Types of Risks, Lecture by Jerry Kaplan / Winster (2003)

Transcript



So let me start with the five biggest mistakes that entrepreneurs make. The first is having unclear goals and an unclear mission. Now, I know it sounds like something you might read in a textbook, but I really find it very valuable when I founded a company with co-founders, to literally sit down and write out what are our goals, what do we intend to do, and in particular, what is our measure of success. When do we say, "Yup. That's a successful company." I'll think of anecdotes while I'm doing this. The last time I did this was for the online auction company Onsale which was the first online auction company on the web. I remember I sat down with my co-founder and we said, "Geez, among the other goals that we had, one of them was, if we can ever build a company up to be worth $20 million and we can sell it, that's a terrific success. We're really happy about it." He brought that to me and reminded me of that the day our market cap hit $2 billion. So sometimes you don't meet your goals. But it's very important to understand that because you'll find that even though you think everybody has the same goals and they're in it for the same things, sometimes they're not. And you just write it down, you can always bring it out, read it often. It's very valuable. The biggest mistake is not being clear on what your goals are. The second, a very common error that I've seen particularly young entrepreneurs make is trying to prove that you're smart. You're really doing it for ego gratification, not because you want to build a company, or you want to do something great or you want to solve some particular problem or bring technology to a needy world, or whatever it might be. And trying to prove you're smart is a really bad reason to start a company or to undertake some project. One of the problems that occurs under those circumstances is typically you don't want to share the credit with other people. Other people will very definitely be due credit under all circumstances. By not sharing that credit, you don't get their help and you don't get their support. The third element is greed. Doing it for money. This leads to a couple of key mistakes that I've seen people make. Probably one of the most common is not raising enough money. "Oh, we can do it on the cheap. We don't really need that much capital." The reason people try to do that is they're trying to keep their equity. "My God, I'm working so hard, I should have 100% of this pie." But the truth is, the question you should ask whenever you go out to raise money is, "Is my company or my organization, my venture, going to be worth more after I raise the money? Is my share going to be worth more than it's worth before I raise the money?" Because a company is really kind of a little engine. It takes in resources and it puts out value. If you can take in a million dollars, and you can convert that into 2 million dollars in value, everybody wins, regardless of how much of the company you had to give up to get that million dollars. So not raising enough capital is very important. And the second is not distributing the equity as widely as possible. The truth is that if you're successful at all in your company, you will do just fine. There's an old joke in the valley, I don't know if this is circulated around here, that equity is like shit. If you pile it up, it just smells bad. But if you spread it around, lots of wonderful things grow. So hoarding the equity and being stingy about giving it out is a big mistake. If you focus on success in your organization, then the money will come. That was three. The fourth mistake that I've seen people make is that they hire people that they like rather than people that they need. Now, many companies have started right here at Stanford by people who are graduating from whatever program they're in. They have some friends that they really like and say, "Let's go start a company so we can stay together. So we can work together. We had a great time these past few years, we want to continue to do it." I got news for you. A company and a venture is not a social club. The problem is that if you hire only people you like, you will not be hiring the critical skills that are needed to build a venture. You will tend to hire people who are like you and don't bring to the table different skills and different points of view which are so critical to being able to integrate into the activity that you're involved in. One of my greatest accomplishments, I think, over the past, it's going to be a long time, 20 years or so, since I've sat in these lights. The building wasn't here, but I sat there anyway. I've worked with people that I truly detest and have done so successfully for long periods of time. And it's been great. You have to learn to respect people that you don't like. I think that's the key message. The fifth biggest mistake that I've seen entrepreneurs make is not knowing when to let go. Now, building a company is very much like raising children. Anybody here have children? Oh my God! That's terrible. We used to have a class on contraception. You have children and you're students, damn, that's really rough. That's rough. When I had kids I couldn't work anymore. That was it. Anyway, children, as you learn, if you raise children, which I hope you never do. The thing about children is that they change as they get older. And your relationship with them changes. The way that you relate to them changes, the value you can add to them also changes. The same thing is true about companies. Companies are like children. The fact that you may be the perfect start-up CEO usually does not mean that you're even a good CEO of a hundred million dollar revenue company. The things you have to do and the skills that you need are very very different. And so one of the most important characteristics that you need to have is a realistic self-assessment, what are you good at, what are you not good at. Fill in the things that you're not good at by bringing on people who have those skills, whether you like them or not. You know, you may detest marketing people, but you need a good one. OK. Well, go get one. You have to have realistic self-assessment so that you know when to step aside. One of the finest comments I've ever heard here in the Silicon Valley was talking to somebody who seriously said, "My ambition in life is to be a vice president in my own company." I think that says it all. Wanting the company to grow big enough so that his skills be best applied in one particular role and the other roles would get filled in by other people. So those are the five biggest mistakes that I've seen entrepreneurs make.

