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an evening with rob adams
entrepreneur’s bootcamp
page three of three | previous page

myth three: i have to ship the killer product

          Okay, the next big myth. Let's pretend for a minute that we've followed the first two principles. We built a team with a lot of execution intelligence and we've gone out and validated the market. We talked to 100 customers and we got a list of 400 features to get in that first product. By golly, we're a startup! We're red-blooded entrepreneurs, and the only way we're going to have credibility is to ship all those features in that product.

          Why?

          “Because we're a startup and that's the only way people are going to take us seriously.”

          I like to call it “boiling the ocean,” making sure everything anyone ever asked for is in that product. It's a form of credibility for us. We all have a chip on our shoulder when we're a startup, so we try to do everything. We try to overcompensate. The critical thing is that it delays time to market. If you're putting 300 or 400 features in that thing, you might be out of the market for two, three, four, five quarters. Not only is the market changing, your product is getting harder and more monolithic. And you're spending more money. That money is burning up month by month by month. It uses large amounts of capital.

          What should you do? Again, it's going to be amazingly simple, and I'm going to have a really good example. Some of you might be able to figure out what the example is.

          You want to take that list of 300 or 400 features, boil it down to the three or four that everybody needs, and get it to the market fast. Get somebody to give you some money for it because, if they've got enough of a problem and enough pain, they will pay you money for it even if it's not perfect. Nothing beats getting someone to give you money because they're going to tell you everything that's wrong with your product. That's what you want. The conversations aren't always pleasant, I know that, but they're usually pretty truthful if you really listen to what they're saying.

          What happens? You get prioritized feedback from your market validation. You know what the top three or four things are. You get in the market faster and it takes far less capital. You can partner to add features. You can get consulting companies to help with instillations. You can license technology. There are many different ways to do it, but, ultimately, you want to ship that minimally functional feature set first—the minimally functional feature set that people will give you some money for, fall in love with what you're doing for them, and tell you what to put in your next release, and your next release, and your next release after that.

          What company is the master of this on the software front? Microsoft. Right. Who uses at least version one of anything from Microsoft? Who uses release two and who uses release three? That's how they work. They are brilliant at this. They have all the money in the world. They could spend billions on development teams and what do they do? They go out and do market research. When they think they find an opportunity—lately, they'll go buy something if they think there's a good product already out there—or, if they build it themselves, they'll ship a lousy release to start with, full of bugs. Look at Windows. I remember seeing the first release of Windows. It was terrible. The second release was terrible. The third release almost got there, but what are you using today on your laptop?

          The thing I want you to remember about shipping the killer product is exactly that. The killer product kills the company. When in doubt, think Microsoft, for this particular feature, anyway. That was not a political statement.

          I'm going to pick up the pace a little bit here. I have four or five more myths to go through, but those three we just talked about—building the management team, doing market validation, and shipping the minimally functional feature sets—those are the biggest three. They have the biggest impact on the probability of success for any company, in particular, technology companies. And, again, remember, as an investor, market risk is what kills companies, not technology risk.

myth four: i must raise a lot of capital quickly

          The next myth is, “I have to raise a lot of money quickly.” That’s not as much of an issue these days, but, frequently, we still see people who want to raise most of the money up front when the value of the company is the lowest, when they're going to have to sell significant portions of their company at a very low price. This tends to produce what we like to call an “output mentality” versus an execution mentality inside the company.

          With the typical entrepreneur, we close a deal, they get a check, and the first thing they're going to say is, “Oh, yeah, we went out and bought 10 desks at a used furniture warehouse. We only spent $80 a desk. Isn't that great?” I'll tell you something: Having desks does not change the value of any company. The next thing they’ll say is: “We went out and, boy, we took that copier salesman and we raked him over the coals. We got a demo for 30 days and we got 10% off the cost of the copier.” How much value did that create in the company?

