Who are the first, most important users to get onto a nascent network, and why? And how do you seed the initial network so that it grows in the way you want?
When the Cold Start Problem is solved, a product is able to consistently create “Magic Moments.” Users open the product and find a network that is built out, meaning they can generally find whoever and whatever they’re looking for. The network effects kick in, and the market hits its Tipping Point as users start coming to you.
How many users does your network need before the product experience becomes good? The way to answer this is for companies to do an analysis on the size of their networks (on the X-axis) plotted against a set of important engagement metrics (on the Y-axis).
For new products, it’s important to have a hypothesis for the size of your network even before you begin. Communication apps can be 1:1, so the network is small, and you can plan accordingly. Contrast that to products that are highly asymmetrical, with content creators and viewers, or marketplaces with buyers and sellers—these are likely to require a much bigger number to hit the threshold, and require a much bigger effort to get started. The size of an initial network helps determine a launch strategy.
Density and interconnectedness is key.
The solution to the Cold Start Problem starts by understanding how to add a small group of the right people, at the same time, using the product in the right way. Getting this initial network off the ground is the key, and the key is the “atomic network”—the smallest, stable network from which all other networks can be built.
My advice: Your product’s first atomic network is probably smaller and more specific than you think. Not a massive segment of users, or a particular customer segment, or a city, but instead something tiny, maybe on the order of hundreds of people, at a specific moment in time.
First, the concept of atomic networks provides the clearest goalposts for an upstart network—it’s all about splitting off, or creating from scratch, a distinct and higher-density atomic network. Network density beats total size, a theme we’ve seen throughout the examples of this book.
Generally one side of the network will be easier to attract—this is the easy side of the network. However, the most important part of any early network is attracting and retaining “The Hard Side” of a network—the small percentage of people that typically end up doing most of the work within the community.
Not only does a product have to appeal to the hard side of the network, but as I discuss in “The Killer Product,” the most successful network effects–driven apps are also sometimes dead simple. They eschew a long list of features and instead emphasize the interactions among people using the app.
Thus the order of operations, at least for most consumer-facing marketplaces, is “supply, demand, supply, supply, supply.” While supply might be easy to get onto the network early on through subsidies, eventually it will become the bottleneck.
The key insight in the stories of Homobiles or Tinder is—how do you find a problem where the hard side of a network is engaged, but their needs are unaddressed? The answer is to look at hobbies and side hustles.
The Magic Moment is a nice concept, but it would be even more useful if you could measure it. The way to best do this might be surprising—you start with the opposite of magic, the moments where the network has broken down, and you start solving the problem from there. At Uber, we called these moments Zeroes. A zero at Uber was the worst experience you could have, when a rider opens the Uber app with the intent to pick an address and pick up a ride—but there aren’t any drivers in the area! This is a zero. When the point of the product is to interact with other participants in the network, a zero means that its value can’t be fulfilled, which means users will bounce and possibly never come back again.
For networked products, the curation of the network—who’s on it, why they’re there, and how they interact with each other—is as important as its product design. Starting with a deliberate point of view on who’s best for your network will define its magnetism, culture, and ultimate trajectory.
People You May Know was a key part of LinkedIn’s success, generating billions of connections within the network. It started with “completing the triangle”—if a bunch of your friends have all connected with Alice but you haven’t yet, then there’s a good chance you might know Alice, too. This helped scale the density of the LinkedIn network so that even after you added hundreds of connections, the site could still help recommend relevant people to you. This is a direct example of alleviating the overcrowding dynamics of a social network, which is exactly why people recommendations, relevance-driven feeds, trending topics, and a slew of other algorithmic approaches have been layered onto social products over time.
The Escape Velocity stage is all about working furiously to strengthen network effects and to sustain growth. This is where the classical definition of a “network effect” is wrong. I redefine it so that it’s not one singular effect, but rather, three distinct, underlying forces: the Acquisition Effect, which lets products tap into the network to drive low-cost, highly efficient user acquisition via viral growth; the Engagement Effect, which increases interaction between users as networks fill in; and finally, the Economic Effect, which improves monetization levels and conversion rates as the network grows.
The Engagement Effect manifests itself by increased engagement as the network grows—this can be developed further by conceptually moving users up the “engagement ladder.” This is done by introducing people to new use cases via incentives, marketing/communications, and new product features. Uber did this via leveling users up from airport trips to dining out to daily commutes.
Content and communications might be a series of how-to videos teaching effective use of LinkedIn’s connection features. And an incentive might look like a free subscription when the user completes certain actions. A product road map can be generated with hundreds of these ideas, large and small, and then prioritized.
Answering these questions generates a long stream of potential experiments and ideas to try. It’s incredibly useful to lay out an engagement loop, one screen at a time, and brainstorm ways to increase each step—this method is at the heart of what I typically do when advising startups on creating higher stickiness.
“The Acquisition Effect,” on the other hand, is the network effect that powers the acquisition of new customers into your product—in other words, viral growth. Products are inherently viral when people bring their friends and colleagues into a network simply by using it—as Dropbox, messaging apps, and social networks do.
As a rough benchmark for evaluating startups at Andreessen Horowitz, I often look for a minimum baseline of 60 percent retention after day 1, 30 percent after day 7, and 15 percent at day 30, where the curve eventually levels out. It’s usually only the networked products that can exceed these numbers. That’s because networked products are unique in that they often become stickier over time, which cancels out the inevitable customer churn. In rare but exceptional cases, the curve will “smile”—meaning that retention and engagement will actually go up over time, and churned users will reactivate. I’ve learned that when a startup shows a smile curve, you should probably try to invest. It’s exceedingly rare.
Economic Effect means that the leading network often has a better business model. Products with a strong Economic Effect are able to maintain premium pricing as their networks grow, because switching costs become higher for participants who might be looking to join other networks.
Hitting the Ceiling
Rather than focusing on the core network of Power Users—the loud and vocal minority that often drive product decisions—instead the approach was to constantly figure out the adjacent set of users whose experience was subpar.
