Shootin' from the Don't

I was a bad kid.

Not like a ‘terrible,’ beat people up, deal drugs, got to juvenile hall kind of kid… but a naughty kid.  I may have egged a few cars, thrown parties when my parents were out of town, vandalized things here and there and snuck out/joy rided in cars before I had my license.  It was me and my closest group of friends, including my brother.  We had a little gang.

As kids, my brother coined a term about the kinds of people we would let into our “gang.”  He said, we should only let people in who we would “Rob a Bank” with.  He claimed this as the perfect test, it tested everything you’d want to know about someone to let into your group.

As of today, I’m going to borrow this term and apply it to PICKING A CO-FOUNDER/EARLY STARTUP HIRES.  Co-founders/Early Startup hires should be people who you would ROB A BANK WITH.  The more likely you’d rob a bank with someone, the more you should found a startup/hire them into your startup.  So what all do you evaluate with this test?

• Trust - arguably the most important thing for a co-founder, you NEED to trust this person with potentially a lot of money/opportunity or to get your back in case things go wrong.
• Intelligence – you wouldn’t want to rob a bank, or start a company with, someone who wasn’t smart.  ’nuff said.
• Creativity – think about it, you’re coming up with a master plan to go through the vents, wrap around the building and break into the vault… you need creativity.  Startups are the same.
• Hunger – face it, no one is robbing a bank unless they REALLY WANT IT.  Same thing for starting a company.
• Courage – it takes a lot of balls to rob a bank…slash start a company or work for an early stage company
• Instincts/Thinking on feet – when you rob a bank, you need to be able to think on your feet.  Same thing when starting a company.
• Communication – you need to able to plan, talk, etc as you both execute the robbery and also plan it.  Same thing for a company.

Really the list goes on and on… focus, planning, complementary skill set, etc, etc…  Rather than the “Rob a Bank Test” being for naughty teenagers choosing who to let into their group, I think this test is best applied to STARTUPS.

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Above is a chart of the stock performance of two companies, since 2003, which compete in the same space.  For now, we’ll call one “blue” and the other “red” (hint: this will be ironic later.)  They are both consumer facing companies and brands which VIRTUALLY anyone would recognize.  They are large, well known, serving in a billion dollar industry.  In my opinion, there is probably no better picture which captures the answer to my question “What does disruption look like?” So what are these two companies?  (write your answer down.)

Since it was funded in the late 90s (it was a dotcom baby), blue has championed a disruptive model to service its customers.  It’s leveraged technology (the internet)…  It’s got a unique culture, listens to its customers, innovates and has grown rapidly.  Red is like a dinosaur… it has moved slowly, never properly embraced technology or change and is generally, poorly run.  Blue has disrupted an industry with technology (but not just technology) and plowed its competitor into the ground (literally, red is on the verge of bankruptcy…)  This is a textbook case of innovation/disruption of a small company that has a clear mission/objective and vision going after the incumbent and CRUSHING IT.

So what are these two companies…drumroll…

Blue is NETFLIX (NFLX)

Red is BlockBuster (BBI)

(see, ironic.)

So, what can we learn from this great disruption example?

1. Think LONG term… here is a great article which touches specifically on one guy you might have heard of, Warren Buffet, and his perspective on Blockbuster.  Here is the key excerpt:

Then he stood up and walked over to his desk, where he showed me two framed letters, one he had sent to Mr. Buffett, and the Oracle of Omaha’s reply. They were written in the fall of 2000, shortly after Viacom had spun off its Blockbuster unit. Mr. Barsky had bought the stock — and then had written to Mr. Buffett suggesting that he buy the company.

Mr. Buffett sent back a one-sentence reply: “I’ve thought about the business a lot but have never been able to come up with a conviction as to where the industry will be in 10 years.”

“Ten years!” Mr. Barsky said. “I think of myself as a long-term investor and I have a two- or three-year horizon.” He shook his head. “In addition to an outsize intellect, Buffett has something that very few investors have. He has a temperament that makes him suitable to being a great long-term investor.”

The takeaway is obvious (simple but not easy): whether investing in a company or starting a company (and really building a company), THINK LONG TERM.  Think about solutions and where your industry will be in 10 years.  Understanding this will help you be a leader in your industry and steer your company better.

2. Innovate. Yes, its an overused term.  But that doesn’t make it not true.  Companies which look to solutions and constantly innovate win.  That’s the bottom line.  Read anything about NetFlix and you will see, clearly, that they are not relying on their DVD-by-Mail biz.  They are VERY focused on the next step: streaming.

