Archives For Entrepreneurship

Salesmanship of Fools

Matt Harris —  December 26, 2012 — 7 Comments

I was talking to a fellow VC the other day, who I know but not well, and he was clearly searching for something to compliment me on, and what he come up with was “hey, I really appreciate how you’re not always nice on Twitter.” As I replied “thank you… I think?”, I was actually thinking that my portfolio companies sure I wish I were nicer, and followed the standard tradition of hyping them at every turn. Hopefully most of them went in knowing that salesmanship, in the traditional sense at least, is not my forte.

They should also know that it used to be worse. When we were starting Village Ventures 12 years ago, and particularly in the aftermath of the bubble, I used to have a downright dystopian sales strategy. I would go in to see potential investors and spend the first 20 minutes talking about how horrible the environment was: “You know, I agree, that’s bad news, but what’s worse is this…”. After setting the appropriate nuclear winter tone, I would go into my spiel: “As we’ve discussed, it’s not obvious that anyone will ever make money again, but if anyone were to, it’s not impossible it would be us…”. Then I would get to my big finish: “I’m sure this isn’t a fit for you now, but if we’re both still in business in a year or two, we should circle up and chat again…”.

After months of this, my then partner Bo took me aside and explained how things worked. To paraphrase, he made it clear that while I wasn’t ever going to star in Glengarry Glen Ross, I could get better. First, I needed to understand that being negative is a crutch. It’s easier to look smart when you’re being critical and dour, and so it can be a refuge for the insecure. Second, people not only expect salesmanship, but they actually want to be sold. Investors know that salesmanship is important to success, for VCs and particularly for entrepreneurs, so in a sense investor meetings are not only a test of your strategy, but also a test of how well you can persuade. This coaching was at least incrementally effective and I’m proud to say I’ve gone from horrible to bad over the last decade or so.
This all got me thinking about the different levels of salesmanship, which I think could stand to be better understood. The top rung is probably pretty obvious: to paraphrase Lewis Gersh, the prototypical salesman is one who could not only sell ice to Eskimos, but could sell them Sarah Palin for Governor as well. There is something deeply cynical, though obviously effective and maybe necessary, about this type of sales … it requires no link between reality and what is being claimed.

The other end of the spectrum is where I think I’ve ended up, which is that I can be persuasive if and only if I believe in what I’m selling, and my belief system is pretty well defined and constrained by a normal probability distribution. In other words, I can definitely be wrong, but not on purpose. The middle ground is the area I find most interesting, which are those people who technically only sell things they believe in, but are capable of such wild optimism (when it’s in their self-interest) that they can believe a whole hell of a lot. As such, the distinction between them and the unethical (my view) salesperson is a pretty fine line, when it comes down to it.

I’d like to think that at the core of entrepreneurship lies innovation, but you could make a good case that the actual core is salesmanship and persuasion. As such, I think it’s important for all of us in the field to remember that it’s a multi-round (and increasingly public) game that we play, which has enormous implications for sales philosophy and strategy.  One of my general gripes about entrepreneurs and VCs is the hype machine aspects of it, and i think too many people take comfort that they aren’t actually “lying”, they’re just being optimistic.  Ultimately the choice comes down to either a)sell stuff you don’t truly believe in; b)be ineffective because you don’t feel comfortable selling what you’re working on; or c)only work on projects you truly believe in, so as to be in a position to sell like crazy. I think the answer is obvious.

Intentionality

Matt Harris —  May 31, 2011 — 1 Comment

It never ceases to amaze me how frequently startups manage to beat large companies. I was in a big bank the other day, and couldn’t help but be impressed by the resources they had at their command. They have a massive customer base, huge profits, thousands of people and a well known brand. They could, if they wanted to, build a hundred versions of what, for example, our company BankSimple is building, test each of them on a separate population of existing customers and then spend $100MM to launch the best version internationally across all of their channels (branch, TV, direct mail, online, mobile, etc). If it failed, it would be a non-event; if they saw any sign of uptake, they could pour the gas on to that channel and that segment and build the momentum from there.

I don’t say this to pick on BankSimple. (In fact, quite the opposite, because those guys are going to light the world on fire this fall with their product, and I expect barely a whimper from the incumbents.) Most venture-backed companies these days create advantage more through execution than through intellectual property. They create equity value as much or more through inspired design than revolutionary technology. BankSimple falls into that category, and they are hardly alone. The phenomena does beg the question, though, of how and why big companies let this happen.

I have a theory, and it revolves around intentionality. Big companies have habits; they basically have to. Massive scale requires some degree of standardization, which engenders rules and regulations, which ultimately groove into immutable habits … habits of action and habits of the mind. Big companies do things without thinking of them; that’s just the way they do things.

