, shut down your whole company.

Russian mobsters laundering millions of dollars of dirty money through your service, resulting in the credit card companies closing you down.

You think I’m joking about that one?

OK, now here’s the best part:

I haven’t even talked about figuring out what product to build, building it, taking it to market, and standing out from the crowd.

All the risks in the core activities of what your company actually does are yet to come, and to be discussed in future posts in this series.


When the VCs say “no”

This post is about what to do between when the VCs say “no” to funding your startup, and when you either change their minds or find some other path.

I’m going to assume that you’ve done all the basics: developed a plan and a pitch, decided that venture financing is right for you and you are right for venture financing, lined up meetings with properly qualified VCs, and made your pitch.

And the answer has come back and it’s “no”.

One “no” doesn’t mean anything—the VC could just be having a bad day, or she had a bad experience with another company in your category, or she had a bad experience with another company with a similar name, or she had a bad experience with another founder who kind of looks like you, or her Mercedes SLR McLaren’s engine could have blown up on the freeway that morning—it could be anything. Go meet with more VCs.

If you meet with three VCs and they all say “no”, it could just be a big coincidence. Go meet with more VCs.

If you meet with five, or six, or eight VCs and they all say no, it’s not a coincidence.

There is something wrong with your plan.

Or, even if there isn’t, there might as well be, because you’re still not getting funded.

Meeting with more VCs after a bunch have said no is probably a waste of time. Instead, retool your plan—which is what this post is about.

But first, lay the groundwork to go back in later.

It’s an old—and true—cliche that VCs rarely actually say “no”—more often they say “maybe”, or “not right now”, or “my partners aren’t sure”, or “that’s interesting, let me think about it”.

They do that because they don’t want to invest in your company given the current facts, but they want to keep the door open in case the facts change.

And that’s exactly what you want—you want to be able to go back to them with a new set of facts, and change their minds, and get to “yes”.

So be sure to take “no” gracefully—politely ask them for feedback (which they probably won’t give you, at least not completely honestly—nobody likes calling someone else’s baby ugly—believe me, I’ve done it), thank them for their time, and ask if you can call them again if things change.

Trust me—they’d much rather be saying “yes” than “no”—they need all the good investments they can get.

Second, consider the environment.

Being told “no” by VCs in 1999 is a lot different than being told “no” in 2002.

If you were told “no” in 1999, I’m sure you’re a wonderful person and you have huge potential and your mother loves you very much, but your plan really was seriously flawed.

If you were told “no” in 2002, you probably actually were the next Google, but most of the VCs were hiding under their desks and they just missed it.

In my opinion, we’re now in a much more rational environment than either of those extremes—a lot of good plans are being funded, along with some bad ones, but not all the bad ones.

I’ll proceed under the assumption that we’re in normal times. But if things get truly euphoric or truly funereal again, the rest of this post will probably not be very helpful—in either case.

Third, retool your plan.

This is the hard part—changing the facts of your plan and what you are trying to do, to make your company more fundable.

To describe the dimensions that you should consider as you contemplate retooling your plan, let me introduce the onion theory of risk.

If you’re an investor, you look at the risk around an investment as if it’s an onion. Just like you peel an onion and remove each layer in turn, risk in a startup investment comes in layers that get peeled away—reduced—one by one.

Your challenge as an entrepreneur trying to raise venture capital is to keep peeling layers of risk off of your particular onion until the VCs say “yes”—until the risk in your startup is reduced to the point where investing in your startup doesn’t look terrifying and merely looks risky.

What are the layers of risk for a high-tech startup?

It depends on the startup, but here are some of the common ones:

Founder risk—does the startup have the right founding team? A common founding team might include a great technologist, plus someone who can run the company, at least to start. Is the technologist really all that? Is the business person capable of running the company? Is the business person missing from the team altogether? Is it a business person or business people with no technologist, and therefore virtually unfundable?

Market risk—is there a market for the product (using the term product and service interchangeably)? Will anyone want it? Will they pay for it? How much will they pay? How do we know?

Competition risk—are there too many other startups already doing this? Is this startup sufficiently differentiated from the other startups, and also differentiated from any large incumbents?

