Medium, Venture Capital, and Hollywood

Yesterday, I was watching an episode of the hit TV series Medium. I don’t usually blog about individual episodes of TV shows, but this one brought together three of my favorite subjects, which are almost never talked about in the same conversation: Venture Capital, Hollywood's casting of characters, and Life After Death.

For those of you that don’t follow the show, Medium is loosely based on real-life psychic Alison Dubois, and her family, who live in the Phoenix, Arizona area. In almost every episode of the show, Alison (played by Patrcia Arquette) sees in her dreams events which usually relate to some crime that’s been committed. Her husband Joe is an aerospace engineer who at this point in the show has a brilliant idea and is trying to start his own company to bring his product to market.

In last night's episode, Joe, being a starving entrepreneur, is almost out of money and there’s only one Venture Capital company he’s able to pitch his idea (which has something to do with solar energy). One of the partners in the firm offers to invest her personal money in his company if she takes him on as a majority partner.

Since Yesterday’s show brought up three very unrelated questions in one 50 minute episode, and since I’m probably the only person on the planet who is equally interested in all three questions, I’ll ask them here all together:

• Should a startup company’s founders give up (and should an investor ask for) majority control of the company in the first round of investment from an angel or Venture Capital investor?
• How true to life is or should Hollywood be when doing movies and TV shows based on the lives of real people?
• Is it really possible to communicate with the dead, as in the case of the FBI agent in last night’s show?


The first question is one that I’ve actually had come up in real life not that long ago in Silicon Valley. A friend of mine, whose company I invested in, had a term sheet from a venture capitalist who wanted 50% of the company in the first round of investment. Now that effectively is the same as giving up majority control, because the founders rarely own 100% of an early stage company – usually there are employees, advisors, and board members. Let's say 10% of the company is owned by employees, 5% by advisors and board members, 50% by the VC’s and 35% left for the founder(s) after the first round in this scenario.

Now, they were going to give him several million dollars, and the company was very early stage – with only a prototoype. But even so, I found it highly unusual for even a venture capital firm to offer to take over control fo the company in the first round. More typically I have seen between 25% and 40% in the first round go to the investors.

In last night’s episode of Medium, the angel investor (who was a partner in a VC firm Joe presetned to) offered him some of her personal money (typically much less than a venture capital firm would put in), but wanted 51% of the company in return. At first, Joe didn’t feel right about this and turned her down, but then through some strange twist of personal persuasion (which I’m sure will be explored in future episodes of the show), he agreed.

Having been both on the team of co-founders, and an angel investor in tech companies, I’ve found that it’s rarely a good idea for investors to take that much ownership in the first round (though it often happens in a second or third round of investment). The point is that to get a company off the ground requires almost super-human effort - and that effort needs to be put in by the founders and the employees. Founders are usually people who really value ownership (that's why they're founders and not employees!). If they feel they are no longer in control of a company's destiny, they can start disconnecting mentally and emotionally from the business, even if they don’t physically leave the company.

Usually this happens at much later stages – when the company has built up a management team and requires the founders innovation and energy, but doesn’t require the kind of manic effort and atmosphere that founders usually instill in their companies in the early days to get it off the ground. In fact (and I say this as a co-founder of many companies myself) sometimes founders can be hindrances to the growth of companies in these later stages. In other cases, the founders are the only ones who can see new market opportunities – hired gun management team members are usually more operating guys and aren’t usually very intuitive about what the market is going or where the product needs to evolve.

But this is a struggle to save for a later date - in the early days this distraction really shouldn't be there - the goal is to get the product to market and get some customers. So my answer to the first question is no – the team of founders should rarely, if ever, give up control in the first round of financing. And investors, you really shouldn't try to take control becuase as you may know running a company is a series of headaches, fires, interspersed with some brillitant tactics - most investors are incapable of handling these - so you want the founders to have ownership of these things in the early days, and be ready to help, not dictate what they should do.

In later rounds, as the company grows, the majority control will usually naturally shift as the company rasies more money - and founders, unless you're a control freak, don't sweat it in round two or three!

This brings us to the second (unrelated) question: How true to life does/should Hollywood be when representing real people? Alison Dubois is a real person, who has put her psychic skills to use helping law enforcement agencies location victims and perpetrators of crimes. She is married to Joe Dubois, who is in fact an aerospace engineer, and they live in Phoenix with three kids (all girls, just like in the show).

