Two great posts on entrepreneurship and risk

Spurred on by my recent Lucky7 post on how capital efficient Bazaarvoice was on its path to IPO, two friends sent me great posts this week on entrepreneurship and risk. And I guess it seems appropriate that I'm writing this post from Edinburgh, Scotland here at TED Global. Edinburgh is, after all, one of the birthplaces of capitalism. Adam Smith, author of The Wealth of Nations, and other prominent figures were born here. And speaking of capitalism, the former Prime Minister of Greece and the poster child for the European economic crisis, George Papandreou's, TED Global talk is already live. I found his talk sobering and, for all the controversy surrounding him, it felt rawly authentic to me.

First, a little bias here - I'm a very risk adverse entrepreneur as a result of bootstrapping my first three businesses, almost failing on the fourth (Coremetrics) due to market timing (too early and didn't predict the dot-com bust) and its overcapitalization, and being mostly customer funded and very capital efficient on the fifth (Bazaarvoice). I'm also a product of bootstrapped entrepreneurs - my parents, who took little risk. As I wrote about my father in my tribute to him, he turned down Wal-Mart when I was 10-years old when they wanted to sell his product in all of their stores nationwide. He was already happy with his life and he didn't want to take on the complexity and risk. But even though my parents took little risk, I saw them go through the inevitable ups and downs in business and the humbling experience of earning your own living through entrepreneurship. Entrepreneurship is never "easy" but, of course, can be highly rewarding - both financially and psychologically. If you are considering taking the plunge for the first time, I recommend you read my Lucky7 post for first-time entrepreneurs to get centered and real about what it is going to "feel" like.

The first post was sent to me by Josh McClure, the co-founder and CEO of Real Massive, who I first referenced in my Lucky7 post about Lola Savannah. It is about the damning nature of an overcapitalized business. I saw this movie in Silicon Valley, where I lived for four years, play out over and over again, especially at the apex of the dot-com boom. You would be wise to read and internalize this PandoDaily post about "startup drugs" by Andy Dunn, co-founder and CEO of Bonobos. One of my favorite excerpts:

Prior to a lobotomy I just underwent which removed shiny new object syndrome (SNOS) from my brain, I was both an asset and a threat to my own company. The company is trying to do one thing, and I would come up with another. I can’t tell you how dangerous this is. If the founder doesn’t know what the company is doing, the company won’t either.

In some cases the shiny new object you come up with saves the company. In other cases it sinks it. If it’s the former, they will call it a pivot and hail you as brilliant. If it ends up being a distraction or taking the company off course, they will call you delusional and un-focussed.

I lived this at Coremetrics, and eventually got some sense (my parents helped as they thought I had lost it). I had six projects going at Coremetrics at once and was overly ambitious to say the least. This drove nearly everyone in the company crazy and our foundational product - the Web analytics that we eventually became known for - was failing. I realized that nothing would matter if we didn't get the core of Coremetrics fixed - and fast. I flew to Austin to spend the month with the R&D team and launched "Stand & Deliver", where I immediately killed the extraneous projects and we delivered for ourselves, our investors, our clients, and our families by shoring up the core. Most of the extraneous projects never saw the light of day again. I'm convinced that if I hadn't made the decision to "Stand & Deliver" and focus, which is so important for a startup to do, Coremetrics would have failed in 2001 and almost no one reading this post would have ever heard of the company.

The second post was sent to me by Mitchell Green, the founder and CEO of Lead Edge Capital, who led our last round of funding at Bazaarvoice prior to IPO. It is by Malcolm Gladwell, one of my favorite authors (his book The Tipping Point was an initial mantra for us and our clients at Bazaarvoice and I also loved his book Outliers). Gladwell's post is about the risk adverse nature of successful entrepreneurs and was initially an article in the New Yorker titled "The Sure Thing". One of my favorite excerpts:

The economist Scott Shane, in his book "The Illusions of Entrepreneurship," makes a similar argument. Yes, he says, many entrepreneurs take plenty of risks—but those are generally the failed entrepreneurs, not the success stories. The failures violate all kinds of established principles of new-business formation. New-business success is clearly correlated with the size of initial capitalization. But failed entrepreneurs tend to be wildly undercapitalized. The data show that organizing as a corporation is best. But failed entrepreneurs tend to organize as sole proprietorships. Writing a business plan is a must; failed entrepreneurs rarely take that step. Taking over an existing business is always the best bet; failed entrepreneurs prefer to start from scratch. Ninety per cent of the fastest-growing companies in the country sell to other businesses; failed entrepreneurs usually try selling to consumers, and, rather than serving customers that other businesses have missed, they chase the same people as their competitors do. The list goes on: they underemphasize marketing; they don't understand the importance of financial controls; they try to compete on price. Shane concedes that some of these risks are unavoidable: would-be entrepreneurs take them because they have no choice. But a good many of these risks reflect a lack of preparation or foresight.

Both Bazaarvoice and Coremetrics started from scratch, and I've also angel-backed companies recently that have started from scratch, like Compare Metrics, where I serve as the Chairman of the Board (note that Compare Metrics also recently completed their Series A with Austin Ventures as the lead). But I would argue in B2B SaaS (Software as a Service) businesses if you really know the market and you make sure that clients will pay for your solution (ideally selling it prior to actually building it), you are not taking much risk. SaaS businesses are like an annuity and you should be able to both pre-sell and collect a good portion of cash up-front from your clients. In other words, as I write in my Lucky7 post on capital efficiency, you should be able to make your businesses mostly customer funded.

In full disclosure to the excerpt in Gladwell's post above, I also recently angel-backed a pure B2C business. But I believe the entrepreneurs are being smart in planning to get profitable on their first $100,000 raised and scale up from there. They also have some interesting B2B strategies to reach consumers via businesses that have already reached them at scale. We'll see how that works out, but like Compare Metrics, I love the entrepreneurs behind it. I wrote about how important entrepreneurial teams are inmy Lucky7 post on the five critical ingredients to build a big company.