Young companies do everything intentionally, not least because in many cases they are doing things for the first time. They may not (and I believe should not) step carefully, but they step mindfully. The logo is as it is, the brand is what it is, the office layout is what it is, all of the elements of the business are what they are because a small group of people deliberately intended them to be so … not because of inertia, or policy or precedent. Again, they may be wrong, or require changing, or grow outdated, but they are almost never casual and almost always done with great care.

If you run your business with intentionality, and add to that a fetish for measurement and a willingness to break glass and change things quickly that aren’t working, you have a massive advantage over your incumbent competition.

As Balzac once said, “Behind every great fortune lies a great crime.” In the past few weeks, we have been treated to scandalous-if-true stories about the founding of Facebook and Twitter. Allegedly, Facebook was founded by the guy who stole the idea from a set of Olympian twins, ripped off a wood-chip dealing fraudster for his first $2k of investment and then screwed the college buddy who provided him with additional growth capital. Twitter was the bastard child of a devious founder, who convinced his early investors that it was worthless so he could look like a hero for buying them back at cost, only then to reveal the true glory of the product and, oddly, not even let most of them invest back in later when they tried their damndest to do so. Oh, and he also fired the real founder and, in an Orwellian turn, pretends the guy never existed in press interviews.

Now, I have no idea if these stories are even partially true. Frankly, I don’t care, and am pretty sure anyone who isn’t actually involved shouldn’t care much either, beyond gossip value (though perhaps “gossip value” is an oxymoron). There will be those who insist that the veracity of these claims goes directly to the moral fiber of the founders, and hence perhaps the culture of these companies, and that therefore we all have to know the truth. I think that take is bullshit, and that’s the thrust of this post.

If I had to pick one adjective that describes all radically successful founders, it would be this: transgressive. That trait is what it takes to start a company that attempts to redefine an industry, or, like Facebook, redefine large parts of society. It is not a polite thing to do. It is audacious, disruptive and preposterous on the face of it. Founders have to be persistent (bullheaded), persuasive (flexible with the truth) and visionary (delusional).

Please don’t take this as a defense of actually criminal, or even unethical, behavior. We would never work with a founder who was guilty of what we considered an actual ethical lapse, and surely if all of the allegations regarding Twitter and Facebook are true, those founders have a lot to answer for. When I’m checking references on a founder, I definitely focus about integrity and ethics. It’s incredibly important to me that I can implicitly trust the people I’m in a foxhole with.

Having said that, I’m painfully aware that the world is full of gray areas. So what I always pursue, in addition to positive character references, is 100% alignment. To be honest, if an entrepreneur I really respected came to me and offered to buy me out for 1X my money, and said he was going to carry on with the project without me, I WOULD ALWAYS SAY NO. Always. I don’t get paid to return 1X to my investors, and I never want to sell when one of my founders is buying (though occasionally I do buy when they are selling, for other reasons.) Further, when I’m doing these reference calls, I occasionally hear things that seem bad, but I interpret as good, eg: “John had a bad habit of promising things to the client that didn’t exist, then scrambling like mad to backfill those capabilities”; “When Jill wants something, she can be pretty hard to deal with until she gets what she’s after”; or “Seth asked a lot of his people, and would occasionally burn some of his weaker performers out.”

You should know that all of this comes from a guy who is married to an entrepreneur, and started a firm with one (different people, thank g-d). I am a charter member of the cult of the founder. Of the 10 guys I lived with in college, nearly all have started a company or been on a founding team. Perhaps the best part of my job is getting to spend time with people who do 10 impossible things before breakfast, ie, my portfolio company CEOs. But we should be honest about what it takes to change the world. It takes more than chutzpah. It takes Balzac.

The first task of a revolutionary is figuring out which buildings to burn down.

In that same sense, the first task of an entrepreneurial firm is to figure out what of the existing order to keep, and what to challenge. This is first in a long series of posts (possibly as many as two) riffing on the analogy of entrepreneur as insurgent and traditional big company as the corrupt regime in power. This will eventually be turned into a book, which you can pre-pre-order by sending me $100 right now. i take Paypal, Facebook credits, Zipmark, Dwolla, Venmo, Waspit, etc.

In the event that anyone is offended by the analogy or glib tone of this essay, and feels inclined to point out that it is an insult to liken an entrepreneur, who risks merely her time and treasure, to an Egyptian, Tunisian or Libyan revolutionary, who risks everything … mea culpa. As to tone, I am a dealer in snark, and when all you have is a hammer, the whole world looks like a nail. As to the analogy, I am gobsmacked by the courage of these young iconoclasts in the middle east, and thrilled by the way they take courage from each other; I can’t help but be reminded of the daring entrepreneurs I am lucky enough to work with.

The essential triumvirate in any insurgency includes the insurgent (entrepreneur), the regime (incumbent big company competitor) and the people (customers/users). The goal of the insurgent is build a movement that leverages his own strength against the regime’s weakness, all in the context of the hopes, dreams, wants and needs of the people. There are many stages to this thing, but the first stage involves getting into the fray and becoming relevant. that inevitably entails some mayhem, and hence this post: if you’re a revolutionary, out on the streets in the early days of an insurgency, which buildings do you burn down?