          The point is, if money is too readily available, people think they have to do things. We saw what happened in the dotcom era. They feel like they have to create what I call “outputs,” and most of us like the easy outputs. They make a checklist of items and knock them off. I challenge you to do the hard things. What are the hard things? How many customers did you call today? Calling customers on the phone is very, very hard to do. You have to get up for it. You get the phone slammed in your ear. You get asked a lot of tough questions that you don't have answers for, but it increases the value of the company. Figuring out what features to take off the feature list increases the value of the company because you're going to get your product out sooner. Taking somebody who was in your alpha program and moving them to your beta test program, then moving them to a real paying customer, those are things that increase the value of the company. Buying desks, buying copiers, getting phone systems, that doesn't increase the value of the company. Yes, they're needed. There's no question they're needed, but hire a really sharp office manager and have him or her go out and do that stuff for you. Get your management team focused early on creating things that produce value.

          One of the great ways to do this is not to raise too much money. Make it precious. Make it money well-spent all the time. We like to talk about focusing on value and flexion points. Don't raise all your money upfront. Go prove something. Go prove your market. Go ship your product. Go get your first customer. Then raise a little more money because you've increased the value of the company. When you hit one of those value and flexion points you can raise that money by selling a smaller percentage of your company. Every time you hit a big value and flexion point, go out and get more money because that money will get less and less expensive for you. Those are the kinds of companies that are able to produce results because they always have enough money in the bank. They're always hitting their value and flexion points because they've got a real execution mentality inside their management team. It's not an output mentality. Think “value and flexion points” and “execution mentality.”

myth five: investors fund business plans

          Another frequent misperception on the part of entrepreneurs is the business plan misperception. I occasionally chuckle at some of the business plans we get. A lot of them are unsolicited. They come in over the transom and they are gorgeous. I've got a new word that I'm going to sell to Kinko's—it's been “Kinkoed.” It's like “FedExed.” It's been Kinkoed. It's got 60 pages of beautiful graphics. It's full color on each page. The paper weighs about 60 pounds. It's got one of those nice, clear covers. The thing is still warm when you get it. There are graphics on every page. The writing is very eloquent and it talks about every subtle nuance the business could go through and what to do about it when it happens. You get to the financial section, and there are 40 pages of beautifully crafted spreadsheets. All the numbers fit correctly and they're out to four decimal places, even though we only measure dollars and cents in two decimal places.

          These things are just gorgeous, and they're just not worth the effort. All I want to read is the executive summary. I want a killer paragraph that tells me what the company is doing, then I want to flip to the resumes and see what the execution intelligence of the team looks like.

          Typically, people put this as number one or two on the list of things to do. What we like to say is no, don't put it as number one or two on the list of things to do. It needs to be done, but put it last on the list. If you've gone out and validated your markets, hired a good team with execution intelligence, figured out minimally acceptable feature sets, and done some of the other things we spoke about, the business plan is going to be very straightforward to write. Not only that, it's going to exude a level of confidence when somebody like me reads it because you really know your market. You know it far better than I do. I'll ask all my standard questions and you'll have answers for them.

          The point is, don't spend a lot of time on this. It's not that it's not important. It needs to be done, but a 10- or 20-page business plan should be plenty. If anything, practice the slide presentation that you're going to do live in front of the investors. That will probably have a bigger impact.

myth six: investors want their money back quickly

          Investors want their money back quickly. This is really a comment on the quality of investor you can go to. My advice here is to get the best investors you can because good investors understand that investing in startups is a long-haul proposition, despite some of the short cycles we had during the boom. Good investors stick with the company. All startups go through their problems. It's never easy. If it were easy, it wouldn't be so lucrative.

          Pick your investor. Make sure it's not somebody who is overly anxious to get their money out quickly. Make sure it's someone who knows your category, understands your space, understands your team, and, importantly, can add value to what you're doing. Pick them very carefully.