In the framework of adding layers to a cake, serving each adjacent network is like adding a new layer. Doing this requires a team to think about new markets, rather than listening to their vocal core markets—a hard feat when the core market generates most of the revenue. For the core market, there’s a different way to grow: adding new formats for people to connect and engage with each other.
In the early days at Airbnb, we would always talk about creating a positive “Expectations Gap.” In the early days, when we were new, guests go in with low expectations, but then would be blown away by the experience. You need this high NPS to get people to tell their friends, and it makes hosts more likely to join too. Our competitors who took shortcuts couldn’t deliver here.
Rarely in network-effects-driven categories does a product win based on features—instead, it’s a combination of harnessing network effects and building a product experience that reinforces those advantages.
Focusing on the hard sides of the network, which are usually smaller in number, provides leverage in competitive moves.
What I got out of it
A pragmatic deep dive on what the cold start problem is, how to conceptualize it, how to try to overcome it, and if you’re lucky, how to ride it
A customer doesn’t differentiate between different parts of your company. It’s all one. All the same. Never lose sight of the customer journey
Who are your ideal customers? What do they want? Why would they care about your product? How do they find you? Demographics and psychographics. Where would you sell it? How would you sell it?
Each phase of the journey has to be great to move customers onto the next step. There are bumps between awareness and acquisition, onboarding and usage that you have to help customers overcome. In each of these moments, the customers asks why? Why should I care? Buy? Use it? Stick with it? Your product, marketing, and support have to remove friction and continuously communicate the why. To do this right, you have to prototype the whole experience. Draw pictures, make models, create mood boards, create a rough outline in wireframes, write imaginary press releases, create mock-ups of how the customer would move from the ad to the store to buying it. Write up the reactions you want, the headlines you want to see from reviewers, the emotions you want to elicit. Bring it to life. Get it out of your head. Map out the whole journey as you map out what your product will do. You should prototype your marketing far before you have a product to market
Don’t tell me what’s so different about your product, tell me what’s different about the user journey
Master the “virus of doubt” – sharing why and how some experience can be better. Why a customer needs your product
Define your Team heartbeat and product heartbeat and company heartbeat. Make the metabolism fast. Have them tie together and communicate
Write a press release containing only the essentials of things that people get excited about and use. Even if you have to pivot, that’s ok. Rewrite the press release. Do it again and again
Why will people need it. Why will people love it. Start with why and then get to what
Analogies give customers super powers
Give self a deadline and reverse engineer features into it, rather than the other way around
3 characteristics of great ideas – it solves for “why” (clearly know the problem it solves), it solves a problem people have in their daily lives, it follows you around
You make the product. You fix the product. You build the business. Repeat
Take notes and keep priorities and questions by hand. Sunday night review and type up and print and start again. Zoom in and out and Share list with management team with a name attached to it. See what leader is focused on, what you’re accountable for, what upcoming milestones are.
Micromanagement is ok in a crisis
The most valuable thing about a crisis you survive is the story you can share with the company afterwards. How the team came together, the crazy things you did, the will to survive
As you grow, be mindful of necessary reorgs. These are messy and annoying but vital. Try to be ahead of them by a few months at least and they typically hit at similar stages. 10-30, 30-50, 50-80, 80-120…
Knowing what to outsource and when is key. Nearly everything non-core should be outsourced to start and more things brought in house over time. You shouldn’t outsource a problem until you’ve at least tried to solve it yourself
Avoid habituation at all costs. You can’t solve interesting problems if you don’t know they’re there.
The product is the brand
The why, the what, and the narrative the product paints needs to be a living thing that evolves as you better understand the problem and your customers
Context matters. Lay out all the different ways a customer might learn about you and then craft the message to fit that context
Product management and product marketing should be the same role – what will get built and how I’m the story will be told
Aim to build a relationship-driven sales culture rather than a commission based one. Offer salary and equity and performance bonuses that vest over time.
Perks should be subsidized and it spontaneous. Make sure people don’t come to expect it
Private boards are 3-5 people. Insider and outsider, CEO, and exec team. Sometimes a chairperson. Need seed crystals – board members who can attract other great board members . The right investors and operators with experience building at your stage
What I got out of it
An energizing and practical book on how to build things that matter – customer journeys, working backwards from press releases / marketing to actual products and features, the product is the brand
The Design Thinking Playbook is an actionable guide to the future of business. By stepping back and questioning the current mindset, the faults of the status quo stand out in stark relief—and this guide gives you the tools and frameworks you need to kick off a digital transformation.
Combine design thinking with systems thinking and the hybrid model- even complex problems can be solved, agility helps and the range of solutions enlarged through the integration of various approaches
Use the lean canvas to summarize the findings- it is the link between the final prototype of design thinking and the lean start-up phase!
The design of business ecosystems becomes a key capability in networked structures–think in value streams and win-win situations for all stakeholders to create a minimum viable ecosystem (MVE)!
New design criteria are essential in digitization. With the use of artificial intelligence and human-robot interaction, there is an exchange of information, knowledge, and emotions- design this interaction consciously and accept that complex system require more complex solutions!
Design not only the space but also the work environment. Make sure that the creative spaces are not overloaded less is more!
Put interdisciplinary teams together consisting of T-shaped and Pi-shaped members- the transparency of the think helps to build winning teams!
Create an organizational structure without silos and a mindset that matches the organization- this is the only way to design thinking transversally in the company.
Apply strategic foresight as the ability to plan and design the desired future- successful companies have a strategy and leaders who promote these visions!
Internalize the mindset and the design thinking process, work in short iterations, and develop an awareness of the goal critical in order to be successful in the end!
Build up empathy by understanding the actual needs and the background of potential users- this is the only way to innovations!
Create prototypes under time pressure and test them as early as possible in the real world. Integrate the various stakeholders testing the principle is: Love it, change it, or leave it!
