Are you also wondering about the sky-high valuations and exits some Silicon Valley companies are seeing for a little while now? Well, consider this a black swan - they are anomalies, outliers - but not the norm.
In Inc. Magazine’s latest issue you find this neat little infographic - which is eye-opening: Only 2% of all private companies being sold in the time-period from 1995 to 2012 fetched more than $2 million. A whopping two thirds got sold for less than $250,000. And this doesn’t take into account that a whole bunch of companies never make it.
Now - this is all not bad news. The challenge is - human bias is to believe that your startup can be the next Instagram. Which leads to behavior which values user growth over profits - and, unless you win the startup lottery (and your chances are probably as good as playing the lottery), will bite you in the backside.
So - just focus on building an amazing product which users love. The rest will come. Don’t fret an exit. Ever. It will happen - or not. And if you do things right, it doesn’t really mater.
A few weeks ago I had the great fortune and pleasure to pick Jed Christiansen’s brain for a good two hours. Jed is probably the one person on this planet with the best data set about incubator and accelerator programs around the world, the companies which go through them and the possible reasons why some incubators are so much more successful than others.
I fundamentally believe that most incubators (which seem to shoot up like mushrooms after a rainy late summer day) are destined to fail - and I also believe that it doesn’t matter.
Let me explain - and start with a disclaimer: The following is especially true if you’re building your incubator outside of the US and more specifically outside of Silicon Valley. With that out of the way - the reasoning is simple: The math doesn’t work.
Most incubators take a rather small chunk of equity for their investment and services (often in the sub-5% range). I believe the reason for this is that some of the super-successful incubators such as Y Combinator have “poisoned the well” by introducing these terms (and they do work for them - more about that later) and forcing the whole industry to follow suit. Also incubators usually take founders stock - i.e. stock without any preferences or protections as are often found in seed and VC rounds.
What happens is this - by the time a company has an exit, they have often gone through a couple of rounds of financing, diluting the original founders shares by 50% or more. Which means that the initial 5% our incubator held become a mere 2.5% or less. Now apply the typical VC logic that out of 10 companies you can count yourself lucky if one or two of them hit it big, three to four do okay and the rest goes under. Now - in most areas of this world a “good exit” is considered something in the $10m range (even in large markets such as Germany there aren’t that many $10m exits). Take into account that a portfolio takes time to mature (somewhere around 5-10 years for the companies to go through their growth phases and come to an exit) and start doing the math, the picture is rather bleak.
Here’s an example calculation: An incubator runs a class of 10 teams, investing $15k into each team and spending 3 months of intense work with them, running the incubator with three people as staff. Assuming that these people have opportunity costs of $150k p.a. (meaning that the people running the incubator could find work at this rate somewhere else) and taking into account costs for office space, etc. you easily have invested $350k into this batch of 10 teams. Five years later you might (this is a risky proposition - no guarantee that anything comes out of it!) make 2.5% on one $10m exit ($250k) and another 2.5% on three $3m exits ($225k), bringing you to about $.5m in returns. Potentially. With a rather high risk. The math just doesn’t work that well.
And that’s precisely why I think the incubator model doesn’t work. To make it work you would need to do two things - take a higher percentage of equity in your first round (much to the grumbling of the founders) and have the ability to protect your position by being able to do follow-on investments (i.e. you invest alongside other investors in the next rounds to prevent dilution of your equity position) - which requires money most incubators don’t have.
Now - why this all doesn’t matter…
Here’s the thing: As much as I think this is bad news for people building and running incubators, it’s perfectly fine for entrepreneurs and the economy at large. The worst outcome of this scenario is a bunch of failed incubators - which in turn have taught and enabled hordes of people to become entrepreneurs. And who knows - even if their first startup didn’t work out, they hopefully learned a lot and will be better off for their next one.
With all that being said - here’s another disclaimer: The well known and established incubators such as Y Combinator, TechStars, 500 Startups, SeedCamp and some others will be fine. They have built their models around these dynamics, have created very specific value propositions for themselves and thus their teams and they have unparalleled access to the market.
For quite some time now I find myself talking to entrepreneurs all over the world about the lessons we learned here at Mozilla, turning the unlikely contestant Firefox against all odds into a hugely successful product used and loved by millions of people.
