Three strategies to guarantee start-up failure
Read Video TranscriptThree Strategies To Guarantee Start Up Failure, By Startup Grind
A: Announcer
PA: Paul Ahlstrom
AU: Audience
A: It's an honour to introduce our next speaker, a close friend of mine and greatest mentor of my career. Paul Ahlstrom has raised almost $1 billion in equity and capital venture funds. He is a serial entrepreneur, author of Nail It Then Scale It. Yesterday's person who introduced him said he was the nicest VP he ever met. He was right on, he probably didn't know why though. Those of us that know him know that the best description for Paul is probably a 50/50 genetic mix of Mother Teresa and Steve Jobs. So with that I give you Paul Ahlstrom.
PA: Mother Teresa, Steve Jobs, wow. That is a unique intro, thank you. I'm grateful to be back here, please don't rush the stage. I'm not Mark Suster and Mark I hope you are feeling better and watching but you still owe me. I'm glad to be here again and first of all I want to give a shout out to some of my new friends Per Bergstrom, who is from Sweden and also my new buds from Terrain and Israel and I have met so many amazing people here but not to say the least my boy from Mexico and I am rocking my Startup Grind Mexico shirt today so pretty happy about that. I don’t know if I can use this mic or need to use this one. Is this one ok? Alright so we are going to go with that one.
Alright, so for those I saw yesterday I want to apologise. I will try to say something new and interesting today. We are going to talk about how to guarantee your start up is going to fail. Now sure anyone can tell you how to build a billion dollar company but I am an expert in understanding the route causes of failure and I am going to take you through three case studies.
Now here are my credentials. We have invested over $1/2 billion dollars and one of the things I learnt was the more money I put into a company before they nail the breakthrough value proposition, I can almost guarantee and predict and engineer failure. Now lest you think I haven’t had any success, I have sold a few companies, I’ve taken a few companies public and out of there we have generated total values of over $4 billion of exit value but one of the things that I have learned is that start ups can fail, in fact 70-80% of the start ups, may be closer to the 90, will fail over the first 5-7 years and they fail for lots of different reasons. There is probably too many to list but I am going to focus today on the three ways that will guarantee a failure. Now these may have an impact on failure but number 1 is launch your product without a specific customer in mind. How many people are guilty of doing this? Launching your customer and your product, just the technology, I got to this great widget, I’ve just got to get it out in the market place but not really having a specific customer in mind. Right here in the front, so I’m going to give out some Homer words right after this and you've got to shout out your failures. Alright, so I want to cut it off right there. He is up building to Homer, phlegm green with chrome stairs leading up to it, a bubble dome for the mother in law on the back so you can't hear her and lots of other features.
It turns out that Homer was not the target customer for the American car and the last scene in the movie is the Japanese car company putting their sign up on top of PM Motors and he drove his brother's company to bankruptcy. Now lest you think this is total fiction, this happened in the United States. The Ford Edsel. They built it in secret, named after Edsel's dead son, launched without any customer feedback, it was the most secret car launch in US history, the biggest failure. Ford learned from this. 6 years later Lee Iacocca at the design team driving the Ford Mustang and what was interesting was that the Lee Iacocca team brought husband and wife teams into the showroom, interacted with the design, the price, the promotion and it was the most successful car launch in American history coming from the same company.
I have had my own bouts with this particular problem. I was a product manager in one of the first test retrieval engines company portfolio and in the early 90s I won a PC magazine and a PC Computing Award and I remember when the publication came out it was the front cover and it said 'Folio views – the mix master, slicer dicer, gives you knife of software applications'. I had built an application for everybody and for nobody and when we went back and looked at the revenue it was 80 markets across, 24 applications down. We had sold into 2040 intersections of markets and applications. Ok, so what does that look like as a company? I'm thinking of building a slick rocket and taking this thing to the moon but it turns out it wasn't exactly a rocket because the pieces started falling off of the company. We couldn't get the profitability, we're levitating right there about break even and I couldn't achieve escape velocity. All of your energy is used to launch but we couldn't achieve escape velocity except in one of the niches. One of the key lessons I will never forget is that every new technology has a first customer. Like it or not it will eventually have lots of customers but it has a first customer and every new technology and you think back to the days of the pre internet, the pager, the first customer was the Doctor and eventually everyone took it off.
