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HUNGRY START-UP STRATEGY

Berrett-Koehler Publishers, Inc.

Chapter One

What Makes You Hungry?

START-UPS ARE BORN HUNGRY—their demand for money exceeds their supply. So start-ups need a different currency—a powerful emotional magnet that draws in talent.

Why would anyone go to work for a start-up? The hours are sure to be longer than they would be at a more established company, and the pay is likely to be lower as cash will be in short supply.

The simple answer is that some talented people are able to defer short-term economic gain in exchange for meaningful work with the possibility of a longer-term payoff.

Of course, this puts entrepreneurs in the difficult position of persuading talented people that they should stop whatever they are doing and work for them instead. And as we'll see in Chapter 3, entrepreneurs must also persuade capital providers to part with their cash to invest in their start-ups.

To recruit talented employees, entrepreneurs must mint emotional currency by way of three hungry start-up goals. These three goals answer the basic questions a talented potential employee might have before going to work for your start-up.

* Why should I join your start-up? Mission. The mission is the entrepreneur's most compelling case for why the start-up is going to achieve greatness. At the core of this case is a passionately held belief that what the start-up aspires to do is important. As we'll see, that passion might come from the desire to make the world a better place, the excitement that comes from being certain that the start-up could capture a great economic opportunity that nobody else has seen, or the simple desire to solve a problem that perplexes the founder.

* How will I get a return on the stock I receive in exchange for giving up my life to your start-up over the next five years? Long-term goals. Long-term goals describe a tangible way that the entrepreneur will measure the venture's success, say, five years into the future. Long-term goals include being the leader in an important new market, becoming a big public company, being acquired by a bigger company, or remaining permanently private and independent.

* How will you actually deliver on that promise? Short-term goals as a series of real options. Short-term goals are specific milestones that the entrepreneur sets over a period of months, and the idea of real options means that each short-term goal is a frugal experiment. Setting good short-term goals reflects how effective the CEO is at getting stuff done. Many of the start-ups I interviewed tend to view these short-term goals as a sequence of go/no-go decisions. For example, the first short-term goal might be to figure out the start-up's business model, the next might be to get customers to use or pay for the product, and the third to expand success from one market to five around the world. If the entrepreneur can figure out, say, the first goal—e.g., the start-up's business model—then she continues on to the second one. Otherwise, she shutters the venture.

MISSION: RESPOND TO MARKET OPPORTUNITY, SOLVE PERSONAL PAIN, AND FOLLOW THE RESEARCH

As Figure 1.1 illustrates, entrepreneurs have different ways of picking a start-up's mission.

Entrepreneurs get the ideas to start companies from three sources:

* In many cases, it appeared clear that the founders did not consider their emotional or intellectual connection to the start-up to be a sufficiently compelling reason to devote themselves to a company. Instead, they felt a need to go beyond that personal impulse and determine whether there was a big enough market opportunity to justify the investment of time and money in starting the venture.

* This is not to say that the ventures that were started purely to relieve personal pain or develop an intellectual interest did not eventually coincide with a market opportunity. Rather, these entrepreneurs were willing to defer identifying that opportunity at the time they started the company. Of the start-ups I interviewed, 24 percent sprang from a combination of personal pain and perceived market opportunity, and 10 percent were born of a combination of or intellectual interest and perceived market opportunity.

Let's take a look now at examples of each kind of mission.

Respond to Market Opportunity

Responding to market opportunity is the most common reason that entrepreneurs start companies. Their mission is to satisfy that unmet need better than the competition and build a significant enterprise in the process.

The specific nature of the market opportunity varies for each start-up and some are more studious than others when it comes to talking with customers to get external evidence to support their belief that the market opportunity is real.

Among the start-ups I interviewed were for-profits and social enterprises. And one interesting feature of these examples is that two of them— SoFi and m-Via—combine pursuit of market opportunity with a bigger social purpose. Here are some examples of the market opportunities that the for-profit start-ups perceived:

I saw an opportunity in the $1 trillion student loan market to lower the rates that students pay on their loans while creating an attractive investment opportunity for alumni.

—Mike Cagney, co-founder and CEO of SoFi, and former vice president and head trader of Wells Fargo. SoFi raises capital from alumni at colleges to help finance loans to their students.

ExtraHop was founded in early 2007; my co-founder and I saw an underserved market. We are targeting a large, fast-growing market.

After all, Gartner estimated that the market for network and application performance monitoring products hit $3.8 billion in 2011 and is growing at an 8.5 percent annually. And we were eager to solve the problem. We spent over two years working on building a product that would work well for the customers with whom we collaborated.