What I got out of it
A playful, useful guide to the process and mindset behind design thinking
Play nice but win was the ethos Dell got from his parents. His dad was a successful orthodontist and his mom was in investing. They had high expectations but stressed you also needed to act well in order to truly succeed
Silver Lake helped take Dell private in 2013. They’d need to raise $25 b, the biggest deal they’d ever have done up to that point, and made it happen
Michael has incessant energy, curiosity, and loved taking electronics apart. His family talked business and economics at home, rather than other surface level things.
Michael was entrepreneurial from a young age and used his hard earned money to buy an Apple II. The first thing he did with this expensive machine was take it apart. His parents were furious but his thought was
They have a decision making framework called facts / alternatives and choices / commitments to help them understand the landscape and try to make the best decision possible
What I got out of it
Fun to hear about the founding story of Dell, but found it mainly pretty fluffy
Whereas entrepreneurs focus on identifying and solving these burning pain points, venture investors try to find those extraordinary entrepreneurs who are trying to solve potentially huge problems in a meaningful way. Venture investors tap into their tremendous network of contacts and “pattern recognition”—the art of leveraging lessons drawn from past successes and failures to identify a combination of factors and behaviors that may point to promising markets, entrepreneurs, products, business models, and so forth. Together, these build a “prepared mind” or “gut feel” about the emerging market opportunities created by the tectonic shifts in customer behavior and the enabling technologies that can be successfully applied to those shifts. Entrepreneurs are true visionaries, and venture investors are great pattern recognizers with an experienced toolkit of how to build companies—and how not to build them. Successful start-ups are created when a trusted relationship and line of communication is established between the visionary (entrepreneur) and the pattern recognizer (investor) for two-way knowledge transfer.
The key to start-up success is purity of motivation. The most successful entrepreneurs tend to start with a desire to solve an interesting problem—one that’s often driven by a personal frustration.
Successful entrepreneurs also have this ability to articulate a roadmap for the sort of things they want to build over time. We rarely do business with a company where there’s a six-month roadmap and then it’s all done.
People with “great DNA” see problems—and they roll up their sleeves and try to solve them. It takes a very special person to do that.
I invest in stubborn entrepreneurs who chase huge opportunities
Maples: I think the tech business is just fundamentally characterized by—Darwin had a term for it in evolution, “punctuated equilibrium”—where the world is evolving a certain way and then bam, it changes completely and fundamentally. You can even see this in the fossil records. Where the fossils progress at a certain rate, and then bam, there is a whole new layer of sediment that looks fundamentally different. The theory is, maybe there was a flood that wiped everything out or some new organism adapted and survived and crowded the old organisms out. I think to make money as an investor in the tech business, you have to find those. If you cannot find any of those ever, I think it is hard to argue that you have a business.
Maples: We do not even think that much about our portfolio. Every company we look at, is there a chance it could be something huge if things go our way? To us, there is nothing else. There is no other question that matters. There is no other analysis that we care about. That is all there is.
Most of the best deals that we have done would not have survived the scrutiny of a partnership.
We do not look at serial entrepreneurship as a positive trait. We look at authenticity and unconventional, proprietary insight as the key difference.
The thing I have found most interesting is that the best deals we have done are the ones where we decided the quickest—which is counterintuitive to me. I would have thought that the ones where we did the most diligence and the ones where we thought about it the most would be the most successful, but in fact, that is not the case.
He said all the successful companies he has seen have this one following factor: they have a leader who gets the team excited by offering them focus and the clarity of what to do.
Here’s the reason there are so many good companies that come out of PayPal: They had an intense, competitive environment internally and obtained really smart people. They managed to attract people who are smart and really competitive, which are makings of good entrepreneurs usually.
Shah: Where does that product-market fit show up in a short period of time? Zachary: In consumer internet, it is user engagement.
I To me the Zen of hiring is firing.
Shah: What is a key to attracting and retaining great talent to build an A team? Dalton: It really boils down to appealing to the most basic human emotions. You want people to have pride in what they do and you want people to create some intrinsic value as a result.
the real question is, why will your product stand out? One way to measure that is when people get emotionally excited about product, you know you are on the right path.
You really drew a great distinction here that a start-up’s job is to create that distinct value, and if it is big enough, someone is going to pick it up one way or the other.
Customers are great at giving you feedback by buying or not buying your product, but they suck at telling you what they want. That’s really the only way to understand if something is working—have them pay for it.
When you present to a VC, your approach should be, “I am comfortable right now. I want your money to scale up.” VCs love that.
the way we say it is, “making a dollar by taking ten away from the leaders.” [A start-up that is] shrinking markets. Shah: “Making a dollar by taking ten.” Tell me more about that. Morgan: Think of the media industry. You take ten dollars away from television advertising and make one dollar in internet advertising and it can be just as effective, so it is shrinking markets.
The thing that puts us most at odds with an entrepreneur is when you have to dig the bad news out of them. The best entrepreneurs are always the ones who come to you quickly and tell you, “We thought X, but not X actually occurred and here is what we are going to do about it,” and then give you a plan. As opposed to the ones that hide it from you for two to three months or even hide it from themselves. I think that is really one of the things we look for. That sort of integrity.
Does a better go-to-market strategy win over better product? Morgan: Yes, the better go-to-market strategy wins over the better product.
Shah: What would be your advice to someone trying to build a high-capital multiplier or a billion-dollar company? Morgan: Keep sensitive, in everything you do, to the pain points you feel. Where you feel that pain, see how you can solve it. That is the key.
Culturally, what is one thing you have paid most attention to? Rashid: We had a company meeting every Friday at five-thirty, where I got up and I talked about things which most companies and CEOs usually don’t talk about. And, I did that to show transparency. I talked about the current state of affairs, future plans, projections, ideas we were thinking about. And I made it a point to let them know, “Look, most CEOs will not tell you these things, but I just want you to understand I am telling you because I trust you.” I also told them, “Guys, if a leak happens, you have to understand that I can’t do this anymore.” They knew that I trusted them. They valued that immensely. In the history of this company, there was never a credible leak from the company itself.
the entrepreneur has to be receptive of the value that the VC really brings to the table—the knowledge and network and the been-there-done-that scenarios.