3. Timing is critical/Get it done (assuming you also do 1 & 2.)  While NetFlix is focused on streaming movies (and they probably realized that back in 2000.)  They realized that the internet (and maybe users) weren’t ready, so they went to DVD-by-Mail (which by the way, must be a massive operational headache.)  This is something we’ve seen clearly in performance marketing… while we’d like to jump to the most innovative ideas, we realize that we must play ball with the industry as it is today and then drive innovation as we grow and have conversations with our clients.

4. Culture matters. Again a cliche… but it matters and works.  Netflix has heavily invested in its culture.  If you haven’t yet, read this document which outlines (in detail) NetFlix culture.

(its worth the 120 pages.)

I’m sure there are more takeaways from these two companies and their story of disruption.  Would love to hear thoughts and additional examples in the comments.

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I love asking weird and provocative questions to prove a point.  This one is no different.  So who is the Richest Man in New York City?

(Take a second and write your answer down.)

Is it the famous financier and founder of the Blackstone Group (Arguably, the best private equity firm in the world?)  Steve Schwarzman

Nope, at a Paltry $4.7 Billion… he ranks #10.  With that in mind, forget about the CEOs of every large investment bank, including my former employer.  They’re not even worth $1 Billion.

Is it the guy who figured out the financial crisis WAY before everyone else and shorted the whole market?  John Paulson

It must be arguably one of the greatest investors (or philospher, if you ask some) of our time, right? George Soros

If you said any of the above, you would be WRONG.  For those of you who guessed MAYOR MICHAEL BLOOMBERG, you are correct!

“So what?” you say.  I think this fact is super important and points out a number of things any business man and especially entrepreneur can takeaway.

Here are the two most important:

1. Creating versus Finding Value. In NYC, a city which presumably has the most (or used to, at least) millionaires per capita mostly due to the finance industry, the RICHEST man is the ENTREPRENEUR who solved a need that all these financiers had.  This point is especially important to me because I left finance, mainly because I didn’t like just finding and shifting value, I was more excited about creating value.

2. The Picks and Shovels. THIS IS ONE OF MY FAVORITE POINTS.  The bloomberg example illustrates one of my favorite points about starting a successful company: “The one who gets rich during a Gold Rush is the one who sells the picks and shovels.”  A Bloomberg terminal is the ultimate example of this… millions of financiers rushing for Gold and their most trusted shovel is a Bloomberg terminal.  In fact, the 3 other billionaires I listed probably use their Bloomberg daily.  I like to keep this in mind when finding great biz ideas: Am I rushing for Gold or selling the picks and shovels?

There are a number of additional, notable points I believe this example represents:

• Similar to picks and shovels point, INFORMATION is the most valuable asset (look at Google.)
• Bloomberg is a pretty special company.  Stayed private and closely held, very cool culture and incredible customer service.  They price ALL of their terminals at the same price, no negotiation EVER (seriously.)  Despite its monopoly, Bloomberg does not rest on its laurels… it innovates.
• Great example of technology serving a need (and good timing.)
• Extreme cash flow business with clear business model (subscription model great)
• Great example of tool whose value is WAY higher than its cost as a % of Revenue.  To be more specific, the average revenue for a traders ‘seat’ on Wall Street is probably… $25M?  Cost of Bloomberg: $13K per year.  That’s .05%!  And any trader would give up his left arm before he’d give up his bloomberg (ask one if you don’t believe me, I was the same way…in fact, as soon as I have enough money, I’d gladly pay the fee to have it, its amazing!)
• Network effects: If everyone has a Bloomberg (and is on Bloomberg messenger) No one leaves!

Clearly, I like Bloomberg.  I think the lesson of “who is the richest man in NYC?” is a great one both personally and for being an entrepreneur.

With ALL of that said, I’m still amazed that in a Web 2.0 world… some entrepreneur (or GOOGLE?) hasn’t tried to disrupt Bloomberg entirely by creating a close to the same FREE (or massively discounted competitor), but I guess that’s the topic of another blog post.

By the way, here are the Top 10 Richest New Yorkers.

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This post is a bit less planned than most but here goes:

In the video below, Randy Komisar from KPCB talks about the uniqueness of Silicon Valley.  He highlights how it deals with failure.  Specifically, he says Silicon Valley rewards experience as an “asset” you can trade in for future endeavors.  He also says that large companies CAN’T do this and if they could, Silicon Valley wouldn’t exist.  His point is that large corporations, unlike silicon valley and baseball, can’t support a culture which bats below 500.

While I don’t completely agree with everything he says, the point of this post is really a question:  How do you create a business or corporation that is able to do what the Silicon Valley ecosystem does at a broad level?  Are there already companies like this that exist?  Drug companies?  3M?  Do those companies create value for shareholders and still bat below “500″?  Would you put Google under this umbrella (they certainly HAVE failed a lot?)

