Idea Evaluation

[Music] whirring the gentleman on the pattern will have quite a bit of very relevant experience for you so I I think you're going to enjoy the discussion as we a background I graduate from the Stanford Business School in 1997 I have been a founder of four different entities a company called optical engineering making industrial co2 lasers drugstore.com good technology newschools venture fund and also tugboat ventures my most recent company I've been doing tugboat for the last four years or an early-stage venture capital firm moving to the topic at hand this panel is about idea evaluation however in conversations with quite a few of the students over the years what I hear most often is the evaluation site is a bit easier the idea generation side is frankly the harder part and often find people saying where the great ideas come from how do you know you've got a great idea so the first piece is coming up with a great idea the second piece trying to determine the quality of that idea so to kick off I'd like to have each of the panelists introduce themselves please take a minute or so and then if you could give us your favorite quote I would be helpful well I'm Bob fel and I'm I've done a number of startups and we'll talk about some of them today I imagine and my favorite quote actually came from Robert Kennedy and it was some people asked why I choose to ask why not my name is Brad whiskers and I'm the CEO of kinetics were headquartered in Boise Idaho my favorite quote is by Julius Caesar that's vini vidi vici came saw conquered his report home after defeating after being victorious in a battle in Asia Minor after four hours and I like it because it's tough and B its pithy I aspire to be as pithy as that so hi my name is Justin Fisher Wolfson I graduated from Stanford with master's computer science an adventure firm called founders fund which is well known for investments in Facebook SpaceX things like that worked in a variety of startups in the valley and I don't know my favorite quote which I'm coming up with off offhand now was reality has covered my perception but not changed by it and it reminds me of when I'm talking to other people what what to look to look at things to their eyes I'm Kevin reef co-founder and CEO of outright calm kind of a late bloomer this is my first kind of venture startup run product management a lot of Big Valley companies over the years my favorite quote and I'll probably not get it perfect but it's Thomas Edison when he talks about some of the biggest failures in life are people who didn't realize how close they were to success before they gave up because I think perseverance is pretty critical to be a successful entrepreneur that's great thank you so diving in my belief is you have to have a little context around the importance of an idea before we dive into the details of how you generate these ideas and how you evaluate these ideas so could each of you take just a moment and give us a sense for how important do you think the idea is versus other elements of a successful business okay we can stop short Bob I'm going to be first each time today I guess ok I mention another quote Edison's quote of its 10% inspiration and 90% perspiration I think the idea is important but I think it's not the most important thing I mean I think that there are a lot of good ideas but it it comes down to the implementation of the idea the management team the passion of the entrepreneur I mean if you were to ask me what's most important does the idea stick with you I mean two days five days three weeks afterwards are you passionate about it and I think it's the passion of the idea and then the research to really see is there a market there but I I think idea generation is good if you read the newspaper and if you speak to people and if you have a coterie of friends that are relatively well-informed and if you have an international flair you're going to see a lot of ideas but it's those that stick with you that you can become passionate about that you've done the basic research on that really matter in my mind I would actually agree with Bob I don't think that the idea itself is the primary driver of success a cohesive team with the ability to execute I think is more important and I agree that the passion is very important someone said it's easier to breathe life life into a corpse than it is to tame a fanatic and I think that's true I think if you've got a passionate team they're going to work very hard and it's it's easy to recruit if you have a passionate team because everybody wants to be part of a passionate team everybody wants to rally around morally compelling initiative and so the idea in of itself is great but not the most important thing and that being said I this is coming from a guy who has a great research team who comes up with fantastic ideas all the time that's a pretty big luxury so yeah so honestly I think ideas are dangerous what happens is you know people can get wedded to them you can go down a path and ultimately this the big success or failure of the business will be determined whether or not you're chasing the right thing so when you have a small group of people it's an early-stage company you just want to figure something out does the idea matter probably not the people are way more important because the number of teams I've seen that have started in one path and gone a completely different way six months later twelve months later and built something very successful I mean there's a huge number of those people but ultimately if you go out and you chase an idea for a long period of time with a great group of people that's not very good it's there's a limit to how successful you can be and I think there's a you know it's a question of where you are in the process that determines how important important the idea is yeah so I agree with all these comments I don't think a great idea is necessarily going to you know give you success there are so many other factors the one caveat is a at ideas crippling and especially an idea that's not based on a real need so there are so many failures out there where people you know people by nature we tend to think in terms of solutions we want to jump to the right answer when I get a shortcut and so we get wedded to an idea we get really excited about it and if it's not grounded in a real need that a lot of people have a lot of people that you can reach from a marketing perspective and get to it's going to be challenging so there is something in kind of the early vetting you need to be honest with yourself about the idea if you don't get the the feedback you need to move on and iterate and change and adapt so yeah so one of these I want to also share as far as context I talked to the panel members before this this is not a discussion about ideas for companies which you might sell in a year this is not about coming up the quick momentum something that's kind of in the psychist of today it might be something that you could put a little money in a little bit of time and turn around and sell this is really about how do you build a company could be a lasting business one that knew frankly would be viewed as a remarkable company so it's within that context that we're talking about idea generation idea evaluation so if your objective is not that you know discount some of this advice because for example building a great team if you're going to sell the company in twelve months is really not that important you might need a great team of engineers for example is the technology company but again context I think is important understand this so for the gentleman that started companies where did your idea come from and what we start Kevin sure so ours started like many with personal pain so my co-founder and I we're running a web development company we'd left kind of big corporate America and our company outright comm is free online bookkeeping very basic and when running our company even though we'd worked it into it for years trying to do the finances on QuickBooks when we were both working at home and needed access to it it was just painful and we thought there's got to be a better way and as we went around and talked to a lot of our clients and vendors and other folks we found that there were a lot of people saying there has to be a better way and so it started with with kind of that personal pain but what was interesting is our original concept that we put out there actually threw up mock-ups on the web and asked people to check it out we didn't get the reception that we thought turns out that what people needed the bigger opportunity the market was something much simpler and so being able to listen to the feedback and kind of change direction and recognizing that our first premise didn't resonate in the market was pretty important so I haven't founded a company but I've been involved with a bunch of earlier stage startups both on the operation side and on the investment side and honestly a lot of it comes down to finding a pain point I think the one caution is that people often find things that are problems for themselves and not necessarily big problems so that's that's one thing