A real VC, a real VC firm, is structured as a service provider to the entrepreneur for the purpose of helping them build their business. There is nothing passive about it, and it is no surprise that private equity firms have had such a hard time going downstream to venture investing.
The great companies are leaning forward. The personality of the company is naturally inquisitive and naturally aggressive.
The way you really know you are winning is that you are defining what success in the market is.
But the factor that enables you to have the greatest effect on the company’s ultimate success or failure is the communications channel between entrepreneurs and investors. As in physics, “complex adaptive systems,” are highly affected by their initial conditions. Shah: That is why, for kids, so much focus goes on building their mind right during the initial few years. Weller: I would say the same is true of a company.
I look for somebody who in the meeting is actually looking to get something out of the meeting from me, other than my check. It’s good to get a check. I understand that’s what they’re trying to get. But I like it when they come in there and they’re actually hoping that I’m going to tell them something interesting. I’m going to ask them some challenging questions. I’m going to do something that changes how they think about things. And they’ll ask me, “Well, how do your companies solve this? What do you see?” And when they’re asking me, or if they say to me, “Hey, you know, I saw that in your portfolio you’re an investor in Nominum, and you’re an investor in Reputation. I really want to meet those guys because I have an idea that I think we can work with each other.” People who are, again, coming in trying to squeeze all the value they can, I love that of them.
I look for people who are not so motivated by the money, but are really driven to build a big company. The more years I am in this business, the more I look for that.
Remember, a start-up starts with nothing. It has no foundation. If the founder seems ambivalent or ephemeral, then there isn’t something grounded upon which to join. What new hires are looking for are consistency and depth. What integrity actually means is being internally consistent and whole. It suggests depth. A person develops deep integrity by reflecting upon his or her situations and experiences and abstracting out the things that really matter. Those facets that matter are woven into this consistent approach on how to engage in the world.
Another reason momentum is really valuable is that it helps cement a culture of performance and effective action. Start-up teams have an initial amount of bonding energy. That bonding energy dissipates every time there is a disappointment. You have a limited amount of time to hold together a team to accomplish something. Every time you have a micro-success, it contributes bonding energy.
At the end of the day, you cannot force a market. But you can be very clear about what premises you are making and what bets you are making. Do everything you can to execute against those bets.
Shah: And what is the first sign you see that someone is just the wrong hire? Scanlan: Productivity. If their team is more productive with them as a part of it or less productive. We had some people that we put in management teams or in management situations where productivity was better without them. And that’s not a good situation. But, you know, those situations are thankfully few.
We have clearly seen this with Steve Jobs. These leaders tend to be tough bosses because they have a big picture and a small picture in their head at the same time—strategy and execution. They are highly critical bosses. They are very demanding, but the companies tend to win because there is this comprehensive leadership, not just the theoretical, big vision. They understand intuitively the execution model. It means that in their head they have this smaller assumption set that unifies everything. They are able to expand that over time.
As I mentioned, they have a holistic picture of a whole company in their mind. As the company expands, their holistic picture expands itself. This ability to holistically think out a company from the product to the customer to whatever. It does not mean they are great engineers or necessarily great sales guys or great financial guys, but they can holistically keep building a bigger and bigger picture of a whole company. For companies where you get a founder and CEO like that, it makes the succession plan very difficult because it is a very, very unique leadership skill.
What you see in these very successful companies fairly early is a higher repeatable sales model. You also see them zooming into first place.
What are some of the key aspects of execution to get a billion-dollar outcome? Winblad: Number one, you really, really have to deliver high value to your customer.
Go see your customers. Go early on. Have really tight engagement with your customers early on and listen to them. If they say this is interesting, but I want that instead, you have to move in that direction. It is really letting the market drive what you offer versus you coming up with great inventions for the customer.
I wish that every CEO was really perfect in telling their company story. If they do that, they can raise money, they can sell products, and they can build partnerships. Can they really tell the story of their company—who we are, why we are here, and why we are valuable. That sounds pretty easy. It is hard.
We have a reasonable formula here. When things surprise us on the upside, as they did with AdMob, they normally continue to surprise. We describe it as “market pull.”
It certainly helps if you have all the right viral features built in, but it is particularly interesting when the product itself is not very good or is not very viral … and people are still talking about it.
The best, well-thought-out products have virality built in and around them.
Besides the virality and viral channels, what else stands out to you in a great product? Lee: Engagement. Do I go back and use the product on a consistent basis? Is the experience such that I am getting value out of it consistently? It does not have to be every hour or every day, but is there something there that is new and insightful on at least a weekly basis that is going to bring me back in?
What gives you an early sign that a company is getting off track? Lee: Adoption and engagement. That is what matters. If people start talking about the product less or they are using the product less over time, those are two big signs that there is a problem. Really great products continue to show linear growth in both adoption and engagement.
Think about how an idea from a twenty-eight-year-old kid in Chicago [Andrew Mason] turned into a multi-billion-dollar business. That was not possible five or ten years ago. Opportunities like this are a possibility because the markets are so big. If you believe in the product, you believe in the use case, and you have the right team—you should ride the opportunity as long as you can. Returns in venture capital are driven by your big winners. If you have something that is playing in a big market and is a leader in that category, and it can run for a few years, you have to let it run. That, I think, is the right thing to do.
There were tons of lessons, but I will pick three key ones. First, we recruited for talent, not experience. Second, we launched quickly and iterated. The third lesson is to not be greedy. We basically raised money whenever we had the opportunity. It felt like we were always fundraising. It resulted in much more dilution for everyone, but that is the only reason we were able to survive as a company.
The best investments are in companies that are fundamentally good, but that nobody thinks are good. This directly applied at Facebook, which is what allowed us to have the opportunity to invest, making the angel investment on Peter Thiel’s behalf, at the $5 million valuation.
Tell me more about how you look at market timing. Howery: Typically, if we see two companies pitch the same idea to us in one week, we will not invest in either. At that point it is too late. Too many people are focused on it already. It is going to be too hard to be the winner at that point, as another team probably has a good lead and it will be hard to compete against them. It is a much better strategy to invest in a company before it is clear what category the company belongs in.
