Myths and Models of Entrepreneurship
I recently went one on one with Rizwan Virk, author of Startups Myths and Models, a venture partner at several VC firms and the founder of the startup accelerator Play Labs @ MIT.
Adam: Thanks again for taking the time to share your advice. First things first, though, I am sure readers would love to learn more about you. How did you get here? What experiences, failures, setbacks or challenges have been most instrumental to your growth?
Rizwan: I started my first company as a fresh graduate from MIT many years ago, just before the dot com boom. For a while, things were booming and we were one of the fastest growing startups on the East coast. But then, my startup ran across all kinds of problems, many of which I wrote about in my first book, Zen Entrepreneurship. That's when I started to realize that things I had been told and believed about startups might not necessarily be true. Later, when I moved to Silicon Valley and started building video games (I was the co-creator of a mobile game called TapFish, which was the #1 game in the Apple and Google Play app stores back in the day), and investing in other entrepreneurs, I started to see the same misconceptions emerging. When I started Play Labs @ MIT, a startup accelerator, I found myself teaching the same lessons again and again, and over the years I've collected those into the new book Startup Myths and Models.
Adam: What do you believe are the biggest misconceptions about the startup world and entrepreneurship?
Rizwan: Well, there are many individual ones covered in the book about financing, starting a company, managing people, and even selling your company. But I think the biggest misconception is an overriding myth that goes something like this: Entrepreneur comes up with idea. Entrepreneur pitches to investors who say, "That's a great idea,” and invest. Entrepreneur builds product. Product is a big success. And everyone is fat, dumb, and happy.
That is mostly a myth, and if you look at the stages of the Hero's journey, which I use as a backdrop for the entrepreneur's journey - it's missing some of the more important parts of the journey - refusal of the call to adventures, the road of trials, and most importantly, a trip to the underworld. The reality is that many successful startups have a first product that doesn't work out, and have lots of investors say, “No" to them, and it's often about understanding the needs of the market and then changing your product to come up with the thing that finally succeeds.
Adam: What advice do you have for entrepreneurs during the ideation phase? How can we come up with great ideas?
Rizwan: One of the myths that I talk about in the book that is prevalent in Silicon Valley is "try to build a billion dollar company,” or the next Unicorn.
I actually give new entrepreneurs the opposite advice: don't try to build a billion dollar company. Find a market that you are obsessed with and that you believe will grow, and use your own experience as your guide. Often the best companies are founded by people who have previous experience with technology. Take Netscape for example. Marc Andreessen had previous experience building a web browser back when the web was much smaller. If he hadn't had that experience, he wouldn't have been a credible guy to kick off the web revolution. Or take Mark Zuckerberg. Before he started Facebook, he had fooled around with a site that had pictures of other students. He then built a site just for college students.
Sometimes the biggest, multi-billion dollar ideas start off small because they are part of the interest of the entrepreneur. Find a market that calls to you, then iterate and find something that is small but is needed/wanted in that market. If the market grows, you could end up building a billion dollar company without even trying!
Adam: What advice do you have on how to best test a business idea? What frameworks should companies consider as they are starting?
Rizwan: I don't know that any particular framework works in every case. One framework I introduce in my book is the "Startup Market Lifecycle” which shows how a startup market goes from a "nascent" phase, where it's mostly hobbyists, to a "growing" phase where it's a recognized market and VCs are beginning to invest, to a "super-hot" phase, where everyone is jumping in and valuations are getting crazy, following by a "maturing" phase when the music so to speak stops and there are only a few seats at the table, and market leaders survive while those that are "me too" companies often don't. Finally, if it's a market that is successful, it will become a "mature" market where valuations are now based on profits, P/E ratios, etc., and all the standard rules and formulas we learned in business school apply. You'll notice that this means that for most of the time a market had startups, those rules didn't necessarily apply.
The other thing for entrepreneurs to consider is not just if there's a need for their product, but most importantly, if the number of potential clients who have that need is growing or static, and if they even recognize that they have the need.
Adam: What advice do you have on how to grow and scale an entrepreneurial venture? What frameworks should entrepreneurs consider as they are growing and scaling?
Rizwan: In the early days of an enterprise, you have to go out and get your first few customers or beta sites. Even if you have a consumer website or app, you have to go out and find out how to get enough exposure for your initial set of downloads. Given the number of apps in the app store, you can't just "build it and they will come."
The bigger issue in scaling an entrepreneurial venture is your ongoing cost of customer acquisition. Now, while it's not exactly considered sustainable, in the early days after you go out and get your first few customers, the best companies have a close to zero cost of additional customer acquisition. In the early days of Facebook, how much money do you think Mark Zuckerberg spent on getting users for Facebook? The answer is zero, since users dragged their friends onto the platform. So, the #1 way of getting customers is through word of mouth. You need to get customers that are so excited that they will tell their friends about your product.
The other way to spend almost nothing is to get press. I did this in my first startup when we had literally zero dollars in the bank. The articles in the biggest enterprise software magazines made customers come to us, leading one of my advisors to remark that the "fish were jumping in the boat.” So, whether you are a B2C or B2B company, the real question is, how do you get to the point of "fish jumping into the boat.” If you have that, even if you are spending some money on marketing and getting customers, those customers will bring in more customers. At one of my startups, our game Tap Fish had a 1 to 5 ad to organic ratio. For every one user we paid for through ads, we would get five more. Why? Because the users we got would tell other users, who would then go download the game.
