Since I’ve started my new career as a venture capitalist I have become keenly aware of some of the classic mistakes that geeks make when trying to raise money for a new business. Instead of writing the same comments over and over again, I thought I’d try to summarize some of the mistakes that people — especially smart people — make when they decide to try to turn their bright ideas into money. Here then is my top-ten list of geek business myths:
Myth #1: A brilliant idea will make you rich.
Reality: A brilliant idea is neither necessary nor sufficient for a successful business, although all else being equal it can’t hurt. Microsoft is probably the canonical example of a successful business, and it has never had a single brilliant idea in its entire history. (To the contrary, Microsoft has achieved success largely by seeking out and destroying other people’s brilliant ideas.) Google was based on a couple of brilliant ideas (Page rank, text-only ads, massive parallel implementation on cheap hardware) but none of those ideas were original with Larry or Sergey. This is not to say that Larry, Sergey and Bill are not bright guys — all three of them are sharper than I can ever hope to be. But the idea that any of them woke up one day with an inspiration and coasted the rest of the way to riches is a myth.
Myth #2: If you build it they will come.
There is a grain of truth to this myth. There have been examples of businesses that just built a product, cast it upon the ether(net), and achieved success. (Google is the canonical example.) But for every Google there are ten examples of companies that had killer products that didn’t sell for one reason or another. My favorite example of this is the first company I tried to start back in 1993. It was called FlowNet, and it was a new design for a high speed local area network. It ran at 500Mb/s in a time when 10 Mb/s ethernet was the norm. For more than five years, FlowNet had the best price/performance ratio of any available network. On top of that, FlowNet had built-in quality-of-service guarantees for streaming video. If FlowNet had taken over the world your streaming video would be working a lot better today than it does.
But despite the fact that on a technical level FlowNet blew everything else out of the water it was an abysmal failure as a business. We never sold a single unit. The full story of why FlowNet failed would take me far afield, but if I had to sum it up in a nutshell the reason it didn’t sell was very simple: it wasn’t Ethernet. And if we’d done our homework and market research we could have known that this would be, if not a show-stopper at least a significant obstacle. And we would have known it before we spent tens of thousands of dollars of our own money on patent attorneys and prototypes.
Myth #3: Someone will steal your idea if you don’t protect it.
Reality: No one gives a damn about your idea until you actually succeed and by then it’s too late. Even on the off chance that you do manage to stumble across someone who is as excited about your idea as you are, if they have any brains they will join you rather than try to beat you. (And if they don’t have any brains then it doesn’t matter what they do.)
Patent protection does serve one useful purpose: it can make investors feel warm and fuzzy, especially naive investors. But I strongly recommend that you do your own patent filings. It’s not hard to do once you learn how (get the Nolo Press book “Patent it Yourself”). You’ll do a better job than most patent attorneys and save yourself a lot of money.
Myth #4: What you think matters.
Reality: It matters not one whit that you and all your buddies think that your idea is the greatest thing since sliced pizza (unless, of course, your buddies are rich enough to be the customer base for your business). What matters is what your customers think. It is natural to assume that if you and your buddies think your idea is cool that millions of other people out there will think it’s cool too, and sometimes it works out that way, but usually not. The reason is that if you are smart enough to have a brilliant idea then you (and most likely your buddies) are different from everyone else. I don’t mean to sound condescending here, but the sad fact of the matter is that compared to you, most people are pretty dumb (look at how many people vote Republican 😉 and they care about dumb things. (I just heard about a new clothing store in Pasadena that has lines around the block. A clothing store!) If you cater only to people who care about the things that you care about then your customer base will be pretty small.
Myth #5: Financial models are bogus.
As with myth #2 there is a grain of truth here. As Carl Sagan was fond of saying, prophecy is a lost art. There is no way to know for sure how much money your business is going to make, or how much it will cost to get to market. The reason for doing financial models is to do a reality check and convince yourself that making a return on investment is even a plausible possibility. If you run the numbers and find out that in order to reach break-even you need a customer base that is ten times larger than the currently known market for your product then you should probably rethink things. As Dwight Eisenhower said: plans are useless, but planning is indispensible.
This myth is the basis for one of the most classic mistakes that geeks make when pitching their ideas. They will say things like “Even if we only capture 1% of the market we’ll make big bucks.” Statements like that are a dead giveaway that you haven’t done your homework to find out what your customers actually want. You may as well say: there’s a good chance that only 1 customer in 100 will buy our product (and frankly, we’re not even sure about that). Doesn’t exactly inspire confidence.