I think many entrepreneurs, at least many first-time entrepreneurs, pick an idea that seems “manageable” or “less risky” than other ideas. In fact, these “safer” ideas may actually be riskier than bigger ideas. The problem is, an idea that does not seem risky to you probably doesn’t seem risky to lot of other people. Given how risk-averse our society has become, it will actually invite more competitors, and so it is going to be much more difficult to win in that market than it first seems.
Yes, I take a different view when it came to my role as CFO and COO. Don’t just reduce risk and cut costs—make it everyone’s job to maximize expected value while reducing risk. Also, a lot of people think in terms of tradeoffs, of either/or. But anybody can do the either/or calculation. The companies that win are thinking
technology is not kind to gatekeepers
Ron showed me that investing is a lot simpler and harder than people think. It’s simple but not easy. The only thing that matters is your reputation. Everything else is a second-order effect.
Our preference is for founders solving a problem for themselves.
What are three things you as an investor wish every entrepreneur knew? Lee: Firstly, at the early stage, optimize for value add and not dilution. Secondly, be very self-critical and thoughtful about what constitutes “value add” for your start-up. And thirdly, think about where you want to be in 18 months, which is usually the amount of time funded for a seed round, and your biggest risks are in getting there. Every investor you add to your team should help you with mitigating those risks. If an investor doesn’t add value, don’t let them invest.
The better the quality of the board and the investors, the better the quality of the management team.
The number two reason that projects are late is that something key that was assumed would work, didn’t work. This is solved by pushing the test of every critical unknown up as early as possible in the schedule.
Oddly enough, you would think that the CEO would be the superset of the creator of things. But rather, the CEO must have discipline and know when and how to say no. Otherwise, you just end up with a company that isn’t productive and can’t get the necessary things done.
An interesting exercise is to walk into a company and ask three people what is the purpose of the company. If you get the same answer from all three, it tells you that the CEO is doing their job. A good purpose statement is, “We want to put a computer on every desktop.” This tells a lot: the customer, the size, the cost, maybe even the shape, etc. It’s very clean and provides guidance.
Also, asking the obvious stupid questions is effective. Getting everyone together and asking really stupid questions works surprisingly well. Trying to be the really smart guy in the room usually fails.
The best tool to cut through the noise is gross margin. The bottom line is that the price is a message from the marketplace. Listen to it and believe it.
If you want to start a company, you really have to go to people who will talk to you. Entrepreneurs have to go out to get objective feedback on their ideas.
have a triangle in my head—functional skill, raw intelligence, personal turning radius. Smart, hard-working, and paranoid together kind of radiates raw horse power. I stick with team and culture.
An ideal start-up has a gifted founder. What does it mean to be a gifted founder? Well, they are coming from a unique situation that allows them to perceive an opportunity in a way that is different from other people. They can turn that perception into a vision of what they are trying to build. They can communicate that vision to others and then get other people excited about it. That is really the essence of the founder. Another aspect of the ideal start-up is that it defines its own market. It’s not an entry into a market that has already been defined by others, but it actually creates a category, creates a market.
Maybe not disrupting a market per se. There may be markets to the left and to the right that are affected, but really I think more value is created when the company ends up becoming synonymous with its market. It defines the category in such a way that it’s not just a better implementation of something that has been done before, but in fact is something completely new. Often, this means new vocabulary has to be created. There is an educational aspect to the sales process, but if you get that right, there is a lot of lasting value and defensibility.
What are some of the signs that you are way too early? Wagner: The key sign is when you’re spending all your time educating the market and the market never seems to be much readier. There is always an education phase when you’re doing a market-creation type of project. But if that education is never drawing to a close and you’re in constant education, then you know that the market isn’t ready. There are ways to deal with this, which is fortunate because it is so common to be early. If you have a capital-efficient business model, you can survive being early, at least some amount of being too early, because you’ll recognize it. If you’re not burning tons of capital, you have some flexibility.
What are three things that you wished as an investor that every entrepreneur knew? Wagner: Focus is essential. Recruiting is the main job, and listening is one of the core skills. And I don’t mean listening to venture capitalists. I mean listening to the market. Shah: What are the most common blind spots you see in the entrepreneurs? Wagner: The most common blind spot will be some insecurity that prevents them from recruiting the best of the best. Another blind spot would be a confirmation bias, which means that they pay attention to the data points that support their existing point of view.
What I got out of it
Great perspective from a number of different venture capitalists and how they think about the space and their role in it
Silicon Valley has always been about the future, not the present – and never the past…As we grow further and further away from that early era, we are also losing our connection to the factors that made the Valley great. That is a dangerous thing, because we risk also losing those factors that have been the real engines of our success…In that recovered knowledge may lie the key to the future
Isolation from the east coast social hierarchy, rules, and processes and the acceptance of failure allowed Silicon Valley to experiment, fail, and flourish
It was the wild west with unbridled ambition
HP men had “an unusual sensitivity to the feelings of others.” This is what made all the difference – value pricing, finest management, created the playbook that others ran
Shockley – able to distill problems without getting confused by extraneous stuff, but was a terrible manager.