Timing risk—is it too early? Is it too late?

Financing risk—after we invest in this round, how many additional rounds of financing will be required for the company to become profitable, and what will the dollar total be? How certain are we about these estimates? How do we know?

Marketing risk—will this startup be able to cut through the noise? How much will marketing cost? Do the economics of customer acquisition—the cost to acquire a customer, and the revenue that customer will generate—work?

Distribution risk—does this startup need certain distribution partners to succeed? Will it be able to get them? How? (For example, this is a common problem with mobile startups that need deals with major mobile carriers to succeed.)

Technology risk—can the product be built? Does it involve rocket science—or an equivalent, like artificial intelligence or natural language processing? Are there fundamental breakthroughs that need to happen? If so, how certain are we that they will happen, or that this team will be able to make them?

Product risk—even assuming the product can in theory be built, can this team build it?

Hiring risk—what positions does the startup need to hire for in order to execute its plan? E.g. a startup planning to build a high-scale web service will need a VP of Operations—will the founding team be able to hire a good one?

Location risk—where is the startup located? Can it hire the right talent in that location? And will I as the VC need to drive more than 20 minutes in my Mercedes SLR McLaren to get there?

You know, when you stack up all these layers and look at the full onion, you realize it’s amazing that any venture investments ever get made.

What you need to do is take a hard-headed look at each of these risks—and any others that are specific to your startup and its category—and put yourself in the VC’s shoes: what could this startup do to minimize or eliminate enough of these risks to make the company fundable?

Then do those things.

This isn’t very much fun, since it will probably involve making significant changes to your plan, but look on the bright side: it’s excellent practice for when your company ultimately goes public and has to file an S1 registration statement with the SEC, in which you have to itemize in huge detail every conceivable risk and bad thing that could ever possibly happen to you, up to and including global warming.

Some ideas on reducing risk:

Founder risk—the tough one. If you’re the technologist on a founding team with a business person, you have to consider the possibility that the VCs don’t think the business person is strong enough to be the founding CEO. Or vice versa, maybe they think the technologist isn’t strong enough to build the product. You may have to swap out one or more founders, and/or add one or more founders.

I put this one right up front because it can be a huge issue and the odds of someone being honest with you about it in the specific are not that high.

Market risk—you probably need to validate the market, at a practical level. Sometimes more detailed and analytical market research will solve the problem, but more often you actually need to go get some customers to demonstrate that the market exists. Preferably, paying customers. Or at least credible prospects who will talk to VCs to validate the market hypothesis.

Competition risk—is your differentiation really sharp enough? Rethink this one from the ground up. Lots of startups do not have strong enough differentiation out of the gate, even after they get funded. If you don’t have a really solid idea as to how you’re dramatically different from or advantaged over known and unknown competitors, you might not want to start a company in the first place.

Two additional points on competition risk that founders routinely screw up in VC pitches:

Never, ever say that you have no competitors. That signals naivete. Great markets draw competitors, and so if you really have no competition, you must not be in a great market. Even if you really believe you have no competitors, create a competitive landscape slide with adjacent companies in related market segments and be ready to talk crisply about how you are like and unlike those adjacent companies.

And never, ever say your market projections indicate you’re going to be hugely successful if you get only 2% of your (extremely large) market. That also signals naivete. If you’re going after 2% of a large market, that means the presumably larger companies that are going to take the other 98% are going to kill you. You have to have a theory for how you’re going to get a significantly higher market share than 2%. (I pick 2% because that’s the cliche, but if you’re a VC, you’ve probably heard someone use it.)

Timing risk—the only thing to do here is to make more progress, and demonstrate that you’re not too early or too late. Getting customers in the bag is the most valuable thing you can do on this one.

Financing risk—rethink very carefully how much money you will need to raise after this round of financing, and try to change the plan in plausible ways to require less money. For example, only serve Cristal at your launch party, and not Remy Martin “Black Pearl” Louis XIII cognac.

Marketing risk—first, make sure your differentiation is super-sharp, because without that, you probably won’t be able to stand out from the noise.