I believe that our story holds a couple of key concepts which are highly applicable for startups of all colors. In the past I have used a modified version of John Lilly’s excellent “7 Lessons from Mozilla” deck. Over time I added a couple of lessons of my own - partly based on my work and understanding of Mozilla as well as personal experiences in the world of startups, venture capital and mentoring a ton of startups through programs such as TechStars, Seedcamp or The Unreasonable Institute.
The following deck is a first pass at uniting all those experiences and influences into a coherent deck. What do you think? What’s missing? What doesn’t make sense? What’s good and terrible?
A few days ago I had the great pleasure to talk at the inaugural tl;dr conference in San Francisco. The conference’s aim was to bring voices around the Post-PC revolution together.
In their own words:
With the launch of the iPhone we entered the era of the Post-PC device. This new generation of connected devices brought the promise of exciting new applications. And these days a massive rolling upgrade of the web into a fully fledged application platform is building incredible momentum, all under the umbrella of HTML5. We are still in the early days of this new technology cycle and it’s a time of significant opportunity. A time to think beyond the traditional web site. Tomorrow’s users will expect more.
In my talk I focussed on the risky reliance on the new platforms which are currently ruling this world and explore how HTML 5 is emerging as the de-facto lingua franca of the new era of connected devices and the Internet of Things.
My talk contained swear words and a quote by Bob Dylan. Enjoy!
And there’s another option for startups that don’t want to go public: Forgo VC and angel investments entirely and fund the company with the profits from your business. That organic-growth option may sound quaint, but it can still be quite successful. Indeed, VC funding is by no means necessary to fund a fast-growing company. In 2009 Paul Kedrosky, a Kauffman Foundation senior fellow and venture capitalist, looked at the Inc. 500 list of the fastest-growing companies in the US for every year between 1997 and 2007—a period that includes the VC boom of 1999-2000. He found about 900 companies in all, of which only 16 percent had VC backing. “Such companies almost certainly could have venture investors, if they wanted them,” Kedrosky wrote in a paper for Kauffman. In other words, the overwhelming majority of the fastest-growing companies decided that they didn’t need VCs.
For High Tech Companies, Going Public Sucks - WIRED
Good food for thought. And here is the quoted study by Paul Kedrosky.
One of the more complicated questions we ask ourselves here at WebFWD every time we receive a new application is: How innovative is the idea? And how do you measure this in an objective fashion?
A while ago I came across Doblin’s “Ten Types of Innovation” model - although it is by far not perfect, it provides a really neat, concise way to look at (and evaluate) innovation. The way Doblin’s model works is: For each innovation (project) you check them on each of the ten factors of the model (which fall into three broad categories: Configuration, Offering and Experience). Essentially you then make a binary decision - does the project innovate on the profit/business model? Does it innovate on the network? etc. The more boxes a project ticks, the more innovative and disruptive it will be. Clean, clear and easy. Not perfect - but usually good enough.
Harvard Business Review published an excellent infographic on the model and its application and if you like long(er) form content, the W.F. Kellogg Foundation has published a paper on “Intentional Innovation” (in the context of philanthropy and social impact”.
If you have ever seen a presentation which talks about customer acquisition or similar topics, you will have inevitably come across the infamous funnel image. The basic premise is: You start out with a whole bunch of prospects (people) and by virtue of the process they get less and less until you end up with your customer(s) (or whatever it was that went through the process). The image most often referenced for this is a funnel.
Now - when I last looked that’s exactly not what is happening in a funnel… A funnel doesn’t “loose” any unit of stuff I put in at the top. The whole premise of a funnel is to not loose anything (and turn your kitchen into a dump in the process).
Well, well… it’s like shooting fish in a barrel, right?
All you need to know about pitching your startup. Seriously.
Graphic from StartX - the Stanford Student Startup Accelerator
…and don’t forget to read Guy Kawasaki’s “Art of the Start”.
If there is a single thing, a single activity and a single metric you should care about when building a business (or a sustainable open project - which you should run like a business anyway), it is cashflow.
Cashflow is simple: Money in minus money out. If your cashflow is positive your business lives, if your cashflow is negative your business dies. Simple as that.
