Startup Founder Evolution

In the past two months I’ve been on two different panels with other entrepreneurs. The first was at WTIA in Bellevue, WA (“Cashing in on Web Services“)– the other panelists were very clearly what I’d call “business entrepreneurs”. All of them had relatively successful funded startups, but not a one of them had probably written a line of code, moved a pixel, wrangled a server, or written a line of copy in months or years (some probably never had).

In contrast, the most recent panel I was on (at the O’Reilly Web 2.0 Summit) was with what I’d call “builder entprepreneurs”… All startups with great traction, some funded, but all of the founders were directly engaged with the creation of the product. They designed, coded, played sysadmin, and played all sorts of other production roles for their startups.

The contrast was startling, and it made me think hard about my earlier contention that the “business guy” doesn’t really have a useful role to play in the very earliest stages of a software startup. The first panel had a pile of examples of business guys leading startups to some significant (sometimes dramatic) success.

At one of the other panels at the Web 2.0 conference, Dave McClure (master of 500 hats and 473 font colors– and one of the smartest guys in the game) summed up the life-cycle of a startup in a great way. “There’s the product development phase, the market development phase, and the revenue development– or revenue optimization– phase.” Rings true to me.

So with this in mind, let’s track the value of a “product entrepreneur” over the early life of a company:

productguyvalue.gif

Now let’s track the value of a “business entrepreneur” over the early life of a company:

productguyvalue.gif

(note: I’m talking about one person’s ability to make a major impact with a startup– I’m not saying that either person is useless at any stage of the startup… And, of course, exceptions abound)

As I’ve said before, the business guy often doesn’t have a lot to do in the early stage of product development– especially if the builders are building something that they actually want themselves. If you’re a bunch of hackers building a simple photo sharing, you don’t need a business guy telling you what the market wants. Of course, if you’re a bunch of hackers building business time management software, you might well need that. Your mileage may vary.

But what I haven’t said before (and what I’m coming to learn) is that the product entrepreneurs have an increasingly marginal role as a startup evolves and becomes more successful. In fact, I’d argue that they are in a rude awakening– they either need to evolve into business entrepreneurs (as Gates and Jobs did, for example– both shrewd business guys) or hire people to play that role (a la Eric Schmidt at Google). Building an asset is the first (and most important) challenge. But finding the customer for that asset and maximizing the revenue/profit is also a challenge (and one that many builders are ill-suited to handle).

It feels like product entrepreneurs are oftentimes “cowboys”. Flying by the seat of their pants, they rally a small team to build a product that people want. It’s no surprise that this is really freakin’ hard and requires a mythical combination of brute force time and effort, insight, customer empathy, and a huge pile of luck. Saddling the product team with a biz guy who chases big customers and locks in the product direction too early can be deadly, as the Wizard points out:

This is one reason I hate to see very early stage companies sign a big customer before the product is baked. You are encumbered by product commitments and customer support before you truly know what the market wanted. You have to be passionate about a customer and the product when you should be laser focused on the product. The customer’s needs and your goals vis a vis the market may diverge. In an effort to show progress, however, the marquee customer is attractive in the belief it will help attract investment (and this may indeed be true). In a previous life before FeedBurner, my founders and I made the mistake of signing a big name customer to a paid monthly contract before we really knew what the product’s place in the market should be. Won’t ever do that again.

The product development phase of company needs product development people and precious little else.

But as the market development phase sets in, builder entrepreneurs are oftentimes increasingly obsolete. It’s no longer time to hurl features willy nilly at your users– you’ve already built something that they like. No you need to measure the hell out of it and turn it into something that they love. You need to iterate on it and turn it into something that confuses 4% of your new users instead of 7%. It means finding a way to tune your viral loop and conquer your SEO enemies to increase the organic flow to your product. And you need to start expoloring the market to figure out who they hell is going to pay for all of this. That means crafted adwords campaigns. That means cold calling. That means price experimentation. That means exploring the world of direct ad sales. Well, it can mean all sorts of things, depending on whether you are a free web service, a freemium product, a pure b2b play or some combination thereof.

But you are firmly out of the world of building products and drifting into the world of iterating a product and exploring a market. And, likely, you’re in the world of sales, marketing, and instrumenting the hell out of your app/site.