I’m going to attempt to answer this question at some later time, in a later post.  The reason is simple: my dream would be to run a company that does this.  Some hybrid of operating business, VC and incubator.  More on this in another post.

Here’s the video:

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Back when I was a student at Penn, I was a “business” summer camp counselor for Wharton (seriously, huge dork, I know.)

As a counselor, I would attend different speaker sessions from accomplished businessmen and entrepreneurs. One of the people we met was one of the owners of the 76ers. He told a story that I still think about today and he related it to business decision making. Here’s how it goes:

The Sports Analogy

You are the head coach of an NBA basketball team. As the game goes on, your team starts losing…badly. By the third quarter, they are down 30 points. So, you chalk the game up to bad travel and you put in your second string. You figure it’s a good learning experience and makes sense to rest the starters. As the fourth quarter progresses, all of a sudden, your team is coming back! With two minutes left in the game, your team has pulled within 6 points!!

Now the question is: What do you do? Do you keep the second string in? After all, they’ve been playing tremendously well and have momentum. Or, do you put your starters in? The best players you have, who are well rested and ready to close the game?

(Please write down your answer.)

Of course, this is a trick question. His answer was simple: It doesn’t matter what you do. People will judge your “decision” based on the OUTCOME of the game. In other words, whether you bring in the starters or keep the benchwarmers in, people will only care what the outcome is. If you win, you’re a genius. If you lose, you’re an idiot. Can’t you just hear the announcers?

Win with Starters: “Well that is GREAT coaching, even though the second string was hot, he took the time and prudence to put in the better players…and that is why they won the game.”

Win with Bench: “Well that is GREAT coaching, he played with the momentum and kept the right guys in…and that is why they won the game.”

And on the other hand…

Lost with Starters: “Well of course he lost! He put in the cold starters who had allowed the other team to outscore them 2-1. What an idiot!”

Lost with Bench: “Well of course he lost! He made a simple rookie mistake, when the game is on the line, you MUST have your best players on the floor.”

One recent example of this has been Bill Belicheck and the 2009-2010 New England Patriots. Now I love to see them struggle, don’t get me wrong. But this year, everyone ridiculed Belicheck for “taking chances,” “going for it on fourth down” and “gambling.” No less than 2 years ago, he coached exactly the same, and was considered a “BOLD GENIUS.”

Sports isn’t the only place we see this phenomenon. It’s present in entertainment, politics, our personal lives and of course… in business and entrepreneurship.  The press has an obvious bias in this, especially for entrepreneurs.

What it means for entrepreneurs

The lesson here is simple: sometimes, or oftentimes, you will be judged based on the OUTCOME of your decisions as opposed to ‘merit’ of your strategy/tactics. This is something every entrepreneur and business person should realize early on and just build tough skin towards it. People will tell you your brilliant or stupid not based on the ‘journey’ but on the result. As an aspiring entrepreneur, I try to remind myself and our team about it always.

It’s extremely helpful to remember this lesson and there are a number of benefits:

• It gets rid of “Paralysis by Analysis” – this is where I find it most useful.  I will say, well doesn’t matter which direction we go… if we’re successful, we’ll be geniuses.  This makes us focus on execution as opposed to getting caught up in overanalyzing (we still do, but it helps).
• Allows you to be your biggest critic and make your own path -when you realize the world will almost always judge you based on outcome, it forces you to clear your own path (and realize if you’re successful, everyone will craft a story about ‘YOUR way’ of doing things.)
• You can take advice in the proper context – every succesful person will have tons of advice.  But this helps you realize that their path is one way to success and your could be different.
• It makes failure more palatable -again, you don’t get caught up in your methods… because you realize outcome is paramount.  If you fail, you know that if you pick back up and make it work… people will later call you a ‘genius’ and look at your failure as a stepping stone.
• Keeps you focused on the goal.  If that’s all you’ll be judged on, maybe its all you need to worry about.

I’m sure there are more (please comment.)  I have friends who are running amazing venture backed startups which will surely be worth $50-100 M in short order.  I have others who have bootstrapped companies and they will also surely be worth that much.  You read about 37Signals and their  productivity and disdain for personal contact and then you read about Google and their involved personal contact and culture building.  Goldman focuses on the money and making junior people commercial, McKinsey focuses on the people and doesn’t want ANYONE to be commercial.  People have a view on size, hours worked, ideas, process and everything else under the sun.

All of these are successful companies and have done it a different way.  Their Success is the bottom line.  So you can do things anyway you want.  If you succeed, you’ll be considered a genius and if you fail…well, keep trying again til you succeed and THEN you’ll be considered a genius (and people will point to your failure as a REASON for success.)

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