Transcript



So what are the best qualities of successful entrepreneurs? The most important quality that I've seen is a belief that you can make a difference. Now, that may sound obvious in some sense but you'd be surprised most people don't think they really make a difference. It's not important, folks. It's not important to try. Actually, most people in this room, probably not in that group, you have to try hard to get to sit where you are. I have to wait 20 years for them to build it up. But you have to believe that you really can make a difference in the world, and that you're going to try to make a difference. And that's one of the most common characteristics I've seen of successful entrepreneurs. The second is, what I might call an action-wise, a passion for going and making things happen. Now, I was at Stanford. I was at the University of Pennsylvania, probably few other places that I've logged onto my memory after years of therapy, but maybe the people that I met in those places really just sat around and knew things. And I found that I've grown to a point where I don't really respect knowing things. Being smart is not a good thing. It's doing things that matters. So I don't care how many degrees you have; I don't care how many courses you've taken; it's almost worse if you get that education or know things and you don't take action and put that to work and try to do something valuable with that information. And the entrepreneurs are the ones who say, "I'm going to go put on a play. I'm going to make it happen." That is the second most important characteristic. They just don't like sitting around and discussing. They like getting out and doing. I've often thought of myself as, self-described myself as an industrial pyromaniac. I like to burn up businesses, burn up markets with new ideas and different ideas that change the world. Sometimes you just wind up with a pile of debris but it sure is fun trying. Also in this category is a subtle concept that I would call urgent patience. And it sort of brings to mind the story of a fellow who was a gardener at a large estate in England many, many decades ago. And the owner of the estate came over and said, "I thought you were going to plant an apple tree over here." And he said, "What's your rush? It's going to take a hundred years for that tree to grow." And he said, "Well then, you better get started right now." That's the attitude that I think is important for entrepreneurs to have, that action-wise. The third is unjustifiable optimism. You have to believe that you can succeed at what you're doing in the face of large evidence to the contrary, and lots of people telling you, "That's ridiculous! Don't even try." If I had listened to all the people that told me, "You're going to do auctions in the Internet? What does that mean? That's crazy!" I never would have gone to business. In fact, the guy who is speaking on, was it Saturday? Friday? Jeff's coming? Jeff is a very interesting guy. He was a man for the times in one very interesting respect. Jeff had the advantage of having no business experience whatsoever. So he had no fear at all. He would just leap and jump to things he was doing back in 1997 when I started Onsale, he started Amazon, and some other people are starting companies. I mean, we would look at him and go, "This guy is nuts!" You know, you'd have to be just kamikaze to do some of the things that, he would make deals on the assumption that he would raise money to pay for it later. Now, unfortunately, those of us who had business experience were hampered by that experience because he was exactly the right guy at the right time. And it was precisely that recklessness that was the key element of Jeff's success along with his intelligence and his understanding of the market and his drive, and other little things like that. The fourth characteristic that you need is a tolerance for uncertainty. Now, the thing about starting a company is that there's always too many variables to control. There's never enough information, never enough time to look into the things that you need to do. And you'd be surprised it's very stressful for most people to live in circumstances of total uncertainty. Are you going to have a test tomorrow? Are you going to sign for this class? Are you going to get into the school you want to go to? Whatever it is, any kind of uncertainty, sometimes you'd feel better just knowing the answer even if it's "No." Well, a good entrepreneur tolerates uncertainty very well. And it's just a personality trait and a skill when you go to bed at night not knowing how things are going to turn out in the morning, and you feel fine about it. The fifth and last of the qualities that I've seen in successful entrepreneurs is a genuine concern for other people. What this creates is a reserve of goodwill among the people around you so that they're willing to work hard and give a little extra because they know that you care about them and what they're doing. The best entrepreneurs genuinely care about the people who work in their companies and about their customers. And you can't fake that kind of thing. That's one of the best characteristics that I've seen in successful entrepreneurs.