          In this environment, institutional venture capitalists aren't necessarily the best people to work with, particularly on the front end. There are angel financiers. There is bootstrapping by going out and doing consulting work. There's bank debt. There's financing from your customers. There are all kinds of ways to go after money. Focus on all the things that are available to you, and, when you do choose funding from somebody, make sure they understand a lot about your business. Make sure you really want to be partners with them.

myth seven: advertising is the hallmark of a good marketing plan

          Of the last two points, the first one is on marketing, the next one is on sales. Again, a common misperception: Advertising is the hallmark of a good business plan. I'll go back to the Super Bowl 2000 halftime again. Probably the biggest spend of venture capital in the history of time was in that 10-minute break. There were the puppet guys and the slice-of-life companies. You kind of said, “Huh, what was that?” I'm not sure. I don't even remember the website names, but that was the last gasp for some of those companies trying to throw up their name in the hopes that somehow people would rush to their website and start buying. A common misperception is that mass marketing is the way to go. If you can't get people to buy, start advertising and doing all these mass marketing types of things.

          The reality is, bring in marketing up front in the earliest stages of the company. It's critical to do that because they're going to help you define your markets and define the pain. Then use marketing as a tool that helps you to find your product. Once you've done all your validation work and you understand your customer's problem, marketing is a great way to make sure that engineering builds what the customers are saying they need. Marketing becomes the healthy interface that goes out with the current version of the product, then comes back and helps engineering know the direct feedback from the customers. Marketing also helps build company buzz, and buzz is important to a startup, usually in the local community for hiring purposes, right? You want to make people aware of what you're doing. If you’ve validated your market, gotten savvy employees, and gotten savvy investors, people will know and that word will travel very fast. You want to get that local buzz going.

          Most importantly, marketing is going to help with customer acquisition. They're going to find programs that help bring qualified leads into the company which the sales organization can then go close.

          Think of that resume tracking software. A good marketing organization will go to the human resource trade shows and to the magazines those people read. It will find the trade groups they go to. It will understand everything about the psychographics and demographics of that market. It will help get your name into the market and help get your sales organization qualified leads. If you pulled them in from the beginning, they've been intimately involved in the market validation and they really understand what the sales organization is going to need in order to close.

myth eight: i can use partners to sell my product

          The last myth is about sales, and sales is the sort of thing that everyone forgets until the last minute. The day before you're going to ship the product, you decide to bring them in, and that's a big mistake. What you really need to do is, first of all, be responsible for selling your own product. Many companies seem to think that they can simply sign up IBM or Oracle or do a joint relationship with Microsoft and then they don't have to sell anything. The fact of the matter is that nobody is going to sell your product for you. If you look at an IBM sales rep’s desk, they have three three-inch binders sitting there bulging with papers. Each piece of paper represents one product from somebody else that they sell. If you think they're going to know about your product, they're just not. You've got to be responsible for creating your own demand. You can't use partners to establish demand for your company initially. As your name gets established and demand grows, partners can be wonderful channels in addition to what you're doing yourself, there's no question about that, but signing them up early and expecting them to produce for you is just not going to happen until you create your own demand.

          We advocate that you take that market validation process you started with and continue it throughout the life cycle of developing the product. First, take all those people you spoke to in order to understand the target audience looked like. Start selling the product to the people you've been talking to all along. Also, now that you know what they look like, go find more of them. Go find the middle-market manufacturers or the large service providers and just go sell more product into that environment. Use marketing as the initial lead generation source, then use your sales organization to help close it.

          That's the end of the formal part of this presentation. I want to emphasize that this was the background research I did for the content that drove the book, and the outline you saw is roughly its chapters. Each chapter talks about a concept, then it takes you through in excruciating detail how a real startup in Austin, Texas—real names are used in the book—how they executed that particular concept. We also talk about large companies that do those things well, companies like Microsoft or Dell or Amazon. The book is available on Amazon, through Barnes & Noble, through all major bookstores. We have it out here as well. And if you like what you heard here or are interested in learning more, there's a lot more detail available in the book.