The initial temptation is to tear it all down, and build a utopia unconstrained by the baggage of the past. This is almost always a mistake. In particular, it’s a mistake not to at least dig deep into the current structure of how things are done, and then when rejecting elements of it, do so from an informed perspective. Even companies that represent radical new ideas leverage existing behaviors and habits. Think of twitter, a company i think we can all agree asked users to engage in a brand new human activity. What are the options you have when you “receive” a tweet? Basically, you can reply, reply all, forward, ignore or delete. Twitter uses its own vernacular, and certainly the fact that it is semi-public is a departure, but it fundamentally builds on heuristics that are deeply familiar from email (and, before that, corporate voicemail). Where possible, don’t destroy or take on those conventions and institutions that you can co-opt and leverage. You may damage the regime, but you’ll also damage yourself, in that you will certainly not delight the people. You don’t burn down the hospitals.

The second category of institution that you can choose to destroy are those that do represent a chance to win favor with the users, but will engender negative consequences from outside the immediate ecosystem. One of the portfolio companies we are very excited about is BankSimple. This is a company that operates in a heavily regulated industry, and is therefore properly cautious to remain within the bounds of what is considered kosher by the regulators. It would be enormously liberating to ignore these constraints, and in fact you could build a retail banking experience that would be absolutely kick-ass if you dispensed with things like Know Your Customer, fraud management and NACHA compliance (I won’t go into it but it’s not something you want at a Superbowl party). You can’t, and shouldn’t. You would hurt the incumbent competitors in the short term, and the customers would be wildly in favor, but forces larger than you would come down hard. You don’t burn down the US Embassy.

Next come the special interests, which exist any society … the privileged classes, the industrialists and landed families who own the factories and the real estate. These are people who have done well by the old regime, and will probably root against you, but who you need, as they control the means of production and have legitimacy (at least some) in the eyes of the people. The answer here depends how radical you want to be. One of our companies, Quirky.com, is clearly revolutionary. Quirky permits designers and investors to collaborate to create products, which Quirky then manufactures and sells. This type of crowdsourced innovation is new to the world and incredibly exciting, and is destined to disrupt the traditional relationships between consumer goods manufacturers and their distribution channels. Why, then, is Quirky also working with traditional retailers like Bed, Bath & Beyond? There is some good analysis here, but the basic answer is that it doesn’t usually make sense to try to innovate all the way up and down the chain when you can leverage some parts of the existing infrastructure. Quirky, at least, has decided not to burn down the office buildings.

Then you have the hard choice regarding the existing justice system. Do you set everybody free? “Free” is kind of a magic word these days, in entrepreneurial circles. The prevailing wisdom is to charge nothing, build a user base, and then “monetize” them. Similarly, when a society’s jails contain both real criminals and good people deemed enemies of the state, it is tempting to let them all free, and figure you can sort out the criminals later. But both of these things are very dangerous to the market dynamics. “Free” is a tough genie to put back in the bottle (also works if you substitute “hardened criminal” for “free” and “jail” for “bottle”.) One of our most exciting companies is called Extreme Reach, which is taking on a dominant incumbent in the video distribution business. It was tempting, at the outset, to compete on price. Instead, Extreme Reach built a technology that let them compete on quality, service and flexibility, maintaining the prevailing price structure. As they now rapidly take share, I can tell you that it’s awfully nice to be getting paid while doing so. There are many, many compelling counter-examples on the consumer side, all of which have built massive audiences by starting out, and largely staying, free. I would say, in general, that revolutionaries do burn down the prisons.

What do you do about the state controlled media? This, after all, is where the people have been getting their information for decades. Can you afford to destroy it, rather than co-opt it and use it for your own purposes? I think this one is increasingly clear. New movements demand new media, and can leverage the hell out of it. Examples here are too numerous to name, both in the insurgency world and the entrepreneurial world, but suffice it to say that getting a seat on Oprah’s couch is now less valuable, for most companies, than a retweet by Chris Sacca. Definitely burn down that state-run TV station.

Finally, there are those elements of the ideology that aren’t just wrong, they are representative of all that is wrong, the root of all evil. They may be lovely, or useful, or valuable, but they just must go, if the revolution is to have any legitimacy. One of our companies, On Deck Capital, has built a platform to enable lending to small businesses. In the last 3 years, they have lent over $100MM to Main St small businesses, with exceptional credit performance. The thing I love most about their model is that they basically ignore the FICO score, that antiquated and creaky credit scoring methodology that was one of the prime causes of the credit crisis. Both in reality, and in the realm of perception, you can’t build a “new” system that relies on emblematic elements of the old. Down with FICO; Up with On Deck! You burn down the secret police building, you burn down the torture chambers, and you burn down the presidential palaces!