“We always overestimate the change that will occur in the next two years and underestimate the change that will occur in the next ten.” – Bill Gates
Founders often have questions like where should I sell this, should I hire more sales people or should I raise more money now or remain bootstrapped. The first question we actually want to know the answer to is why. Why are you doing this business? Why is this a passion? Why do you have a burning desire to deliver an idea or outcome to the world.
A lot of companies at the start feel like they are jumping off a cliff and building an aeroplane on the way down. But the ones who go on to become great have a very strong “why”. The average time from seed to exit in the US was roughly 8.3 years in 2017. That’s a long time to do something because you think it makes a lot of money, or because you think it’s a big problem and therefore would be a good business idea. A big problem is only a relevant problem if it’s YOUR problem – one that you are passionate about. If you don’t own a dog or have never owned a dog, don’t start a dog startup.
In engineering, asking a series of 5 “why” questions is often used to diagnose problems and present solutions. It works sort of like an inherent devil’s advocate, where asking a “why” question and receiving an answer is then distilled a further four times to get the root cause of a problem.
The same logic can be applied to your businesses whenever you think about something fundamental. Let’s take a real example where we got asked about moving to a partner only sales channel and not building an in house direct sales team.
Q: Why do you think you need a partner sales channel? A: Because sales are very slow and I think I need to get people who understand sales better than our team Q: Why do you think it’s your team that is making your sales slow? A: Because when I go into a meeting, I can sell this. I understand what the problem is. I tell this to my team and they can’t replicate the results. We don’t have the money to hire a dedicated sales team so I’ve been using our COO to do sales Q: Why do you think you can sell it but your COO and co-founder can’t. You’ve both been at the business at the start and you both have experience in the industry where you sell A: I don’t know. Maybe I’m more passionate in my delivery Q: Why have you decided that getting a sales partner is the solution to this. Do you know anything about sales partnerships and the economics of distribution? A: Well I thought it would all be incremental so it didn’t really matter. If we got more sales via a partner, they would be sales that we wouldn’t have gotten anyway so any margin is better than zero Q: Why didn’t you do this from the start or why haven’t you done it sooner? A: Because it went against my fundamental principle that we wanted to deliver best in class customer service for a problem I really understood and I felt that the initial problem I had as a user was that the people who were selling me things didn’t understand my needs – in fact they didn’t even understand the product they were selling well and I had to take multiple meetings to work out it wasn’t right for me.
At this point the penny dropped. At an early stage company (i.e before you have metrics or can A/B test anything) almost every business decision is as much a philosophical decision about how and why you want to deliver value to your target audience. Every part of your value chain should therefore be focused that sector or customer. Want to know whether or not to advertise in a particular publication – go ask the customer, go look where they hang out, see what they read, what they watch. And it’s not just asking a matter of one person – I encourage you to actually go out and talk to 10, 20, 50 – as many as you can. That’s the easiest way to understand if you should or should not be doing something, and it works all the way through your life cycle.
This is illustrated no better than in Jeff Bezos’ annual Amazon shareholder letter. Nowhere in the letter is the word “profit” or “net income” or “returns” any of the other buzzwords we normally see. However, what it does contain is 20+ mentions of the word “customer” and “product” and Amazon’s customer focus. There was a story recently which illustrated this where Jeff personally rang the Amazon customer help line and timed how long it took someone to answer as a measure of his commitment to customer satisfaction (it was four minutes, and that wasn’t a great result for the persons involved!). Going through the Amazon values is an exercise in itself – but to summarise you can read a very good article here from Parsa Saljoughian after he read every Amazon shareholder letter. You should also read the 2018 Amazon letter here released a few days ago which talks about the Amazon focus on high standards – a topic for another post.
So as an investor, we take a strong approach to understanding your “why” before we invest in a founder. After we invest in them we take the same approach in reflecting that “why” back to them as they grow their company strategically. Regardless of how attractive the economics of a decision are, if that decision is fundamentally counterintuitive to the “why” or reduces the ability to deliver that vision, then it isn’t going to work long term.
In many ways that’s a simple statement, but the simplest ideas are usually the best. At the beginning, you enjoy a relatively high degree of freedom. It’s much easier for a seed stage startup than Microsoft to suddenly change their pricing model or not deliver a product they thought they told everyone they would release. And that freedom is sometimes good and sometimes paralysing. But the reality is that everyone can and should build a great sustainable business based on a laser focused “why”.
Look at Dropbox (NASDAQ:DBX) and Box (NYSE:BOX) for example. Dropbox is consumer based, with only 2% of its 500m users actually paying for it on an average of c $9 a month. Box is enterprise based with c 50m+ user accounts at an ACV of $300 a month. It essentially delivers the same fundamental service – secure cloud storage – sounds the same right? When Dropbox announced its IPO, Aaron Levie at Box famously congratulated Dropbox because he didn’t see Dropbox as a competitor and thought they were naturally complementary products. And the reason why Dropbox has focused at the consumer level and not enterprise is somewhat of the same reason why most corporate PCs run Windows and not MacOS. The answer – customer centricity. Because all good businesses have strong customer and buyer profiles. They don’t try and be everything to all people or sell to anyone who wants to buy. They differentiate themselves in their target market by saying if you want X, you should buy from us. But if you want Y, then Company Z makes much more sense.
So the moral of the story, is that at an early stage – your passion and hunger to do something positive is not only your motivation but your North Star metric when you don’t have enough data to do proper metrics. Consider what the books say, consider your mentors and conventionally established wisdom – but at the end of the day the world is filled with tech companies that work because their customers love them, and not because of how they would perform on a case study basis. It’s true that investors do a lot of pattern matching i.e what is your growth rate versus other companies they have seen (if it’s higher or the same therefore it should be similarly successful) but at the end of the day they want something they resonate with. If you have off the chart NPS and customer feedback you can work with experts to fix other bottlenecks and optimize your processes – it’s significantly harder to do the reverse!
So in closing – if you were unsure if your vision or focus was right because it was not reaping near term financial goals, we will remind you of the quote at the start of this post. When you play the long game and create value for your users because you really care about the mission – great businesses are built!