to consider a lot of us are consumers we understand the consumer needs but it isn't assuming you're solving a big problem some of the more interesting companies I've seen you know what about you know when when I was working in mobile it was really around you know what are some of the big problems you can solve for you know some enterprise players that you know people have built relationships with over time and you can leverage those relationships to find out what the problems are you know you look at retailing people have to hit their numbers every month right you know on certain products they're huge rebates you don't necessarily know those things unless you've been in the industry so leveraging you know industry knowledge and places that you've worked or things like that can add a lot of value I guess I'd be surprised if anybody in that room has ever heard of kinetics so I'll give a little background first kinetics is an internal incubator we were founded 98 by internal incubator what I mean is we have a research team that comes up with our own ideas and those are the only ideas that we incubate and we only incubate those ideas using our own money we don't have any third party or institutional backers we are founded 98 we have no debt we have a hundred total employees well in excess of 300 million in revenues this year and very very highly profitable so we've got a lot of money to do what we need to do in order and Kubik companies and grow them so we have two operating subs a lifecycle of a company in our of a subsidiary with our company is we have a research phase where we have a research team that evaluates that takes any ideas that are that are members of our company come up with they've they vet them for technological or business viability then we pass them on to our early stage investment phase where we incorporate we do all the things we need to do in order to make the company viable we have that we have a growth acceleration phase where we hire a stand-alone management team to take it to the next level with an eye to our liquidity event we had our first liquidity event in in 2000 so we currently have two operating subs the first is Clickbank which is a very large online retailer of digital goods we sell thirty five thousand titles footers by twelve thousand vendors we have 2.8 million total affiliates and our affiliate network we and over 110 thousand of those facilitate a transaction in a given month we do it's a we do 26 thousand transactions a day so it's a pretty sizable company and then our second operating sub is an early stage company it's in our growth stage it's in our early stage investment phase right now it's company called count spelled kou NT count is an online risk control solution not just online it's basically card-not-present risk control solution the way it came up was with Clickbank being a retailer of digital goods there was a lot of we saw a disproportionately large amount of what are what are called tests on the internet where people with stolen credit cards or compromised cards would try to use it would try to hit Clickbank in order to see if the cards were good and though in the brick and mortar world it's like someone gets your credit card at a restaurant they take it to a gas station immediately plug it in the gas pump because nobody's going to cuff them and they make sure the cards so good then they go to Staples or somewhere by a buy a laptop and fence it they do that in the online world on digital goods because they don't have to put in a bunch of cardholder specific data there's no shipping address etc so we saw a lot of the bad guys we were a test site just like any digital goods retailer was fortunately our founder has a PhD in mathematics from Princeton is and this was his sweet spot his online risk he actually invented and patented device fingerprinting which is kind of a risk control standard in the world right now and so he came up with solutions we realized hey we've got this fantastic solutions a solution that is highly effective for our for our companies let's other other online retailers may have the same be suffering from the same problems we sent some folks out to do some analytics and determined it was the same so as a result of our pain the pain the we felt that Clickbank we decided we could come up with the solution that work for the rest of the world and it's been remarkably successful so we're very fortunate idea evaluation idea Genesis I'll just go through three companies in which I have been involved the most recent is price lock and how it came about is very simple I had read about Southwest Airlines having two billion of its earnings just by hedging its fuel costs and I I'm involved in a a company for the benefit of inner school children a food company and I was across the street from a commissary filling up at the gas station and two guys in a Dodge pickup were arguing over the price of gas I think this was in 2006 and one guy said it's going to go up 30% 40% and I just I don't normally walk over to people in a gas station but I walked over to these two guys and I said let me ask you something price of dollar 67 on for gas if you could get a thousand two thousand gallons you're full gallonage that you needed for the next few years in pay and I added a quarter to the price would you do it and both those guys that absolutely we do in a segment said how would you pay for it is that we use our credit card I said that's 18 percent money we don't care the price of gas is going up that much and so it the idea started to nod me and much to the chagrin of my wife every time I pull into a gas station I go over and speak to people and and ultimately price lock was born to extend you know I went I had relationships at Goldman Sachs and I did go see them and asked them I learned a lot about hedging and it was not just from you know that occasion became a business but we did our work and we put together the funding I put my own money up in the beginning but basically it was as simple as how do you extend what Southwest Airlines had done to to to a whole new class of customers and that's how price lock was born the second company I'll talk to you about how the idea was generated was really premier radio if you recall and maybe some of you won't recall in 1994 everyone was buying radio stations and I was at a conference much like this the Milken conference in LA and Sam Zell spoke and he made this one comment the world is buying radio stations and an idea went off in my head I said you know it's interesting everyone's buying radio stations why don't I try and get a radio programmer and build a radio program it because it's axiomatic when Rupert Murdoch thought the metro media stations he wanted form the Fox network if you own a distribution you want to have the programming that goes with it so I try I couldn't buy ABC or CBS I couldn't afford it but there was a small company called premier radio which I bought with a couple people for 33 million dollars and then we just did a rollup we bought Jim Rohn sports and Bob Costas and sports and talk shows the last thing we bought god-forgive-me was rush limbaugh but in any event we did do that and we became the largest radio programming company in the world and we sold it somebody ran'l now for 498 million dollars so it was not a bad deal the last idea that I want to talk about was an idea that in my mind we did too quickly and we did it we've got you friends at Kleiner Perkins but you probably know it silicon gaming the I had been involved in Electronic Arts and with Brooke Byers in the startup and I said and I was standing in Las Vegas of Steve Wynn and he said you know it's not going to always be the blue-haired ladies that play these machines and all of a sudden I said Jesus you know we have this touch technology you have so much we've learned from the game business why don't we put a group together and why don't we create a company and we did create silicon gaming with the whole idea that silicon game we would have the new type saut machine that it would not be just this static you know press the button and watch your money what we built the company we put a lot of money into it we had but we had a heck of a product but what I didn't really do and this is goes to the you know an idea as only as good as its implementation what I didn't really learn and I did hire Andy Pascal Steve Wynn's nephew who ran the slot machine business for at that time MGM Mirage but I didn't realize that it doesn't matter how good or bad the machine is it just matters can you get in location people go there and they play the Machine and it doesn't matter you can have beautiful graphics you've just spent a lot of money it's get me something that works quickly because the odds are all the same anyhow so we sold it we built a company we got our money out with maybe a little bit of profit not not if you've count time and we sold the company to igt which is the largest in the slot-machine business so I come back to our original point ideas are only as good as they were implementation and the work you do to make sure that the market is big enough and you can build a profit business there