Yet I am befuddled by the lack of understanding for this essential fact of business. I literally haven’t had a single discussion about the actions which lead a particular business to get to positive cashflow or even the notion of cashflow with any of the many startups I’ve met over the course of the last couple of years. It seems that Silicon Valley’s obsession with growth and the vague notion of “we’ll figure out the business model later” led to a culture of people building companies with the single goal of selling them. And as Silicon Valley culture spreads throughout the world these days, founders all around the globe follow suit.
I cannot stress enough how important it is to get to positive cashflow as soon as possible. Unless you’re the next Facebook/AirBnB/Name-your-preferred-hot-startup and swim in heaps of venture capital (which to be honest you most likely won’t be - the cards are clearly stacked against you… just look at the stats) having positive cashflow means you are master of your own destiny. Cashflow puts you into the driver seat. It allows you to do the things you want to do. And even if you want to raise money to accelerate your growth it puts you into a position of power, not one where you need to beg for money.
So - unless you want to build your business as an acquisition target (nothing wrong with that - just know that the odds are heavily stacked against you) but want to build a business which lasts, read up on cashflow, understand the principals by heart and make it one of your key objectives!
And to that end - we’ll make cashflow discipline an essential part of Mozilla’s WebFWD program. Time to build the next crop of 100 year organizations!
P.S. Here’s some recommended reading for you - Don’t Build A Company To Sell, Build It To Last by Kanyi Maqubela and anything you can find by Norm Brodsky (a columnist at Inc Magazine), e.g. this piece on cashflow</a>.
Two days ago I mentioned that I intend to write a book about Open Innovation (the Mozilla way).
I am thinking about finding a company (ideally not in tech) which is interested in implementing an Open Innovation strategy into their business process and which would like my support/help to do so. It would help me refine my thinking and gain insights into challenges, problems and opportunities outside of Mozilla’s world and hopefully would help the company on their own journey (and make the book more useful).
This is all still pretty raw in terms of thinking - but do let me know if you represent such a company (ideally mid to large size) and are interested.
A little while ago I met the wonderful people from SecondSight, a Dutch think tank which publishes a quarterly magazine/book on future trends (their tagline is rather fittingly: “Open Your Eyes to the Future”). They asked me to write a piece for their latest edition titled “New More Free Power”.
After a long, engaged discussion with the team we settled on a story on the rewards you get from growing your mission as opposed to your headcount (i.e. you choose to stay small and forgo certain aspects of growth).
Here’s the article:
Your organization is growing rapidly, which is good. Or so you think. When organizations (including companies as well as non-profits) grow, they tend to hit plateaus they must pass to successfully continue on their chosen path. Unfortunately, growth rarely (if ever) happens linearly, and to scale an organization from garage to multi-national corporation you need to accomodate massive changes along the way. You will have to change the way you operate. Often this change is painful. When you were three people in a garage everyone knew about and helped out with everything. This won’t happen when you run and manage a multi-national corporation. Growth will change your corporate culture from one built on deep levels of trust to systems which include the awkwardness of more formal, scheduled performance reviews. This change will touch the very root of your organization: when a little sandwich shop that you start in the hopes of changing the world one sandwich at a time evolves into a national food chain, you start measuring success in three-letter acronyms. This challenge is compounded at the point you no longer become the sole master of your own destiny: shareholders demanding quarterly growth and board members calling for industry benchmarking change your focus. You inadvertedly find yourself, as Author Steven Pressfield once described, “in the belly of the beast.” And this beast demands to be fed by further growth. But your evolution need not occur in these ways. Organizations choose not to grow at any price. These organizations put their principles, values, beliefs - and quite often a specific mission - first. Take for example the backbone of Germany’s industrial success, the Mittelstand (loosely translated into English as “SMBs”: small- and medium-sized businesses). These companies are typically just a few hundred employees strong. They pride themselves in producing to the highest quality standards. They are the reason why “Made in Germany” is such an accolade. And they choose to be big fish in small ponds. They are typically family-owned businesses with strong beliefs and principles. These are companies where the founder typically hangs in the CEO’s office and is often his