Adam: What are your best sales and marketing tips?
Rizwan: On the sales side, I find that many startup founders end up saying things like "My sales guy sucks,” but this is a myth. If you aren't making enough sales, there are usually two major problems in B2B sales: the ever-changing pipeline and the never-changing pipeline. Both can be indicative of a "bad sales person.” On the other hand, as an entrepreneur you cannot expect a salesperson or even VP of sales to ever understand your product and market needs the way that you do; therefore, you have to be responsible for selling the first few. Only when you've shown that the product meets the market need and can be sold to multiple customers that are not personal acquaintances, then a salesperson can take over.
On the marketing side, the most common thing I hear from entrepreneurs is "If only I had more money, we could do more marketing.” But the most effective marketing is zero dollar marketing, as I mentioned earlier. Also, if you don't have enough money for marketing, this means you probably haven't shown that the metrics of the marketing spend make sense - your cost of customer acquisition is more than your lifetime value. If you can show that, then it's not that hard to convince investors (or a bank) to give you money for marketing. This means really learning how to measure these two things, which is pretty tricky in a startup. Better to find ways to make your cost of customer acquisition = zero, so that you know you are in these parameters for sure and not guessing.
Adam: What do you look for when you invest in companies? What are your best tips for fellow investors and best tips for companies interested in raising money?
Rizwan: I look for startup teams that have a deep understanding of a market, whether it's from the previous experience of the founders, or because they have been in a market for a while, or just from traction that their product is showing. Anyone can say, "OK I'm going to attack X because it's a big market,” but only when you have been in market X for a while do you truly understand the "unstated" needs of people in that market.
I also look for a market opportunity that is not too large at the moment, which the startup team could conceivably come to dominate. I think too often entrepreneurs start with a "big market" or a "great product" and for me, it's about the team and the stage of the market opportunity. If that market opportunity is too big it should be attracting lots of money from bigger players; or perhaps it's not as easy as it looks, or there is some other reason why the market is being ignored. Also, since most startup companies are successful not just with their first product but via their second or third or fourth products, I look for a team that is adaptable. These same points can apply to the entrepreneur's path for raising money, as well as for investors looking to make investments.
Adam: In your experience, what are the defining qualities of an effective leader? How can leaders and aspiring leaders take their leadership skills to the next level?
Rizwan: One of the things I learned from interviewing well-known venture capitalists is that there are as many different leadership styles as there are individual entrepreneurs. I think the key is to not try to adopt someone else's "leadership" style. That doesn't mean you might not adopt some specific habits (meeting times, action item tracking, etc.) but those are really more management.
To be an effective leader, I think you need to have some level of trust from the people you are leading. This can come from experience together (they know you've been right before), from your being there for them when they needed you, from your being honest, or from you having a vision that they have all bought into. Some leaders are better at making speeches, some are better at analyzing data, some are better at personal relationships.
Moreover, my advice is to be more true to yourself. Focus on your own strengths and weaknesses rather than trying to be the next Steve Jobs. Not everyone needs to do product demos to be an effective leader.
I find that entrepreneurs tend to become one of two types of "bad leaders" - one is a micro-manager, and one is an absent manager. The key is to find a balance between these two, and to find what the Buddha called "the middle path" but for leadership and management.
Adam: What is your best advice on building, leading and managing teams?
Rizwan: Teams often come down to the people that you put on them, but it's important to have the right chemistry and balance. Early on, I learned about this thing called the Four Quadrants of hiring, and in my new book, I express it as a myth which is "hire the best/most experienced people you can find.” This turns out not to be the best strategy. Sometimes you get people with too much experience who are set in their ways. Sometimes you get strong-willed people who are butting heads all the time. The key is to find the right balance of experience and cultural fit. In fact, if someone has the right cultural fit, you can help them get the experience, but if they don't have the right cultural fit for a startup, then it almost doesn't matter what experience they have; they'll end up being problematic and you may end up having to let them go regardless.
Adam: What is the single best piece of advice you have ever received?
Rizwan: On raising financing, one of the best pieces of advice I've received was from VC Brad Feld, who told me that too often entrepreneurs come to him asking for money and say, "If you give me x amount of money, I will go off and do these great things.” He reminded me that entrepreneurs are much more likely to get money if they are already doing great things, then investors want to come along for the ride.
Adam: Is there anything else you would like to share?
Rizwan: I would say that starting a business is a journey, which I liken to the hero's journey - like Frodo or Odysseus or even Luke Skywalker - it is in many ways a life-defining journey. Just like these classic adventures, you may hear the "call of adventure" but it needs to be personalized to you. Too often, we think we need to do things the way that other people have done them and we'll be just as successful as they are, the next Steve Jobs, or Elon Musk, or Mark Zuckerberg. I found that not to be the case. I think the combination of our strengths, weaknesses, hopes, aspirations, and most importantly, our obsessions, is what makes our journey unique and special. If you are called to embark on this path, then it is, in fact, your journey, even though you will need many helpers and mentors.
In the end, as Galadriel says to Frodo: "This task has been appointed to you, and if you do not find a way, no one will."