from thank you so going from specific I'd like to ask you now about and it and Bob I think you gave a few and Justin you give a few also but any other thoughts on strategies for coming up with ideas how do you go out in the world tomorrow say the four of you or starting fresh tomorrow and you're like I'm gonna go build a big company I want to be a meaningful remarkable company I want it to matter what would you do tomorrow to start looking for ideas anybody can take that one we're not to go in order four sons that you know two marriages going from you know 29 down to two seven years old and you know I look at the world of Education and I see you know just generally China going to school 30% more Korea going to school 30% more and if I were to start a company tomorrow the general area of education would have huge appeal to me I don't know what it would be but I mean I think there's a lot of Asian opportunities education space I also think there are opportunities in quantified health I mean there's much of their bunch of interesting that change that are happening with sensors today but I mean maybe the broader question is you know how would you go about starting a company because I think first off it's a question of what you're passionate about so maybe your passion about health care maybe your passion about education you know if you're not don't worry about it right there's there's the general sense of if you want to build big businesses if you want to build lasting businesses something that will be a great enterprise you're looking for the subsets of opportunities that can be billion-dollar companies and that's not all companies right there there are lots of very successful small businesses that drive most of the employment as I've heard on the radio consistently in America so I mean there are lots of great businesses that you can do but if you want to build a billion-dollar multi-billion dollar company that has a real impact on a lot of people that's a small subset of businesses and so you have to think big and you have to understand where there's a big problem in a big market I think there's within that a subset of businesses that are easy right so going back to your point about you know distribution right you know you're trying to get slot machines on the floor distribution in almost all businesses is a pretty big challenge so the question is you know some some ways are easier than others and some might be specific to your background and your relationships so that's that's kind of what I would start by thinking about so how do what's billion-dollar business and then what's an easy billion-dollar business and one way to think about that is to think about what kinds of businesses tend to be winner-take-all so places where you have some kind of network effect right you've got all the classic communications networks things like that you've got Facebook all the phone companies like these are these are quintessential network effects businesses when there's a winner there's in winter and it's a big one right you can look at places where you have an information asymmetry companies like Google they have a better product because they have way more data on whatever one is doing to refine the results so they've consistently just stayed ahead of the curve of everyone else because they continue to have more and more data so I think there are some general themes that you can take advantage of when you're just trying to think up what are the really really big idea is that you can chase down on the high level question I'd go to lunch and by that I mean I get the smartest people that I know which are generally fortunately people that are on my team and I'd take them to sushi and this is what we generally do we go to sushi we sit at a sushi restaurant in Boise and yes we have those for a landlocked state and we go to the same place and we sit at the same table and we start brainstorming and we'll brainstorm for a few hours will identify some problems and then we'll start identifying plausible solutions and that will usually carry over into our research lab where we sit in front of a whiteboard with you pick your drink dr. pepper for one of them Red Bull for another and water for me fortunately because I've got to have to have the cooler head to prevail by the end of the discussion and we usually start then refining the ideas of okay that's a fantastic solution although it's going to take us three years to develop what's the good enough element to that solution that can get us into the game and the ones we come up with that solution then we start evaluating okay is that scalable and is it and then we start evaluating alright and are we going to make any money at it and then we start asking people who are the potential customers and there's no there's no better way to ask them than just to sit them down and ask them which is what we've done with ours is this a solution that you'd be interested in what are the bells and whistles that you'd need to add and then you keep going back to and can we do that is it scalable can we do it with a relatively small number of people and and make relatively large numbers doing it so when we want to find a solution when we want to have our next idea when we want to vet our next idea we just go to lunch yep in Boise in Boise that's it that's like that's a good restaurant yes your business I think you do a good job yeah she plays rah rah rest in Boise Idaho is the birthplace of many many good eyes so I'm kind of a fan of Bob's story about going up and talking people at gas stations so for me I find it hard to say I want to go out and come up with ideas and it's more about making sure you're good at listening every day in every interaction you have with other people because ideas get thrown by you every single day you read about it you hear about it and it's just are you paying attention and every once in a while something you know this gets back to the passion comment when you hear something that you're like okay that interests me that intrigues me that's probably going to catch some of your internal passion and you'll probably stick with it so then go out and do some more research talk to more people read up on it and see if you kind of get that validation is things support your hypothesis and sometimes you're going to find that not you're wrong okay move on to something else but a lot of it is and a lot of the entrepreneurs I know they've got a backlog of ideas I've got 10 15 things that they would love to work on right now except they're working on something that I think is their best idea and if that stops they'll move on to the next one so you know a lot of folks I've got a list you know on my laptop actually up on the web on backpack of the things one day I want to get to you know after this company what's the next thing I'm going to tackle and it's always coming up and so I think a lot of it is just being very aware and recognize the different data points as they come across your path to start drawn those connections that maybe other people don't see and then you start investing the time to really go validate is there a big market there can I reach these people can i you know derive most of the economic benefit from it so I think this is a good transition point because there's been whether it be over sushi or they'll be walking down the street in every interaction whether it be you're talking to other folks around Stanford going to the gas station how do you guys feel about the the discussion of your ideas with other people do you feel like you have to hold it close to your vest or do you feel you can open it up or how do you think about that I mean you're probably not blogging about your best idea before you start it but you know I would haven't you advise people and in in that spectrum of I'm not talking to anybody because I want anybody to know what I'm doing because it's just such a great idea it'll get copied to your posting a blog post saying here's my idea I think it's greatest in the world can you beat me to it so what would you guys say I'll start I think one of the most common mistakes and I've made it many times is you think your idea is amazing and if anybody else hears that they're going to rip it off it's not true if it's a really great idea and it's really innovative most people who hear are going to tell you you're an idiot because conventional wisdom but like the really big opportunities tend to be when most people don't see it so the really good ones are you're going to say it and a lot of people say that's just stupid so for example I don't know if it's going to be successful but I find blippi fascinating right sharing your credit card spending I cannot think of a start-up in the last like five years where I've heard more people say that's most idiotic thing I've ever heard and yet people are doing right and why and one of our investors was just at our board meeting the other day telling me about the benefits he uses and he you know he built this relationship with another entrepreneurs like that's fascinating to me so that's one of those things where I'm pretty sure they could have shown it to ten people and they