great-grandfather. What’s notable is how these companies deliberate choose to prioritize values (such as quality and the way they treat their employees) over growth. Quite a few of these companies would be highly attractive acquisition targets for large multi-national corporations or prime candidates for a public listing on the stock market. Yet their owners decided to grow slowly, organically and only to the extent that their values & beliefs are preserved, if not advanced. The Open Source movement is a fascinating angle on this approach to growth. In Silicon Valley (and now, effectively around the world) a growing number of founders, dissatisfied with the way business is done, start companies with Open Source at its core. They are out to change the world - but they are doing it under their own terms, with strong beliefs, cultures and missions. Mozilla, the maker of the popular Firefox web browser, is one of these organizations. Founded as a non-profit with a mission to “provide choice and innovation on the Internet,” Mozilla took on the mighty Microsoft Corporation and turned a virtually monopolized browser market (thanks to Microsoft’s Internet Explorer) into a thriving and competitive ecosystem. Firefox is a feather in Mozilla’s mission cap. To continue building on its mission, Mozilla is creating WebFWD, an incubator and accelerator program for mission-based Open Source organizations. Among the first organizations Mozilla is fostering is CASH Music, a non-profit startup founded by musicians to help fellow independent artists market themselves on the Web, effectively making artists masters of their own destiny. When CASH grows, Mozilla grows - not in revenues or headcount, but in expanding its core mission. Let’s return to that sandwich store. There is a wonderful story from the founders of 37 Signals, a software company which itself chose to grow slowly, carefully and organically. Their neighborhood has a sandwich shop which makes the best sandwiches. They use carefully-selected ingredients and ensure each sandwich is freshly-made. Customers love the little shop. Every day at lunch time long queues form outside of the shop. Usually the shop sells out long before meeting all the demand. They are often asked why they don’t produce more sandwiches, as higher production would allow them to serve more customers, grow their business and ultimately make more money, The owner’s response is: “it wouldn’t be the same shop. It would hamper quality as we couldn’t deliver the same product for our customers.” They wouldn’t be able to change the world one sandwich at a time. Building your organization around true values, beliefs and a mission gives it a human quality. Which can be far more valuable than growth and sheer profit. And just what we need. As human beings.
It all began with a rather innocent question: After experiencing the amazing qualities of operating completely in the open here at Mozilla, creating and leading some very exciting Open Innovation projects such as Mozilla’s Design Challenges & since last year our WebFWD accelerator program and thinking, analyzing, discussing and talking more and more about Open Innovation and how we do things here at Mozilla… wouldn’t it be great if we document this knowledge and thus enable more organizations to benefit from it?
This lead to a slightly less innocent tweet:
And so here we are – I am going to write this thing. And use this blog as a testbed for ideas, text fragments, discuss interesting source material I find elsewhere and generally rant about my inability to express myself properly in the English language.
To be clear: Anything I write will only be possible because I stand on the shoulders of giants. So many awesome people have done so much amazing work on this - both inside and outside of Mozilla. I am just a messenger.
Join me for the ride - and please provide feedback!
As you might know I am pretty obsessed with good artisan coffee making (espresso to be precise). Recently I found myself in the middle of a long discussion about the “right” equipment.
Good coffee is pretty much a function of 1) the right beans, 2) the right grinder, 3) the right machine, 4) the right temper and 5) skill. If you ever want to go down the espresso rabbit hole - here’s my current top 5 list.
Today I had the great honor & pleasure of keynoting the Technology Convergence Conference 2012, talking about Open Innovation, Mozilla and how to apply all this to your business.
The summary of my talk reads:
Open Innovation, Crowd Sourcing, Community-driven Innovation, Chaords (describing organizations which are a mixture of Chaos and Order) - the world around us is using "open" as the new default. Fearless leaders are unleashing the beast which redefines the core of many innovation practices. Pascal Finette recounts the inspiring story of Mozilla, the Open Source non-profit organization which managed to break Microsoft's stronghold on the browser market and today has more than 450 million users worldwide. Alongside this fascinating David vs Goliath tale you will learn how Mozilla won by being completely open, working with the wider community and redefining how innovation can be done. At the end of his session, Pascal will have enabled you to tame the beast and make it work for you and your organization.
Here’s the deck: