O'Reilly Media's entrepreneur-in-residence, Marc Hedlund, explored entrepreneurship with a group of coders at the O'Reilly Emerging Technology Conference (Etech) in San Diego today. Hedlund took the approach of Go, and broke down his lessons into proverbs:
Starting a company
1. It's good to be king. An entrepreneur is the best job that he's ever had; exciting and liberating to have your problems and experiences change from day to day. You get to use all of the parts of your brain - marketing, engineering, human resources.
2. Losing sucks. It's OK to fail, especially if people see you get back up again and take the lessons. Assume that it will take you three failures before you succeed.
3. Building to flip is building to flop. If you set out with the idea that succeeding means being acquired, it's a bad way to start - this means that you have a limited set of paths to pursue. (I actually disagree with this...if you come up with a neat little business that you can build on your own dime, flipping it to an acquirer can be a great outcome. Venture funding is not for every business.)
4. Prudence becomes procrastination. Don't keep talking and talking around the issues, get to the point quickly - especially if you receive lots of negative feedback.
5. Momentum builds on itself. If you have a strong idea, people will look at you like you're crazy. Getting people excited about a picture, or something they can use and touch, is very powerful. Make prototypes.
6. Jump when you are more excited than afraid. It's tough to know when it's time to quit your day job.
Picking an idea
1. Pay attention to the idea that won't leave you alone. If you have to convince yourself to work on it, it's a bad idea. If you wake up in the middle of the night with insights, then it's something to pursue.
2. If you keep your secrets from the market, the market will keep its secrets from you. It's better to hear what people have to say about your idea than it is for you work in a vacuum. And it's extremely unlikely that someone will steal your idea, though you may not want to shout it in a room full of like-minded entrepreneurs.
3. Immediate yes is immediate no. People who impulsively agree to support you are also likely to impulsively move on to something else.
(There are a bunch more here, but I unfortunately had to miss a chunk of the session...but I think you get the idea.)
Taking a realistic look at acquisition
It's getting very cheap (relatively) to start a company nowadays. Shared hosting reduces the need for hardware and bandwidth purchases, web services and open source code mean that you don't need to build everything from scratch.
Given this, Hedlund notes that acquisition is becoming a much more popular option; since the IPO market is not as exuberant as it used to be, large private companies end up making acquisitions in order to grow. What are the magic numbers that you need in order to get attention from acquirers? Attracting 100,000 users in 1.5 years = $20 - 30M in sale price. As Hedlund points out, the problem with this for today's founder is that 1.5 years from now is a big unknown. There are few potential buyers, and if everyone is going in the same direction, it will be difficult to stand out as a unique opportunity.
Do the math: there are 150 VCs that might be interested in funding you, and 10 strategic acquirers that might be interested in buying you. So, try to maximize the possible successful outcomes and don't limit yourself.
If you are trying to be acquired, Hedlund recommends that you fit yourself into the story that the acquirer tells. Be good at something that they are not, and prove that what you've built isn't easy. And if you can, approach companies in which you have friends, so that you can build the perception of a smooth transition and working relationship. And when you get an offer (presuming that you are not venture-backed), "think of it as a good signing bonus."
Snapshots of other paths taken
Bloglines: One guy in a room created this business. Built up an amazing audience and was acquired for it.
del.icio.us: Venture-backed, and was able to actually grab the brass ring with its recent acquisition by Yahoo!. This is an outlier, though, so it shouldn't be part of your plan.
Feedburner: A good team with a good set of users.
Flickr: The funding is very adaptable here, since the company had a grant from the Canadian government. Cobbled funding together from many different sources and made it work.
Indico: A resume database that requires many large public companies to come together and agree. This is a "boil the ocean" business plan - the entire landscape must change in order for it to work. The founder (Dan Arkind) is now on his third business model as he continues testing what would drive adoption.
Jotspot: Everyone sees Wikipedia and thinks it's great, but it hasn't been proven here yet. Two industry veterans (the Excite co-founders) are working on it. It's difficult for other entrepreneurs to compete with proven guys, since everyone loves a sequel.
Koders: Search engine for open source code. They started out with two models: a public search site with advertising, and an enterprise model where they helped companies manage their source code. There's also an as-yet-unannounced third model. This is a tough sell to investors; they want to hear that you have one model, and you're going to get a lot of traction with that one customer. Don't talk about there different models that will add up to one big one.
Odeo: A podcast directory founded by the Blogger guys. Easier to ask investors to bet on a market than to bet on both a market and a founder. New markets are more easily funded when the entrepreneur has made money in new markets previously. The bet is the founder, not the market.
Project PlaceSite: Services for cafe hotspots. They created mini social networks; cafes installed a special home page on the hotspot router, similar to what you see when you log on to a hotel internet connection. The mistake here? There aren't that many national cafes; most a re local - just one branch, or just a few branches within a city. The sales model would then require that each cafe would have to be sold to individually; this is an extremely difficult sales proposition and requires a lot of manpower.
SpikeSource: Ray Lane (Oracle) and Kim Polese (Marimba) - again, proven people. It's OK to be in the same market as these companies, but try to fly below their radar. Be cheaper, sell to smaller companies, or whatever else you need to do so that you are not competing directly with Ray Lane on sales calls.
Splunk: Enterprise search on log files. Their pitch was "Google for x" - along with everyone else raising money in 2005, so it's not the best way to raise money. Make sure you position your idea as one that stands alone and has value by itself.
Upcoming.org: The founders are pals with the Flickr guys, so it helped in acquisition talks with Yahoo! This acquisition happened while all three founders still had day jobs.
Zimbra: An enterprise software company using Ajax that competes with Microsoft Exchange. They got the most ooos at Web 2.0, but what's going to be challenging is that there's not a direct correlation between quality and sales in the enterprise. There are more relationship dynamics at play.
Case study: GripeJuice
This was an idea that Hedlund considered building a company on, but ultimately rejected. GripeJuice was meant to be a collective bargaining site for dissatisfied customers: it's a call-center application for the customer side.
The good: There's a real need around bad customer service; everyone has had bad experiences, but there's no solution at hand. Also, it would be cheap to develop. And best of all, selfish consumer action (keeping track of my dispute) benefits the group.
The bad: This requires high manual effort for the consumer; they need to call up a browser to keep track of their interaction, but are unlikely to think about it until they're a few calls in on the same problem. At the same time, frustration with the problem is not connected to a willingness to pay, and the tested price was very low. And of course, "all of the biggest complainers will be YOUR customers!"
Takeaways
There are very few VCs out there that only bring capital; everyone will bring strong opinions, and they will either be additive or distracting. So choose your VC as you would a co-founder. Also, be sensible about whether or not it makes sense to bring an outside investor into your business. If you'd be happy running a small profitable company, then bootstrap or raise modest debt that you can repay - venture investors need to invest in opportunities where there is going to be an exit that allows them to realize a return on their original investment.
Tags: christine herron christine.net space jockeys technology best practices etech o'reilly entrepreneur
