Startup: An Insider's Guide to Launching and Running a Business (6 page)

Core Lessons

Some things are universal. In life and in business, some things pass the test of time and seem to come up again and again as relevant and useful to know. Required knowledge.

Core Lessons is a collection of ideas on building a business—ideas that I see as universal. If this were a biology book, here is where the author would thoughtfully point out that all life requires water and energy to survive. This chapter will survey some universally relevant truths that you can apply to your business no matter whether you are in Silicon Valley, in Tokyo, or on Mars. This is also where you will find out some of the more painful details of how I have screwed up, been blindsided, or otherwise been subjected to a stone-fisted kibosh or two.

These core lessons are the kind of business rules that are of über-importance—the kind of things that I would carve in stone and erect before the townspeople. As I emphasize the importance of carefully constructing a set of “frames” with which to view your business, you will find a number of them here that will inform your decisions as an entrepreneur. As basic as some of these points sound, they may not be as intuitive and automatic as they should be; even seasoned and experienced entrepreneurs that have read advance versions of this book have commented on how a few of these points were things that they had not thought about explicitly before, but ended up agreeing with wholeheartedly.

Basics Win Ball Games

The most successful businesses are those that master the basic transactions of their market and execute them with reliability and excellence.

Identify what the
core operations
are for your market, and what the constituent parts of those operations are. Then ask yourself if you are executing the mundane details as well as you are capable of. “Winning” is very often the result of focusing on the little details, and then doing them well again and again.

Consider this: the difference between wild success and complete failure may be as small as a 3 percent difference in your performance, run out over a period of years. With this in mind, the little things start to look more and more important.

Excellence starts with basics. If the basic operations of your business are not being handled, then the sexy new stuff, new opportunities, and exciting “next” things will mean much less to you. You have to get the basic current operations down and running well before you spend too much energy grasping for the next big thing.

_________________

No Partial Credit

A critical difference between being an employee and running your own business is the idea that there’s
no partial credit
given for your efforts. When you are working for a company, in good times and not-so-good times, you can count on a paycheck. If you do your job well (or even not so well), you get a paycheck. If the company fails to meet its sales figures, or misses a product launch window, everyone still gets paid (so long as the company does not go out of business). The company assumes the burden of providing security for its employees, so in many ways the absolute necessity to perform is present, but not pointed. The entrepreneur does not usually have that level of security.

My business partner Sterling often lamented that it was all or nothing with our work. On numerous projects, we would only make money if we got
everything
lined up in perfect fashion. If we got 95 percent done (which is normally an “A” in school and most other cases), we would still be in the same state as if we had just sat and watched
Matlock
reruns on the USA Network for the last ten months.

In one case, our company made a play to outrun the competitors by developing an automated sales engine that would post products such as books and DVDs to online marketplaces such as eBay and Amazon. The system would
fetch real-time inventory information from supply warehouses across the United States, automatically post and audit online sales listings, and communicate with online payment services, banks, and an in-house fulfillment process—including an automated packing robot. Wow! The problem was that huge chunks of this operation were an all-or-nothing proposition. That is to say, the company would benefit not a whit until the whole darn thing was finished, tested, plugged in, and primed with money to start the goods flowing. 99 percent done? Big whoop, because we still can’t use it. In this case, our normal operations, because they were mostly manual and time intensive, were sewing up 100 percent of available resources most of the time. We were robbing Peter to pay Paul to get more development done, because it meant transactions in progress now, and existing customers had to be deprioritized (just a tad) for us to even look at system enhancements (
Figure 2-1
).

Figure 2-1.
“All or nothing” is the wrong way to structure deliverables: Value should be earned throughout your projects

Back in 1999, our company Meridian Internet Services was running several operations at once, including a group of branded social networking sites, developing proprietary search engine optimization systems (getting web sites ranked well on search engines), running powerful search engine marketing campaigns (efficiently paying for traffic across the Web), and growing a spin-off geographic data business. With a social media business, one of the clear value propositions is that you have lots of different kinds of people visiting you and sharing information with you and with each other. Often, this is potentially valuable information that could help you to market to them in an effective way. Years before Google AdWords appeared, we designed a business called BannerEdge (back when banner ads were important) that would allow a dynamic auction of advertising based on deep criteria matching of the people that the advertiser wanted to target. This was an ambitious project and had profound implications for connecting advertisers with very specific groups of people. Mathematically, the project could have made us a great deal of money. (That “could have” in the previous sentence sounds ominous, doesn’t it?)

