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.