Startup lessons from the 90's

The book ‘Founders at Work’ interviews well known tech founders about their earliest days. It’s well worth the full read, but below I summarized portions that really stood out to me. Note, these stories and companies came up in the 90’s and early 2000’s — we believe in learning from history.

Introduction

“Perseverance is important because, in a startup, nothing goes according to plan. Founders live day to day with a sense of uncertainty, isolation, and sometimes lack of progress. Plus, startups, by their nature, are doing new things — and when you do new things, people often reject you.”

“Don’t worry about people stealing your ideas. If your ideas are any good, you’ll have to ram them down people’s throats.”

“People think startups grow out of some brilliant initial idea like a plant from a seed. But almost all the founders I interviewed changed their ideas as they developed them.”

Max Levchin, Paypal

Watch what’s growing. “Fraud was not that big of a problem. It was less than 1 percent — it was really low. But then, if you looked at the rate of growth of fraud, you could see that, if you don’t stop it, it would become 5 percent, 10 percent of the system, which would have been prohibitive.”

Don’t patent software. “I didn’t really want to patent it because, for one, I don’t like software patents, and, two, if you patent it, you make it public. Even if you don’t know someone’s infringing, they will still be getting the benefit. Instead, we just chose to keep it a trade secret and not show it to anyone.“

On the trade off between safety and dropoff rate. “There are tools to just say, “Give me your social security number, give me your address and your mother’s maiden name, and we send you a physical piece of paper and you sign it and send it back to us.” By the time that’s all accomplished, you are a very safe user. But by then you are also not a user, because for every step you have to take, the dropoff rate is probably 30 percent. If you take the time you’re done with the fourth step.”

Find a way to be viral. “We built the system to be viral from day one. The idea was: I can send you the money, even if you aren’t a member. If I send you $10, you get an email saying, “You have $10 waiting for you. Sign up, and you can take it.” That’s the most powerful viral driver there is. Free money available to you.”

Cofounders are good. “Try to have a good cofounder. I think it’s all about people, and, if you are doing it completely alone, it’s really hard. It’s not impossible, in particular if you are a loner and introverted type, but it’s still really hard.”

Sabeer Bhatia, Hotmail

On VC behaving badly. “We didn’t have a very good lawyer back then. Of course it was touted to us as “We love you so much that we want to have the right to buy the next round. You can go to other people too. But that’s the one that got us. It impeded our ability to go to another VC. What ended up happening was that we could not get a higher valuation because DFJ wanted to put more money in the company themselves. So any time we would talk to another VC, they would talk him out of it: “This is not a good company, don’t worry about it.” So we were really stuck with DFJ for the next round. They put us down to other VC’s. Of course, that was very early on and now everything is all fine and dandy, but at that point in time… we had a term sheet for a much higher valuation. But when we would talk to any other VC, the other VC would call the guys at DFJ and they’d say, “No, don’t invest in them.” Sometimes they don’t play by the rules.”

On participating preferred. “This came at a very expensive valuation with certain rights that should not have come with it — like participating preferred, which is they first get their money out and then they participate in the rest, which was OK for the earlier rounds, but not for the later ones.”

Don’t basterdize the user experience. “People would ask, “So, how are you going to make money?” And the whole thing about making money was all those pesky ads. Ads were perceived to be kind of a negative. And that’s the reason why, when there used to be 25 search engines, only 2 or 3 have survived. The others have died because they made their front pages look like Las Vegas casinos as opposed to preserving that simple, clean interface that Google has. I think the strategy that Google took was far better. They earned the trust of the end consumer.”

Business plans are good. “The general piece of advice, which is fairly mundane and oft repeated, is: make sure you write a business plan because it will crystallize your thoughts to communicate your ideas with somebody else. Second is, don’t try to change user behavior dramatically. “

Steve Wozniak, Apple

Good corporate behavior. “But it’s that whole thing I was talking about: Hewlettt-Packard, we’re a community. There was a recession in ’73 and Hewlett-Packard had to cut back 10 percent. Instead of laying off 10 percent of the people, they cut everyone’s salary by 10 percent and gave us one day off every two weeks. So basically they said, “nobody goes without a job.” I like that sort of thing.”