would have said come on don't do that that's crazy plus the whole point about executing you have a great idea and everybody can have the same great idea but it's the team that out executes the others who really refines that idea gets in market and proves it that's going to win so you know yet you don't blog about it but you know we had mock-ups of our original vision up on the web you know two years ago two and a half years ago showing exactly what we were going to build and yet we have a lot of competitors that we've kind of blown by since then because they look you know they could have seen it they looked at it and they didn't think we were right well we kind of turned out to be right I kind of build on Kevin's point because I think if you talk one I think there's really no reason not to share with people I mean whether or not you put it out on the internet and you know you do much SEM so that way lots of people find out about it is a different story but functionally talking to people in general gets you good feedback and if it's a really great day you're going to get two responses that's a terrible idea why the hell would I ever do that or wow that's the best idea I've ever heard can I join you right people in general the responses while that's the greatest idea I've ever heard let me go try and do the exact same thing and build another team over here that that's a very uncommon uncommon response so in general it's I think it's worth talking to people the you know the the interesting the interesting thing about sharing ideas is one it's great way to recruit people right like you you want to be able to build the best team and so you need to be able to tell a story that's compelling that you can that you can attract the best kinds of people and so I think telling that story to other people will force you to build a concise clear vision of what you're trying to do and I think that's that's a very important part of the process and quite frankly most people don't do anything you could go out I mean there are lots of great ideas lots of very successful companies in many respects we're pretty obvious and I'm not a big fan of intellectual property but I mean the issue with most of these companies isn't that they're that hard they're not necessarily that difficult to do but you could have told a million people and only seven of them would have even tried so I mean functionally it's that people don't take the first steps to go and build something right and there's a lot of perfectly reasonable excuses for not doing it but in general people just don't take the first step and that's and that's the big reason why lots of perfectly huge businesses get built and you wonder why there weren't 47 other people chasing them down I agree with Justin and Kevin we to some degree we have a very aggressive trade secret protection program in place and that's because particularly the industry that counts in well let's actually click link as well we've been shamelessly plagiarized a lot of times the differentiator is that we execute quickly we have a scrum shop with with two-week sprints and we get things done and we get them done quickly and efficiently but people do shamelessly plagiarize good ideas so we have a good trade secret protection program we don't really let go of our secret sauce but we do go out and talk to people about our ideas because that's a that's the best way to find out how good your idea is you may think it may solve as someone else said earlier it may solve a pain that you're currently suffering but you don't know if you're you're just particularly bad at what you do so your pains far worse than anybody else's so you might want to you might want to vet that a little bit so we were kind of right in the middle we protect our trade secrets but then we come up with speaking points that we can talk to other people about so they can't figure out exactly what we're going to do but tells them enough so we can get good input so when we go to market we've optimized the likelihood of success to sign an NDA you know so I'm a former lawyer I'm a recovering lawyer yeah so and and our team at Fenwick and West probably kill me for saying this but you know it depends on the nature of the beast but a lot of times you don't and I don't know exactly how good those are anyway because every PE you ever talk to signs an NDA but then they go off and somewhere along Sand Hill Road everything everybody knows everything about everything every other company because they go out and grab a cocktail together so I don't know exactly how effective they are there are instances when we do and there's a lot of instances when we don't we're just very careful about what what we disclose that nobody can invent our secret sauce we're not posting source code perhaps you're right what you're talking about is technical I mean you you build technical barriers that are sort of not obvious to till you know you go on tell some of what your business is and the problems that you're solving it's a high level things it's hard to reverse engineer that buttress by a healthy patent portfolio and them and all you're doing by shamelessly polarizing us is providing us with a revenue opportunity so history that's the formal lawyer talking yeah I'm just gonna book a table at the sushi restaurant next is raw I think it's broad next I've never protected an idea I found that the more I I talked to people and the more responses I get the more refined the idea becomes and the better I am at articulating it thereafter and I think over time we all develop a coterie of friends and sounding boards who you know maybe there's a half a dozen people whom you always go to and you talk to about ideas and I know in Santa Barbara every Sunday morning at least during the football season a group of guys and I have breakfast and you know probably bet more than we discuss ideas but you could develop a group of people with whom you you feel comfortable telling your ideas and they give you honest open feedback and I think that I've never tried to protect an idea because I've always thought if I want to do it I'll try and do it with the best management team of anyone and you know maybe it's a confidence but that's that's where I stand so how about the common mistakes in evaluating an idea where have you or your friends kind of ran into trouble Bob you were kind enough to share the story of silk in gaming sound like you kind of missed the behavioral aspects of that in the importance location but can you share some other examples were or would kind of illustrate common mistakes that are made I you know I I've stayed with some ideas too long and just because you know I was passionate about them but not realistic you know we we looked at the restaurant business 1992 I think it was and I said why is there not a casual Chinese like PF Changs and I did you know I did get with Philip Chang and I did do a couple of prototypes and I kept saying we just don't have it right well you know several million dollars later we still didn't have it right so it was it was a mistake just stay with too long and but listen to my wife no truly I mean she said you know this food is terrible I mean she was very blunt about it and I kept saying I Brent yeah which is absolutely true I mean it basically you I said but it's authentic its authentic and that you know I was I was passionate about that part of the world and I was I was wrong the second mistakes that I've made or with you know and sometimes I'm so anxious to proceed that I pick the management by background and not by how well will I get on with them it's a hard thing to really figure out you you you you pick someone because God what a great background go back to this this guy ran all of the restaurants for you know for meri Corp and a big chain I'm just using one example but the guy could not be an entrepreneur I mean he you know he had to have five people if he told a small story and so I urge anyone who's going to be an entrepreneur and build a management team spend a lot of time with the people you're going to hire get to know them better than the mistakes I've made it not doing that enough in certain instances and and and and you just get mesmerized by someone's background as opposed to do it do they do they fit with you it's ok we'll do you promise so you're spending more time with them what are you trying to get underneath in those discussions would I want to go a ball game with this man or woman would I want to spend time with their family I mean it's just it it takes time to get to know someone and it is good in a start-up there's going to be the bad times and do you want this person in the trenches with you there's going to be the bad times you're going to you know I I can remember certain times where I thought you know I'm not going to make payroll and there's going to be bad times and would this person really just say forget about paying me or stuff like that I it's that I've made mistakes and we all have I'm sure any people forget that the only reason companies go out of businesses they run out of money like at the very fundamental level the only reason you you you stop running your business