In fact, the more I did research into the show, the more pleasantly I was surprised at how closely they kept true to life. In any fictionalization, there will have to be changes to make the story more interesting and flow better. The question is, are these changes Hollywood-esque, or are they simply to help tell the story better but don’t change the basic concept of the show?

The first thing that Hollywood does in most instances (whether fictionalizing a true story or even adapting a complex novel) is to cast a good looking star in the role of the person (“the good guy”). The second thing it does is cast someone in the bad guy role, a role which is usually a stretch since real life rarely involves a straight struggle between a single protagonist and a single antagonist. The third thing is that they cast another good looking actor as the love interest to add motivation. Finally, they bend the story out of shape so that it’s unrecognizable… A great but very successful example of this is Braveheart, about the Scot William Wallace and his fight for independence from Britain – a quick examination of a biography about Wallace will lead you to say “oh my god, can’t believe they made that up or changed this, or left out that!” Still, even with the changes, it was a great film and won the Oscar!

In this vein, I was pleasantly surprised by Medium. Patrica Arquette looks like she gained a few pounds for this role and honestly looks more like a mother of three than the real Alison Dubois. The crime-fighting aspects of the story give it a rare sense of an antagonist in each episode so one doesn’t have to be made up. And the story lines seem to be inspired by actual events in Mrs. Dubois life. And her husband, Joe, far from being the typical handsome macho love interest, comes across as a nice, dorky, but very supportive engineering type … just the type that might actually break out on his own with an engineering idea and try to raise venture capital. Well done NBC!

Of course, then there is the pesky question of how accurate psychics really are, and if psychic phenomenon can ever be at the level portrayed in the show, and if it can really be used to solve crimes. In the show, Alison is almost never wrong – that’s pretty unrealistic I think. In every show her dreams show her exactly what she needs to know to solve the crime!

Good TV no doubt, but it is a bit of fictionalization. Now those of you who’ve read my book Zen Entrepreneurship probably know that I’m a big fan of dreams – we can learn about ourselves, we can solve scientific and technical problems, get inspiration for artwork, even help ourselves get out of personal jams and find direction in our lives by listening and interpreting our dreams. To name just a few scientific achievements and works of fiction which emerged while the inventor or author slept: the structure of the atom (Neils Bohr), the structure of the periodic table (Mendeleev), the sewing machine (Singer), Dr. Jekyll and Mr. Hyde (Robert Louis Steveneson), and my personal favorite dream-inspired science fiction story, the Terminator (James Cameron). Not to mention hundreds if not thousands of others.

Still, even I will be the first to admit that the ability to have 100% psychically accurate dreams is pretty much close to impossible – dreams tend to be more symbolic in nature, although some can be literal like those portrayed on the show. In real life, it turns out that only some of Alison’s “insights” come from her dreams – she says that most come to her while fully awake. In general I think the changes Hollywood made in order to make the show exciting and fun to watch are acceptable "changes" true to the spirit of the real people without being right in ever slavish detail.

Which brings us to perhaps the most controversial aspect of the show: Can you communicate with the dead accurately after they’re gone? Those of you who think that’s a question that’s not going to be answered in a blog that started of talking about tech entrepreneurs giving up 51% control of the company are right – this entry has gone a bit long! I’ll have to explore that question another time …

“Build It Quick” but “Make It Last” – Lessons in Software Development for Startups

I’ve often been asked what methodology and architecture works best for software development in startups. The truth of the matter is that no one methodology or architecture works best in startups – and that goes for everything from Xtreme programming to SOA to Factory design patterns. I’ve been involved with enough startups to know that you have to take a ‘zen-like’ approach – doing whatever seems right at the time, but all the while keeping an eye on where you want to go.

Given the fast pace of most startups, we don’t have the luxury of strictly following all the rules of any given methodology. I call it a luxury because every methodology has inherent built in processes and limitations - and most methodologies were built to get more reliable software for big projects – not necessarily to get a version 1.0 out the door so that the concept can be proven with customers.

Nevertheless there are some “observations” about development in startups that are worth keeping in mind. I say “keeping in mind” rather than slavishly following some set of rules because the situation might require something else, so keep an open mind. Venture funded startups tend to have more methodology and processes than bootstrapped or angel financed ventures –and for good reason – they can afford it.