Joe Kraus, Excite

Don’t adopt the prior medium. “The second was that nobody knew what the business model was going to be. In fact, Excite really never got the business model right at all. We fell into the classic problem of how, when a new medium comes out, it adopts the practices, the content, the business models of the old medium — which fails, and then the more appropriate models get figured out. For example, all the television programming its early days looked like radio. It was literally the same guys reading the radio program on television, and it was extraordinarily boring. And advertising was radio advertising — the announcer reading the ad. We too adopted the business model of the prior medium, which was print. Cost per thousand impression (cpm) based advertising was how we made money in search, and that was wrong. We never figured out the cost-per-click piece of it. We got too buried in our legacy of cpm based advertising and that’s how we died. Or at least that’s how the Excite piece of business wasn’t as much as it could have been.”

On potential competition from incumbent big companies. “We were too young to realize that existing companies’ biggest problem is legacy. Period. They can’t focus on new businesses because they’ve got to manage their old ones. And so when we moved to web search, it was never clear to us that Verity, PLS, and Open Text wouldn’t actually go and do this. But they couldn’t because they were servicing all their existing businesses and could never invest enough in this new kind of business.”

Vinod Khosla is the kind of VC you want. “We had $1 million in the bank and we didn’t know what we were going to bid. We sat down in my office, all on the floor. Vinod said we should bid $3 million. I was like, “How do we bid $3 million? We only have $1 million in the bank.” And he said, “Well, if we win, I’m pretty sure we can raise it, but if we don’t win, I don’t know how we’re going to raise.” And so I thought, “OK, this is really scary.” If you are 22 and trying to make these big decisions, it’s great to have a very active guy like Vinod helping you out. And I mean active. I was talking to Vinod twice a day easily. He’s one of the senior partners at Kleiner Perkins and he’s spending multiple hours a day on my business, which you just don’t get. But that’s Vinod’s style.

Don’t be scared. “I see way too many people give up in the startup world. They just give up too easily. For example, we had this VP of marketing that I worked to get for about 3 months. He was the former VP of marketing at QVC. He called me literally the day before he was supposed to move out to California and said, “I can’t do it.” I said, “Well, we’re going to have dinner tonight, so I’m coming out to New York.” I got on a plane and went to New York and sat down with him. And I got really lucky: we’re at the restaurant and we were quiet for a second and you could hear people talking about the Net. They were talking Hotmail and AOL and the Internet boom going on. So I said, “Look, these people aren’t talking about home shopping, they’re talking about the Internet. So your choice is, ‘Do you want to be part of the past or do you want to be part of the future?’”

Teams over idea. “Venture capitalists, with the exception of people like Don Valentine, would tell you that they’d rather fund a great team than a great idea. The reason is that if they have a bad idea, great teams can figure out a better one. Mediocre people even with a great idea can screw it up in its execution. Or if they have a bad idea, then they aren’t going to be in a position to think about how to change it. They’re just going to pursue it blindly.”

Dan Bricklin, Software Arts

Why adoption maybe slow. “People who saw it, who needed it, got it. Sorry, no — some of the people who needed it got it. You have to be a person who is able to look at a general-purpose tool and be able to think, “How would I use that to solve my problem?” Most people are not that way. They look for a tool that is being used already for something close to their problem and then understand what it is. Many people who saw the spreadsheet with an example, if the example wasn’t in their field, they couldn’t make the leap. Because they’re not programmers in their mind.”

Hitting the right audience. “But, if you showed it to somebody where it clicked, either because they understood the general-purpose nature and could apply it to their own needs, or you showed them an example, like financial forecasting or something that they did, and they knew the other tools in the world, they got very excited. If you showed it to a computer person who didn’t have those needs, they’d say, “That’s kind of cool, but what’s so special about that? I could just do it in Basic.” Now, there were those that hadn’t seen as interactive a computer before, weren’t as aware of word processing and some of the other things, and, when they saw it, it really opened up their minds to what you could do interactively with computers.”

On selling early. “The business is going through the roof; why are you selling now?” And in hindsight, of course, it turned around. Six months, a year later, the business started crashing. They didn’t get the peak, but they came pretty close. There are some people to whom it’s worth taking the risk, because you risk going for the big one, and, in a portfolio, that’s good. But as they say on Wall Street, the bulls make money, the bears make money, but the pigs get slaughtered. In other words, don’t be greedy. Whether you think things are going up or things are going down, you can make money going both ways. But, if you are piggish, are greedy, that’s when you have problems; you’ll be irrational about that.”

Mitchel Kapor, Lotus

VC are shady. “If the VCs were more transparent and disclosed stuff so that entrepreneurs could make it a choice, that would be better. They wouldn’t have to change the terms, just disclose them and explain what they mean, and what’s likely to happen. But they don’t do that. They see it as a negotiation in which having information that the other side doesn’t have gives you an advantage. It gives an advantage in terms of that individual negotiation, but if you’re trying to form a genuine partnership where you have repeat encounters and you withhold critical information in the first and most important one, you’re undermining long-term collaboration.”