Then, model out your customer acquisition economics in detail and make sure that you can show how you’ll get more revenue from a customer than it will cost in sales and marketing expense to acquire that customer. This is a common problem for startups pursuing the small business market, for example.

If it turns out you need a lot of money in absolute terms for marketing, look for alternate approaches—perhaps guerilla marketing, or some form of virality.

Distribution risk—this is a very tough one—if your plan has distribution risk, which is to say you need a key distribution partner to make it work, personally I’d recommend shelving the plan and doing something else. Otherwise, you may need to go get the distribution deal before you can raise money, which is almost impossible.

Technology risk—there’s only one way around this, which is to build the product, or at least get it to beta, and then raise money.

Product risk—same answer—build it.

Hiring risk—the best way to address this is to figure out which position/positions the VCs are worried about, and add it/them to the founding team. This will mean additional dilution for you, but it’s probably the only way to solve the problem.

Location risk—this is the one you’re really not going to like. If you’re not in a major center of entrepreneurialism and you’re having trouble raising money, you probably need to move. There’s a reason why most films get made in Los Angeles, and there’s a reason most venture-backed US tech startups happen in Silicon Valley and handful of other places—that’s where the money is. You can start a company wherever you want, but you may not be able to get it funded there.

You’ll notice that a lot of what you may need to do is kick the ball further down the road—make more progress against your plan before you raise venture capital.

This obviously raises the issue of how you’re supposed to do that before you’ve raised money.

Try to raise angel money, or bootstrap off of initial customers or consulting contracts, or work on it after hours while keeping your current job, or quit your job and live off of credit cards for a while.

Lots of entrepreneurs have done these things and succeeded—and of course, many have failed.

Nobody said this would be easy.

The most valuable thing you can do is actually build your product. When in doubt, focus on that.

The next most valuable thing you can do is get customers—or, for a consumer Internet service, establish a pattern of page view growth.

The whole theory of venture capital is that VCs are investing in risk—another term for venture capital is “risk capital”—but the reality is that VCs will only take on so much risk, and the best thing you can do to optimize your chances of raising money is to take out risk.

Peel away at the onion.

Then, once you’ve done that, recraft the pitch around the new facts. Go do the pitches again. And repeat as necessary.

And to end on a happy note, remember that “yes” can turn into “no” at any point up until the cash hits your company’s bank account.

So keep your options open all the way to the end.


“But I don’t know any VCs!”

In my last post in this series, When the VCs say “no”, I discussed what to do once you have been turned down for venture funding for the first time.

However, this presupposes you’ve been able to pitch VCs in the first place. What if you have a startup for which you’d like to raise venture funding, but you don’t know any VCs?

I can certainly sympathize with this problem—when I was in college working on Mosaic at the University of Illinois, the term “venture capital” might as well have been “klaatu barada nikto” for all I knew. I had never met a venture capitalist, no venture capitalist had ever talked to me, and I wouldn’t have recognized one if I’d stumbled over his checkbook on the sidewalk. Without Jim Clark, I’m not at all certain I would have been able to raise money to start a company like Netscape, had it even occured to me to start a company in the first place.

The starting point for raising money from VCs when you don’t know any VCs is to realize that VCs work mostly through referrals—they hear about a promising startup or entrepreneur from someone they have worked with before, like another entrepreneur, an executive or engineer at one of the startups they have funded, or an angel investor with whom they have previously co-invested.

The reason for this is simply the math: any individual VC can only fund a few companies per year, and for every one she funds, she probably meets with 15 or 20, and there are hundreds more that would like to meet with her that she doesn’t possibly have time to meet with. She has to rely on her network to help her screen the hundreds down to 15 or 20, so she can spend her time finding the right one out of the 15 or 20.

Therefore, submitting a business plan “over the transom”, or unsolicited, to a venture firm is likely to amount to just as much as submitting a screenplay “over the transom” to a Hollywood talent agency—that is, precisely nothing.

So the primary trick becomes getting yourself into a position where you’re one of the 15 or 20 a particular venture capitalist is meeting with based on referrals from her network, not one of the hundreds of people who don’t come recommended by anyone and whom she has no intention of meeting.