So, that said, here are some of my own observations:

• Startups are used to getting sites/products built without big teams. Startups usually have very few resources in the beginning – one or two developers write the entire site. There are usually no QA resources or dedicated product managers in the beginning. This means that:
  
  
  
  • Startup developers have to be more then “just developers”. They have to test their own code and make sure it works– As an example, many Facebook applications are built entirely by one developer in a short period of time without any QA resources (though they are needed as the app gets more complicated). When we started CambridgeDocs, my co-founder and I built the entire product without much QA – we used our initial beta customers to do QA. This doesn’t always mean using JUnit or even always using automated testing, though these can be quite helpful and I recommend using them. It does mean you have to have a set of “smoke tests” that you test out each time you check in your code.
    
  
  
  • Those building the first product need to think of themselves as users of the first product – and not just as “only developers”. This helps to guide the various minute decisions that need to be made rather than always expecting a group of “users” to tell them what to do or an “architect” to make the decisions for them. It also helps with the expanded QA role developers in early stage startups are forced to take on. And sometimes, believe it or not, you just have to play with the “whole” site or product and see if you can break it – not just the modules you’ve written - just like an end user tester would.
    
  
  
  • Developers need to be able to juggle multiple tasks and languages. In a startup it doesn’t work so well to say “I’m only a PHP guy I don’t do javascript or AJAX or action script” – if the application requires both you will need to do both. This means learning enough about different languages so that you can juggle them as needed. For example at CambridgeDocs we decided to do our core platform in java, but we had modules that ended up being built in all kinds of other languages - VB .NET, C, C++, C#, VBA, XSLT. That doesn’t mean that we were able to send people to courses on any of these languages – the developer had to pick up a book or do searches on-line and figure out how much of these languages they needed to know for the task at hand. Usually only a small amount of knowledge of a particular language was required in order to complete the task. In another startup the main platform was built in java, but we were able to build some perl code that did what needed to be done and the first few production clients used this perl code while we waited for the java platform to get done. This was better for the startup than telling clients to wait until it’s done.
    
  
  
  • Developers have a lot of leeway in the beginning. This leeway can be good or bad, depending on your disposition. Usually it means you not just have to do a development task, but have to figure out the best/most efficient way to get it done – use open source/third party tools, do it yourself, use algorithm/architecture # 1 or #2.
    
  • Developers need to give estimates early and refine their estimating. Developers need to give estimates as their “best guess” based on the information at hand. These estimates almost certainly will need to change as the team encounters unexpected difficulties with a particular piece of technology or third party product. Don’t be afraid to give an initial estimate and say “this is my best guess – I’ll refine it as I go” – rather than saying “I need another 2 weeks to study this problem before I can give you an estimate”. Basically you need to transition from a “CYA-perspective” (Cover-Your-Ass) of estimating (which is done in larger organizations) to a “GID-perspective” (“Get-it-Done”).
    



• Startups usually prefer an iterative approach – get something up quickly, then iterate and make it better. This is crucial – what goes into a particular version or product release is debatable almost up until the time of release. In my very first startup (I wrote about this in my book, Zen Entrepreneurship) we were going to a conference in Florida the next day and the product was supposed to be release – we only had one problem – it crashed when multiple instances were running on the same machine. Now we could’ve pushed back the release, but the release date was critical for us, so we got around the bug by simply taking that feature out – it wasn’t critical especially for a first release.
  


• Specifications are usually limited. Most specifications within startups are screenshots or mockups with some explanation. That doesn’t mean that there are no specifications. But it does mean that typically to specify an API you would just go ahead and write the function headers in java or whatever language you’re using. This initial cut would be the spec and then evolve into the final product. Similarly an HTML mockup of a page is the spec for what the page will look like – this HTML is then translated into PHP or java or Ruby On Rails and it morphs into the final product. Usually (fortunately or unfortunately) the initial specs are discarded and the “work in progress” becomes the working spec as the initial version is built. There usually isn't time (again fortunately or unfortunately) for workflow analysis, full UML, etc.
  


• Code needs to be written “cleanly” even (especially) in prototypes. This might seem like a counter-argument to the build it fast argument. But it turns out that in a startup a prototype will almost inevitably end up as part of the production application. As an example, even before we formally started CambridgeDocs I built a prototype of an HTML parser and called it “RizHTMLParser”. I was never planning for it to be a production thing – but as often happens in startups, it was rolled in as the first version of our HTML parser. For years we had a class in our java code that was named after me personally – this happens a lot more than you would think – and our product was being used in production by many Fortune 500 companies!
  
  It’s better to just pick a more descriptive name for the class to begin with, even while prototyping. This doesn’t mean that you should take a lot more time to build prototypes – not at all – what it does mean is that you should take a few extra seconds and write the code cleanly and with names that make sense because it's probably going to end up in production somehow. Same goes for commenting- take a few extra seconds and write some comments. Writing “clean code” shouldn’t take much longer but it helps in maintainability down the road.
  


• Startups need to think about the future, but build for the present. Flexible and scalable architectures are good – startups usually need to follow an architecture that leaves room for the future but that takes into account present needs.
  
  This is a delicate balance between “get it done quickly” and “build it to scale” and "build for re-use" – resulting in something that has some level of “quick and dirty” but done in a modular enough fashion so that it can later be replaced as the codebase is re-factored and the organization gets bigger.
  
  As an example, when we built our first Microsoft Word file reader we needed something quick – we used a bridge from our java server to Microsoft Word and used its built-in API. This solved the problem but was not a good scalable solution (it was single-threaded, and had a host of other problems) – we identified the way we’d like to do it – straight cross-platform java code which read .doc files on the server. But the amount of development required for the eventual solution was well beyond what we could afford – so we did it quick but we isolated it in a way so that it would be very easy to switch to eventual driver when it was ready. This quick and dirty driver actually worked for us for over a year and got us our first few word-related customers, at which point we had identified some clients who would provide the funding for the full development effort. We eventually re-wrote it and the scaleable re-write became one of our key pieces of differentiation.
  
  I like to think of this as a “Build it Quick” but “Make it Last” philosophy. Another entrepreneur I know called I the “version 1.0/ version 3.0” tradeoff –you need to get version 1.0 done, but you want to think about what version 3.0 might look like. It means you need an architecture that doesn’t follow “hard and fast rules” (i.e. this methodology or that methodology) but leaves open the possibility of pieces being written in a less than optimal manner in the beginning in order to demo something to a client and then re-factored over time.
  

Poetry for Entrepreneurs: Love My Startup More than You

Some of you may know that I moved to Silicon Valley recently.

Although i've engaged in some startup activity here, alot of what i've been doing is watching and observing. Being a writer, this naturally made me want to put down a few words about what i'm seeing about the state of entrepreneurship in the valley. Oddly enough I found the best way to comment on life here is through poetry (don't ask me why - I've never written much poetry before).

This poem, "Love My Startup More Than You" is about love and hope and the life of an entrepreneur. It’s about relationships and how they’re put on hold sometimes in the early days of a startup.

It came from watching the way that my married friends were involved in starting companies. It’s not unusual here for someone to have a full time job, and be working nights and weekends for their own (or some friend’s) startup, which alas doesn’t leave a lot of time for romance.
This poem is based on an old army marching tune from World War I - a time when young men ere leaving their girlfriends behind to go to fight in Europe. The original started "Cindy Cindy Cindy Lou, Love My Rifle More Than You”.

I’ve changed Cindy Lou to be Cindy Lu, in honor of the large Asian population in Silicon Valley. And of course i've changed "Rifle" to "Startup". ere it is:


Love My Startup More Than You
by Rizwan Virk

Cindy Lu, Cindy Lu
You know that my heart is true

But my Idea is very new
And we’ll make a million dollars
If only I can prove
That the market is true!

Cindy Lu Cindy Lu
Soon I’ll be home
And put my arms around you
....
But first
I’m being shown
Design specs I must review!

The beta downloads are a jumping
But so are the bugs that need a thumping!

Please let me know
When the baby is asleep
Then I can show
You how we'll avoid feature creep!

Towards you my sweetheart I’ll always feel
A never ending attraction
But right now what I really need to show
Is more customer traction!

Cindy Lu, Cindy Lu
Don’t look at me that way,
You’ll worry yourself blue!

Once we raise our series A
Our mortgage will be easy to pay!

And if the company gets in a bind,
My investors will help me find
Some folks that are keen
To assemble a management team
And we’ll be on our way
To making lots of green!

So please don’t think that I’m mean
When I say:

Cindy Lu, Cindy Lu
You know my heart is true,
But just right now,
I love my startup
More than you!

