The five critical ingredients to build a big company

I'm going to greatly expand on this topic, so I'll keep this post as short as possible. I could write a book on this post alone. For now, I want to quickly get down my thoughts on the five most critical ingredients to build a big company - one that changes the world and creates a lot of jobs and economic impact. Here are the ingredients:

  • Business model: this is actually the most important ingredient of the five. Without a good business model, you will not be successful in building a large company. A good business model is one that has the margin profile that is similar or better to companies in its category and one that has a very large addressable market. How did we do that at Bazaarvoice? Well, Brant and I thought long and hard about how big the Total Available Market (TAM) was and what our natural extensions would be to continue growth. Advertising was one of those extensions that we visioned in the first business plan for Bazaarvoice. Now at Bazaarvoice we have acquired Longboard Media, which in a way concludes our original vision in our first business plan. We also made sure to look at the financial profile of other Software as a Service (SaaS) companies. These benchmarking reports are easily available from investment banks such as Morgan Stanley. We set up our initial pricing calculator for the sales team to make sure that we wouldn't easily sell a client if the gross margin on the deal was projected to be lower than 70%, which is inline with publicly traded SaaS companies. I qualify "sell" with "easily" because we needed to give some leeway to the sales team in case it was a "strategic account" - one that got us into a new vertical or geography or product line. But, on average, our initial clients signed on at a projected gross margin of 70%. If we couldn't sell our first product for that, then it probably wasn't worth selling in the first place because we could have never built into a SaaS company that had a viable financial profile. Better to learn as early as possible, when everything is maliable, than learn later. Constraint-based planning force you to come up with a way to get there versus having a lack of disciplined planning.
  • Team: without a good team, you cannot build a good business. My fellow partners at Austin Ventures may say this is the first thing they look for. And it is true that if you have a good business model without a "complete" or good team that the team will have to filled out or change for you to be successful. And this process never stops because people are your biggest variable and high growth actually puts more pressure to either bring out the best or worst in a team. What is a good team? Well, Brant and I partnered on Bazaarvoice because we complement each other very well. Like me, he is a utility player - someone that I saw amazing potential in at Coremetrics. At Bazaarvoice, he initially played the roles of client service, content moderation, marketing, and product management. He also assisted greatly in sales. After all, we were selling a Software as a Service platform and with it came a guarantee of success with our software through the services we coupled with it. So his role was integral and clients wanted to talk with him. I initially played the role of CEO and VP of Sales. I was responsible for hiring the team, fundraising, establishing our Board of Directors and Advisors, and selling our initial clients. I greatly leveraged my eCommerce and broad network to do so. I intentionally waited until we were 12 months old to hire our first VP of Sales, Michael Osborne, because I wanted to run with my network first and get the business model right before we added too much fuel to the fire. Momentum has a way of building - and that goes for both positive and negative momentum.

  • Mindset: the founding team must have a mindset to go long. Brant and I could have sold Bazaarvoice for $25 million when the company was a year old. That discussion took us all of 5 minutes. Instead, we doubled down. We wanted to go for a much bigger outcome, which creates larger ripple effects. If we had sold for $25 million, it would have been enriching to us. But it wouldn't have created so many jobs and financial outcomes for many later. Capitalism can be the greatest force for good (an intentional reference to conscious capitalism, a movement and organization that Ilove). If we had sold early to enrich only ourselves, we wouldn't now serve over 2,000 clients around the world, including over one-third of the Fortune 100. We wouldn't have the potential today that the company does. Bazaarvoice wouldn't be worth around $700 million. We wouldn't have created over 1,100 jobs. We wouldn't havenine offices all around the world. Today, I found myself most proud of all of the jobs we have created around the world, as well as the impact we have had on commerce overall. It has been soul-nourishing work, to say the least. You also have to have the right mindset on increasing the pie for all. Karma is at work here, and that mindset usually means you have to raise money to become the #1 player in the industry.

  • Funding: at some point if you want to build a large company, you are almost certainly going to need to take funding. Companies like Apple, Facebook, Google, and Microsoft all had to do so. And even if somehow you avoid it until your IPO, remember that an IPO is a fundraising event itself. If you have the mindset of "I need to own it all and I can never give up control", it will be very limiting in terms of your optionality to build a large company. You need capital to hire sales people to capture your market quickly, or someone else more aggressive will take the lead. Sales people take awhile to payback, even in the best of business models. And when you think big, you think global, as we have at Bazaarvoice. Read my Lucky7 Bootstrap or VC? post for more perspective on this. And remember that whomever you take money from, whether it is an angel investor, a VC, or private equity (PE) firm, that the partnership with them is like a marriage. You better "marry" the right person. Just like you better partner with the right people for your team. But it is easier to move on from your team than it is to move on from your investors. Also, it is very important that you maintain a bootstrap mentality to the greatest extent possible after you take funding. I suggest you internalize Seth Godin's brilliant read, The Bootstrapper's Bible(available for free). Brant and I read this book at the beginning of Bazaarvoice, and we really took it to heart. I wish I had done the same at Coremetrics, and it was ironic that I didn't because I bootstrapped my first three businesses and they all had great cashflow. But it was the dot-com craze and all of the metrics (eyeballs, pageviews, etc.) that counted back then were squish at best. Treat your money like it could be your company's last, because it may be.

  • Culture: you need to constantly reinforce a culture of performance if you want to build your company for the long term. Performing at or above your goals gives you the freedom to build for as long as you would like - usually. One exception to this rule is if someone approaches your company with an offer that is "too good to refuse". But, again, we could have sold Bazaarvoice for $25 million and we could have thought like that. And there were other offers along the path to IPO that we also turned down. Instead, we had a longer-term mindset and a business model that deserved that kind of goal. As the CEO at Bazaarvoice, I was constantly reinforcing us building for the long term, and I'm doing the same now as our Vice Chairman. You can see how I'm doing so in the annual shareholders letter. Also, building a great culture will not only make it more fun for all of your team members, it will make it more fun for you too. You'll get caught up in the great cause, people, and environment just like everyone else. Man's Search for Meaning, one of my favorite books ever, addresses this in a profound way. I'll be writing a lot about culture on the Lucky7 blog over time - there is a lot I would like to share in this area, some easy to implement and some not so easy. For now, keep in mind that culture is something that you always nourish, just like an individual person has to always nourish their soul. If you and your team do not focus on debating culture, just as you debate strategy, then you will not have as strong of a culture as you could and your culture may even evolve in a way that you, as the founder, don't like. So stay on it and you'll be happy you did.