Brainstorming and development of this project was underway, and we invested months of time. We developed new database structures, new user interfaces, and dynamic auction algorithms from scratch. These things take time—and in our case took a lot of time. While our social networking business continued to grow, from a development perspective it was put on hold so we could follow the opportunity for a much bigger success with the new real-time auction-advertising model. A whole year of heads-down development work was eventually put into this project. But it never saw the light of day. The social networking business hit an iceberg, and the raison d’être for BannerEdge went away. The opportunity cost of that lost time was staggering; it turned into a full year of effort for our company to be flushed down the proverbial … ahem … washbasin. Also mentally devastating was the fact that all of the thought, work, and dreams associated with the brave new world of marketing that we envisioned disappeared into the dustbin of history without so much as one user seeing it, and without it ever making us a single, solitary dollar.

The lesson for me here was that this project took a lot of time. It was ambitious. But it was also not going to make any incremental revenue for us until it was completed, released into the wild, and connected with customers.

What could we have done differently, you might wonder? Perhaps we could have postponed the targeting algorithms and real-time auction and just made an interface where buyers could create ads and sell them to our population of users. With this base, we could have theoretically begun a revenue stream and
learned about how media buyers behave. From that we could have added on our additional game-changing features one at a time. Hindsight is one hell of a painful thing sometimes, isn’t it?

I recently had the opportunity to meet some development team leaders from Google, and when they described their product strategy, it was similarly structured: Define the smallest piece of functionality that would be even potentially useful for customers, build it, and then ship it. Use that experience and user feedback to develop the feature set as you decide what is next from a feature standpoint.

Takeaway:
Structure your projects to provide incremental value as you go.

_________________

Diversify

Diversification can keep you alive.
Diversification
is a buzzword in financial markets for a reason. It makes a critical difference when things don’t go as planned … because things frequently don’t go as planned.

Common Single Points of Failure

When you fly in an airliner, you can just sit back, relax, and enjoy the ride. You don’t need to worry very much about crashes, mechanical failures, or other problems because a lot of careful attention is paid by the engineers to make sure that when you set off from one city to another, you will get there intact and happy. They accomplish this task firstly by engineering the hell out of the components, and they install redundant mechanisms for all vital systems on every aircraft. Your business is very much like that airliner: you build it to get you somewhere. It is designed to carry you and your team to that destination in one piece, preferably without crashing, having mechanical failures, or encountering critical problems.

Just like the aircraft engineers at Boeing, you should identify your key systems, and then add redundancies to them. The purpose being that when failures do occur (and they will), you will reduce the severity and consequence of that event from “Passengers and crew, brace for impact!” to a less dramatic “Stewardess, that bump spilled my coffee!”

Here are some single points of failure that have been significant in my businesses.

A Single Distribution Channel

When the media sales company that I was part owner of was faced with a change in policy with its PayPal transaction capability, our primary sales channel (eBay.com) suddenly fell off the radar screen. This meant closing our doors. The company had known for over two years that it needed to diversify, but the development and marketing resources to do so were not sufficient to keep pace with surging real-time business demands
and
open up other sales channels at the same time. In an unrelated point, I was a passive shareholder and could not force the executive team to heed the advice: diversify! Such single points of failure had come near to killing the business on at least three different occasions. To continue the aircraft analogy, it was a known design flaw of the aircraft, and eventually the pilots, crew, and passengers paid a high price for it.

A Single Key Employee

This person has unique knowledge required to do your business. What will you do if he moves on, or (in business parlance) gets hit by a bus? Don’t wait to find out—hire more talent and train them to know what your key guy knows.

In my current role, I am constantly on the task of making sure my team members are redundant from one to the other. When an imbalance comes into being where one guy holds too much information that others don’t have, I either cross-train them or request budget to hire another team member to provide coverage.

A Single Channel

Depending on one source for your leads and business can be a big risk too. If you depend on being on the first page of Google for most of your business, you are going to have problems if/when you are no longer at the top of the search results. Build diversification into your plan. These days, Google is the primary source of traffic and sales for many online businesses. What would you do if that part of your customer acquisition strategy was cut in half, or disappeared entirely? That is a tough question to answer, but in finding an answer (even in part) you will be making large steps toward disaster-proofing
your operation, while adding more business in the process. Diversification will mean more business in good times and survivability in bad times.

An Outsized Large Client

If your company depends disproportionately on one client such as Wal-Mart, then you are clearly at risk. A simple change in that company’s mindset or strategy could leave you in a dire situation without notice and without recourse. Diversify your channels to include other clients if possible.

Sometimes it
makes sense
to focus on one large client, though. A good friend of mine has a banking services business with one major client that provides over 90 percent of his transaction volume. We discussed diversification many times, and his conclusion was that it is extremely difficult, if not impossible to diversify in his case. After a couple of years of worry, his response to that single point of failure was to double down and increase his volume with the client. He decided that his best path was to make sure that the client is as dependent on him as he is on them. This way of addressing the single point of failure has worked well for him so far: profits and volume are up. Now that he has stopped worrying about finding other customers, he is able to focus more of his attention on that one customer and lock in that relationship. Meanwhile, since he is consciously aware of the risk, he is banking as much profit as possible as a hedge against a future fluctuation in the fortunes or requirements of that single large customer.

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