is because you've run out of money in the world of startups money equals time right more money you have more cash to have in the bank the more time you have to build your business and that's just the fundamental nature of the game so you know the question I think the biggest mistakes that people tend to make is they somehow get the timing wrong I mean timing turns out to usually be one of the most important things with any business and if you know you're right and people have been saying mobile as the place to be in the 80s well you know start your mobile company in the 80s probably not around today started in the 90s probably not around today started in 2002 probably not around today right so functionally it's question of you know how much time do you have to build your business and if you get it wrong if you if it turns out that you thought it was a direct-to-consumer business but you actually actually have to go and strike big distribution deals with you know major companies that take 24 months to do you know that's that's money and so people you know I think one of the biggest mistakes you can make is not understanding the amount of capital it takes to build the business into a sustainable point once you have a sustainable business the world is very different but a lot of startups especially around this this area you know they're they're not they're not started in a sustainable way right it takes time to get there and you have to make sure to have enough cushion that if you're wrong you still have a chance to get there because if you're off by six months it doesn't matter all right I agree with both just an EM Bob I think yes the question was common mistakes mine would be probably letting the fervor of creating an exciting cool solution be the driver without properly sizing the market or proper properly evaluating your end consumers needs I see that a lot even in our shop when our research team when they start working on a project we get really excited about something's really cool I mean this is just a fantastic idea and what we have to do with the model that we've created we have to be really disciplined we can take it a long way we've developed products and been pretty close to being ready to go to market and had to say okay we've put a lot of time and energy into this thing is this the right move for us right now and you have to be really willing to put your pride aside and say you know what we may not have we may not have evaluate that quite properly so we're going to fold it pull the plug now because we want to be around tomorrow and we don't want this to be a huge drain and you've just got to be really disciplined about that and it takes a lot of pride to be able to say yeah we were wrong on this one next one we're going to nail so did you ever have one where you felt in your gut that it was wrong but you went ahead and launched it and then learned that your gut was right fortuitously no we haven't we haven't done that yet there's been ones where in my gut when we started the development process that I thought wow this is this is I don't know I don't see the full vision yet but I but you know we're all we've all we all think it's got potential and as we as it evolved as we got closer to launch we didn't that this isn't the right move so we've been fortunate enough to pull the trigger and cut things off before we've gone to market so can I ask a follow-up question John suppose we bred some people would argue that if you have a lot of very smart analytical people sitting around a table which may be what your research lab is maybe it's not I don't know that contrarian ideas the ones that are the non-obvious ideas will never make it through the table because there's too many people can shoot down any contrary an idea so high because you do have contrary night you've done things that other people pry density is obvious right so how do you manage that so that the the analysts don't crush it well I mean accepted more broadly like your friends who are analysts your friends who are good consultants and bankers and all that here you might be bouncing your ideas off it just can't see why you want to go after that stupid idea well there's a lot of things first of all we all recognize that whenever we start these discussions we have to be open honest and fearless I want people that come up with contrarian ideas because it to the rear they're not coming throwing those out on the table we're going to we're going to make mistakes that we didn't have to make and we're going to spend money that we didn't have to spend in order to figure out those mistakes so I think we've worked together enough that we understand what each other's strengths and weaknesses are and we're able to to factor that in at this point as we've been we've been successful at what we've done because sometimes we recognize yeah he's got a good point there but there's also this proclivity that he has you know not necessarily like this sort of idea and we're able to call each other out on those things and so somehow we make it work just by being very very open very honest and communicating we're probably if you ask one of my CEOs we communicate too much here's the side of not talking so much but I'm I'm the dr. Phil of the business world I guess so we we just know each other we work through them and we and we and if people have legitimate concerns we we we drive we drill down on them so have you ever pushed against the entire team or had a subset of the team push against the entire team to move an idea forward oh yeah I mean of course so you carry the big baseball bat uh there's a few big baseball bats so there's there's more than one but because what a dynamic psychologists share context some of the firms I worked at it often be a partner who said I really believe in this idea it may be the sixth search engine in the world it may be two guys that are very young they don't seem that complete perspective on what it takes to build a business but with this is going to be huge and the other partners say now we don't want to be in the sixth search engine it's the technology is not that differentiated the core technology is very similar the technology and the existing search engines what do we really have here and then one person sometimes just puts it down they just say work I just have to do this so I was always trying to bring it out we've had those situations ok so at the end of the day the buck stops here so sometimes I can hear the call yeah sometimes I got to make the call so but it's we've got a healthy we get into some healthy debates which is actually a lot of fun in the other common mistakes so I would say you know two most common mistakes I see one is what everybody's talked about which is you tend to get locked in the solution you know you don't you don't believe the data that comes back that says this idea that you think is awesome isn't so awesome that's really easy to do we all get attached to things we love so doing that the other one I want to talk about is one of things really hard the early stage is just maintaining folk because you're going to have so much data going on here you know you can only do so many things getting distracted is very easy to do chasing shiny objects and new opportunities there it's because when you start it's pretty rare that you know the ultimate answer when you start you're going to get there it's going to be a journey but it's very easy to get too far off course and especially if you know if you're chasing money if you're chasing a big deal these things like that it's very easy to do and so you know time and resources are precious and limited so kind of focus and ruthless prioritization are pretty important it's very easy to get distracted so how do you balance it because I like to think of that early formation stage as honest being this drunkards walk you're in this process the discovery you talk to one guy at the gas station he says one thing that's discouraging you talk to another guy the gas - does do something different and then you talk to your buddy and says oh I have this friend that knows how to do these exchanges you should start building the idea how do you know how much you kind of need to leave a little bit right back and forth ideas discussion so are you talking about post that phase we've decided it you're going to go is it through so so there are certain things where you know if you're getting conflicting data you just need to invest more time to go you know find art and are you looking at the data the proper way right are you not are you missing something you know you're you think you're on found the root cause but you're really looking at the symptom and you just need to dig and maybe get some more data points but I think the bigger risk is actually once you get beyond that you start there are some short-term pressures around timing and maybe milestones that you need to hit that some opportunities may present themselves and say you know what I can I can demonstrate more progress in the short term but that might take me off course a little bit and it's a constant trade-off of what am I trying to get to versus what can I do today tomorrow