Transcript



The last area I want to talk about is the five critical skills that entrepreneurs need. Now the first is going to sound like it's out of a textbook, but the definition may be a little bit surprising. And that is leadership. Now, I don't know how much stuff I read about leadership and I never really understood it until I saw people who were genuine and true leaders. Because leadership only comes into play when things aren't going well. And the key aspect of leadership is the ability to build a consensus in the face of uncertainty. Now, oddly enough, I'm not actually very good at this, but I have known many people who have a remarkable ability of taking a large group of people who have divergent opinions, all of whom have good evidence for their positions, and where there really isn't an analytically determinable course of action, and they can stand up in front of that group and say "Okay, we know that this is risky but we're all going to get together and we're going to go and we're going to do that." And that is what leadership is about. Where everybody goes, "Well, I didn't really agree but you know what, he's right, we got to do this together and we got to go make it happen." And that is the key aspect of leadership. Since I really haven't learned it well, I don't think it can be taught. I think it's a personality skill about being persuasive and that's a really critical skill. To be able to bring together people of divergent opinions under uncertainty and get them to agree to attack a particular problem. The second skill you need is communication. Everybody in your organization has to know what their job is and has to understand in some - I forgot the word - this is the problem. When you think of the word, raise your hand. Even in some unusual way, everybody in their organization has to understand how what they are doing really contributes to the success of the organization. Now, what you will find if you run a company is you think you've made everything clear. And you think you've gotten your messages across. And you think everybody knows what's going on. It's really really hard to communicate these things. And people don't necessarily understand it. And you have to keep hammering on your messages, day and night, everybody that you need to communicate to. You have to talk to them. You have to explain to them why it is that staying late on Friday to make sure those extra boxes get shipped is going to make a difference because it's going to arrive on Monday instead of on Tuesday and maybe that's the end of the quarter and you need to get the revenue in, or whatever it might be. To explain to people why what they're doing has a direct effect on the results that the group has is a very very important thing. You're constantly communicating, constantly connecting the dots. You're over talking to one guy, "Hey, you know, you're working on that. There's a guy here who is doing something similar. They need to talk to her, and you can share. You don't need to do it twice." I'm wearing two microphones right now. Both of them are for video taping. The first question I asked is why don't they just have one camera and make one video tape? Hey, you know what? That's the difference between a university and a company. It's redundancy. Okay. Wouldn't happen in my company. We would never tape something twice. The amazing thing is if you watch both of these tapes side by side, they're going to be different. Worst part of this is when I make myself laugh. The third critical skill that entrepreneurs have to have is knowing when to make a decision. Now, this is a very interesting thing because usually in your life, you're not faced with this problem. But when you're running a company, you're faced with it all the time. If you make it too early, that's a mistake. You make it too late, that's a mistake. And the emotional state that most people have would drive them either to make it too early or too late. Let me be specific. The hallmark of the amateur is to make decisions before they need to get made. The reason is they're confused and feel inundated by all of the complexities around them. And they have a visceral desire to simplify the situation. And in simplifying, the usage of the word simplify in this situation is to make a decision prematurely. Ok, now we know when we're going to release the product. Ok now, what do we have to do? Well maybe that wasn't the right time to make that decision. Maybe you should wait another few weeks until you have a little more data. Now let me go to the other extreme. There are people typically of an academic style who make the opposite problem. They won't make a decision until they reach the point where they feel like they have enough information that they have confidence that they are making the right decision. And that is often, usually, making it too late. So, one of the skills you always have to ask yourself when you're in a position of leading an organization is "Is this the right time? Do I need to make it now? Will it help the organization if I make it now? Will I have more information in time when the consequences won't be bad?" And that's the kind of calculus that you have to learn and not react emotionally like "Oh my god, I got to make a decision so everybody could sleep at night." Or "How can I make a decision, we're not going to know until tomorrow whether or not something happened." Bad idea. The fourth is really a critical skill. It's doing teamwork. It's about trust. It's about delegation. It's about supporting the people around you and believing that their skills are skills that you don't have and most important, knowing that sometimes they know better than you do. Just because you may be the CEO of an organization or the vice president of a division, whatever it is, you don't have a monopoly on what's right and what's wrong. And it doesn't mean that you know better than the other people who work for you. You have to learn to let the intelligence of the institution, of the organization, to bubble up and most of the good ideas actually will come from within. Like people who have direct contact with the customers, people who have direct contact with suppliers, whatever it might be. Those are the people that you have to trust and you have to listen to and you have to follow them. Being a good leader means being a good follower sometimes. You have to follow the people who have the skills and have the knowledge, regardless of where they sit in the organization chart. My last point is critical skills in your ability to telescope. To be able to focus in on some little detail that needs attention and take care of it and then be able to telescope back out and see the big picture, understand how that fits the big picture. Related to these two last points, one of the guiding principles that I've used in starting companies is to think of myself, understand that I am an employee of the company just like everybody else. I'm not special, I'm not different. And no task is beneath me. I can remember washing the dishes in the sink because it needed to get done on a Friday afternoon and everybody else had important stuff to do. And people are often surprised. "Hey, the CEO cleaned the kitchen." Well what is happening? What does that tell you about what kind of attitude I should have as hypothetical employee? If the CEO doesn't think it's beneath him to wash the dishes and make sure the kitchen is clean. So, if you think of yourself as an employee just like everybody else in the organization, that's a great way to then trust to do teamwork and to support the people around you. And also, represents your ability to telescope. To give worth to small details and come out and look at the wide details as well.