Virtual Entrepreneurship in Second Life: the New Pioneers

I just attended the Second Life Community Convention in Chicago and I’m happy to say that the pioneering spirit at the edge of the electronic frontier is not only still alive and well, it is thriving in the form of virtual entrepreneurs.

For those of you who haven’t heard of it, Second Life is an example of a metaverse – a virtual 3-d world that exists only out on the Internet. It’s been around for a few years now and over the last year there has been a lot of press (both positive and negative) about it in the last twelve months – though I think for the general population the idea of living an entire virtual life on the internet, complete with virtual businesses, virtual art, virtual relationships, is still a fairly fringe concept. Unlike many “games” there isn’t necessarily a game-plot in second life – i.e. your goal is not to kill monsters, but rather to live a virtual life (which might include killing monsters if that’s your thing). There are no points – but there are dollars – which you can make, buy, sell, and you can spend – just like in the real world. You can join and create both formal and informal social networks, or just make friends and socialize.

My mission was to find entrepreneurs in the virtual world and to assess the possibilites of starting and growing businesses based on this virtual world. What I found was that the convention and the businesses I ran across remind me alot of how the Web was perceived in 1995/1996 - a small but dedicated group of initial pioneers who are working on the cuttng edge but are still relatively low key.

There is no single event yet which marks the beginning of a “mad rush” into this new frontier by the investment community, like the Netscape IPO represented in the nineties. One candidate is the first time a virtual person – Anshe Chung – appeared on the cover of Business Week as a real estate mogul who was eventually worth at least a million US dollars but who owned no real land outside of Second Life, a lot of eyes (and eyebrows) were raised. For lots of investors, this was the first time they had even heard of Second Life.

In fact, despite this rush of users, the term pioneer is still a very good one for a vrtual entreprenuer – most businesses I encountered were small, doing pioneering work building new gadgets, location, clothing, etc. out in the virtual world. The landscape is evolving all the time – as users add new islands, new shops, new cafes, new dance clubs, etc. It still reminds me a little of the Old West – a relatively open landscape that is being shaped by dreamers and innovators that will eventually become something all of us have to pay attention to. There are now lots of more settlers, but the character of the place hasn't quite changed yet.

Altough there has been a large rush of users in recent months, the total number of registered users is still pretty small when compared to users of the web, or of social networking applications like MySpace or Facebook. While these social networking companies have been the poster boys for the “web 2.0” hype, I might argue that the real pioneering work of inventing a new kind of Internet which is used for collaboration, social interaction, education, marketing and business is going on virtual worlds like Second Life. This is “internet 2.0” – and may someday be more important than static web pages.

So here are some of the things that I found:

• Today, most transactions within second life are small by real-life standards. This is because they are conducted with Linden dollars, and the exchange rate is 266 linden dollars for each US dollars. However, the fact that there is an easy to find exchange rate and as the sheer volume of transactions adds up, more and more transactions within second life can add up to real money. Entrepreneurship is alive and on the rise. Today, there are a very large number of shops and vendors within second life who are selling and trading in virtual goods. Some of these have become well established, but many are new and just scraping by. To date, some of these kinds of businesses are making enough money to sustain their owner’s lifestyles but a few are rising beyond that level yet.
  
• The ability to build a community within the virtual world is one of its main strengths. While we talked about web 2.0 communities, the communities and interaction within a 3-d world allow a level of interaction that is unparalleled and so the communities formed tend to be stronger and more intimate than simply email or web based communities.
  
• The real money today and the largest companies in the virtual world are made by “builders” – who take real life corporations and build a presence for them in the virtual world. These projects today range in size form $20K to $100K – which again parallels the cost of establishing web presences a decade ago before it became mainstream.
  Real life companies like IBM are using shared collaborative spaces in Second Life rather than spending the money to go to actual physical locations to collaborate. Real life movies (300, Transformers) and publishers and authors (William Gibson for example) are starting to launch books and do special marketing events within Second Life. Reuters has a presence within second life as well.
  
• While the numbers are still small, the impact of an event in a Second Life can go well beyond the number of people who are actually at the event. For example, a book or movie event may only have 60 people attending in Second Life. That event is then rebroadcast on blogs, vlogs, podcasts, and described on blogs which start extending the reach to many thousands of end users.
  
• Think of the web and the metaverse as co-existing and working together; many applications which require more compl.ex interactions than can be done in second life today (such as the stock exchanges) start with a Second Life transaction, and then take you to web sites to implement the complex business logic. Expect to see more of this.
  