—Jesse Rothstein, CEO of Extrahop, a sub-$50,000 appliance that provides IT managers with real-time system health and performance information.

I see a big opportunity in a very fast-growing industry. IDC reports that between 2001 and 2011, the market for our product—virtualization storage— grew from scratch to $11 billion. Before founding Tintri, I oversaw the development of all server virtualization technology for VMware as its VP of R&D from 1999 to 2006. I recognized the problem server virtualization created for storage early on and resolved to shift my career focus to solve this storage dilemma. To that end, I founded Tintri—it's Gaelic for "lightning." My aim was to extend the benefits of virtualization from the server side to storage—what could be a lightning bolt of efficiency if carried out.

—Kieran Harty, CEO of Tintri, which helps companies store and retrieve information more efficiently.

While working at a mobile gaming start-up, I grew increasingly outraged as I analyzed the way the cross-border money transfer business has skillfully avoided disruption of its tactics over the last thirty years. I felt that it was unfair to exploit the weakness of people sending money home and became convinced that I could develop a service that would offer them a lower-cost, safer way to transfer money.

—Bill Barhydt, CEO of m-Via, which helps people wire money to their families in Mexico and other countries.

From these examples, the takeaway is simple. Start-up CEOs should set their start-up's mission based on their own experience. But the mission should be bolstered by some external validation: ideally, in-depth customer research that confirms that what is important to the founder will also be important to a sizable audience.

This same principle holds for social enterprises—set up not for profit, but to make the world better. What's different about them is that they face a unique challenge in their efforts to achieve what is most commonly a very noble social purpose. It's challenging for social enterprises to make enough money to perpetuate doing social good. Here are some examples:

One of the reasons I started PoverUP was that in the summer of 2008, I volunteered in a border refugee village in Thailand. That's where I realized that a little money—I bought 50 donuts for $1—could go a long way to helping poor people start businesses that would lift them out of poverty.

—Charlie Javice, co-founder and CEO of PoverUP, a social network for university students to get involved in social enterprises.

I developed the idea for a peer-to-peer donation service in 2005 while pursuing my master's degree in Industrial Engineering at Stanford after visiting Indonesia a few months before the December 2004 tsunami struck. Following the relief efforts, I saw stockpiles of usable medicine, large enough to overflow a football stadium, not only not being used but also costing Indonesia millions of dollars to dispose of as toxic waste. I started SIRUM to solve the supply chain problem that prevented perfectly good medicine from getting to the people who needed it.

—Adam Kircher, founder of SIRUM, a nonprofit that gets medication that would otherwise be dumped or incinerated into the hands of poor people in California.

A mother living in a rural village outside of Bangalore, India, gives birth to a baby two months prematurely. Her family cannot afford to go to the city hospital in Bangalore, so her husband, who raises silkworms that he warms under lamps, decides to care for the baby in the same way. A few days later, their insufficiently warmed baby dies. Stopping this tragedy—20 million low-birth-weight and premature babies are born each year—is the primary mission of Embrace.

—Jane Chen, founder and CEO of Embrace, which makes a sleeping-bag–like baby warmer that helps improve the odds of survival for premature babies born in developing countries.

Lacking the potential to attract people motivated by an opportunity to become wealthy, the missions of these social enterprises must be particularly compelling. And these examples do share the following common characteristics:

* They all spring from emotionally powerful and compelling stories about why the organization was formed.

* They attract talented people who want to help achieve that long-term goal.

* It is clear who will benefit from achieving the goal.

* The founders are likely to face a challenge as they attempt to maintain unswerving devotion to their long-term goals and generating sufficient cash flow to keep their organizations operating.

Solve Personal Pain

While the majority of start-ups I interviewed set their long-term goals based on a perceived market opportunity, some believed so strongly in the importance of addressing their personal pain that they went ahead with their companies without hard evidence of a significant market opportunity.

Here are some examples of the personal pain that spurred the creation of for-profit start-ups:

I got the idea for AfterSteps after a grandparent died. My mother started calling me in periodic spurts with her estate plans, wishes for various personal items, and requests for how to handle her body. I decided there had to be a better way. So I started AfterSteps to bring organization, completeness, and knowledge to the end-of-life planning process.

—Jesse Bloomgarden, founder and CEO of AfterSteps, a service that helps people prepare their loved ones for their death.

Before starting Huddle, I worked for a "big data" firm called Dunnhumby— it analyzed data for large retailers such as Procter & Gamble —where I led a business that grew to $60 million in revenues in three years. When the company was acquired, I left. I used some of the proceeds from the sale to finance Huddle's initial operations in 2008. I wanted to solve a problem I had at Dunnhumby—my 300-person staff could not work together on projects through a single, easy-to-use system. Huddle was started to remedy that problem.