But before you think about doing that, the first order of business is to (paraphrasing for a family audience) “have your stuff together”—create and develop your plan, your presentation, and your supporting materials so that when you do meet with a VC, you impress her right out of the gate as bringing her a fundable startup founded by someone who knows what he—that’s you—is doing.

My recommendation is to read up on all the things you should do to put together a really effective business plan and presentation, and then pretend you have already been turned down once—then go back to my last post and go through all the different things you should anticipate and fix before you actually do walk through the door.

One of the reason VCs only meet with startups through their networks is because too many of the hundreds of other startups that they could meet with come across as amateurish and uninformed, and therefore not fundable, when they do take meetings with them. So you have a big opportunity to cut through the noise by making a great first impression—which requires really thinking things through ahead of time and doing all the hard work up front to really make your pitch and plan a masterpiece.

Working backwards from that, the best thing you can walk in with is a working product. Or, if you can’t get to a working product without raising venture funding, then at least a beta or prototype of some form—a web site that works but hasn’t launched, or a software mockup with partial functionality, or something. And of course it’s even better if you walk in with existing “traction” of some form—customers, beta customers, some evidence of adoption by Internet users, whatever is appropriate for your particular startup.

With a working product that could be the foundation of a fundable startup, you have a much better chance of getting funded once you do get in the door. Back to my rule of thumb from the last post: when in doubt, work on the product.

Failing a working product and ideally customers or users, be sure to have as fleshed out a presentation as you possibly can—including mockups, screenshots, market analyses, customer research such as interviews with real prospects, and the like.

Don’t bother with a long detailed written business plan. Most VCs will either fund a startup based on a fleshed out Powerpoint presentation of about 20 slides, or they won’t fund it at all. Corollary: any VC who requires a long detailed written business plan is probably not the right VC to be working with.

Next: qualify, qualify, qualify. Do extensive research on venture capitalists and find the ones who focus on the sector relevant to your startup. It is completely counterproductive to everyone involved for you to pitch a health care VC on a consumer Internet startup, or vice versa. Individual VCs are usually quite focused in the kinds of companies they are looking for, and identifying those VCs and screening out all the others is absolutely key.

Now, on to developing contacts:

The best way to develop contacts with VCs, in my opinion, is to work at a venture-backed startup, kick butt, get promoted, and network the whole way.

If you can’t get hired by a venture-backed startup right now, work at a well-regarded large tech company that employs a lot of people like Google or Apple, gain experience, and then go to work at a venture-backed startup, kick butt, get promoted, and network the whole way.

And if you can’t get hired by a well-regarded large tech company, go get a bachelor’s or master’s degree at a major research university from which well-regarded large tech companies regularly recruit, then work at a well-regarded large tech company that employs a lot of people like Google or Apple, gain experience, and then go to work at a venture-backed startup, kick butt, get promoted, and network the whole way.

I sound like I’m joking, but I’m completely serious—this is the path taken by many venture-backed entrepreneurs I know.

Some alternate techniques that don’t take quite as long:

If you’re still in school, immediately transfer to, or plan on going to graduate school at, a large research university with well-known connections to the venture capital community, like Stanford or MIT.

Graduate students at Stanford are directly responsible for such companies as Sun, Cisco, Yahoo, and Google, so needless to say, Silicon Valley VCs are continually on the prowl on the Stanford engineering campus for the next Jerry Yang or Larry Page.

(In contrast, the University of Illinois, where I went to school, is mostly prowled by mutant cold-weather cows.)

Alternately, jump all over Y Combinator. This program, created by entrepreneur Paul Graham and his partners, funds early-stage startups in an organized program in Silicon Valley and Boston and then makes sure the good ones get in front of venture capitalists for follow-on funding. It’s a great idea and a huge opportunity for the people who participate in it.

Read VC blogs—read them all, and read them very very carefully. VCs who blog are doing entrepreneurs a huge service both in conveying highly useful information as well as frequently putting themselves out there to be contacted by entrepreneurs in various ways including email, comments, and even uploaded podcasts. Each VC is different in terms of how she wants to engage with people online, but by all means read as many VC blogs as you can and interact with as many of them as you can in appropriate ways.