Myth #6: What you know matters more than who you know.
Reality: You’ve been in denial about this your whole life. You were either brought up to believe that being smart mattered, or you just didn’t believe your mother when she told you that getting along with the other kids was more important than getting straight A’s.
The truth is, who you know matters more than what you know. This is not to say that being smart and knowledgable is useless. Knowing “what” is often an effective means of getting introduced to the right “whos”. But ultimately, the people you know and trust (and more importantly who trust you) matter more than the factual knowledge you may have at your immediate disposal. And there is a sound reason for this: business decisions are horrifically complicated. No one person can possibly amass all the knowledge and experience required to make a broad range of such decisions on their own, so effective business people delegate much of their decision-making to other people. And when they choose who to delegate to, their first pick is always people they know and trust.
Ironically, C programmers understand this much better than Lisp programmers. One of the ironies of the programming world is that using Lisp is vastly more productive than using pretty much any other programming language, but successful businesses based on Lisp are quite rare. The reason for this, I think, is that Lisp allows you to be so productive that a single person can get things done without having to work together with anyone else, and so Lisp programmers never develop the social skills needed to work effectively as a member of a team. A C programmer, by contrast, can’t do anything useful except as a member of a team. So although programming in C hobbles you in some ways, it forces you to form groups whose net effectiveness is greater than the sum of their parts, and who collectively can stomp on all the individual Lisp programmers out there, even though one-on-one a Lisper can run rings around a C programmer.
Myth #7: A Ph.D. means something.
Reality: The only thing a Ph.D. means is that you’re not a moron, and you’re willing to put up with the bullshit it takes to slog your way through a Ph.D. program somewhere. Empirically, having a Ph.D. is negatively correlated with business success. This is because the reward structure in academia is almost the exact opposite of what it is in business. In academia, what your peers think matters. In business, it’s what your customers think that matters, and your customers are (almost certainly) not your peers.[UPDATE: this is not to say that getting a Ph.D. is useless. You can learn a lot of useful stuff by getting a Ph.D. But it’s the knowledge and experience that you gain by going through the process that is potentially valuable (for business endeavors), not the degree itself.]
Myth #8: I need $5 million to start my business
Reality: Unless you’re building hardware (in which case you should definitely rethink what you’re doing) you most likely don’t need any startup capital at all. Paul Graham has written extensively about this so I won’t belabor it too much, except to say this: you don’t need much startup capital, but what you do need is a willingness to work your buns off. You have to bring your brilliant idea to fruition yourself; no one else will do it for you, and no one will give you the money to hire someone to do it for you. The reason is very simple: if you don’t believe in the commercial potential of your idea enough to give up your evenings and weekends to own a bigger chunk of it, why should anyone else believe in it enough to put their hard-earned money at risk?
Myth #9: The idea is the most important part of my business plan.
Reality: The idea is very nearly irrelevant. What matters is 1) who are your customers? 2) Why will they buy what you’re selling? (Note that the reason for this could very well be something like, “Because I’m famous and I have a huge fan base and they will buy sacks of stale dog shit if it has my name on it.” But in your case it will more likely be, “Because we have a great product that blows the competition out of the water.”) 3) Who is on your team? and 4) What are the risks?
Myth #10: Having no competition is a good thing.
Reality: If you have no competition the most likely reason for that is that there’s no money to be made. There are six billion people on this planet, and it’s very unlikely that every last of them will have left a lucrative market niche completely unexploited.
The good news is that it is very likely that your competition sucks. The vast majority of businesses are not run very well. They make shoddy products. They treat their customers and their employees like shit. It’s not hard to find market opportunities where you can go in and kick the competition’s ass. You don’t want no competition, what you want is bad competition. And there’s plenty of that out there.
Special bonus myth (free with your paid subscription): After the IPO I’ll be happy.
If you don’t enjoy the process of starting a business then you will probably not succeed. It’s just too much work, and it will suck you dry if you’re not having fun doing it. Even if you get filthy stinking rich you will just have more time to look back across the years you wasted being miserable and nursing your acid reflux. The charm of expensive cars and whatnot wears off quickly. There’s only one kind of happiness that money can buy, and that is the opportunity to be on the other side of the table when some bright kid comes along with a brilliant idea for a business.
All these myths can be neatly summarized in a pithy slogan: it’s the customer, stupid. Success in business is not about having a brilliant idea. Bright ideas are a dime a dozen. Business is about taking a bright idea and assembling a team that can turn that idea into a product and bring that product to customers who want to buy it. It’s that simple. And that complicated.