Your job as an entrepreneur is to figure out, to identify in this early stage before you scale it in to the broader market place who that early customer is and how do you make that customer comfortable? So I took that technology out of folio, learned my lesson and I focused it on a single customer beach head. We did an analysis and looked at all the markets and applications and we found out that we had accidentally sold into IT knowledge management. We were the biggest leader in that industry. We didn't even know that. We were participating in it. So we focused in on the IT sector. Our target customer was a help desk manager and the application was knowledge management. With that focus in mind I relaunched the company or spun the company out, raised some venture capital; that was a fun experience as an entrepreneur. I feel for you, having to deal with us and then we launched and in 24 months sold the company. Right after that I turned to the dark side and became a VC. I sold out, sorry! It was too tempting.
So, number 2, if you want to guarantee failure, go compete head to head with an established market leader for the same customer and that's real important for the same customer. Without being 10x better or having a differentiation. Why is that deadly? That customer is up there and you have to get that customer to switch to you and in the case of Facebook and Path it wasn't just getting them to switch, you had to get all their friends to switch and if you are sitting at the top of the hill shooting down you have a superior position because you can catch up and Path, sorry to pick on Path but you are a pretty good example on this. Path built a superior product in many ways but Facebook got incrementally better and better and better so Path, although their launch was a superior product, they were fighting for the same customer and Facebook had time to get the mobile going and figure out the positioning and retain their market leadership position. There are lots of areas where Path could have entered. Indonesia it turns out was not a well protected area for Facebook and that is one of the areas that Path is/has taken but in the early days you are dooking it out in a legitimate launch strategy, a green field or some people call it blue ocean, new categories are created.
So in the early days of social networking a lot of companies that launched, Facebook emerged as a market leader and for those customers they had a very defensible position. How do you take on a market leader? How do you take on a Facebook? We know you shouldn't go head to head with the same customer. What if you find a new customer? Well, because Facebook started broadening their market reach by definition they went from the college to the high schools to the mums and dads and when we got on and our kids got off. So when we got on Facebook all our kids said 'so well I can't have that private phone conversation like we used to do, we used to go close the door and be off to the side and say and talk to our friends' so the current version of that is are these social networks like Instagram and Snap Chat where the disaffected youth have gotten off of Facebook and are looking for a private space to communicate and as you look at that curve that passes by the market leader it becomes super interesting. In advance we are sitting on that curve and we are looking down at that market saying 'that is stupid. I would never do that. I would never purchase that product' and I am going to give you some examples of what it feels like to look down at that market place and we have this gut reaction. We don't always see it coming. So we talk about blue ocean. Honeywell created a category and owned it for 100 years. How could you displace Honeywell?
Another legitimate way to enter the market place is to be 10x better like Nest because if you think about it what Nest had to do was they had to shift me as a customer away from Honeywell which I had, to their product and they were 10x better and I shifted. So I didn't have to go shift all my friends, I just had to shift me. If you are going to take on an entrenched market leader for the same customer then you better be 10x better and have a lot of cash. This is a very expensive strategy. The head of design of Apple Iphone was launched this company and they did an excellent job. So much cheaper is to go after the low end to disrupt an under served customer. So what does that under served customer look like? I got this great idea, let's have people rent our couches. Any average person, normal person says 'I stay in a hotel. I'm perfectly fine staying at a safe hotel. I don't want to stay in somebody's house renting their couch. It may have lice. I don't want the problem'. You can't imagine how tough for those people to sell this idea. Here's another one. Let's help people take the bus. I take planes, I don't take buses, I don't know anyone who takes the bus. I got this really good idea. You know when we have all those ideas on our cork board about our wedding, let's take that and let's put it on line. These ideas kind of feel stupid to people, I want to give you a visceral feeling of what it feels like to be that visionary, that entrepreneur out there taking these risks.
Maybe you have seen this (video playing) ok, I have got this great idea for my start up. People are going to love it. They are going to be flocking to me soon. No, really they are coming. I got my marketing guy with me. Ok here is what we are going to do. We are going to say every inane thing that enters our mind and we are going to publish it on the internet. Yeah and to the universe! This is going to be huge! Or we are going to rent our cars to other people, it will be great. Trust me. Ok, so we go this thing going and the product manager is kind of getting into the groove and they have a customer validation and they are ready to go. Here comes the engineer. Alright, now we have built this thing, can you build it? Absolutely, I can build that. All we need is a few sales people to help us get this out there and get the ad revenue going. So maybe not so soon. Ah sales people, there we go. Hey this is working, let's get some more sales people here. Alright, hey, we have a start up. We look stupid but at least we look stupid together. Now the market starts coming and hey we have got a company. We've got venture funding and when girls in bikinis start sprinting at you, you know you've made it!