See the list of VC bloggers on my home page, as well as on the home pages of various of those bloggers.

At the very least you will start to get a really good sense of which VCs who blog are interested in which kinds of companies.

At best, a VC blogger may encourage her readers to communicate with her in various ways, including soliciting email pitches in certain startup categories of interest to her.

Fred Wilson of Union Square Ventures has even gone so far as to encourage entrepreneurs to record and upload audio pitches for new ventures so he can listen to them on his IPod. I don’t know if he’s still doing that, but it’s worth reading his blog and finding out.

Along those lines, some VCs are aggressive early adopters of new forms of communication and interaction—current examples being Facebook and Twitter. Observationally, when a VC is exploring a new communiation medium like Facebook or Twitter, she can be more interested in interacting with various people over that new medium than she might otherwise be. So, when such a new thing comes out—like, hint hint, Facebook or Twitter—jump all over it, see which VCs are using it, and interact with them that way—sensibly, of course.

More generally, it’s a good idea for entrepreneurs who are looking for funding to blog—about their startup, about interesting things going on, about their point of view. This puts an entrepreneur in the flow of conversation, which can lead to interaction with VCs through the normal medium of blogging. And, when a VC does decide to take a look at you and your company, she can read your blog to get a sense of who you are and how you think. It’s another great opportunity to put forward a fantastic first impression.

Finally, if you are a programmer, I highly encourage you, if you have time, to create or contribute to a meaningful open source project. The open source movement is an amazing opportunity for programmers all over the world to not only build useful software that lots of people can use, but also build their own reputations completely apart from whatever day jobs they happen to have. Being able to email a VC and say, “I’m the creator of open source program X which has 50,000 users worldwide, and I want to tell you about my new startup” is a lot more effective than your normal pitch.

If you engage in a set of these techniques over time, you should be able to interact with at least a few VCs in ways that they find useful and that might lead to further conversations about funding, or even introductions to other VCs.

I’m personally hoping that the next Google comes out of a VC being sent an email pitch after the entrepreneur read that VC’s blog. Then every VC on the planet will suddenly start blogging, overnight.

If none of those ideas work for you:

Your alternatives in reverse (declining) order of preference for funding are, in my view: angel funding, bootstrapping via consulting contracts or early customers, keeping your day job and working on your startup in your spare time, and credit card debt.

Angel funding—funding from individuals who like to invest small amounts of money in early-stage startups, often before VCs come in—can be a great way to go since good angels know good VCs and will be eager to introduce you to them so that your company goes on to be successful for the angel as well as for you.

This of course begs the question of how to raise angel money, which is another topic altogether!

I am not encouraging the other three alternatives—bootstrapping, working on it part time, or credit card debt. Each has serious problems. But, it is easy to name highly successful entrepreneurs who have followed each of those paths, so they are worth noting.

Closing link:

Finally, be sure to read this page on Sequoia Capital’s web site.

Sequoia is one of the very best venture firms in the world, and has funded many companies that you have heard of including Oracle, Apple, Yahoo, and Google.

On that page, Sequoia does entrepreneurs everywhere a huge service by first listing the criteria that they look for in a startup, then the recommended structure for your pitch presentation, and then finally actually asks for pitches “over the transom”.

I have not done a thorough review of other VC web sites to see who else is being this open, but for Sequoia to be offering this to the world at large is a huge opportunity for the right startup. Don’t let it pass by.


The only thing that matters

This post is all about the only thing that matters for a new startup.

But first, some theory:

If you look at a broad cross-section of startups—say, 30 or 40 or more; enough to screen out the pure flukes and look for patterns—two obvious facts will jump out at you.

First obvious fact: there is an incredibly wide divergence of success—some of those startups are insanely successful, some highly successful, many somewhat successful, and quite a few of course outright fail.

Second obvious fact: there is an incredibly wide divergence of caliber and quality for the three core elements of each startup—teamproduct, and market.

