Friday, December 14, 2007

In Praise of Capital Efficiency: How Being A Cheap Bastard Leads To Startup Success

Whenever a boom comes around, I read articles about how it's dangerous to be too cheap and too cautious. One saying I learned during the last boom was "You can't save your way to prosperity."

Maybe. But as you start to hear the siren song of profligacy (last time, we called it "Get Big Fast"), remember that history teaches us that capital efficiency is one of the most important traits of successful companies.

I had breakfast with a VC from a top-tier firm this morning. He told me that his firm had commissioned a research project to investigate how much capital VC firms deployed in their best investments versus the rest of their portfolio.

The answer stunned them: $2.7 million.

The investing principle of cutting your losses and letting your winners run would seem to predict that top investments would receive more capital. Instead, their research showed that the most successful VC investments typically consume far less capital than the average investment.

I'm not surprised.

One of the lessons I've drawn from studying the great military strategists of history (Hannibal, Alexander the Great, Napoleon) is that successful generals are economical in their use of manpower. They don't commit all their forces to every battle.

What sets them apart is their uncanny ability to sense the critical moment during the battle when it pays to take decisive action. It is then that they commit their reserves, turning a close fight into a stunning victory.

As an entrepreneur, think of yourself as one of these great generals. Be a cheapskate, and conserve your capital until you have eliminated enough risks and uncertainties to allow you to sense the turning point. Then step on the gas.

Tuesday, December 11, 2007

The Difference Between How Good and Bad Organizations Handle Disagreements

One clear way to distinguish between a good organization and a bad one is to look at how it handles disagreement.

The mark of a good organization is that disagreement leads to improvements in the business.

The mark of a poor organization is that disagreement leads to a worsening in the business.

In the chaos and uncertainty of the startup environment, disagreement is inevitable. Good organizations make sure that disagreements are heard, and that the relevant team members work together to find an acceptable resolution.

In contrast, bad organizations either fail to focus, or end up battling internal rather than external foes.

The temptation exists to ignore disagreements and simply hope that they go away. This may seem attractive, but becomes quickly untenable. Startups don't have the resources or the time to vacillate or pursue multiple approaches. Everyone has to agree and work towards a single focus.

I've seen teams of smart, talented people who didn't have the discipline to resolve their disagreements, and they almost always head south.

Remember, of course, that resolution doesn't have to mean that everyone agrees...what it does mean is that everyone agrees on what course of action the company will pursue--even those who disagree. You can't let people employ the passive-aggressive approach and just take their ball and go home.

As a side note, I feel that a lack of disagreement is also a warning sign. Given that there are seldom clear right answers, a startup that lacks disagreement is either not trying, not thinking, or not composed of human beings. A talented team consists of people with different backgrounds and skills--they are bound to disagree on some things. The trick is how you handle those disagreements.

Sunday, December 09, 2007

Rules, Damned Rules, and Heuristics

Since I don't have the patience to reconstruct the elegant arguments of my lost post (including the careful and humorous references to Genghis Khan, The Princess Bride, football referees, and Dungeons and Dragons), I'm going to give it to you straight and raw.

Rules are dangerous because outside of natural laws of physics and chemistry, rules are rarely universal and consistent. You don't get the chance to attempt a saving throw to save your business from going under.

Whether or not "Get Big Fast" works as a rule for startups depends a lot on the external environment. Sometimes it is a good idea to get involved in a land war in Asia.

The best rule is consider the situation carefully and systematically, use heuristics when possible to save time and energy, but ultimately to trust your own judgment.

Your VCs care more about whether you build a successful business than whether you follow their suggestions. Google offered $30 million for Friendster, and Yahoo! offered $1 billion for Facebook. Yet Jonathan was wrong to turn down $30 million and Zuck was right to turn down $1 billion.

Browser-Based Madness

Yet again, a browser failure has eaten one of my posts. And despite Google's claim that Blogger now autosaves posts every minute, there is no sign of my lost post on "Rules, Damned Rules, and Statistics." Screw you, Blogger.

Alas, I lack Eric Sink's technical dexterity and sheer cussedness to recover the post. Any bright ideas, Google readers?