Clapping and laughter
Alright, did you feel the pain in the beginning? You know what that feels like? Doesn't it feel kind of cool and everybody followed. It looks crazy. So, the couch surfing business, obviously that was AirBnB and there they are. AirBnB were going crazy, 550,000 listings. The bus take you might not have heard of yet but you will. It's called Wanderu. They are growing 400% quarter over quarter, helping milennials be more efficient taking ground transportation. Corkboard business, obviously that was Pinterest, the fastest growing social network. If you notice Facebooks on the right, the core business is shrinking. Of course its getting more profitable. It's buying businesses to buy growth. They bought Instagram here in the middle, they tried to buy some of the other ones. Pinterest is killing it. I don’t get Pinterest, I don’t understand it but that's ok. I looked down at it and said 'that is a stupid idea' and then my wife said 'why don’t you invest in that? I love this'.
Number 3, if you want to guarantee failure and here is the number 1 way to guarantee failure. Scale it before you nail it. The poster child of doing this was Webvan, $830 million raised before they understood their business model. Do you think you could get your business model figured out on a piece of paper before you raise 1 venture dollar? As VC's we've become a little smarter since these days in 2000 and its one of the first questions we ask: what's your business model? Is it sustainable? And this, not to pick on Webvan, there's a lot of people we can pick on but the number 1 cause of start up failure and this was a Stanford study that was done here was the start up Genome project. It was premature scaling. It's the number 1 cause of start up failure, it's the death of 70% of start ups. Doing good things, but doing them out of order. So hiring a sales team before you know exactly what you are going to sell, building your beta before you build your alpha, before you build your prototype, spending money before you understand your business model, these are all deadly mistakes. Kozmo was probably the guiltiest of the guiltiest. They allowed you to go order a Twix bar from the 7/11. They picked it up for you, bought it, they brought it to you but they didn’t charge you anything for the Twix. They charged you for the Twix bar but not for the delivery. I have no idea how they ever planned to make money. They poured $280 million into it before somebody said 'Err the Emperor has no clothes on. This is not working'.
The opposite example is Qualtrics. They nailed it before they scaled it and he was at a several $100 billion valuation before he took his first venture dollar and I think Ryan's speaking here today. Amazing example and there are many many companies Plurasite and others who have scaled their business before taking capital and I know I am speaking against me and my brothers here but I am just an entrepreneur hiding as a venture capitalist so I didn’t really go to the dark side.
So let's end on a positive note, if you want to increase the odds of success, this is not going to guarantee your chances of success but increase your odds, try launching with a specific customer in mind that you have a validated monetisable pain where you understand at a viscerale level value creation, the value exchange you have between you and your customer and you have had those conversations and got out of the building and talked to them. You did not just code inside the four walls.
Second, chose your market entry wisely. There is lots of ways to enter the market. Blue Ocean, create your own market. That tends not to work so great. Normally those are the guys, the pioneers with the face down, with the arrow in the back but sometimes it works out. Extend a market with somebody else. So build on top of salesforce.com. Extend the market. This is a legitimate way to build a company. Leverage to the existing infrastructure. Facebook is tough. We have launched several companies on top of Facebook, that’s why I like to pick on them, they keep changing the rules underneath you. You have to get your product launched.
10x innovation – if you have cash and have a world changing idea that makes you a market hero but the cheapest way to do it is go disrupt, go after low end under served customers and this is the number 1 question I get as a VC, what is my strategy for entering the market place? I want to teach this and share this because it is a conversation I have day in, day out.
Last but not least, nail it before you scale it. It seems obvious. Alright, so I promised we were going to end with the Homer words. Now, raise your hand if you have launched a company without a customer in mind. You could be the customer but obviously Homer was not the customer for the average American and drove his brother's company with his $82,000 car into bankruptcy. So I want you to take this home, put it on your desk and commit to never do this again. So how many have launched, have done this, one, and two promised not to do it again?
Throws DVD into crowd.
Alright, down here in the front and you got to tell me what was...shout out your biggest failure. Oh you aren't so anxious any more! Here give her an award. Ok, the last one, you are going to have to shout out your failure.
Au: Making google glass eye without making google glass first.
PA: Ok, there you go.
Au: I got one yesterday.
PA: Oh you got one yesterday. We have an award. One more confession.
Au: Virtual reality video conferencing.
PA: Oh that's terrible. Alright here you go, right there. Pass it back to the good man who has learnt his lesson. Thank you for your time. Its been fun being with you. Have a great conference.
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