Beat the Odds

One of the reasons entrepreneurs seek out VCs, is that some VCs can put a thumb on the scale that determines whether a company will be successful.  Often this assistance is not in just a monetary form, but in the form of reputation, or relationships.  I find more often than not that this value add is in the form of solid advice.  VCBall is, in many ways, my attempt to pass on some of that general advice or perspective I might have to beat the odds. 

Well, I found a book that made my summer.  This last month I have had a real hard time not blabbering on about this book, Blueprint to a Billion, to virtually everyone I had a sitdown meeting with.   The book is about something that most VCs and  entrepreneurs think about a great deal: how do I beat the 1 in 20,000 odds that my company or the company I am considering joining or investing in will scale to $1B in sales in 5 to 7 years? 

The book's author, David Thomson, has researched this question through financial analysis, as well as through structured interviews, that if a company did not have ONE of "Seven Essential" traits, it'd take 14 years to hit a billion in revenues, vs 7 years that a billion dollar company would take on average if it had all 7 traits.  And if a company failed to have TWO of these 7 traits then the likelihood of scaling to a billion in revenues fell to non existent.   

So listen up, here are 7 general themes that Thomson feels are "essential" to beat the odds and scale your company to a Billion in 7 years (or ever):

1/ Find or create a great value proposition.  It's hard to grow quick if you don't generate a ton of value; while companies that aspire to be big and get there quickly often are hard-pressed to succinctly explain and quantify that value proposition. 

2/ Find a quickly growing market.  Rapidly growing markets (100%+) tend to be much more forgiving of mistakes than slower growing ones.  Obvious, but again, often overlooked, and statistically addressed in the book.

3/ Get some marquee customers.  Having big customers help you figure out your business model is a smart move.  Often, entrepreneurs and their backers fail to listen to what the marquee customers say, assuming they even have them. Most in my experience, simply fail to aspire to have them, and don't make it a strategic goal to get one.

4/ Leverage a "Big Brother" Partner.   As I get more experienced this one rings like a gong.  Without a big corporate partner than benefits greatly from your success, scaling to a Billion from one off singles and PRware (meaningless partnership announcements) is tough.  Again, it's about making this a strategic goal vs a "nice to have".

5/ Be capital efficient.  It's a myth that you need to spend lots and lots of money to build a Billion dollar business.  Most companies are self-funding after a certain point (typically around $25M in annual revenues per the author), and they have high margins early on that are sustainable, and they don't consume that much cash to get there.  So you need to be very efficient acquiring customers and making sure on a unit basis they are profitable (excluding your beta or pilot customers of course).  That means you need a good internal person to make sure you control expenses while growing, which gets us to:

6/ Paired management teams.  The myth of the all knowing, all powerful Oz-like superman founder is just that: a myth.   You need both an external CEO that focuses on the vision, product, marketing, and sales and an internal CEO/COO that focuses on delivering on that vision profitably.  If you don't have one or the other get one, or you're likely never to get to a billion. 

7/ Have at least one board member on your board, outside of your investor or management team (althought that helps!) that has grown a company to a billion.  Boards that are dominated by management and investors don't grow to a billion.  Boards that have a couple CEOs, that have grown their own companies to a billion, do.  So get a couple of those experienced CEOs, or as close as you can get, if you plan to grow to a billion.  Sounds pretty simply, but it's shocking that few entrepreneurs and investors have them on their boards. 

While a lot of stuff I was cognizant of, and see in my portfolio companies, sometimes it is a tough job to convince managers and other investors of these critical 7 elements.    With this book, it's at least a starting point of the discussion.  Recently, it's made me a bit bolder in pressing these points.  It's one of the first times in a book, or in any media for that matter, I've seen any real attempt at analysis on the subject of growing companies in a rigourous and analystical way.  (Please comment below if you have some other recommendations!).  I could blog for the rest of the year on these themes, and plan to, but in the meantime, I'd grab or download the book ASAP.   Even if you are not thinking about growing a company quickly, the applications for people in investing, business development, government policy, merger and acquisitions and job searching are very very significant I think.