you know what can give me a little bit of money or a little bit of runway but it's not quite core to what we're trying to do don't know that there's an easy answer on how to do that but I think it's one of the biggest risks in terms of things to watch out for talk a little bit about the risk of you've got a contrary an idea and now you hit it on this Kevin and you're walking up a Down Sand Hill Road and they don't see it so you just pull a color on how you feel about that would you literally walk away from money completely bootstrap at $20,000 a year salary would you give up at that point well how would you respond to that well given that I thought about giving up maybe five six times before we actually got our money the first time that's a challenge I mean it's tough we did bootstrap it but everybody has a different risk profile right you may not have $20,000 that you can afford and I've been working on the valley and been well compensated I could afford to do it for a little while but if you're not in that situation everybody's got to make a personal choice of you know for your situation you know how passionate are you do you believe this and a lot of times you know we had a lot of people pass on us the first time and then we had a lot of term sheets on our second time so we were able to prove some people wrong but you're going to find that a lot of people are not going to believe in your idea that's why my favorite quote is it's about perseverance it's about are you willing to stick with it you are going to screw up a lot of stuff you make a lot of mistakes but if you view those as the best opportunities to learn and get better so that you know eventually you'll figure it out and you'll show the traction and the money will come find you if I guess my advice would be if you can't get the money early on or you can't convince folks go prove it in market because if your idea is legit you'll be able to prove it in market and once you do that you'll get a lot of believers so that's one other question which kind of struck me as we were talking is you guys keep talking about the importance of the team when you're at the early phases of idea generation and idea evaluation do you want to have a co-founder with you doing that or a couple co-founders and if you do what kind of people would you recommend be there at that time because you don't know exactly where it's going to all go do you any comments on that standpoint you you want someone who understands the business that you're going into pretty well you want someone who's compatible and you want someone who is cut of the cloth of the entrepreneur who can take adversity well to your point about perseverance sometimes you make mistakes in the beginning you recast but I I thank you it's from my standpoint in my standpoint no it's easier to have a partner so you'd rather not be alone Eagle figure it all out yourself and then find the right partner for that particular business the first deal I ever did I was five percent and someone else was ninety five percent and he called me partner and I learned something from that because it it gave me the feeling that I was really with him and I and taught me the value of treating people with respect and as if they were partners even though it was ninety five five emails touch up still for me you know I couldn't write code well enough to start a software company so I definitely needed some someone to partner with so there was a necessity there but what I've learned over time so my co-founder and I get along very well not because we have the same mindset but because we have very complementary mindsets he's a very even-keeled person and I'm like this like Steve Ballmer I get really frustrated and then I get really excited and he's there to balance me and he's got a great technical mind and good product Sensibility so if you are going to get a partner it is agree with Bob but you want to know that person really well because there a lot of stuff will go wrong and it's you know the classic lines about you find out what people are really like when stuff goes wrong you want to make sure you are in the trenches with somebody who believes in the vision is committed and can react well to adversity and move and be creative and did you deeply reference check your co-founder I got to work with him so we both came out of the same company that was your deep yes reference checking was yeah we both found that neither one could get along with large company life anymore so we had same passion for going and creating stuff anything else I just basically like getting married to people right if you're if you're gonna have a partner it's not a it's not you know it's not a fling right this is something that's gonna you're going to be in for a long time to the point of you want to know that the person you're getting involved with is someone that you want to be involved with for a long period of time I think the you know the issue is with one person it's kind of hard to heart it's kind of hard to have a conversation and you know having having another person you can you can have a constructive conversation and you can get to a better outcome now this there's a there's a breaking point to this three people okay you know four people five people six people I mean it starts to get to the point where it's unmanageable so you know there's probably could cut off around three you know two is probably better than one but you know one is definitely better than four so you know that it's good to be able to have a conversation I think that's important when you're starting something super yeah I agree it's hard to have an idea rich environment if it's you so even if you have the big stick yeah Mattox cobbler is or how great your ideas are but uh but I agree that the key with them with Bob and Kevin of bolsa which is the key is make sure you've got somebody that Bob said earlier you're gonna want to be able to go to a baseball game with you don't have to agree all the time in fact you probably don't want the person you're always going to agree with is your partner but you better make sure you can you can handle having sushi with them regularly that's great okay so another thing I think is important because we talked about kind of the team your network outside personal life just having other people who are supportive is going to be pretty important too especially when stuff goes wrong so you know having a wife that will tell you that you're nuts or having friends that will tell you to keep believing that you know don't give up this is I mean this is just true in business in general having other people to believe you and support you is more important down the road than it probably appears when you start so thank you so I'm going to open up to questions in just a couple of minutes but I want to do any of you guys just have a burning thing you want to say given that we've had this discussion like that which David asked that question or I need to get this out anything you want to say before we move to questions don't give people a chance to think about questions I'd like to ask V entrepreneur requires you to be irrational to a certain extent because it is marginally an irrational irrational I think it's marginally insane to go out and try and start a company with nothing right and this is this is a difficult process lots of things will go wrong everyone will tell you that there's a high likelihood of failure the statistics bear that out so you have to be marginally insane to do that and the people that are the best are the ones that can somehow balance the fact that you know they'll take all the data that says this is a terrible terrible idea and throw it out and say no it doesn't matter it actually is a great idea and they'll be right some of the time and you don't also have the flexibility to get it back and know that it you know it I need to stop this I need to go do something else and that's an impossible thing from anyone sitting on a panel to figure out we know which way which which time is the right time to pick that path but that's I mean that's really what it those are the ultimately successful entrepreneurs and it's a really hard thing to do it does get back to that passion thing you know you have to have the fire inside to deal with all the stuff that's going to happen because if it's just an academic exercise if it's just you know I I want this great business when things get hard you need something else to hold on to you need to really really want it believe in it whether it's anger that's driving you or just frustration whatever it takes to motivate you to really want to make this happen that's probably the number one thing I've heard from every investor when they evaluate let me talk about passion it's you know they want to see that they want to see that fire that will just will wheel it to success it's a lot of work I mean it's cold spot work you know your your your know we have great resources backing our startups but it's still a lot work you're still going to your first customer and they're like all right where are your references well you can call my mom she thinks I'm great also there's a couple