Fabrice Grinda: You need to be a fundamental optimist, because the reality is, if you look at the statistics, if you start a company today, there’s only five percent chance that it will still be around in five years. So there’s a 95 percent failure rate. So you need to believe that you’re going to beat those odds, because either your idea’s great, or you know how to do something different, or better, and you’re so good that you’re going to be able to go with that.
You also need be very adaptive, in the sense that things are going to happen very differently from the script that you usually imagine in terms of the way it plays out, and so as soon as something is thrown your way, you need to adapt, adjust, and always think or rethink your model.
Fabrice Grinda: The reality is I never share them, because to your employees, you always have to be cheerful. Even if you’re about to miss payroll, you’re like, “No, everything’s going to be great. The money’s about to arrive,” etcetera.
In terms of your own doubts, you know, I think through what are the different downsides, or not downsides, but the differences. There are differences you can do, and I evaluate the scenarios, and sometimes I might be wrong, but the reality is, just try it. You try it, and you see if it works out, and if it doesn’t, you know, it’s okay, you move on.
And if your company fails, you know, it’s okay. You’ll have learned something, and had a fantastic experience, and the reality is you can probably go back and, you know, get another job, and maybe even a better position because of all the experience you’ll have accumulated as a small business owner.
Fabrice Grinda: Oh, absolutely.
In fact, I’d rather invest in someone who has created a company and failed than somebody who has never created a company, because he will know all the mistakes not make. Because I would argue the job I do today is pretty much exactly the same job I was doing ten years ago when I started my first large start-up.
The difference is now I don’t make all the same mistakes.
Fabrice Grinda: The most difficult thing is usually raising the money, which is, when you’re starting your business, especially the first time around, you have no reputation, you have no track record, you usually have very little money of your own, and so understanding how to raise money, if you need to raise money, and how to go about it, is key.
And the first time around, I made all the mistakes.
I had read that you need a big, 80 page complex business plan and financial model, which I wrote, and I was calling these venture capitalist, and emailing them the business plan. None of them ever replied. I never got a call back.
It took me a long time to realize that, they don’t have time to read a business plan that’s 80 pages long. You need like a ten, 15 page PowerPoint. You need to be introduced by people who know them.
And frankly, because you’re such an inexperienced entrepreneur, you need to show that you can execute, because they don’t want to take the execution risk. So you need to build the site for your company, you need to have some revenue and some clients. You need to show that you can actually deliver before you raise money, and then you should go and raise money using that ten, 15 page PowerPoint and introductions.
Fabrice Grinda: The reality is I don’t think that much preparation is required. I think you go and do it.
The only aspect that requires real strategic thinking is the business you’re entering. You need to make sure it’s the right business.
What’s the market size?
What are the margins in the business?
Is it scalable?
How much capital do I really need to enter the business?
So, I have my nine business selection criteria, and I make sure that every idea that I consider entering, I vet through these criteria, but once that’s set, you know, I just go for it. I incorporate, I try to find the key employees I’m going to need, and then you try it.
Fabrice Grinda: The criteria are somewhat personal, because they relate to my interest, but what’s a billion dollar market opportunity, and the reason is you need a big idea. Otherwise you’re not really fundable. No investor is going to fund you for a 20 or 30 million dollar business.
Number two, what has a valid business model? I want to know from the get go who I’m going to charge, what I’m going to charge, and what the gross in that margins are, because you’re much more likely to be successful than if you try to figure out how to make money as you go along.
There are a few counter examples to that. Google is one of them.
Number three, I don’t want an idea that requires more than one or two million seed money, and more than five to 15 million in series A money. And the reason is if it requires much more capital than that, you’re not going to be able to raise it, or it’s going to dilute you too much. And might mean that your idea is better served by being within a larger organization than that of a start up.
Number four, I like an idea that’s scalable. I mean, I have nothing against companies like Starbucks, or Wal-Mart. But my key success factor in life is not managing a million employees. And so I like ideas that can grow rapidly with relatively small teams.
Number five, I like to be in a business that is rapidly growing, because a rising tide raises all boats, and it increases your appeal to investors, to potential partners, to consumers, etcetera.
Number six, I like to be in business that has very little risk of margin compression. You don’t want to be in business where one customer accounts for all your sales, and one supplier for all your costs, because they can replace you, or they can compress your margins very easily.
Number seven, I like to be in a market or in an idea that I know how to execute, or I can learn rapidly. I mean, that’s one of the reasons I’m not in biotech. They’re brilliant ideas, but I would not have the first idea, or the first clue how to evaluate the different ideas in the business.
Number eight, I want to be in a business where I can be one of the top three successful players in the business. Most of the economics in business is accrued in number one, two and three companies, so you want to make sure that you’re one. I don’t necessarily mean win on a global level, but at least win in a selected market that you go after, be it a neighborhood, a city, a country, or the world.
And nine, maybe most important, I want to do an idea that I love to do, something that excites me, something that’s going to keep me up at night, and keep me interested and going, even in the moments of that.
Fabrice Grinda: Many people would tell you this is a bad time. The economy is about to turn, the capital is becoming less available, valuations are declining, but I can tell you why it’s a great time.
In those environments where people are becoming more risk averse, this is the time you go and you take risks. This is the time where you put it out there, because you’re going to face a lot less competition, and so once your product’s out there, if it’s any good, you’re going to succeed without anyone, you know, rushing behind you to copy it, and so you’ll have a multi-year lead by the time, you know, the other people become aggressive or interested in copying you.
Fabrice Grinda: Luck is definitely a factor. It really, really helps to be lucky.
I think all the businesses that succeed, you know, have really hard working entrepreneurs that are gritty and passionate. In fact, I would argue that grit, passion, and tenacity are much more important than intelligence.
Intelligence is partly useful for selecting the right idea. But once you get going, the strategy usually doesn’t change that much. It’s all tactics. It’s all details, you know, walking, tackling, making sure everything is right, so it’s all about grit, tenacity, and passion, and then being the right time, and the right place, and the right skills, and getting lucky.
Fabrice Grinda: There are so many reasons a company can fail. The environment might be too competitive, it might have the wrong business model, the entrepreneurs might have over extended themselves.
I don’t think there’s a thread for why people fail.
I think there are billions of reasons why people fail, but a few reasons why people succeed.
Recorded on; May 25, 2009.