Guy's Maxim: Launch Early, then Churn Baby Churn

I think that the maxim "Launch early, then churn baby churn" was originally coined by Guy Kawasaki. The only problem I have with this is that there is definitely such a thing as "launching too early." As is the case with many difficult things, entrepreneurship can sometimes feel lonely. This is because the entrepreneur is often the only one at first who can see a beautiful vision of what it is that she is going to create. Because the entrepreneur is always reflecting on how beautiful her vision is and how likely it is that somebody could copy what she is doing, she feels a crushing need to launch as soon as possible.

I have learned the hard way that while I generally believe in Guy's maxim, I think we need a bit more clarification. Here are some things to consider doing:

• Ask a fellow entrepreneur (known for brutal honesty) if he would look at the state of your pre-live product and tell you if he would go live in that state
• Get the opinion of some relevant industry bloggers
• If another competitor has already gone live with a similar product, I think this actually increases the need to get it right before launching. Slow down, take a deep breath, and focus on beating the competitor over time. Most often, we feel a desperate need to go live right after a competitor has launched.
• What is the probability of a preponderance of poor reviews if you go live in your current state?
• First impressions last a very long time, especially if you won't be able to update your product or service very rapidly after the initial launch

The Primary Learning Curve for Growth Companies: Sales Cycle

In the 1960s, a then much lesser known management consulting firm called Boston Consulting Group made a name for itself on a relatively small set of powerful business ideas. Perhaps the shining example is the BCG Growth Share Matrix. However, BCG also received notoriety for the popularization of the strategic impact of the "learning curve" or the "experience curve." You can learn more here. While the notion of economies of scale has been around for a long time, BCG did a great job of giving an explanation for one major cause of economies of scale--learning or experience.

Typically BCG related their thinking to manufacturing or product creation processes. Their basic hypothesis was that the more product you make, the better you get at making it efficiently. This means that the production cost for each unit of product goes down as the company sells more product.

I have been thinking about tweaking this model to relate it to the major area of learning for most startups: sales. I have seen in my own entrepreneurial endeavours that there is a striking similarity between the learning curve effect on production to a similar effect for many growth companies on sales cycles. Specifically, that the more product you sell, the quicker your sales cycle. I bet that you could actually track this for a startup. The y-axis of the graph would be sales cycle (measured in units of time) and the x-axis would be cumulative units sold. I would be that for most startups the curve would slope down according to the familiar BCG experience curve.

What are the implications of this. Not totally sure at this point. I sometimes wonder if there is a chicken-egg issue with this whole line of thinking. Put another way, does the sales cycle start to fall because the management team manages it down (by removing bottlenecks, figuring out efficiencies, etc.) or does the fact that a company is selling more cause the sales cycle to fall, or some combination of both.

On a practical note, it does seem like getting the sales cycle down is one of the central challenges of growing a company. Obviously there are lots of things you can do to try to manage the cycle down including:

• Getting more leads so that your sales team can focus only on higher quality leads
• Qualifying your leads better so that you focus only on higher quality leads
• Hiring more sales people
• Etc.

The Dream of the "Lifestyle" Business

I wonder how many entrepreneurs started their companies with the hopes that they were starting their ultimate "lifestyle" business. For those who may not have heard the term, a "lifestyle" business is one that doesn't require significant work (at least after you have got it up and running) and generates enough cash flow that the owner can have a great lifestyle. The owner can go on vacation whenever she wants, not have a "day job," and still enjoy running a profitable enterprise.

Now I wonder how many of these entrepreneurs' lifestyle dreams foundered on the rocky shores of reality. We are kind of going through a crash course in this right now. While we at VR definitely started VR with the intention of creating a profitable entity, when we first started we had no real competition. We were doing something very unique--in fact, so unique that few saw it as a legitimate business opportunity. Inevitably, as we struggled to change the business model, keep up with competitors, and get revenue we found that our aspirations of a lifestyle business were ill conceived. It required a lot more work than we thought. There was a lot more stress.

Now we are kind of at a point where we again have to decide: do we want this to be a lifestyle business, is that really even an option, or is that nature of most technology startups such that there is no rest until the exit. I assume that we could work toward creating a lifestyle business but I think that option is not realistic given the pressure we feel to succeed.

Funding Matrix

So I have been thinking a lot about what it takes to raise money lately. It seems like there are a number of ways to create a fundable opportunity but at the most basic level there are only a few things that matter:

• Vision


• Results


• IP


• Other forms of differentiation

The vision is the business case and articulation of why the opportunity (regardless of any actual execution) is exciting. More importantly, the vision shows how big, important, or exciting a business opportunity is. For most venture capitalists and private equity professionals, this means that the opportunity has to be pretty big. I put this before results because for most entrepreneurs a vision must precede results. Ultimately, results are the most important but usually results are the natural product of some kind of vision.

Results are the tangible rewards for executing against a good vision--generally speaking these are profits / cash flow. Some companies seem to be able to generate significant results without a great vision. Other companies generate great results and have a good vision but the vision isn't big enough to appeal to private equity / venture capital investors.

IP is "economic rents." These are assets that only you have and others cannot have, by law.

Other forms of differentiation refer to other assets that only you have and that others cannot have, but this situation is not protected by law.

Most venture capital professionals evaluate deals based on the management team, market, product or service, business model, and deal terms. So is this method at odds with a method that focuses on vision, results, IP, and other forms of differentiation? I don't think so. I think that the two overlap but ultimately serve slightly different purposes. Investors will find out about the vision, results, IP and business model of the company as they look at management, market, business model, product, financial results, etc. The purpose of this other way of looking at a deal is really to highlight the trade-offs that arise when a company either is generating significant results or not and the trade-offs that arise when a company chooses to grow a startup with protectable IP, a differentiated business model or no differentiation.

