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an evening with rob adams
entrepreneur’s bootcamp
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myth one: good ideas are scarcemyth 1

          The first thing we find with a lot of entrepreneurs is that they really focus on their idea. They'll walk into our office, and say, “Listen, I've figured out the world's greatest thing.” In the book we talk about it being like the Hope Diamond: “It's got to be very rare, it’s going to be very large, there can only be one like it in the world, and it's utterly brilliant. By the way, I can't tell you about it because the minute I do you're going to be able to copy me and you're going to compete with me.”

          Our response to that is: Ideas are commodities. I have yet to see one original idea in a business plan, and I'm talking as a person who has probably read thousands of them at this point. We try to educate the entrepreneur to think of all ideas as commodities. I like to quote the “1:8:20” rule. If one person in Austin, Texas, has an idea, there are at least eight people up and down the East Coast corridor that have it, and there are probably 20 people in the garages of Palo Alto in Silicon Valley that have it.

          Get over it. The idea is not what's going to make a difference in your company.

          Some of the other evidence of this is the “get to market fast” fallacy. Clearly, we saw a lot of that during the dotcom era. “This thing is so copyable, the only way I can really be competitive is to put my foot on the gas and go, go, go.” We all saw the results of that. In fact, I think we saw the results of that at the Super Bowl 2000 halftime, if I remember correctly.

          The last point is the “no competition” fallacy. Let me tell you, if you think you have no competition, I'd advise you to make some up very, very quickly. The one that always works is the “I want to keep my money” kind of competition, which is what you find a lot of customers saying these days.

          If that's what we see a lot of, what do we refocus the entrepreneur on? Again, it's easy to say what not to do, but what do you want to do?

          We like to look for solid concepts.

          Later, I'll talk about management teams, which is going to matter more, but the way we try to educate the entrepreneur is not to focus on the idea, but instead to focus on the business problem you're solving. I'm not really that interested in your technology, I want to know about the business problem you're fixing. The way you can look for good ideas is to look for what I call corollaries—real, existing problems in the market today that people are spending money on. You probably have found a better or more cost effective way to fix it, you're doing something different than the solutions today, but there should be some product or service they buy or some handmade technology they use or some group of experts that are fixing that problem now.

          I met with a group today and we made up this magical resume tracking software. We're going to build a software product that tracks resumes inside companies. If that's a good opportunity, we should be able to call companies up and talk to their human resource departments and find out that they have a real problem tracking resumes. Not only do they have a problem tracking resumes, they're doing something about it today. They've got a department that tracks them or they've got temporary workers who track them, or they've got a software solution that they've made to track them, but there should be something in those organizations today where they're spending a fair amount of money on this problem.

          For it to be interesting to a venture investor—and I'll be the first to tell you that, in this environment, I wouldn't advise venture capital as the first thing to go for; I would advise bootstrapping or using strategic money or using customer's money as the way to get your company off the ground—but, for it to be interesting to investors, you should be able to show a market of about a billion dollars in spending today for a software solution. We can adjust the market levels up or down depending on the kind of technology or category we're talking about, but you should be able to show a strong, real market.

          Let's go back to that resume tracking software. We should be able to point to a billion dollars worth of spending in the domestic United States per year fixing that problem the old fashion way. Why a billion dollars? Just a rough rule of thumb. It’s because if you can get a 10% share of a $1 billion market, you've got about a $100 million company. That's a very attractive company by today's standards. What’s more, there should be adjacent market segments just as large. Pretend for a minute that we built our resume tracking software. We know it's a billion-dollar market, and we're on our way to $100 million. We hit a flat spot at about $50 million, and we just can't seem to get out of it. We're kind of stuck. Well, it might be more cost effective for that company to back out of expanding in that market and move over one market. Maybe we're going to go to purchase order tracking software or accounts receivable tracking software. The point is that you should have several markets in and around the core market that are attractive and relatively easy to get to so that you have a diversity of markets to go after.

          The last point is probably the most important, and it's where most entrepreneurs get hung up, particularly technology-focused entrepreneurs. You want a startup team with execution skills in the space. What is the definition of execution skills? If I'm building resume tracking software, I don't want my VP of Engineering to be somebody who came out of personal computers, or, if I'm selling to that market, I don't want my VP of Operations to be somebody who ran a bunch of McDonalds franchises. I probably want a CEO who has been in that market before. I probably want a salesperson who knows that category. I probably want a VP of Engineering who has built software in that category before. What I like to call the “execution intelligence” of the team should be able to go in and exploit that market totally.

          Now, that's not to say that every person has to have incredible experience. What it does say is that the sum total of the management team should equal good experience and good capabilities for going after that particular market. The example I like to cite on the public company front is one down in Austin, Texas, called Dell Computer. Think of what Dell has done. They have taken something almost as ubiquitous as paper clips, the personal computer—they all have the same processors, the same storage devices, the same disk drives, keyboards, screens—and they've executed to superhuman perfection. The way they've been able to do that is by hiring their management team. Who would have ever dreamed that some kid named Michael Dell who was an undergrad at the University of Texas would be the person who knocked off Compaq, forced IBM to get out of the PC business, and trashed a whole bunch of personal computer companies over the last 10 or 15 years, companies that most of us probably don't even remember? It was superhuman execution that got them where they need to be.