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P.S. I am such a nut about the book, the author, David Thomson called me two Fridays ago, after hearing that I raved about this book to a close friend of his.   I asked him what motivated him to write the book.  And he told me he had several offers to runs some startups that subsequently failed;  David was so pissed off that the risks involved for a late 40 year old were so high (in his mind), that he wanted to reverse engineer how he could tell when a company had a higher probability to scale to $1B in 5-7 years.  He spent 3 years researching this topic, and as far as I know, is the only person to attempt to systemically determine what key traits a startup needs to stand a chance to scale to a billion exponentially.  Leave it to an obsessed, pissed off entrepreneur to try to change the world!  If you read this far and are still interested, email me, and I'll forward the first chapter to you (when I have the time) which Dave send to me to distribute. go to his site and download the first chapter. I asked him to put a link up, no luck so far, and I dare not do that myself!

Comments

[Rob]

Hi Steve,

Does MySpace have all the traits of a $1B company?

Thanks,
Rob

[Steve Brotman]

Timely news. I'd say that Google's recent $900M deal with MySpace makes MySpace a billion dollar company for sure. However, I'm not familiar with the internal dynamics there. Also, MySpace is now owned by NewsCorp, which acquired them most likely with the thought that MySpace would scale into a multi-billion dollar company.

Does anyone know if MySpace would qualify as a BluePrint co per above prior to the acquisition?

Steve

[Rob]

I would love to hear David Thomson's take on whether MySpace is a $1B company.

[Ken Berger]

Steve- Stepping up as 'anyone' re: your question, when I run MySpace (MS) through the "Seven Essential Traits" test, I find the following:

1/ Find or create a great value proposition.

MS wasn't early, they were a late entrant. But a key innovation was the band/fan angle. Some compare this to Google later employing the Adwords model: either company were doing reasonably well but a key innovative twist, whether through luck, stumbling upon, or pure ingenuity, was essential to taking the company through the stratosphere. Check (as in "passes this test").

2/ Find a quickly growing market.

Practically a given. Online interactions and identity management is about as deeply transformational-- and growing-- as most any tech trend we know of today (and also prior to the acquisition). Check.

3/ Get some marquee customers.

Technically, MS' direct customers (those who pay the co) are arguably the ad providers. More interesting would be to consider the indirect customers: the users. IMO, the smartest and biggest distinction MS has is allowing the users freedom to do what they wish, even if it often results in bloated and scarcely-readable homepages (and some legal and personal security risks). "If you love someone, set them free". This has allowed the users to design the product, provide the content, and guide the business model.

But another extraordinary angle MS used was to aggressively court key celebrities as users. As a musician myself, once I noticed that some of my fav musicians had created accounts and posted their music on MS, I adopted it as my primary social networking site. This aspect provides validation and street cred key to attracting new users, which has a snowball effect. Check.

4/ Leverage a "Big Brother" Partner.

The Google deal would have been the definition of this, but it's way after the fact to be considered in this discussion. Though big record labels scoffed at first, they later found themselves in the unimaginable position of being forced to partner with this disruptor. This of course lends validity to the brand and company and thus snowballs uptake. Check.

5/ Be capital efficient.

You can't get much more capital-efficient than a web software company. Of course: server bandwidth costs money, especially as load exponentially increases, and websites can become victims of their own success. But the minimizing of COGS and inventory on the balance sheet, together with the fact that most of the content is 'donated' and built by the users, makes an efficiency that's tough to rival. Check.

6/ Paired management teams.

MS seems the poster child company for this. An under-emphasized aspect behind the co's history is that the founders come from hard-core direct marketing and viral backgrounds. Smartly, the baby-faced Tom/Chris team has been allowed to remain at the helm, Tom is a 'friend' of all new users, keeping a folksy rather than corporate feel. Check.

7/ Have at least one board member on your board [...] that has grown a company to a billion.

Here's where MS is interesting and different from most startups: they weren't really a startup. They were employees building a company on behalf of a parent, Intermix, (despite last minute VC infusion to attempt to bring MS back to being a true startup). Resources from the parent as well as elsewhere were certainly key to growth. Check.

Results: 7 out of 7. My answer, based on my opinions, is "yes". Seems to fit this taxonomy to a tee.

[David G. Thomson]

After receiving many requests, Steve has finally motivated me to get chapter one on my website for you to download. If you go to www.blueprinttoabillion.com, go to the Download page, scroll down to the bottom of this page, you will see two pdf files to download. One is the front matter and one is chapter one. Enjoy!

Thank you Steve for the complements on the research and book. I am thrilled you are applying it to your companies and discussion here. I liked the analysis of MySpace. You nailed it Ken.

Best,

David