Tim Brady, Yahoo

On taking the exit when the window is open. “No, it really wasn’t driven by the VCs. There were a bunch of different reasons — and I wasn’t privy to all those conversations. However, there were a couple of considerations. One, IPO windows don’t last forever. Markets get hot and then they don’t. If you go out, you can only go IPO while the market’s hot. Netscape lit the market afire for us. The other consideration was that we say that one of the ways we were going to have to compete was to acquire companies. The best way to do that was to have a currency other than the cash in the bank — to have a stock to pay people for their companies. So, in order to get big fast, which we thought we needed to do, we had to have a public stock.”

Arthur Van Hoff, Marimba

Fire fast. “We did a first release of the software, which was a really important thing. We hired some executives and lots of great people. We hired some really bad people too — we had to fire somebody in the first year. We had our first lawsuit filed.”

Patents aren’t very valuable. “It was a patent infringement case, without merit. Patents are pretty frivolous overall anyway. But if you’re at the receiving end of a lawsuit, it can make things difficult.”

Paul Graham, Viaweb

Deals blow up more often than they get done. “So many things can go wrong with deals, and they all do. Before we ultimately got bought by Yahoo, we probably had nine or ten different acquirers that we were talking to, and things always went wrong for one reason or another.”

Mark Fletcher, ONElist

Go with a C-corp. “It was a big hassle because VCs want a C-corp ; any sort of investor generally wants a C-corp because that’s what they understand.”

Philip Greenspun, ArsDigita

Ask who will be on your board. “So I let them decide, and they chose Greylock and General Atlantic. Which might have been OK, except that senior partners in those firms were so rich that they didn’t want to spend any time sitting on the boards of companies they were investing in. Why should they? They had six houses each and Gulfstream jets to get among all their houses. They were going to the World Economic Forum in Davos. Why would they want to sit at my board meeting? I used to sit at my board meetings, and I would think to myself, “This is my own company and I’m bored out of my skull.” The VCs delegated very junior people to sit on our board.”

Don’t give up board control. “But these guys told me that I have no power because they control the board, three to two, and it doesn’t matter what anyone else says.” He said, “Yes, but the shareholders elect the board. Just have a shareholders’ meeting and elect yourself and your cofounders (or whoever else you want) to the board, and these guys will be back to their two board seats, which is what they bargained for. They have a minority investment. They bargained for two board seats and veto power over certain transactions from those board seats, but that’s all they’re entitled to.”

Lawsuits. “Then Jin and I went off to California for some reason, on a guy’s road trip to California and having a great time. When we got back to Boston, we discovered that we’d been sued. Me, Eve, and Tracy got sued in Delaware Chancery Court. I thought, “God damn that lawyer, Sam, he lied to me; he told me we wouldn’t get sued!” And I later realized that Sam had been right and wrong. They still had control of the company checkbook. Even after he’d been voted CEO to write a $1 million check from the company checking account to their lawyers so that they could have this shareholder lawsuit without paying for it. This was an unauthorized looting of the company on behalf of one set of shareholders. It was probably illegal, but in Massachusetts it could take years to recover that kind of money. And they figured it’s not going to be a big deal because we’ll still have control of the company; we’ll impoverish this guy with an onerous lawsuit. He’ll never have enough money or staying power to come after us in Massachusetts for looting, and maybe he’ll never find out.”

Joel Spolsky, Fog Creek Software

VC’s have poor reputations. “We took no investments because there were so many horror stories about what VCs would do to you. ArsDigita was the most public one, obviously, of kicking out the founders and then mismanaging the company and bringing in the so-called professional management. “

James Currier, Tickle

On fluffing your numbers to attract dumb VC. “I remember saying to them, “Look, in 4 years, we’ll be doing $18 million in revenue with $4.5 million of profit. After that the sky’s the limit. I’m an ex-venture guy; I’m telling you the truth. We can get to $18 million in year 4, and 30 times $4 million is a $120 million valuation for the company at that time. You’ll get 20 times your money. They all told me $18 million wasn’t interesting. And I’d say, “But most people will tell you $50 million, and you know they’re lying. I’m already discounting it because I’m a venture guy just like you are.” And they’d say, “Yeah, but $18 million just isn’t interesting.” So I changed my spreadsheet to say $50 million. And they said, “OK, that’s pretty interesting.”

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