• The metaverses are going through growing pains and not yet mainstream, but given the growth rates they will be soon. The current infrastructure won’t hold up well as the numbers on virtual communities grow like the numbers on the web did.
  
• The amount of time spent by a consumer in Second Life paying attention to new products and spaces is significantly higher than the time spent by a user of the web on a web page or a banner ad. In some case, a Second Life user will spend 20 minutes before they decide whether a shop or a product is right for them – on the web think seconds.
  
• Initially the real opportunity long term may be in leveraging the virtual worlds not simply as a place to sell – but as a place to promote, provide thought leadership, cutting edge music and movies, and educational tools and tying into real products. However as the numbers and dollar volume of transactions grows, expect to hear about more businesses that have limited “real-life” presence at all but are thriving within virtual worlds. Expect that at some point, for certain sectors of the economy, having a presence in a metaverse maybe as important as having a website for your business is today. Remember even 10 years ago that most businesses did not have websites and today it is a requirement in certain industries.
  

While some of the numbers that exist on second life today might look “smallish” to a venture capital and entrepreneurial community that is used to seeing millions of US dollars invested in software and new media companies, my main point is this: Just Wait.

Conclusion: The metaverses today still represent a ground floor opportunity .. .they are still a bit like the wild west in the second half of the nineteenth century, and the World Wide Web in the last decade of the twentieth century. If you’re a pioneer you should be looking at it seriously…

Social Entrepreneurship, MIT, and the eco-system

Social Development has emerged as a "legitimate area" for investment - with business plan competitions and venture capital funds being setup specifically for development. This raises an interesting question: is Social Entrepreneurship really different than so-called "regular" Entrepreneurship?

A few weeks ago, I was at the MIT 100K Business Plan competition finals in Cambridge, MA. Some of you may know that this is billed as the “world's leading business plan competition” and is part of the “ecosystem of entrepreneurship” around MIT.

So what did I notice this year? Other than the inflation of the prize to 100K, the biggest visible change was the addition of a “social development” track in addition to the regular entrepreneurship track.

I find this encouraging because there seems to be the growing recognition the purpose of entrepreneurship is more than to just “make money” – it’s to provide something valuable to the societies that they serve. The winning team in this track, Bagazo, provided an alternative to using wood for cooking in the entrepreneur’s native country, Haiti. Another finalist, Saafwater, came up with a new distribution system to provide clean water to areas in Pakistan which don’t have it at the moment. Another finalist wanted to provide a website for micro-lending, and another provided a system for alternative/renewable energy.

I was actually a finalist back in 1992 when it was known as the 10K competition (In between and for a long time it was the 50K) and have stopped by every few years to tap into this ecosystem. One of the things that I like most about this competition is that it’s a microcosm of trends in the world of entrepreneurship and venture capital.

During the late nineties, when the dot-com boom was in full force, the finalists (and winners) were often internet and IT companies. A few very well-known companies came out of the competition during this time, including Akamai, Direct Hit, and netGenesis. Tellingly, after the boom, the number of IT companies; pharma and biotech were all the rage. When I spoke at the semi-finals in 2005, the downward trend in the percentage of IT companies vs. biotech was starting to slowly reverse itself.


But what I found most thought-provoking about what I saw this year was that renewable energy and medical technologies fields took top prizes in both tracks - not just in the in the development track.

This raises several very intersting questions: Is Social Entrepreneurship something new? Is it something different then regular entrepreneurship? Are the two mutually exclusive or do they overlap in fundamental ways?

My most read post on this blog was about Mohammad Younas, from Bangladesh, who started the micro-financing trend – which was a way to invest very small amounts of money in “village entrepreneurs” on a small scale. This was a valuable service to the communities that he served, but it also turned out to be very good business.

I believe that all entrepreneurship should provide some valuable service to the communities that it’s serving; all social development tries to do the same, perhaps without the profit motive at the center. But it’s unclear whether the NGO and non-profit model, while providing great short term benefits, can really help to lift poverty levels and basic services over the long term. I read a book about China recently, and they called the economic development of China over the last 15-20 years the “greatest anti-poverty program in the history of the world” – because it lifted millions of individuals out of poverty and into the middle-class. And what was at the center of this program? You guessed it: Entrepreneurship.