other guys that I hang out with regularly but you know it's it's a lot of work to break through with with a start-up right you know I said this to my oldest son few weeks ago you if you find something for which you really have a passion you'll never work a day in your life and its really true if you really have the passion I mean my best definition of an entrepreneur is someone who has no other choice you know it's just what you want to do that's great so short hands how many questions out there one two three about nine we've got 15 minutes so we're going to get through all these we need to do some about a minute and a half so we just ask your question and if I can ask the panelists who ever look at each other and if something thinks it's theirs grab it and then if you have one add-on comment but let's not go through all four people is that okay great it's good it makes it easy for us everything was interesting but intentionally evaluation really you came back on the knee but the market and so on okay now investors typically are focused on the business model and as everyone knows a lot of very successful businesses have been built on an absence of initial revenue so that's major issue I think that when you're zero are faced with that problem there is a need but the cost of this user the cost of marketing whatever network research be so by that I mean the hem arena as well get it for free and hope that the inclusion rate Sunday some viable business some evaluation on the viability of the business model is something which I'd like you know it's good thank you I mean so functional II I agree with you I think that's why venture capital exists right I mean if there if there wasn't someone to give you money to run a business and give all your product away for free you know it like that's that's what makes the valley run that's that's what's made a run for four years I think Kevin's point of his experiences are very true though you can go out there you can have an idea people you know people don't buy into it until you get market traction right and then and then you know it's a completely different investment and so from an investment standpoint you know if you're if you're talking about making really early-stage investments I say I don't I wouldn't care I don't care about the idea that much I care about the people I want to see two or three people who are incredibly passionate about something who work well together and are going to go figure it out and like I said I've invested in many of those teams they've come up and done completely different things six months later and that's great that's actually in some sense what you want to have happen but if you're going through you know if you're if you're going through and trying to solve that distribution problem yeah I mean it once you get market traction there has to be a business it has to has to work right there has to be a model that makes sense and I think that just kinda depends on where you are on the on the time line of going through that you know building that company anybody else wants about business model I think if you're talking about really early stage investment where you're writing a yeah I think it completely depended it may not matter at all right I mean you could have looked at even if you looked at Google back you know when they were out doing you know shopping their Dell it wouldn't matter like Facebook it wouldn't have mattered but there was still a long-term concept of you know where you where you thought you could probably get money but it wasn't you could still build very valuable businesses without without that I mean YouTube was very valuable business and you know today it's it's a very successful division of Google but they didn't make money especially for years I guess I think different venture capitalists have very different opinions about this and if you are a consumer internet investor venture capitalist and you understand media business models you may be much more comfortable saying I don't care about revenues because you can get to hundreds of millions of eyeballs we know how to monetize those somehow versus on the enterprise side you're not going to get that at all if you go to somebody in touch Kalp say look we're going to actually give hardware and software to enterprises for free and we'll figure it out later they're going to say you're crazy you know you have to have a business more you're selling to enterprises because if you sell something because I'm going to free to the enterprise often they put no value on you have no commitment from the enterprise itself because the cost of that is much more than just the cost of the software so I think there's a real innovation and how enterprise software is being done today because people are taking the channels that have worked on the consumer internet a lot of the vital channels spreading it through the enterprise then going back to the enterprise and asking them for money later right so I mean I think they're a pom computing room others did the exact same thing there's current consumer entry points but keep moving on I think you're gonna have to be very careful about who you talk to and understand the bias of those venture capital firms because that people have different tolerances for that so okay Kevin you mentioned the importance of user feedback early in validating an idea give any advice for the best mate get users in front of it is it mock website yeah the cheapest fastest way you can do it so is it trying to think is it can my real name of the author wrote a book called don't make me think we talked about our tendency to want to overthink kind of especially with from an academic mindset how we do research the most important thing about research is do it quickly show it to somebody who is even a reasonable proxy for your target customer and do it with paper on the web you know HTML mock-ups even if it's conversations napkins you know gas stations throw ideas out there the most important thing is just get some early feedback from some potentially prospective customers because you know you'll get more feedback in the first iteration from three to five people to then go modify the idea so it's more important to kind of iterate quickly than it is to put together like the perfect research project or get the right prototype and you know that it's just early data is better than like the perfect data later after the investigation yeah I think it it's going to depend on the idea so they're definitely pleased that we have first mover advantage but there are I think a lot of ideas out there tend to be an iteration on somebody else has already tried it and - I think most of the points people have made it's not necessarily the idea it is about the execution so fast follower works really well if you see somebody do it they're just not doing it quite right we're actually following there was a company to try to do exactly we're doing built too complex a product approach the market in the wrong way they got into a switching game and we looked out and we said that's you know very similar vision for what we wanted to do when we disagreed with their tactics and we came in so we were not the first ones with this idea I actually don't think that I've been creating any business is hard and so in some sense you know building the biggest business possible isn't significantly more risky than building a smaller business I mean they're there you know there's some nuance there but the difference between running a you know a company that's 500 million you know valued at $500 a billion dollars is not substantially different right I mean that there are there a lot of you know there are differences but in some sense you want to you want to go after the biggest possible idea because a lot of the challenges you're going to see in terms of building the team and distribution things like that they're sort of constants right and they only they scale literally whereas other things don't scale literally they're exponential so the best thing you can do is non Trentino yourself real don't-don't-don't BS yourself know yourself know your real capabilities that's the hardest thing yes have a grand vision but know who and what you can do and that takes a while but it's a very important factor in success I live one bit that if you're going to take a bold strategy like that you better have an angle you better understand something nobody else understands and go after it because we'll use Google as an example when they were getting started they knew Yahoo they knew Inc to me they knew Alta Vista and they knew the limits of those businesses and they were absolutely convinced that they were not committed to innovating and search and other people on the server side way you know excites were seven billion dollars out of homes were 15 billion dollars Inc Tamizh work twelve billion dollars they're going to keep innovating forever you'll never catch them is like that isn't what was happening inside those companies they had stopped so cheapskate cashflow you willing to work insane hours and surround yourself with other people who are as well great all for hit that one talk to a lot