Noyce was the opposite – trusting, respect, decency, equality. Knew he needed to be liked, so he surrounded himself with tough lieutenants
Valentine organized Fairchild by markets which ripped open the ability to grow and expand for the company – 4 little independent companies inside Fairchild – each had its own sales, product marketing, engineering, and even advertising and legal departments
Intel – social engineering, paradox, giant research team, perfect triumvirate with Moore, Noyce, Grove
Shannon had pulled off something remarkable; he had linked the controllable behavior of machines with a system of logic that encompassed all science, perhaps even all human thought. The Age of Computers had begun – and hard on its heels the rise of information theory, the great organizer of the postwar world
Recessions have proven over and again that they are boon times for entrepreneurs
IBM Fellowships were used to keep top talent around (IBM’s velvet trap)
Activision – Levy listed the game designers’ names on the cartridges, he announced them on television ads. The expected happened: certain top designers actually gained a following, a steady, loyal cadre of fans who could be relied upon to buy each new offering by that “author.” What’s more, despite their vulnerability to head hunters, these ego-satiated designers remained loyal to Activision
When business is good, anything goes
Incredible retelling of Jobs/Woz/Apple
Jobs’ most important contribution to Apple: his dead-eye accuracy at understanding precisely what his generation thought of itself and then playing that tune in perfect pitch
Reformers and revolutionaries, by eschewing long established and long verified rules of conduct, often slip into behavior far worse than that which they once derided
What I got out of it
Inspiring, energizing, informative, important. Makes you want to get out and build one of these firms that influences not only its customers, but the way business is done
Types of opportunities – paradigm shift, new product / business model / me-too product
Opportunity recognition – markets that change and are receptive to change, badly understood (big and misunderstood), fast growing, incumbent players cannot move, little competition
Process of Opportunity Recognition – intuitive, analytical
Seek a mission-critical pain killer, not a vitamin
Be extremely specific in defining your customer
Great entrepreneurs tend to be generalists – breadth > depth
Founders need to understand the market, product, and execution. Need to be focused on value creation, not control
Risk Identification and Elimination – raise money to reduce key risks – market, technical, people, financial
Decision making – the implementor should be the decision maker
Flexibility – In the planning process, understanding the variables is more important than the plan. It is as important to understand the other players’ plans as it is to figure out your own plans
Focus is paramount – with limited time and resources, specialization is key – should be saying “no” to 9/10 things
Focus and speed are a startups’ key advantages
Split every problem to its smallest atomic problem
Be as useful as you can to others, have vision, form win/win alliances
Focus all your efforts to satisfy the first 20% of the market segment. the others will follow
Design partners, best references, proven success
People – overqualified so the company can grow into their skills
Processes must be scalable – at some point speed becomes a liability and the need to build systems to scale operations becomes obvious
Management needs to live 3-6 months in the future
What I got out of it
Interesting that Oliver Samwer, of Rocket Internet, started his entrepreneurial career from an academic angle. He certainly doesn’t abide by all the lessons – culture, for example – but fascinating to see the lessons he pulled out and applied (ruthlessly)
Diving into the rise of the epic tech companies of the 21st century – Uber and AirBnb
Travis’ Law – politicians who are accountable to their people can be influenced if the product or service being delivered is markedly better than the status quo
The best but hardest solution is to meet the people who hate you – Brian Chesky
Amazing how often a company has to recreate itself as it scales. The right approach, leadership, philosophy, strategy, mindset that gets you from 0 to 1, often isn’t the mindset that lets you create a large and enduring company
What I got out of it
An inspiring overview of the founding and growth of two epic companies. Makes you want to go out and build something world changing. Didn’t take a lot of notes, but the stories behind these two companies is so amazing to learn about
The different between winners and losers is simple. Products developed with senior management out in front of customers early and often – win. Products handed off to a sales and marketing organization that has only been tangentially involved in the new Product Development process lose. It’s that simple
The lesson is clear: by listening to potential future customers’, by going out into the field and investigating potential customers needs and market before being inexorably committed to a specific path and precise product specs – the difference between the winners and losers – and that’s the Customer Development Process described in this book
10 major flaws of the PD model for startups
Biggest risk is not in the development of the new product but in the development of customers and markets. Startups don’t fail because they lack a product; they fail because they lack customers and a proven financial model. This alone should be a pretty good clue about what’s wrong with using the PD diagram as the sole guide to what a startup needs to be doing. Look at the PD model and ask “where are the customers?” (PD model – concept/seed, PD, alpha/beta test, launch/1st ship)
Focus on first customer ship date – does not mean you understand your customers or how to market or sell to them! Have to first understand who you are selling your product to and why they will buy it
Emphasis on execution instead of learning and discovery – ask questions and learn before you try to sell your product – what are the problems our products solve? how big is the problem? is it a must have?…
Lack of meaningful sales, marketing and BD milestones – first must focus on reaching a deep understanding of customers and their problems, discovering a repeatable road map of how they buy, and building a financial model that results in profitability. How well do we understand what problems customers have? how much will they pay to solve those problems? do our product features solve those problems?
The use of a PD methodology to measure sales
The use of a PD methodology to measure marketing
Death Spiral: the cost of getting product launch wrong
Not all startups are alike. A fundamental truth about startups completely ignored in the PD model is they are not all alike. One of the radical insights guiding this book is that startups fall into one of 4 basic categories:
Bringing a new product into an existing market
Bringing a new product into a new market
Is there a large customer base who couldn’t do “this” before, whether these customers can be convinced they want or need your new product, and whether customer adoption occurs in your lifetime. It also requires rather sophisticated thinking about financing – how you manage the cash burn rate during the adoption phase, and how you manage and find investors who are patient and have deep pockets
Bringing a new product into an existing market and trying to resegment that market as a low-cost entrant
Bringing a new product into an existing market and trying to resegment that market as a niche entrant
Existing market and asks would some part of this market buy a new product designed to address their specific needs? Even if it cost more? or worse perfomance in one particular aspect? Niche goes after the core of an existing market’s profitable business by trying to attempt customers some characteristic of the new product is radical enough to change the rules and shape of an existing market
Start with what customers want and will pay for. Learning and discovery, from starting the company to scaling the business.
The CD model starts with a simple premise: learning and discovery who a company’s initial customers will be, and what markets they are in, requires a separate and distinct process from the PD…However, early on, we are neither selling or marketing. Before any of the traditional functions of selling and marketing can happen, the company has to prove a market could exist, verify someone would pay real dollars for the solutions the company envisions, and then go out and create the market. These testing, learning, and discovery activities are at the heart of what makes a startup unique, and they are what make CD so different from the PD process
Winners understand why customers buy. Losers never do
Should get a modicum of grumbling on prices – or else may be too low
What pain does this alleviate? What value does it deliver? Why should I care?