Do the “desire for wealth” and the “desire to do good” go hand in hand? I believe they do: Every great (and even not-so –great) entrepreneur envisions that their product or service will help someone - their "target market". Perhaps one key difference is who is helped - villagers in Bangladesh, middle-class kids in suburban America, or people working in large corporations . Another key difference is the priority of the profit motive - it is often second in a social development venture, but it's still there.

The emergence of the Development track at the MIT competition is a welcome thing and evidence of a much larger trend. But I would argue that these two aren’t mutually exclusive - after all, the winners in the development track were for profit companies, not non-profit organizations.

Maybe in a few years they’ll merge these two tracks and there won’t really be any difference at all between “Entrepreneurship” and “Social Entreprenuership’.

The Bootstrapper’s Dilemma

The question of focus is an important one for any entrepreneur. We hear it all the time – from the idea of having a “core competency”, from implementing “niche marketing”, and even in the oft-referenced “elevator pitch” – getting your message so focused that you can literally give it within an elevator ride.

Of course, no one can argue that focus isn’t a good thing. But in a bootstrapped company without outside financing, this becomes a particularly tough issue: the question is where to focus and for how long? And what to do if the focus isn’t working? And is the current focus (the one you started with) blinding you to where the real opportunity is? Or is your real problem a lack of focus?

In a venture capital backed company, you typically invest in building a product for a specific market; you then hire the team that can go after that market, and over time you hopefully get enough success in that market from your sales and marketing team to recoup your initial investment and then some. Once you’ve done that, you can think about either taking the product into different markets or starting a second product. If your initial bet doesn't pay off, you think about raising money to attack another market (or hopefully this happens while you still have plenty of cash left), often with a change of management. Or the company goes bust.

But what do you do in a bootstrapped company when you have little or no outside financing?

This is an interesting question because you have two conflicting demands that are coming at you week after week, month after month:
1) you need enough cash and profits to keep the company going, and
2) you have very limited resources so it’s important not to spread yourself too thin.

In fact, these two demands are at the core of what I call the Bootstrapper’s Dilemma: If you have limited cash and need to keep the company going, you are likely to take any sales/revenue you can get, even if it’s not in the area of your focus. Furthermore, you may discover that the real opportunity is in a market/area that is adjacent to what your first guess was. But if you don’t focus, you are not likely to make much headway in any of the areas that you are attacking.

We had this problem at one of my bootstrapped startups – our technology/products could be used in several different markets, each of which was a legitimate and potentially profitable usage of the technology. Each of the markets had slightly (in some cases significantly) different use-cases, even though they all relied on similar (but not exactly the same) technology. This disparity between our different use-cases was causing us to spread our limited marketing and sales and development dollars too thin.

However, we never had enough cash to allow ourselves to focus on only one of those areas and turn down opportunities in the other areas, because focusing also meant that we might not have enough cash to survive long enough for that focus to pay off. In a bootstrapped startup, “Cash, not focus, is almost always King” – if you’re not bringing cash in the door – you might be out of business pretty quickly.

So this brings us to the question – if we agree that focus is important for growing a company, when is it appropriate to focus and when isn’t it?

In my company, one of our co-founders was always asking us to take a bet on one of those areas, and if that bet didn’t work, then it would mean we were done. In that scenario we should shut down the company and go on to other opportunities. The other co-founders, myself included, wanted to see the company survive no matter what – our intent was to build a going concern, not a big hit or a big failure - even if our initial guesses about the market weren't correct.

This brings up a different but not unrelated issue: getting alignment on the motivations of the principals in your company. This is an issue that you should think about carefully in any startup, even when starting a company with someone you know, and especially if you're starting a company with someone you don’t know well. I'll talk about this in another post.

In the end, I believe that this question of focus isn’t as easy or as "cut and dry" as the simple rule of thumb: “you need to focus” – advice which is often given to (but not always listened to by) entrepreneurs.

Recently, I was speaking about this with a colleague who has been “in the trenches” as a CFO with multiple startups (both venture backed and bootstrapped), and his point was: When bootstrapping, you can afford to focus only if 1) you have enough outside money to see it through to the results of that focus or 2) you have a customer who’s funding you for some time, and you can afford, based upon the results of that customer, to turn away other potential customers which do not fit the same focus. Basically, you can only afford to focus if you can literally afford to focus. And if you want to focus, then find either such a customer or raise enough money so that you can do so.