of people people are always willing to that's a topic that people will talk ad nauseam about and get a lot of input there's there's all kinds of benchmarks depending on the industry but there's no substitute for bending a lot of people's here and saying how'd you do it what are you doing what are you taking and I tell people all the time I'd rather own five percent of a hundred million dollar pie that 100 percent of a 1 million dollar pie so a lot of people don't don't ever figure that out yeah I think that's actually the biggest risk and hear that a lot with folks worrying so much early on about equity stakes and sharing the answer is it is much more important to have a reasonable share of a success that you know splitting up a tiny pie doesn't matter as much as making sure it's a huge pie be generous okay brandy talk about inside of your business and how you bet your own ideas without giving away your secret sauce you found a lot Dussehra again won this thing partly vetting those you know crazy ones and something that is relatively viable and the question is so is there a process or maybe the three top things you okay yeah we have a very we have a very formalized process now it used to be it used to be you know done with a lot of emails and whiteboards but now we have a we have a vetting process that we go through it's becoming more and more formal even that even the transition from the research team to the development team in the spec and the whole transfer process these are all pretty formalized right now with an eye to getting buy-in early getting move we've structured a pretty them we even have a nice little picture about it how it all works out that I noticed it a lot of recipients give everybody yeah not so much but you're really nice when you talk to somebody at coffee yeah I know but we have a formal process that we go through we have boxes that we check and we keep that's where we're diligent we keep checking those boxes and going back and each board meeting they go back is this still the still the direction we want ahead are we still this still economically viable can we get this to market can we I don't want to ask you for this slide but yeah SoDo theme that the top three check boxes do you say four gates that yeah those probably differ from entity to entity but ours are really are we going to have to hire a bunch of people because we like keeping it lean and mean I like having an organization of a hundred people between that's all subsidiaries we know each other we know each other's families we know each other well we we ought we we were very agile as a result of that and can we do it highly profitably we don't like to go into endeavors that we're going to take four or five six years to in order to hit profitability we like to do it early and we really most of our businesses surround financial models that are transaction based okay good question a lot of us in the room are fairly young entrepreneurs I was wondering if you have any suggestions particularly when it comes to evaluating are there particular industries or ideas that are too big or too difficult to crack for a young entrepreneur do you see or do you have any advice great idea of whether it comes from a seven-year-old or 20 year old or a 40 year old or older I mean it's it if it's a great idea and you can you can articulate it and validate it and build the management team for it go for it take your dreams and go for it if there's some reason why you need relationships or something go find that person and make them part of the team yeah I'm trying to remember who's had their hands up for us who's had their hand up for a while okay good I mean that's that's tough question to answer without kind of specific details but I think the fact is having the Google example that that Dave gave us is perfectly accurate right amid all these big companies were perceived to be doing a lot of a lot of innovation you know Google came along realized those companies were completely dead on the inside from a technical standpoint and then over time you know they built a better product and they just launched it from a consumer perspective they give you a better answer so people switched right it's you know it takes time to change things but you know they they they didn't didn't get caught up in the perception that everyone else did that all these other companies would continue to innovate indefinitely and switching costs were low which you have yeah it's one click away what switchback it's equally what about an idea that costs you a lot of money like where do you find an investor that is going to invest your idea that you know you're not afraid to take or you know disguise a clarification so you set a service business that requires a lot of money yeah so you need money up front before we even get going kind of thing okay speak to it cuz I'm a one of the reason I'm a fan of software is because it's so cheap to get started you know we could bootstrap it so the more capping you in more risky toes different kinds of investors are going to invest in that kind of business I mean Green Tech in general is a heavily capital intensive business a lot of those things came out of labs at universities so I mean to a certain extent those are projects people been working on there was some scientific advance that they thought they could commercialize so there's there's been usually there's a substantial amount of work that happens before people are willing to pony up a lot of money no matter what it is that's a you better have a tremendous advantage of the current players 22-1 attend to one advantage if you're going to try to convince someone to give you a lot of money up front on a concept that so they can have to see that there's a big prize for winning I'm starting make sure it are there any trading job they've got a complementary skill someone like that or so mistakes and picking co-founders something like that things to watch out for two most important things we talked a little bit about you got to have kind of shared mindset like you're trying to do the same thing then you need comparable levels of commitment and it's you really got to know what's you you both have to be solving for the same thing because if you're solving for different things forget it it's it's going to go poorly virtually when you have a co fund or a new idea you're talking 24/7 I mean you could be talking at 6:00 in the morning and 10:00 at night you better you better have someone has the same mindset and passion you do I guess in frightening whole marriage it's absolutely a marriage it's the exact same thing like the same stuff that will go wrong in a relationship it's yet great maybe not all the same things yeah Wow hey guys back row we got this is the last one sir but IDs are easy just lay them out there come on no we stick to our core space which is you know if you look at any of the businesses we've worked in it there in the e-commerce space and mostly transaction based and we understand the risks associated with doing business online and with participating in the online community and would be something in that space mitigating that risk you may also want to hit that all for you guys can take that one if you like somebody go after title insurance and reinventing and refinance in real estate space tunneled routes okay the fact that you have to get a the exact same policy over and over again that is market inefficiency right there Justin Bob weren't throwing up well I you know I I think you look at the world and you say there are so many opportunities you know I have a increasing passion for education I suspect the next thing I do will be in education but there are so many things but you have to be passionate about it you have and have fun it has to be something you really want to do and and not just because it can make money and be a big business because you really enjoy it and and don't a entrepreneur is the most enjoyable thing in the world if you have a real passion I think in a lot of things that have been a lot of tools and built on the consumer Internet - for lack of a better word manipulate people into doing what you want them to do I think you can probably take a lot of those tools and help people make the decisions that they find difficult to make make their lives better so I'll give you one last idea make a list of ten things it may start with silly ideas and then drop them off the bottom and keep adding your list will get better and better attack the top three things on the list and see if there's anything fun - my wrong with those ideas and so it's kind of hypothesis driven approach and you'll start getting better and better at this but you got to force yourself a discipline around kind of walking on the world and looking for things every single day they could be problems and put them on that list and force rank them every day okay guys thank you very much can you please give the panel [Applause]

Channel: Stanford Graduate School of Business

Views: 70,222

Rating: 4.8815331 out of 5

Keywords: Entrepreneurship, competition, start-ups, educational

Id: gEomG_ffp7Y

Length: 74min 15sec (4455 seconds)

Published: Mon Mar 22 2010