Unlearning your MBA

I started listening (late enough) to podcasts a lot, and the one I’m really fan of: The Stanford Entrepreneurship podcast. It’s really awesome and you should look it up in itunes.. I’m going to post my thoughts about those because they have a capacity of making me react everytime..Wait till I get to the one where Guy Kawasaki talks!

I’m starting with the one about unlearning your MBA where David Heinemeier, one of the creator of Ruby on Rails is speaking. Interestingly enough, Steve Blank is the moderator (a guy I love). If you follow my blog you know that I was pretty harsh about Jason Fried who founded 37 signals (linked to Ruby on Rails), and I was really looking forward to hear David talk to see if I just was stupid in my analysis of what Jason said about a flat organization.. I will split up that post in 4 sections:

  • Unlearn MBA – the main theme of the podcast
  • Shouldn’t Take Venture Capital and spend your own money
  • Working like crazy to build a startup
  • Salesforce.com

I was optimistic about that podcast. I wanted it to prove me wrong and unfortunately started pretty poorly… Unlearn your MBA. David started criticizing how bad the MBA he did was and didn’t help him in what he did to build a business.. All his professors were so theoretical in nature, judging on the length of the papers he was handing in, and thinking 1980’s industries value chain and business models. Well, what I think is that the problem is not that people should unlearn their MBA: people should not attend the MBA he went to!! If that is the experience he got from his MBA in Copenhagen, they should really revisit the professors they hired and their curriculum because, excuse me, but David is right: He should unlearn all this.. I’m barely out of the Berkeley Haas MBA, and I have to say that a ton of what I have learned there can be apply to everything business I think about today. My professors were experience entrepreneurs (Steve Blank included), they were lawyers from the field (Mario Rosati), successful people from many startups and their knowledge was immense and relevant at every inch. They taught me to think much broadly than I was able to before the MBA, they taught me to question assumptions, they tough me to test my idea, pitch better, be more confident, challenge the status quo, everything. My view of how to tackle a business today has completely shifted thanks to the MBA and I thank them for putting together such a great program. That actually raises a valid concern if you are considering an MBA: how do you select an MBA that will allow you to NOT have to unlearn it afterward? Vesting your MBA is important, not all of them are equal.. but generalizing like David did is pretty closed minded.

So the podcast went on and David started talking about VC money. He is of the school that VC money is a time bomb on your business. I have to admit, that made me like him better. I agree that taking any kind of VC money could simply kill your business and make you focus on the wrong things. Taking VC money is not the only way to build a business. Spending your own money makes you think differently about what you need to focus on, and I agree with David on a lot of points he made. I would simply extend into the fact that some businesses are doomed to failed without VC money: Capital intensive businesses (clean tech or health care), or  industries where being the first to market is super important and extremely fast growth is needed (where market barriers are very low => think Groupon!). Some businesses, even software businesses (David restricted his comments to software/web) just have bigger chances of success if they are VC backed than if they are not. When do you take VC money, or what stage of the company is a true question that needs to be thought through carefully. Getting VC money is not an end goal, it has to support a growth strategy and make sense for your business and your industry. I think that fundamentally David is right, but again, a bit short sighted. VC money is not all evil, but he is right that many entrepreneurs fall into the bad trap of just looking at the money, not the underlying purpose of getting that money.

At this stage, I was neutral, and then David started talking about the fact that to build a business you didn’t have to work 100 hours a week or you get burned out and you might be much more productive working less and sleeping more. At that point I realized that I could relate to David’s experience. In my two former businesses I worked hard, but not like hell. of course I would spend much more hours on them than I would do for another business where I would be employed but not to the point where I would get burned out. I agree with David, efficiency is more important than quantity. Many people get overwhelmed very quickly and brag about how many hours they spend at work. When I hear that I always feel that those people have two problems: They don’t know how to prioritize correctly, and they are not efficient. Although I already hear some of you screaming that they don’t have enough resources, their deadline as so tight, etc and it is very true for many of you so I shouldn’t generalize. Let’s just say that “often times” those people bragging have those two problems. Prioritization and efficiency are extremely powerful skills that allow you to work on the right stuff, at the right time and get the job done without waste. Thriving for those two skills should be everyone’s goals. I am sure that David has both skills very developed. Good for him!

I started to like him at that point and thought that despite his take on the MBA, which is understandable if he did actually go to a bad MBA, made me think that I had been too harsh about 37 Signals. So I started writing this blog post thinking that I would praise the guy.. (not that anybody cares about who I praise or not by the way..). As I was writing I was hearing the Q&A section of the podcast in the background led by Steve Blank (which I love. Did I already say that?) and Steve asked him about the scalability of a business like 37 signals versus a $1B business. And he killed it.. David thinks he could run a $1B company with 15 people, the way they do today. No correlation. What the Hell?? Is he stupid or what?? 37 Signals is ten years old. I realized it’s like Salesforce.com. I thought to myself: well you are not a billion dollars company because you are short sighted, and salesforce.com is over a billion dollars company because they have done all thing you have been criticizing during the podcast. But what nailed it is when he started talking about Salesforce.com (I didn’t plan this! it just happened!). David said: did you look at their margin, did you look at their P/E ratio, it’s bad and all that stuff, it’s so low (P/E so high), how can a software business make 5% margin. This to me is just the final proof that David doesn’t understand what a growth business is about. Salesforce.com reinvests every possible dollars they have into their growth. Salesforce.com has had the goal of leading the revolution of enterprise software all along, they made the Cloud and SaaS a reality, they have a long term vision (something that 37 signals doesn’t have as – David’s words: they think 2 weeks ahead), they are buying their growth in a model where if they were to make no sales next year, and I means zero dollars, firing every possible employee, they would probably make over a billion dollars in margin (no cost). That is what the whole SaaS model is about, and that is what Salesforce.com is about: Growth! reinvest every penny into the business. If next year Salesforce.com announces 40% margin I’ll be pissed! Why didn’t they spend more in hiring, marketing, expending? When Salesforce.com is a $5B business I’m guessing the growth potential might slow down a bit and then the margins are going to explode, the P/E will go down from the really high level it is at today. When salesforce.com decide to stop fueling the growth, they will make huge amount of money: that’s the SaaS model, it’s not just software. David doesn’t get it apparently.