          With that, I'd like to thank you very much for your attention. I'd love to take some questions from you.

the audience: q & a

Audience Member: You started AV Labs which helped startups get going. How did you pick the companies to bring into the lab that deserved this extra effort?

Mr. Adams: Great question. We saw in some companies parts of what we just talked about here. Things like the focus on customers, validation, building the management team, all those things might not have been there totally, but we saw enough of them to know that we could add another part to them. If we saw a strong management team, if we saw a good market demand, and we saw a few of the others, we knew it was worth placing a bet on.

Audience Member: Rob, I loved your book. Are you coming out with a second one?

Mr. Adams: As the book has been out, a lot more large organizations are paying attention to it. One thing that really resonates is the market validation section, which is chapter two of the book. There's some chance, if I were a betting man, I'd bet someday we might come out with a book that went deep on market validation because I think that's critical to all companies.

Audience Member: I was wondering why you wrote a book instead of investing in a company, if you have all that time.

Mr. Adams: That's a great question. First of all, understand that anyone who writes a book and has a job like I do doesn't actually write the book. The second thing is that we see so many business plans and spend so much time trying to educate people on what they should be doing that it was easier just to say, “Here, read this and call me when you're done.”

Audience Member: You said one could take a new approach to a business process I believe in that strongly because that's where I think the money is, but that's a good idea, too, isn't it? Doesn't a good idea have to be generated in order to come up with a good idea?

Mr. Adams: I guess so. The thing is, it depends on what you mean by “new business process.” In today's environment, nobody wants to change business processes because it's too risky. They want to be able to take something they know, a bounded equation, and do it better. They don't want to rearrange how they do their manufacturing line, they want to go in and look at how they do quality assurance, sourcing, resource planning, or something like that. You've got to be able to take something that they already know and are comfortable with, and, rather than radically redesigning how it gets done, just go in and do it better, faster, or cheaper for them.

Audience Member: How would you rate the importance of defensible technologies?

Mr. Adams: The challenge for defensible technology is that you can go get a patent—that's an important thing for a lot of early-stage companies to do—but your patent is only as good as your bank account is large. If somebody really wants to squash you, they will. Yes, you need to get the patents, but understand that until you get to be of significant size it's going to be hard to really be defensible. I'd rather have a company that has the execution intelligence we talked about, that is an unusual conglomeration of people who really know a space or a category and have really figured out how to stay close to the customers. I would argue that so few companies do that, even though it sounds so basic—I know, you're all sitting here saying, “Why wouldn't you do that?” Trust me, so few companies do that that your best defense will be a good execution team and staying close to your customer.

Audience Member: I would suggest that instead of asking your customers if you may call back, you should never ask them, just call back.

Mr. Adams: That is a great suggestion.

Audience Member: Would you suggest that a small company finance with debt or preferred stock or equity?

Mr. Adams: Of those three options, debt would be the best. Actually, the best would be bootstrap. The best would be getting a customer to pay you for the first release or fund your development, followed by debt, then followed by equity in today's market.

Audience Member: Could you talk a little bit more about risk mitigation for a startup company?

Mr. Adams: We talk a lot about this in the book. Remember, an investor is paying for reduced risk. The more risk that has been pulled out of your company, the more valuable it is to an investor. Everything we talked about today incrementally reduces risk. If you can build a company where the risk is reduced because it's got a strong management team, a good product spec that isn't trying to do too much, an understanding of its market, revenue traction, and people paying money for the product, those are all things that mitigate risk and make the company more and more valuable to an investor. Anything you can do to mitigate risk is going to increase the value of your company.

          Thank you very much.

Ms. MacPherson: Thank you, Rob.

          Rob is, as we know, a venture capitalist, but, as I listened to what he was saying, a lot of those suggestions apply to any company or any organization. Talking to 100 customers is not as easy as it sounds, but it is something that everyone would benefit from, whether you're looking for venture capital or not. Hopefully, most of you are not. There were a lot of good lessons here.

          Thanks very much for coming. Thanks again, Rob.

[End]

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