On the one hand, focus provides that “laser-like” intensity which can allow you to really nail a business problem and get into a virtuous cycle where each sale helps to propel the next. On the other hand, insisting on a focus when the market is pulling you in a different direction means you might “miss the boat” on the real opportunity in a changing market; or worse, you might literally run out of cash.

I read a VC blog recently that talked about how one of his portfolio company’s entrepreneurs wanted to build a second, related product before the first product had really gained a lot of traction. The VC of course gave the standard adivce: “you should focus”. But after the entrepreneur insisted, he gave in, and the introduction of the second product served as a key factor in not only rapidly expanding sales, but in laying the groundwork for the eventual successful acquisition of the company.

I think this story makes a very good point. That’s why I like to talk about the “Zen of Entrepreneurship” – because you can’t always follow cut and dry rules without thinking through the consequences and applying them to the unique situation at hand. Sometimes you have to keep a "beginner's mind" when looking at a fluid situation, and recognize that the answer may not be the same as it was even six or nine or twelve months ago.

To truly succeed in the Bootstrapper’s Dilemma you have to adopt a Zen-like state of mind and find a delicate balance among these factors – where the market pull is coming from now, where you thought it was going to come from when you started the company, how much money and runway you have left, how you’re spending that money in going after your target market(s), and of course what your personal goals are for the company and your life. This balance is unique to you and your business and although you can go to others for advice, only you can find the real answer.

What Would Gandalf Do?

A Lesson from the Wizard: Look ahead, but don’t forget to look behind

The first lesson in this set comes to us from the behavior of Gandalf the Wizard in the Hobbit, which was the prequel to the Lord of the Rings trilogy.

In the book, Gandalf, has recruited the Hobbit Bilbo Baggins to travel with the 13 dwarves to the Lonely Mountain on an “adventure” to claim their long lost treasure, which is being guarded by the evil dragon Smaug. Sound familiar? Anyone who has been recruited on an entrepreneurial adventure to "find the treasure" can surely relate!

Like many “adventures” in the business world, at first the journey goes along swimmingly – they sing songs, light campfires, and otherwise enjoy themselves on the road. At some point, Gandalf leaves the party, and they suddenly find themselves without their leader.

How do they handle this situations? This "first adventure" has many implications for an entrepreneur who is just beginning his or her journey and the team of "adventurers" that he or she is leading.



NOTE: This is the first of a set of lessons about business, entrepreneurship, and life from my favorite fantasy and science fiction, such as the Lord of the Rings and the Earthsea chronicles – it’s from a book I’m working on tentatively titled: “Wizards at the Helm”.

It is a cold, rainy night, not even the dwarves are able to light a fire. Without Gandalf, the party is left in the dark to fend for themselves when suddenly they spot a fire in the woods. The party sends Bilbo to investigate, and they get into trouble with a set of monstrous trolls, who capture the hobbit and the dwarves and threaten to “eat them”.

This is their first “true adventure” on what I think is a very archetypal heroic journey, and as you can see it’s not an inconsequential one – their very lives are put into mortal peril!

Gandalf’s departure allows the party to “test its mettle” – and though they are found lacking and need to be “bailed out" of this incident, the episode represents an important point in the development of both Bilbo and Gandalf as characters and heroes.

Many early stage business ventures also face death when they first try to make it on their own. But it’s the trials themselves which harden up the group and prepare them for the challenges which lay ahead. It is important to get through this first set of trials, even if you have to rely on a board member, or a mentor, or a wizard who knows the terrain.

And in fact it is Gandalf, who has dealt with Trolls before, who shows up in time, plays a clever trick on the Trolls, and rescues the party. After they are rescued, the dwarves naturally ask Gandalf: “Where were you?”

He answers, “Looking ahead”

The next question from them is: “And what made you come back?”

“Looking behind.” said Gandalf.

What can this teach you as you go on your own “heroic journey”?

To truly be a wizard you have to be able to anticipate what’s going on ahead of the curve, and sometimes this means scouting out into the future and leaving others behind to take care of present tasks.

But even when you do that, no matter what you see, you can’t ignore what’s happening in the present. You need to not only be able to scout ahead, but also bring those with you on the journey safely through the "road of trials". But it's not enough to do it all yourself. You also need to give them room to develop their own abilities as “heroes” and not lean on you as a crutch. This will serve you in the long run.