Transcript



Sales skills can mean a lot of different things in a lot of circumstances. When you need to sell security equipment at airports is very different than when you need to sell Tupperware door to door. Some of them are athletic skills, some of them are social skills. The answer is, of course, it's very important. Do you have to have those skills? Let me come back to one of the points that I failed to make but tried to make. You don't need those skills if you're starting a company. What you need is the ability to attract somebody who does have those skills. And the critical fit skill for you is knowing what you're good at and what you're not good at. You're starting a restaurant, are you going to work in the kitchen? Is your skill cooking and you're going to hire the maitre d'? Or are you the maitre d' and you're going to hire a chef? That's the important thing to look at. Sales, sure, it's very important. It's different in every case. But what you need in starting a company is to recognize what kind of sales skills, who can you get that can do that. And remember, probably, that's not the kind of person you'd particularly want to socialize with, or you don't like. So that's my advice and it's very true.

Transcript



If you follow what's called the deal flow at the local venture firms, what you will find is that virtually every idea is repeatedly proposed over and over and over again. Maybe in slightly different form, in a different twist, using a different enabling technology. But the truth is that just about every idea that turns into a real company, a lot of people have. But what happens is, typically, these companies, some center companies get financed over a period of time and they wither and die, wither and die, wither and die, and then one of them hits with essentially the same proposition. And then anyone that comes after that typically can't succeed or rarely succeeds. The timing is very very important. And it's extremely difficult to call. It has to do with the confluence of a lot of different factors which include enabling technologies, awareness of the customer base, its consumers, that kind of thing, like the TiVo. I mean, is that a good idea, when is it a good idea, are people willing to accept it. That's a great example, because I think it's been proposed continuously for 25 years. Other factors, one of which is perhaps the most interesting, which is fashion in the investment industry. Because that drives, more than you might suspect, what kind of companies get financed and what's going to happen and how successful they're going to be. I mentioned Amazon. Amazon engaged in a process of rapid expansion, and that's a polite way to put it, during a time, when it so happened, that endless amounts of capital were available. If you had gone in 1996 or 1997 when Jeff started that company, and said I want to raise a billion dollars and put it into information technology for building this company. I can't even begin to tell you how ridiculous that would have sounded. So timing is critically important in starting a company and it's very very hard to judge, when exactly is the right time? When is it going to be the right time to put applications for your cell phone? This has a VGA level camera in it. I'm selling them here at the back. When is the right time to start a company to go do that? Very very hard to say. The right time will come, but timing is absolutely critical and getting it right is hard. The idea doesn't stand alone, independent of the timing and independent of the investment community, the investment fashion. Those things all have to come together in the perfect way in order for you to be successful in building your company.

