Friday, August 06, 2010

Little Bets and the Power Of Quitting


As an entrepreneur or a company, you should appreciate the underrated power of quitting.

While we often glorify a never-say-die attitude, and celebrate the entrepreneurs who build great companies despite near-universal criticism, extreme persistence comes at a price.

I caught up with a friend yesterday, a high-profile entrepreneur who will remain nameless (I forgot to ask him for permission to blog about him). He could snap his fingers and raise millions in venture capital. But he's decided to take a different approach.

He calls his new philosophy "50-50-5". He is making little bets by starting companies with the following rules:

1) He invests no more than $50,000
2) The goal is to use that investment to get them to $50,000 in monthly revenues...
3) ...for at least 5 consecutive months

Why is he doing this rather than simply raising millions and making a big bet? Because the greatest danger he faces is not running out of money (he has plenty). It's investing a far more precious resource (his time) in the wrong business.

Yet you don't have to be independently wealthy to face the same issues. The first time I started a company, I raised $6 million from investors. Once I took their money, I felt an obligation to make them money or die trying. As a result, I stuck it out with the company far longer than was strictly rational, when I would have been better served moving on.

And while I could have resigned from my own company and moved on, doing so would have meant betraying the trust of my investors and the other members of my team.

If you're a good entrepreneur, you'll feel the same sense of obligation when you raise money--which means it's important to avoid raising money until you have clear signs that your business will be successful, even it it's relatively easy for you to raise money.

Once you do, you'll lose the power of quitting.

For a cautionary tale, take the story of Google Wave. Google recently suffered through a massive wave of stories covering its decision to pull the plug on Google Wave. (I'd provide a summary of Google Wave, but even *I* don't really understand what it was.) Most of the stories were uncomplimentary, and some seemed downright delighted to see Google stumble.

Google did the equivalent of raising VC for Google Wave--a big, splashy public launch, complete with lining up big-name partners to build on the platform. And they did this for a similar reason that VCs might make a bet on untested technology and product--they thought the Google Wave team, which used to be the Google Maps team, could replicate the runaway success of their first effort.

But the cost of this approach is that Google dedicated a ton of energy and effort at a completely unproven and ultimately unusable product, and was doubling down until very recently (stories point out that just weeks ago, Google was announcing developer conferences for the very product they dropped like bad date yesterday). Not to mention the humiliation and reduced credibility in the Enterprise space.

Still, I give credit to Google for being willing to take the hit now, rather than slowly dragging out the death of Wave just to save face. While the cost of quitting was high, Google now gets to reorient a significant chunk of its best and brightest talent to meeting far bigger threats: Facebook and Apple.

But none of this would have been necessary had Google understood the power of quitting and the hidden value of little bets.

11 comments:

Peter Sims said...

Thanks for the insightful post, Chris, and I obviously resonate with the thesis. ;-) At the core of it, we all want to think BIG, but people all too often aren't solving real problems with big ideas, i.e. Google Wave. Acting small allows entrepreneurs to validate that they have identified and solved problems on a small (lower risk) scale before betting big. It's common sense, something bootstrapped entrepreneurs do in their sleep, but that the Silicon Valley VC culture routinely ignores...and, it's often the entrepreneurs who suffer. That type of hubris has ironically destroyed a lot of value and is a really important one to be aware of and discuss. Thanks again.

drakep said...

Chris, great post. On the topic of successful quitters, I recall that Blake Krikorian (SLING founder) said that the smartest thing he did in creating SLING, was the decision to kill an idea/company that was failing and go find a better idea; voila.

Cheers,

Drake

Chris said...

Peter,

I originally just titled the post, "The Power of Quitting" but realized halfway through that it was a perfect fit with your "Little Bets" approach. I'm glad it worked out well.

P.S. If you have a link where people can preorder the book, let me know, and I'll post an update!

Chris said...

Drake,

I find it amazing that we're willing to commit years of our lives to ideas that come to us in a flash.

I'm fond of saying that the idea is far less important than the execution. But given good execution, the quality of the idea can mean the difference between minimal success and wild success.

Roy said...

Great comments, and not an oft-discussed topic. I just said to someone today that this approach (whether 50-50-5 or similar bootstrap) is important before raising VC because first you should convince *yourself* that the opportunity is there.

Chris said...

Roy,

Yes, whenever I hear entrepreneurs say something like, "We need to raise money so we can find out if this works," I shudder.

Not only is it bad for the investor, it's bad for the entrepreneur.

Paul King said...

Hey Chris,

can a brother check an email?! haha

-

I love the small bet philosophy, and even more (and you probably already know this) I love the small return philosophy even more. As I've told you, not every single stinking website has to be a google, groupon, or facebook and look for the big exit. I think, and especially in my current situation, it'd just be nice to be making an extra $10-20-30,000 a month. What's wrong with that?

With that said, here's one thing about 50/50/5 - it's pretty tough - especially for the non-programmer who must outsource the development - that amount leaves very, very little (if any) to market. Personally, for my little cash cow idea, I've talked to 3 different highly respected shops here in town - 2 gave a $90k + build, one said it was too complicated and wouldn't take it. 1 of the 2 lowered to $50k+ with certain mods/non-essential elements left out until a later time. Marketing and other expenses $50k.

100/50/5 in time, no problem.

100/25/for life - even easier.

Quitting? Not till I'm sitting on the beach, beer in one hand, cigarette in the other, surrounded by beautiful women in string bikinis.

Chris said...

Paul,

My email is a disaster zone. But you can always follow me on Twitter and then message me.

Send me an overview of the project, and I'll see if I can find anyone who will do it for less.

Anonymous said...

Excellent post and I can totally relate.

I published my first book last year to some fanfare. I took on a massive amount of debt in order to devote myself to selling the book; writing it once we landed an agent and a contract; and then, marketing the hell out of it for a full year. We got coverage from major papers, appeared on a natl. TV show as featured guests for the first half-hour, and did scores of radio.

I kept waiting to hit it big, and as the debt (and press) accumulated, kept assuring myself that I was taking a calculated risk that was likely to pay off.

Wrong.

I networked my butt off, posted regularly on my blog, interacted with readers, made wonderful and valuable connections with other writers in my field, and yet, still... haven't earned out our modest advance. Which means no royalties.

Recently, after our TV appearance was on as a rerun, I had to face the facts. My big gamble had NOT paid off in terms of a monetary return... and maybe never will.

Sure, I have the cache of publishing what some have called a life-changing book and all that comes with being a "best-selling" author. But all my networking and hustling and pouring my heart into work I really care about hasn't translated into pennies in my pocket.

I made the mistake of believing everyone else who kept telling me this book would be such a huge success -- and more importantly, kept believing myself. Now I must rectify the financial instability I've created while I look for a full-time job. It's hard not to look around me and think, "Sheesh, what an idiot..."

It's a RELIEF to give up. If only I'd taken the long view before and strictly allowed myself calculated, "little bets."

At least I have some snazzy, new marketing and project management skills to apply to my goal of securing employment!

But yes, lesson learned.

Chris said...

Anonymous,

The other thing to bear in mind is that even books which are bestsellers generally don't make much money for the author.

I spoke to one well-known publishing house; their best-selling non-fiction book of the past decade, an award-winning perennial, had sold 150,000 copies. With author royalties running $1-2/book, you can see that even wild success is not a good recipe for financial success.

However, if you can use your book as a springboard to a speaking career, I know quite a number of authors who have made the leap to guru-dom and $25,000 speaker fees.

Will Weisser said...

Have you read THE DIP by Seth Godin? Very similar message about the power and importance of quitting. Definitely worth checking out - a short but powerful book.