There are 4 parts to the CD Cycle:
Customer Discovery – focuses on understanding customer problems and needs
Founders and PD define the first product and the job of the CD team is to see whether there are customers and a market for that vision
Have we identified a problem customers want solved? does our product solve these customer needs? if so, do we have a viable and profitable business model? have we learned enough to go out and sell?
Meeting customers is not to gather feature requests so you can change the product. Instead, your purpose in talking to customers is to find customers for the product you are already building.
4 steps – state hypotheses, test problem hypotheses, test product concept, verify
Winners understand why customers buy.
Start by making a lift of 50 potential customers you can test your ideas on. Always ask “who’s the smartest person you know?”
3 column table – list of problems, today’s solution, your company’s solution
The “IPO questions” – what is the biggest pain in your work? If you could wave a magic wand and change anything in what you do, what would it be
Always have your list of 3 things you need to learn before you leave. Overtime, these questions will likely change
Goal is to have a single paragraph feature list that can sell to thousands of customers
Be sure to get to the “who has the money” question
Customer Validation – developing a sales model that can be replicated
Develop the playbook of the proven and repeatable sales process that has been field-tested by successfully selling the product to early customers. These first two steps corroborate your business model, verifies your market, locates your customers, tests the perceived value of your product, identifies the economic buyer, establishes your pricing and channel strategy, and checks out your sales cycle and process. If, and only if, you find a group of repeatable customers with a repeatable sales process, and then find those customers yield a profitable business model, do you move to the next step (scaling up and crossing the Chasm
These questions must be answered long before the sales organization begins to grow in size
Existing market – compare product to yoru competitors and describe how some feature or attribute is better or faster – an incremental improvement
New market – too early for customers to understand. Instead, describe the problem your product will solve and the benefits that the customers will get from solving it – a transformation improvement
Resegmented – compare product to your competitors
Customer Creation – creating and driving end user demand
Only turn on heavy marketing spend after the point where a startup acquires its first customers, thus allowing the company to control its cash burn rate and protect its most precious asset
What type of startup are you? What are your positioning messages (based on your deep understanding of who the customers are and what they want?
New Lanchester Strategy
If a single company has 74% of the market, it is an effective monopoly. That’s an unassailable position for a head on assault (think MSFT)
Combined market share for leader and second ranking company is greater than 74% and the first company is within 1.7 times the share of the second, it means the market is held by a duopoly. Unassailable for the startup to attack
Company has 41% market share and at least 1.7 times the market share of the next largest, it is the market leader. Very difficult for startup to enter
Biggest player in a market has at least 26% share, market is unstable with a strong possibility of abrupt shifts. May be some startup opportunities
Biggest player has less than 26% market share, it has no real impact in influencing the market. Startups who want to enter an existing market find these the easiest to penetrate
Your goal is to become number one in something important to your customer. It could be product attribute, territory, distribution chain/retailer, or customer base. Keep segmenting by market (age, income, region,e tc.) and focusing on the competitors’ weak points until you have a battle you can win. You know your segmentation is correct when you have created a niche where you can be number one. Remember, any company can take customers away from any other company – if it can define the battle
4 building blocks of customer creation
Year one objectives
Positioning: both company and product – answers “what does your company do for me?”
Must be different and credible if an existing market
Communicating a vision and passion of what could be if a new market
Launch: both company and product
Demand creation (advertising, public relations, trade shows, etc.)
Company Building – transitioning the organization from one designed for learning and discovery to a well-oiled machine engineered for execution
Formal departments with VPs of Sales, Marketing, and BD. These executives now focus on building mission-oriented departments exploiting the company’s early market success
Moving from Customer Development (Development Team-Centric), to Company Building (mission-centric), to Large company (process-centric)
In a new market, the goal in this stage is about husbanding resources and passionately evangelizing and growing the market until the market grows large enough for sales revenue to appear. Your experience of selling to earlyvangelists during customer validation will help you answer how many of these types of early customers can yoru company really find in the first few years. This helps inform a realistic sales strategy
Blank had some amazing mentors throughout his 25 year career
Joseph Campbell popularized the notion of an archetypal journey that recurs in the mythologies and religions of cultures around the world. From Moses and the burning bush to Luke Skywalker meeting Obi wan Kenobi, the journey always begins with a hero who hears a calling to a quest. At the outset of the voyage, the path is unclear, and the end is not in sight. Each hero meets a unique set of obstacles, yet Campbell’s keen insight was that the outline of these stories was always the same. There were not a thousand different heroes, but one hero with a thousand faces.
Generate end user demand
Drive that demand into our sales channel
Educate our sales channels
Help engineering understand customer needs
The appendices alone are worth the price of the book
Early mission statement – tells employees why they come to work, what they need to do, and how they will know when they have. Should also mention revenue and profit. An example of a clearly written mission statement is the one “lived” at CafePress.
At CafePress, our mission is to allow customers to set up stores to sell a wide-range of custom products. (Our goal is to make sure they say we are the best place to go on the web to make and sell CD’s, books, and promotional items). Here’s how we are going to do that:
We are going to give them a variety of high-quality products and good service in an easy-to-use web site (we will know we succeed if an average store sells $45 per month). At the same time, we will help these customers sell by giving them marketing tools to reach their customers
We are going to do it for what they would consider a fair price (yet maintain 40% margins). Next year our plan is to grow to $30m in revenue and be profitable (therefore need 25,000 new customers a month)
We are going to try to be a good citizen of our community (we are going to print on recyclable materials, use environmentally friendly packaging, and use non-toxic inks wherever practical)
We are going to take good care of our employees (full medical, and dental) because the longer they stick around, the better our restaurant will become
We are also going to offer stock options to all employees, because if they’re interested in our profits and long-term success, we’ll all make money
If you read this mission statement sentence by sentence, it tells the employees why they come to work, what they need to do, and how they will know when they’re successful
The litmus test is: can a new employee read the corporate mission statement and understand the company, their job, and what they need to do to succeed?