          Whenever you think of this skill, I want you to think of two things. Number one, I want you to think of the concept of execution intelligence—the collective intelligence and execution ability of the team. Number two, I want you to think of Dell Computer as a great example of a company that has done a great job at it.

myth two: i know my customer myth 2

Here’s the next big myth: “I know my customer.” This one is probably the biggest consumer of capital I've ever seen. The classic case is when we'll be negotiating a term sheet with an entrepreneur and they're going to argue over fractions of equity percentages. I don't blame them. Equity is a very rare thing and you need to treasure it. We want to see our management teams and our founders having large ownership positions in their companies. They'll go out and design a product they think the market wants without really understanding their customer, yet here we are arguing over fractions of percentage points.

          The classic way people design products is $5 million at a time. Give me $5 million for software, and I'll go out and ship Version 1.0. Version 1.0 is wrong? Okay. Now I'm going to raise another $5 million and ship Version 2.0. Version 2.0 is not quite there. I'll go out and raise a third $5 million. If I'm even alive at that point, maybe I got it right. That's going to kill you instantly as far as ownership percentages, and, second, investors aren't that interested in the company anymore if it's gone through that much money.

          As you're designing your product, think about this concept of understanding your customer. The way the bad version of it happens is from talking to a couple of your friends or cohorts and extrapolating broad market trends from three or four data points. It's what I call the “Ready, Fire, Aim” approach to building a product. It goes like this: “I'm going to take somebody who thinks they know the market. I'm going to lock them in a room. I'm going to have them write a product spec. I'm going to design my product from that product spec, and I'm going to put it on the market. I'm then going to hire a bunch of salespeople.” Of course, the salespeople screwed up because they couldn't sell the product. Usually, it was the product that was wrong.

          The other thing to remember about this from an investors standpoint is that most technology companies don't fail for technology reasons. As we talked about, they fail for market reasons. So, how do you get your market right? It's a real simple concept I call “market validation,” and it entails a real tricky concept—you have to pick up the phone and talk to 100 customers. That is hard to do. It only takes three or four weeks and it costs a couple of hundred dollars in long distance phone bills. Don't ask me why more people don't do it, but the classic entrepreneur comes into our office—let's use our resume tracking software example—and says, “I know exactly what people need to track resumes. Give me $5 million so I can build the product.”

          I'll say, “Fine. Who are you going to sell it to?”

          They'll say, “Middle-market manufacturing companies.”

          “How much are you going to charge?” They'll give me an answer.

          “Who is going to buy it?” They'll give me an answer.

          “Who is going to pay for it? Who is in the approval cycle? How much are you going to charge? How is it going to get installed? Is there consulting that goes with it?”

          We'll ask 10, 12, 15 questions, and I'll dutifully write down each answer the entrepreneur gives. Then I'll challenge them. I'll say, “Let's get on the phone and call 100 people in this target market and ask them the same questions and see what they say.” Lo and behold, they break into a cold sweat. We make the calls, and they come back and say, “You know, I didn't know that market that well after all. I found out that the opportunity is more in larger service companies. I found out that they really can't afford to pay $200,000, that it's more of a $50,000 problem. I found out that the biggest competition we're going to have is people doing the process manually.”

          It's amazing how such a simple, simple process yields such large results as far as what kind of product to ship. It's also amazing because it's so inexpensive to do.

          We find that the best companies make this a part of their culture. When they want to figure out a new product, they get everyone in the company on the phone. I mean the receptionist. I mean the engineers. I mean the salespeople. I mean the CEO. Guess what? Everyone has a new appreciation for what it's like to sell something. Does it take 20 or 30 phone calls to get one interview done? Well, now you understand what it's going to be like to sell that product. You call your target market and say, “Can I have the human resources department?” They say, “Who in human resources?” You have to have answers for those questions, and you need them before you start building anything.

          What market validation really does is get the right product and the right features into the market faster. Remember, any good entrepreneur wants a fast changing market. The minute you don't pay attention to your market, the minute you let it slip a day or two without paying attention to it, it's changed. You have to make sure that your product is keeping up with it.

          The other interesting thing about this process is that you get a national source for alpha, beta, and first customers. When you're asking these people about the problem, slip in a question like, “On a scale of 1 to 10, how bad is this problem for you?” Out of those 100, maybe 10 will say it's a 10, that it's super high. Slip in a question at the end, “Would you mind if we called you back later to talk more about this product?” If they say yes, call them. Tell them when the product is available. If they really have a problem, they'll want to test it..

       Getting somebody to pay you money is the best thing you can do for an early-stage company. It helps recruit savvy employees. Nothing attracts people or board members or advisors or investors like really knowing your market. Nothing beats going into a pitch to a venture capital firm where the VC’s asking a question about the market and having your VP of Engineering answer because he had been there on the phone. Nothing will beat that. The confidence that exudes from the management team is just incredible. It really raises smart capital, and, most importantly, it optimizes the company's capitalization. You get your product pretty close to right the first time you ship it. Okay, it's never going to be perfect. Let's be realistic. This is a startup. This is what risk is all about. But I'd rather get it close-to-right on the first $5 million than close-to-right on the third $5 million.

[continued]

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