At any given startup, the team will range from outstanding to remarkably flawed; the product will range from a masterpiece of engineering to barely functional; and the market will range from booming to comatose.

And so you start to wonder—what correlates the most to success—teamproduct, or market? Or, more bluntly, what causes success? And, for those of us who are students of startup failure—what’s most dangerous: a bad team, a weak product, or a poor market?

Let’s start by defining terms.

The caliber of a startup team can be defined as the suitability of the CEO, senior staff, engineers, and other key staff relative to the opportunity in front of them.

You look at a startup and ask, will this team be able to optimally execute against their opportunity? I focus on effectiveness as opposed to experience, since the history of the tech industry is full of highly successful startups that were staffed primarily by people who had never “done it before”.

The quality of a startup’s product can be defined as how impressive the product is to one customer or user who actually uses it: How easy is the product to use? How feature rich is it? How fast is it? How extensible is it? How polished is it? How many (or rather, how few) bugs does it have?

The size of a startup’s market is the the number, and growth rate, of those customers or users for that product.

(Let’s assume for this discussion that you can make money at scale—that the cost of acquiring a customer isn’t higher than the revenue that customer will generate.)

Some people have been objecting to my classification as follows: “How great can a product be if nobody wants it?” In other words, isn’t the quality of a product defined by how appealing it is to lots of customers?

No. Product quality and market size are completely different.

Here’s the classic scenario: the world’s best software application for an operating system nobody runs. Just ask any software developer targeting the market for BeOS, Amiga, OS/2, or NeXT applications what the difference is between great product and big market.


If you ask entrepreneurs or VCs which of teamproduct, or market is most important, many will say team. This is the obvious answer, in part because in the beginning of a startup, you know a lot more about the team than you do the product, which hasn’t been built yet, or the market, which hasn’t been explored yet.

Plus, we’ve all been raised on slogans like “people are our most important asset”—at least in the US, pro-people sentiments permeate our culture, ranging from high school self-esteem programs to the Declaration of Independence’s inalienable rights to life, liberty, and the pursuit of happiness—so the answer that team is the most important feels right.

And who wants to take the position that people don’t matter?

On the other hand, if you ask engineers, many will say product. This is a product business, startups invent products, customers buy and use the products. Apple and Google are the best companies in the industry today because they build the best products. Without the product there is no company. Just try having a great team and no product, or a great market and no product. What’s wrong with you? Now let me get back to work on the product.

Personally, I’ll take the third position—I’ll assert that market is the most important factor in a startup’s success or failure.


In a great market—a market with lots of real potential customers—the market pulls product out of the startup.

The market needs to be fulfilled and the market will be fulfilled, by the first viable product that comes along.

The product doesn’t need to be great; it just has to basically work. And, the market doesn’t care how good the team is, as long as the team can produce that viable product.

In short, customers are knocking down your door to get the product; the main goal is to actually answer the phone and respond to all the emails from people who want to buy.

And when you have a great market, the team is remarkably easy to upgrade on the fly.

This is the story of search keyword advertising, and Internet auctions, and TCP/IP routers.

Conversely, in a terrible market, you can have the best product in the world and an absolutely killer team, and it doesn’t matter—you’re going to fail.

You’ll break your pick for years trying to find customers who don’t exist for your marvelous product, and your wonderful team will eventually get demoralized and quit, and your startup will die.

This is the story of videoconferencing, and workflow software, and micropayments.

In honor of Andy Rachleff, formerly of Benchmark Capital, who crystallized this formulation for me, let me present Rachleff’s Law of Startup Success:

The #1 company-killer is lack of market.

Andy puts it this way:

  • When a great team meets a lousy market, market wins.
  • When a lousy team meets a great market, market wins.
  • When a great team meets a great market, something special happens.

You can obviously screw up a great market—and that has been done, and not infrequently—but assuming the team is baseline competent and the product is fundamentally acceptable, a great market will tend to equal success and a poor market will tend to equal failure. Market matters most.

And neither a stellar team nor a fantastic product will redeem a bad market.

OK, so what?

Well, first question: Since team is the thing you have the most control over at the start, and everyone wants to have a great team, what does a great team actually get you?