—Alastair Mitchell, founder and CEO of Huddle, a service that enables big companies collaborate on projects.

I attended an all-girls high school in India and was then admitted to one of its top engineering programs, IIT Kanpur, India. There, I was one of three girls in a class of fifty computer science majors. I was shy and studied alone while the more gregarious boys collaborated. As a result, the boys, working together, could get answers in ten minutes to questions that I spent four hours solving myself. Piazza is my way of letting the shy and the gregarious of both sexes collaborate online. I believe that Piazza works better than wikis and threaded discussion groups that are often used for student Q&A.

—Pooja Nath Sankar, CEO of Piazza, a service that helps students ask questions of peers and professors and get the best answers at the top.

These stories all share certain common characteristics that typify entrepreneurs seeking to solve personal pain:

* The start-up CEOs each had a compelling personal problem and wanted to develop a business dedicated to solving that problem.

* The CEOs were willing to invest their time and money in developing a solution to their problems and did not let the absence of a clear market opportunity stop them.

* The CEOs assumed that if they could solve the problem well, they would find plenty of other people who would pay them for the solution.

While the long-term success cannot yet be predicted for any of these ventures, their goals serve a useful purpose. By choosing long-term goals that relieve their pain, there is little doubt that these founders will have ample motivation to solve the problem effectively.

And in these cases, it does not take a precise market size estimate for the founders to apply some common sense and realize that their pain is widely shared—even if the precise size of the market is not of great interest to them in setting long-term goals for their companies.

Follow the Research

A few of the start-ups I interviewed were started by people with PhDs who decided to try to turn their doctoral research into a business. While this is a fairly risky business proposition, there is often a chance that their original research can be applied to an existing problem for which there is not a particularly good solution. It is also possible that their work can create a market where one has not previously existed.

Here are some examples of how following the research spurred the creation of two start-ups:

Sifteo CEO Jeevan Kalanithi, a colleague from Stanford, and I were studying at MIT's Media Lab. He shared my interest in bringing physical objects such as dominoes back to interactive gaming. We wondered together why everything on our computers—email, files, and icons— were two-dimensional. We wanted to bring three-dimensionality to computing—to develop siftable computers that people could use their hands to manipulate—to sift and sort—like a pile of LEGOs. In the summer of 2009, we founded Sifteo to build products that would fulfill our vision for hands-on interaction.

—Dave Merrill, co-founder and president, Sifteo, which makes blocks with programmable screens that can interact wirelessly.

I took a leave of absence from my Stanford master's degree program in computer science after earning a BS in the field—I have four classes left—to start Loki Studios. At Stanford, I met an engineer who shared my passion for the idea of starting a gaming company that would take advantage of mobile technologies.

—Ivan Lee, CEO of Loki Studios, a maker of mobile Pokemon-like games.

It's not very often that entrepreneurs start companies to follow the research; however, they:

* Each had a strong interest in applying new technologies to games.

* All came up with novel ways to apply existing technologies to their interest in games.

* Assumed that if they could solve the problem well, they would be able to create a market of people who would be willing to pay for their solution.

While these intellectual ventures both got started without substantial research into the market potential for the products that they were developing, it is clear from talking with the founders that they would be happy to develop their products and get them working well. If they happened to find sizable numbers of other people who shared their interest, they would be delighted.

So, if you are an entrepreneur who wants to follow the research, you should consider raising capital from investors who share your interest in the field.

Solve Personal Pain and Respond to Market Opportunity

As noted previously, about a quarter of the companies I interviewed started companies to relieve personal pain and because they believed that there would be a big market opportunity in so doing.

Here are some examples:

I left my driveway at 9 a.m. for a doctor's appointment; I signed in, waited a few hours, and finally got in to see my doctor, who prescribed medication. I get back in the car, drove to the pharmacy, waited in a line for my prescription, and paid for it. By the time I returned to the driveway, it was 2:30 in the afternoon. A fine day, wasted. I was thinking about starting a new company targeting a big market and when I was returning from the pharmacy that day, I realized that health care would fit the bill. So I decided to start WhiteGlove Health.

—Bob Fabbio, CEO of WhiteGlove Health, which provides health care to corporate employees in their homes or offices.

(Continues...)

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Excerpted from HUNGRY START-UP STRATEGY by PETER S. COHAN Copyright © 2012 by Peter S. Cohan. Excerpted by permission of Berrett-Koehler Publishers, Inc.. All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
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