JIM GOETZ IS A venture capitalist at Sequoia Capital. Prior to joining Sequoia, Jim served as a general partner at Accel. He has been the venture capital backer of many successful firms, including Nimble Storage, Palo Alto Networks, Ruckus Wireless, and WhatsApp. He says he is really interested in new investing categories where there is no existing market. Of his current investments, Goetz says he is “most interested in mobile and the post-PC transition, and in disrupting the enterprise IT stack.” Goetz received a BS in electrical and computer engineering from the University of Cincinnati from 1983 to 1988 and an MS in electrical engineering and computer systems from Stanford University from 1988 to 1990.
1. “I am looking for unknowns, who are passionate and mission-based.”
One of the most attractive things about the venture capital world is that someone without credential X or Y can still become a success. Some of the most famous founders did not graduate from college. That is not to say that credentials are irrelevant or unhelpful, especially early in a person’s career. But history has shown that they are not absolutely required. One of the very best credentials, of course, is previously scoring a very big financial return, most importantly for the person considering your proposal. Increasingly what people are looking for in a potential team member is skills-based credentials that can be witnessed in real-world achievements.
Mercenaries are motivated primarily by money. Missionaries are driven by a cause. Missionaries are not only more likely to persevere during challenging times, they are also more liable to work to keep the business independent—characteristics that tend to produce the most grand slams. Underdogs with huge ambition for their businesses are rarer than most people imagine.
2. “Many of the entrepreneurs that we back are attacking a personal pain.”
Passion for the customer pain point is what creates the desired missionary quality. Personal pain also inevitably means that the founder understands the problem deeply. If a business is not solving a genuine customer problem in a unique and compelling way, the business will not succeed. Steve Blank has made the same point when he said,
The best entrepreneurs are the ones who are passionate about solving a problem because they’ve had it or seen others have it, love those customers, love solving that problem, or have been domain experts. Those are authentic entrepreneurs. Entrepreneurs, at their heart, are artists. What comes out from the great artists is something completely unexpected. World-class entrepreneurs understand something that is driven by passion.
In this way, entrepreneurship is a calling rather than a job. Steve Jobs said once,
I’m convinced that about half of what separates the successful entrepreneurs from the non-successful ones is pure perseverance. Unless you have a lot of passion about this, you’re not going to survive. You’re going to give it up. So you’ve got to have an idea, or a problem or a wrong that you want to right that you’re passionate about; otherwise, you’re not going to have the perseverance to stick it through.
3. “We’re looking for clarity and focus.”
One in fifteen entrepreneurs that come through our doors can convey their initial market position in literally five minutes.
Goetz recommends that entrepreneurs spend significant time developing a concise and compelling story. Can an entrepreneur convey his or her pitch in only five minutes? How about in just two minutes? Can the idea for the business be conveyed with clarity and focus in two or three sentences?
When you are in a business driven by optionality, like the venture capital business, investing a lot of resources in creating spreadsheets is a waste of time since the assumptions in it are in many cases just guesses. The best way to quantify an uncertain opportunity is actually with a story. Chris Sacca puts it this way: “Good stories always beat good spreadsheets. Before drawing a single slide of your pitch deck, tell the story out loud to anyone who will listen. Again and again.” The more you tell stories, the better you get at telling them. Referring to notes while telling your story is vastly less effective. If you speak from the heart in telling your story, you can say a tenth as much but have twice or more as much impact. Many entrepreneurs have an investable idea, but they cannot express it well enough to get funded and attract the necessary team. In such a case, the entrepreneur may need to find a cofounder who can tell the story well. But the better approach is to learn to be a storyteller. Some may consider Dale Carnegie and Toastmasters training to be corny, but it works for many people who have not yet learned how to tell a story.
4. “Most interesting to us are new categories.”
When you are in a new category, there is less competition. Having breathing room at a startup is an underrated attribute for a business. The most successful startups are often the creators of new categories. They typically create an innovative new technology and a market to go with it. This is hard to do, but also very valuable if it can be accomplished.
5. “Think big, start small.”
A great deal of passion and energy around a specific pain point for a very specific customer. Focus, focus, focus.
Our view is that, early on, if you’re solving a meaningful problem, even if it’s for a small group of people, there is an opportunity to expand beyond that over time.
It is easy for a startup to lose focus. There are lots of shiny new pennies that people like journalists like to talk about, which can cause distraction. Paying attention to what is actually going on in a business and avoiding distractions are essential.
Creating a minimum feature set in a business that has not yet found product–market fit is not a goal but a tactic that can be used to create cost-effective, speedy, validated learning about the value hypothesis. The goal is to learn and then steer based on feedback, rather than try to predict and emerge with a killer, fully formed product. The most effective processes are based on feedback loops, which are in turn based on the scientific method: Build, measure, learn. What the startup offers as its minimum viable product should be complete in what it does to deliver and capture value, but not a fully complete implementation of the vision. The minimum viable product is an experiment intended to generate validated learning about what customers value enough to pay for.
Goetz has told the founding stories of Apple, Cisco, and other companies to make this point. In each case, the founders discovered a solution to a particular customer pain point before they moved on to bigger ambitions. If a business can generate adoption and credibility in solving a single customer problem through applying greater focus, it can then more easily move to cross-sell and up-sell additional services. Product and service extensions will arise naturally.
6. “What are your unfair advantages?”
You need to be able to break into a market and dominate.
This point of Goetz’s describes where strategy kicks in the hardest. Among key strategy questions that every business should ask are the following: (1) What will the businesses do differently than its competitors? (2) What sustainable advantage can the business create versus competitors? and (3) Is that differentiation sustainable in the face of competition? These strategy questions focus on matters quite different from what Professor Michael Porter calls “operational effectiveness.” Without a moat, competition among suppliers will inevitably cause increases in supply, which will cause the price to drop to a point at which there is no long-term industry profit greater than the cost of capital. When Buffett says, “Microeconomics is business,” this is what he means. Too much supply is bad for profits. It is that simple. Founders will lower their credibility if they are not realistic about existing competitors. Pretending competitors do not exist in presentations to investors and potential employees is unwise.