Hopefully a great team gets you at least an OK product, and ideally a great product.

However, I can name you a bunch of examples of great teams that totally screwed up their products. Great products are really, really hard to build.

Hopefully a great team also gets you a great market—but I can also name you lots of examples of great teams that executed brilliantly against terrible markets and failed. Markets that don’t exist don’t care how smart you are.

In my experience, the most frequent case of great team paired with bad product and/or terrible market is the second- or third-time entrepreneur whose first company was a huge success. People get cocky, and slip up. There is one high-profile, highly successful software entrepreneur right now who is burning through something like $80 million in venture funding in his latest startup and has practically nothing to show for it except for some great press clippings and a couple of beta customers—because there is virtually no market for what he is building.

Conversely, I can name you any number of weak teams whose startups were highly successful due to explosively large markets for what they were doing.

Finally, to quote Tim Shephard: “A great team is a team that will always beat a mediocre team, given the same market and product.”

Second question: Can’t great products sometimes create huge new markets?


This is a best case scenario, though.

VMWare is the most recent company to have done it—VMWare’s product was so profoundly transformative out of the gate that it catalyzed a whole new movement toward operating system virtualization, which turns out to be a monster market.

And of course, in this scenario, it also doesn’t really matter how good your team is, as long as the team is good enough to develop the product to the baseline level of quality the market requires and get it fundamentally to market.

Understand I’m not saying that you should shoot low in terms of quality of team, or that VMWare’s team was not incredibly strong—it was, and is. I’m saying, bring a product as transformative as VMWare’s to market and you’re going to succeed, full stop.

Short of that, I wouldn’t count on your product creating a new market from scratch.

Third question: as a startup founder, what should I do about all this?

Let’s introduce Rachleff’s Corollary of Startup Success:

The only thing that matters is getting to product/market fit.

Product/market fit means being in a good market with a product that can satisfy that market.

You can always feel when product/market fit isn’t happening. The customers aren’t quite getting value out of the product, word of mouth isn’t spreading, usage isn’t growing that fast, press reviews are kind of “blah”, the sales cycle takes too long, and lots of deals never close.

And you can always feel product/market fit when it’s happening. The customers are buying the product just as fast as you can make it—or usage is growing just as fast as you can add more servers. Money from customers is piling up in your company checking account. You’re hiring sales and customer support staff as fast as you can. Reporters are calling because they’ve heard about your hot new thing and they want to talk to you about it. You start getting entrepreneur of the year awards from Harvard Business School. Investment bankers are staking out your house. You could eat free for a year at Buck’s.

Lots of startups fail before product/market fit ever happens.

My contention, in fact, is that they fail because they never get to product/market fit.

Carried a step further, I believe that the life of any startup can be divided into two parts: before product/market fit (call this “BPMF”) and after product/market fit (“APMF”).

When you are BPMF, focus obsessively on getting to product/market fit.

Do whatever is required to get to product/market fit. Including changing out people, rewriting your product, moving into a different market, telling customers no when you don’t want to, telling customers yes when you don’t want to, raising that fourth round of highly dilutive venture capital—whatever is required.

When you get right down to it, you can ignore almost everything else.

I’m not suggesting that you do ignore everything else—just that judging from what I’ve seen in successful startups, you can.

Whenever you see a successful startup, you see one that has reached product/market fit—and usually along the way screwed up all kinds of other things, from channel model to pipeline development strategy to marketing plan to press relations to compensation policies to the CEO sleeping with the venture capitalist. And the startup is still successful.

Conversely, you see a surprising number of really well-run startups that have all aspects of operations completely buttoned down, HR policies in place, great sales model, thoroughly thought-through marketing plan, great interview processes, outstanding catered food, 30″ monitors for all the programmers, top tier VCs on the board—heading straight off a cliff due to not ever finding product/market fit.

Ironically, once a startup is successful, and you ask the founders what made it successful, they will usually cite all kinds of things that had nothing to do with it. People are terrible at understanding causation. But in almost every case, the cause was actually product/market fit.

Because, really, what else could it possibly be?

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