Transcript



There are many kinds of risks that you have in starting a company. There's technical risks, there's financing risks, there's market risks. Those are some major categories, this is the stuff you will learn in business school. The trick is get the risk out as early as possible and take as few risks as possible. Back to the GO example, that had high market risk, high technical risk and high finance risk. It was one of the dumbest ideas I ever undertook. But the fact is that you want to get the marketing risk out as early as possible. And if you've got a great a product, then you've got to go explain to everybody why it's great and what they've got to do with it. If it's not obvious to them, that's just one more risk that you have. You just have to weigh that along with everything else. I mentioned TiVo before, I don't know why this is on my mind at the moment, but that was a great example. Anybody here have one, or a digital video recorder? OK, there's several people. The rest of you all use your PCs to rip the stuff off I guess. How many people here who have one think they can live without it? One. OK. Two. OK. Most people who try that, I don't know if it's such a good idea, once you start to use it, you're hooked. That's it. I can watch an hour long show in twenty minutes. And you know what? It's just as bad. But the fact is, that's an idea where it was very hard to explain, to get the market going. "Why do I need to buy another box to do this? It's recording shows. Can't I do that on videotape?" It's not the same thing. Little tiny changes in the way technology's handled make a huge difference in the effects that it has in terms of having a market. That was an example of a great concept. Terrific buzz. But you had to go out and explain it to everybody. And it's still not where it will be or should be, precisely because they had to go out and build a market for it. So, you're better off picking things where people know the market, or they accept that they need something. "Yeah, I need a microwave." "OK. Well, I've got one that cooks stuff in half the time." That's an easy sale. I remember trying to get a microwave for my mother twenty years ago. It was like, "Why do I need that for? I have a stove. I don't need a microwave." She hadn't experienced it. Now she only cooks in the microwave and the stove doesn't work. If I have one final piece of advice for you on this, never eat my mother's cooking.

Transcript



What do I think about the transition from what you typically call like an R&D phase. One of the most interesting aspects of that is you often meet different people. Different people become more important, the roles change when you go over that kind of a transition. Planning for that and managing for what is important. The last company that I started on, we hired a bunch of people. Now when you're starting a new company you are small and there's not enough money and it doesn't mean that you have an office when you're interviewing people at Starbucks. You know, it's hard if you come aboard. And one of the carrots you may be tempted to throw out in front them is you say, "Ok, I'll make you the vice president in sales if you join us." I can be vice president in sales. That's great! But the problem is they may be good vice presidents in sales when you're trying to get three test customers and not a good one when you are trying to hire a field force that has to be in 17 different regions. They have no experience with it, they don't know how to do it and they are probably not good at it. So what I did with the last company is I didn't give into that temptation. Everybody is hired and most senior people are director of this and director that. And the reason or two is we are going to make you rich even if we don't make you ego-happy because we're going to be so successful that we have to hire somebody else who has been doing that for 20 years at Oracle or Cisco or wherever he might be to be vice president of sales and you'll be director of sales. You can learn a lot and if it upsets you just always remember this: you have 20 times as much stock as that VP. And that's a great argument. So be careful when you hire people early on to recognize it as the company grows, you've got to change the management. You have to bring on people with different sets of skills and that's what you do with those transition points. You are about to scale it up? That is when you bring in the heavy hitters and the bigger guns.