So, let me channel my inner consultant here and put up a matrix that I think exposes a relationship between these ideas and the fundability of a company.

As you can see in the matrix, I think that companies with both a great vision and great results can almost always get funded quite easily. Companies with a great vision but no significant results yet (roughly 80% of all venture-backed companies) almost always need some form of differentiation to appeal to venture capitalists, or angel investors.

Companies that lack vision and results are in a tough spot. Typically, the only chance these companies have of getting funding is by having some form of protectable IP (e.g., patents). There are some investors who will invest in protectable IP with the intention of selling it to a company that will be able to create a vision and results for it -or- sometimes they have a vision of the IP themselves -or- they hire somebody to develop a vision. I would consider this a rare case though.

The takeaway is this. Results are inherently good and put companies in a great spot for fundraising. If you don't have results you better have a great vision and you better have some form of differentiation.

Focus vs. Flexibility

As one who has had the privilege of working with a lot of startups, I feel it would be hard to overestimate the visceral and emotional tension that occurs as startup entrepreneurs try to focus but also maintain flexibility. There is an inherent tension between focus and flexibility. Why? Because it is idealistic and naive to think that a startup can immediately, without any preparation, dramatically change course even when all the right reasons dictate such a change. If a startup could dramatically change course without advanced preparation, then there would be no tension between focus and flexibility. A startup could simply stay laser focused on solving a particular business problem and then point the laser in a different direction upon receiving new data. In reality, it is not this easy.

This leads to a problem. Startups that are not sure that they have created the product, service, or business model that will create enormous success often have to start working on multiple offerings _from the very beginning_. If they don't start working on putting multiple "irons in the fire" early on, they will be in trouble when they learn that the one "bet" that they made isn't paying out. So this creates a tension. On the one hand most seasoned startup veterans consider a lack of focus literally a cardinal sin for startups but I can't understand how you can avoid some lack of focus until you hit on a winning business model. Perhaps it is just because I haven't been smart (or lucky) enough in my career yet to identify the perfect business model from the very beginning of a start up and ride a wave of success from idea conception to glorious exit. Does anybody else out there have these feelings?

How We Got Started

I don't know about you but I enjoy reading about the founders of cool companies. I think that VR is a cool company so I am hoping that some of you might be interested in how we started it. VR really started up at the Harvard Business School in 2004. There were several of us who had entrepreneurial backgrounds who really wanted to work in VC, but the chances of getting a job in VC were kind of similar to the chances of the Boston Red Sox winning the world series before the curse was lifted (and it was lifted as the Yankees will see in the post-season). We applied for positions but none of us got jobs. So we opted to do what we had always enjoyed--start a company. One of the companies we started was originally called Venture Engine. The idea behind Venture Engine was to turn the tables on venture capitalists a little--not in any kind of particularly spiteful way--by allowing the entrepreneurs who worked with them to confidentially rate their experiences working with the VC. The idea actually camewhile some of us were watching a Red Sox game in The Grille restaurant. We were thinking about the book Moneyball and about how much data we gather on professional baseball players. It led us to think about how much data professional public equity investors gather about publicly traded companies and how little data is available about private companies and their investors. We kind of thought that the private equity industry would follow the path of most other cottage industries. It would start out as small and clubby with very little information available to outsiders, kind of like the early days of real estate investing. Then just like real estate investing, information providers would crop up and start providing more information about the industry, about its investors, and about deals. Think about MLS for example, or its web 2.0 peer Zillow.

Anyway, we envisioned selling entrpeneur's ratings of VCs to the VCs themselves and to the large institutional investors who invest in VCs. We launched the company in earnest in Q3 2004 and started gathering data from entrepreneurs in 2005. We ultimately changed our name to Venture Returns. While entrepreneur ratings were the genesis of the idea, we never really wanted this to become the centerpiece of what we were trying to do. We always dreamed much bigger and as you can see on our current site, www.venturereturns.com, we view this as only one of many services we offer to our user community.

I don't want to talk too much about our grand vision because there are some competitors out there, but let met just say we are excited about what we think we can offer our core community of entrepreneurs and the VCs and private equity professionals who invest in them.

One of the tools that we have launched is a valuation tool for private companies. We recognize that valuation is a very tricky art and science. Some of us, myself included, have actually spent years doing these kind of valuations. We didn't build this tool as a professional, perfect way to create a valuation of a private company. Rather, we think of ourselves more like Zillow.com, in the sense that this is a first-pass rough estimate of the value of your company. As we gather more data and as we refine our model we think that it will become quite accurate. Also, the tool allows deal professionals (private equity gals and guys, VCs, and investment banking pros for starters) to find comparables in a much quicker and efficient way than they have historically. Selecting the right set of comparables in valuation work is always tricky. We have created a tool that should make this dramatically easier. While we may not be able to take the art out of selecting the right comps, we can assure you that our comp data is solid. We get our public comp data directly from stock exchange feeds and we update these feeds every day. Further, we gather and quality check our own M&A data. Right now the tool works only for technology companies but we are in the process of expanding it to all companies.

Here is a picture of a quick valuation that I did for a friend of mine who has a security software company that is growing nicely and has significant trailing revenues and that recently hit profitability. WARNING: the picture looks awful unless you click on the little expand button down at the bottom of the page. Sorry I need to convert this to a .jpeg and re-upload sometime later.