I’m coming out of this podcast wondering how 37 Signals is still alive. Basecamp is pretty good, I’ll give you that, but man, with such a management team, I’m surprise they are still here, and I’m starting to really think they have other sources of revenue to keep them alive. Anyway. Interesting podcast to listen to.


What about the Team?

As I was reading my previous post about how good the picture needs to be for an entrepreneur, I realized that I totally overlooked the team. This was not intentional as the Team is definitely very important but I have a certain view about that.. My feeling is that VC would love to have a business with a great team: Knowledgeable people, outstanding track record of success, etc.. But what you realize is that when you start working with a VC it’s for years (hopefully), and the VCs will try to have either people that are the cream of the crop for the job, OR former buddies they worked with in the past and who have been successful in the post. You should not under-estimate the fact that Affinity will play a enormous role in the choice of the team (for you and the VC). I’m not blaming them for that, would you not rather work with people you have already worked with and who have been successful rather than having to bet on a  new team?

The only advice I could have is certainly to find a someone who already had a successful startup at a key role in your team.. or be ready to hire a CEO (from the list provided by the VC ;-)) Additionally, make sure you REALLY get along with your teammates and open up issues as fast as possible. It’s easy to change things at the beginning of a company, but as time passes, things get harder..

A few myths about VC funding

I met an entrepreneur who filed a patent for a pretty interesting technology and he was willing to get some funding for his business. He came to me as I was participating in panel for the launch of the UC Berkeley Business plan competition 2010. He was very convincing about his technology and really felt that his idea could get funded quickly.

After his first presentation to a VC firm that turned him down we had a long conversation about the most probable reasons why he had been turned down. This is when I realized that some people (probably more that I think) actually have a misperception of VC funding. The influence of the Bubble era pre-2001 are still deeply rooted in many people’s mind,making them think they can get funding with “just an idea”, but the scares of the burst after 2001, are also deeply rooted in the VC’s mind.

Here are a few myths about VC funding that I think should be well understood by wannabe entrepreneurs:
A good technology is enough for a VC: Technology is good but not sufficient. A VC firm is here to invest and make fast returns on their investments. A company at the technology stage has a lot of work to go by to prove the market opportunity, define a business model and acquire customers. A VC would rather invest a bit later in a proven business than earlier in a technology.
VC have so much money they’ll finance everything: It is true that VC do have a lot of money and they do need to invest it. But make no mistakes, VC bet on big wins for most of their investments. A big bet is a Google, a VMWare or similar company for which the return is astronomical. Out of 10 companies in which a VC invest, One will be a big win, 2 or 3 will make money and the rest might barely make it or lose money. (BACKUP WITH NUMBERS) If you think about the fact that all of those were thought to be potential big wins, imagine how much a VC can be wrong.. Just a little less wrong that others (hopefully).
Asking for a low amount is equivalent to low risk for a VC: I have seen a incredible amount of entrepreneurs taking that stand: asking for $100K, or $250K to make the VC feel it’s so low that they are not taking much risk. This attitude clearly shows that the entrepreneur doesn’t understand how  a VC works. There is two component when looking at how a VC works in terms of investment decision. To make it brief:
If a VC has several millions to invest and a very limited number of partners to take care of their portfolio. if a $300M fund invest in $250K deals they will need to find and finance 1200 deals.. knowing that most of the time those VCs have 2 to 10 general partners, is their something wrong in the equation? VC are willing to invest from $5M to $30M or more in one venture if the return is good enough. A few deals a year is perfect for each General Partner and their is no time for very small deals.
if your venture requires only a few hundred thousands dollars to start and explode to the level a VC is interested in, it certainly means that their is a very low barrier to entry and competition will be very quick to come by and hinder the growth. Some competitive edge must be present to explain how you can produce so much value with such a little amount of cash to start with. I’m not saying it is impossible, but it’s doubtful.
Any VC will do for my Venture: This is a very common mistakes made by Entrepreneurs as they pitch to VCs. A VC is here not only for the money they invest, but for the network they provide, their experience, and their capacity to execute a good exit. The Track record of previous funds and of the general partners as well as the composition of the VC’s portfolio are very important in choosing the VC you want to work with. I might be naive, but I feel that a VC-Venture deal has to be a match for both sides otherwise it is doomed to fail. Pick your VC carefully because if it makes sense for you to work with them, the reciprocal might very well be true.

I’m digging up some numbers and will post them very shortly..