Mission-centric companies are much better able to deal with two fundamental problems that a startup continually faces: uncertainty and time. Startups index on speed and agility, allowing individual executives to act with initiative and boldness
Mission-centric management has 5 unique parts
mutual trust and communication
“good enough” decision making
One way to nurture maturity is to shift superstars into coaches and role models. This keeps superstars motivated and from leaving your company. However, your company has to protect the mavericks. The long-term tenure, motivation, and contribution of iconoclastic superstars and founders is the ultimate test of a leadership culture
What I got out of it
Running the customer development process in parallel to product development is a must. When framed in the way Blank does – that you have to first deeply understand your customers, what problem you’re solving, how well you’re solving it, and having a repeatable sales roadmap – it seems obvious that this is the way to approach it. Why pour precious dollars on sales and marketing on something you’re not sure will even sell and, if it does sell, how to sell it.
Elad discusses some key topics that entrepreneurs face from initial stages of a company to exit. He gets great insights from some of the best known entrepreneurs which is helpful to better understand how to navigate complex situations that naturally arise through this process
Most startups, once they hit product market fit, shift more towards distribution focus rather than product focus. Distribution has proven to beat out product time and again
Coming out with a second hit product is often harder than the first but you need to keep iterating or else you’ll get left behind
Pricing power is a key aspect of a moat. If you can’t raise prices, you’re in trouble. This is enormous leverage as it drops right to the bottom line and can fund new efforts, hiring, research, and more. Higher prices = faster growth
Role of the CEO
The CEO sets the vision of the company and communicates that to all stakeholders while hiring, growing, and fostering the culture.
They are chief psychologist and need to be responsible for capital allocation.
You must manage yourself, your reports, and your Board.
You must learn to delegate more, audit your calendar, say “no” more often and make time for things you enjoy.
Learn from an experienced executive, trial by fire, have dinner often with CEOs at other companies, get an executive coach.
You must be able to get perspective and keep the big picture in view – this means focusing on the right things.
Hold regular 1-on-1s, weekly staff meetings
Should write a “How to Work with Me” document which will help others quickly understand how you like to work
Great example of how Johnson of Stripe wrote her document
Can’t have too many things be mandatory so must choose carefully
As a leader, you have to state the obvious and you have to do it often. Make sure people are on the same page. Create documents which outline your overall vision and strategy and shorter term documents for how you’ll get there. You must codify a set of behaviors and principles and adhere to them. You need planning procedures earlier than you think and they must start at the top and flow all the way down
There are five main jobs for the CEO
Chief product officer
Primary face of the company
Steward for senior executives
You do not want to preserve culture. You want to steer and guide it overtime
Role of the Board
Choosing your Board, particularly your independent director, is of utmost important.
The book has some great examples of how you should approach, what you want at varying stages, etc.
The Board’s role is advisory and they should come in asking, “how can I help?” and pose questions rather than demand action.
It should be a collaborative open relationship rather than a hierarchical one.
One of your mantra’s has to be “do no harm”
Board meetings exist to help the company and ensure proper corporate governance for all stakeholders.
Board meetings should start with
Board matters which should be a quick, high-level overview of key metrics which impact the strategy and the high-level vision
Follow-up items from last Board’s meeting
End with strategic initiatives which should take up most of the time.
Send out the slides before the meeting so everyone has a chance to review them and think about everything
Keep your Board to five or six people if possible as it starts getting political and unwieldy much beyond that.
You have to set expectations early that there won’t be fancy PowerPoint decks just a sheet of paper with the key metrics and strategic points you want to talk about
As a CEO and founder you have to manage the board
Hiring and Training
When hiring people, you should ask the same questions for people interviewing for the same roles so that you can calibrate. The faster you can interview and offer a job the higher your candidate conversion will be
At the beginning, you should hire through your network and this will take a lot of time and effort. As you grow, you can use outside recruiters or bring someone in house to manage it all
When someone is brought on board, send out a welcome email, have a care package waiting for them (such as a hoodie, a onesie for their baby, their laptop etc.)
Assign them a mentor or a buddy for the first couple months and make sure they feel true ownership over whatever they were hired to do
How to hire Executives, COO
Your job as the CEO is not to know everything but to make sure all problems are solved. Hire people that complement you and can do certain things better than you ever could. These high level issues are perfect for a COO.
Great executives are thinking about and preparing for issues that will come up in 6-12 months. They’re not fighting today’s fires but figuring out how to solve others before they even start
You must hire someone with the right experience. If your company is too large or small for a certain hire, the executive will be bored or over their heads
There is no perfect Org structure and if you’re growing very quickly, you will literally have a different company and 6 to 12 months. So, you should optimize for the current needs rather than trying to optimize for where you think the company might be in a couple years.
Reorgs, while difficult, will happen both at the company level and at the functional level but they must be handled delicately, thoughtfully, and quickly
Rapidly growing companies should look to have a position that “fills the gaps.” Someone who reports directly to the founder or CEO and can help cover bases and fix problems until a bigger team and an executive is hired and built out. Fast growing companies are chaotic on the inside and that’s why a position like this is so powerful. Finding a good person, having them understand the problems, building out their team, and scaling takes time so you really need to be looking out for at least a year and hiring someone to fix the problems you think you’ll run up against.
Early on make sure you have the proper scaffolding for your organization so that it doesn’t break when you scale. it doesn’t need to be large or require tons of people but it should be thoughtfully built out
You can compromise on skill or experience when hiring quickly but never compromise on culture – no jerks. Say your culture and values so often that you get sick of it. Reward people on performance and culture to align incentives
Product managers are the CEOs of a certain product lines and are responsible for addressing customer needs, desires, wants, and creating products to match that
When fundraising, don’t over-optimize for a valuation. Raise money at a fair price and that way you can grow into it organically. In addition, later fundraising could be easier because metrics are more realistic and manageable to meet
Right of First Refusal for secondary share offerings and/or a mandate in your charter discussing this could be helpful if you grow and employees want to diversify and cash out
What I got out of it
A supremely helpful and insightful book for anyone thinking of starting a company, in the midst of starting one, or far along the path. Will come back to and reference often