7. “Business models can be a weapon against incumbents.”
The subscription and cloud-based business model, thanks to Marc Benioff, is now a weapon for all of you.
The process of taking innovation and turning it into value is the essence of a business model. The objective of a startup in creating a business model is to build a scalable business that delivers unique sustainable customer value. Goetz is saying that the innovation that drives the success of a business is often the business model. Goetz uses the business model of software as a service (SaaS) as an example of this phenomenon. One of the key elements of the SaaS business model is that it is so extraordinarily beneficial to customers. Paying only for what you need just in time is a huge customer benefit. This model creates new challenges for the provider, of course. In a SaaS model, capital and operating expenditures are transferred to the service provider, and the customers pay only as they need the service. But these challenges can be barriers to entry against the competition for a SaaS provider. Netflix is an example of a company with a business model that acts as a weapon against incumbents in a consumer setting.
8. “We are looking for depth and substance of passion for the pain and experience.”
We are very interested in your expertise in the domain.
When you know what you are doing, it is amazing how much you can accomplish. Having a Zen-style “beginner’s mind” toward creating solutions to new problems is helpful, but this does not mean that it is ideal to be clueless about the domain itself. Domain expertise relevant to the business is treasured, as is humility about what you do not know. In the case of WhatsApp, Goetz says the founders’ domain expertise came “from their lives and frustrations from working at Yahoo [where both founders had worked] and seeing what happened when the company shifted its focus to advertising and away from the user.”
9. “We talk about ‘times-ten’ productivity. That’s where you assemble a small group of elite engineers and get them amped up. It happens because they’re genuinely excited to their core.”
Engineers who are in an enabling and challenging environment feel empowered, and that empowerment translates into extreme levels of productivity. WhatsApp (backed by Goetz) is a famous example of an empowered team doing amazing things with a tiny number of engineers/employees. Pioneering venture capitalist Franklin “Pitch” Johnson once said that part of what you must offer to be a successful venture capitalist is commitment. To be committed you can’t help but get somewhat emotionally involved and that means being available. Johnson also once said, “We invest stomach lining in those companies because any venture capitalist with his or her salt gets emotionally involved. You can’t be that detached because the entrepreneurs are very emotional people who want to succeed.”
10. “Do the numbers make sense?”
A company that raises more money than needed may lose some discipline in the culture, and you may start to see some behavior that may not be the foundation for a long-term enduring business.
There are a range of key performance indicators that are relevant to any business and a few that are particularly important. These metrics are not always the same since business models vary, but they should be designed to enable a business to get to the right place. Everyone on the team should know the metrics that will drive success. Having a single metric that the entire company can rally around can be particularly valuable.
One vitally important number is the amount of available cash. You can be forgiven for a lot of things in business—except running out of cash. Many accounting problems can eventually be overcome as long as the business has access to cash, which is the oxygen of business. Having said that, even famously frugal managers are not opposed to spending money as long as it creates value. One thing that people often underestimate is the need to acquire customers in a cost-effective way. Acquiring customers cheaply is such a beautiful way to make generating a profit easier. Conversely, paying too much to acquire a customer is an unsolvable problem. The cost of acquiring a customer and the cost of serving a customer can be stone-cold killers for a business. One aspect of a startup that makes life far easier is high gross margins. Life is so much better for a business if gross margins approach 80 to 90 percent. Sales and marketing, research and development, and general and administrative expenses come after gross margin, and if they are collectively too high, they can kill a business.
11. “If it begins to work, it will wildly exceed everyone’s expectations. We desperately try to convince the founders to remain independent.”
As the world becomes more digital, positive feedback is increasingly becoming what determines the financial result in a business. When the right network effects can be created, the payoff in a digital world can be nonlinear. And when network effects disappear, the speed at which that happens may be nonlinear. In other words, network effects are a double-edged sword: Success can disappear just as quickly as it was created. The loss of network benefits can be even more spectacular since it is often something very visible that transforms into nothing in such cases. When network effects create benefits, the early success is unseen and more surprising since the phenomenon involves “emergence.” Something suddenly appearing in a way that is far greater than the sum of its parts can be surprising.
12. “I don’t try to tout the next great thing I want to get in front of because I don’t set that course. The entrepreneurs do that.”
If all a founder needs is capital, then they are quite lucky indeed—and probably delusional. Goetz is saying that a board’s primary role should be advising the founders and management, not trying to run the business. Someone like Goetz has seen many different boards and knows how important a good board is in terms of increasing the probability of a business’s success. Being humble and a life-long learner can pay big dividends for both the venture capitalist and the entrepreneur; as Warren Buffett says, “Risk comes from not knowing what you are doing.” The pioneering venture capitalist Bill Draper believes, “Venture capital is not all about money, it’s really mostly about building a company with the entrepreneurs who do the heavy lifting.” Implicit in this statement is that the best venture capitalists help with “light lifting.” Different venture capitalists and firms have different models for how much support they provide to portfolio companies. Venture capitalist support can range from (1) extensive support from so-called platform approaches that offer end-to-end support (e.g., public relations, marketing, finance, recruiting, sales, distribution) to (2) lighter-touch support, where the venture capitalists get involved in only a few issues, like recruiting or scaling growth, in addition to their board duties. No venture capitalist can be an expert in all domains of knowledge. It is the venture capitalist’s job to learn from the entrepreneur and to substitute his or her vision for that of the entrepreneur.