As Papa PG says, if you look at the leaders of successful tech companies you see more CS degrees than you see MBAs. That makes sense– geeks are critical to conquer the first (and most important) problem of a startup… Building a badass product. But if you look at these same tech companies, you see CS geeks who’ve actually set aside their geeky roots (though maybe not their geeky instincts) and become very very shrewd business guys. And you also see inferior products kicking the crap out of superior products through better sales/marketing/and distribution.

So to all of you builders out there… Beware! When you reach a challenge in the evolution of your business, the most natural thing in the world is to frame it as a product problem. “If we just build this new feature/product, we’ll be off to the races and we’ll never have to do any of that business crap!”. Keep your eyes peeled for the time when you have to personally evolve and start tackling business problems, or step out of the way and let someone else do it for you.

  • http://markmaunder.com/ Mark

    To be honest, I didn't read this post. I just scrolled down to the two graphs. And they're awesome! Completely agree.

  • http://andrewchen.typepad.com Andrew Chen

    tony, have you been following any of the “customer development process” that Eric Ries and Venturehacks have been referencing? A summary of that process is to flip market and product development, and make sure you understand your channels, target customers, and build the smallest possible product to accommodate those needs. In that case, the biz guys can get started super early.

    The consumer version of this is often called “lead user research” which is something that firms like IDEO practice. In all of these approaches, product development is seen as a peer iterative process to the iterations you do in the market.

  • Dan

    Finally, somebody that understands the value of shrewd business skills and instincts. There's a good reason Jobs/Gates have been so successful. If you read any book about Gates it will say that he obsessively any read as many business journal articles, books, and otherwise valuable information he could get his hands on.

    The technical founders are often revered in their own circles e.g. Ycombinator, and the 'business' folks are villainized. However, your graphs are absolutely correct. The value of product developers decreases over time in a startup, and the marketing/revenue folks take over. The point to be made here is that each skill set is crucial for success. So techies- don't get too high on yourselves! And us suits and creatives will do the same. Together we will take over the world in an unbeatable left-brain/right-brain one two punch.

    The reality is that most people spend CASH for well-designed, well-marketed products with an emotional rather than logical appeal. Any marketing 101 course will tell you that people buy benefits, not features. If you want to learn to market your app, you would be well advised to imitate the marketing materials/approaches of 37 signals. They don't sell project management software; they sell a life/work philosophy of simplicity and elegance. Notice there was no mention about which Javascript library their apps use. Most paying customers spending cold, hard CASH don't care!

  • http://www.rescuetime.com webwright

    Hrm. This certainly seems like the traditional way to do it, actually– though I'm not convinced it's the best way. It's the marketing version of “waterfall development” – go get your specifications and then build to it, rather than going agile and getting into the build/iterate product cycle…

    I think the best market research is throwing an early version of a product at users. Market research can yield from pretty interesting/valuable information, but I'm not sure that it can create a recipe for a good product. I watched Jobster (my previous employer) spend tons of time getting smart about the market, but they have yet to build a product that excites their market.

    I guess it depends on how expensive (in time and cash) it is to get your v1 in front of potential customers… Most web/software apps are fairly trivial in terms of the time necessary to build a prototype nowadays. I always tend to focus on ideas with high tractability (which I wrote about here: http://sahuguet.wordpress.com/2007/12/20/tony-w… )

  • http://andrewchen.typepad.com Andrew Chen

    No, totally different than the traditional waterfall way – basically think of it as extending Agile out to the business end. Treat the customer as an unknown, the distribution as an unknown, and the initial featureset as an unknown, and do the smallest possible iteration of the entire business (end-to-end, customer to distribution to product) and bring that to market. Then recalibrate using user research and analytics, and bring the next iteration. The entire cycle should be very small.

    The problem with Agile development is that all the advantages only confer to the technology side, and you can often end up with a very monolithic view of customer/distribution/etc. And by not iterating on those at the same time you're iterating on the product, you are building up huge risk by sequencing these steps out. That is, “Agile development” = waterfall for business end, agile on technology.

    Now all of this is worse in Waterfall, where you assume a known customer with a known featureset – and then the development process also assumes known risks. I agree that this is worse in every respect. But Agile on the business end and Agile on the tech end, simultaneously, is key.

    In terms of the best market research being about building a product first, that's a fine thing to say from an engineer's point of view :) There are plenty of additional shortcuts to understand users before even developing the product, for example paper prototyping, ethnography research, etc. These things can all be cheaper to do than building a product, and faster too. It's something that a nontechnical cofounder can work on, from day 1, while the engineers are building the early product.

  • http://venturehacks.com nivi

    Tony, I will second Andrew's suggestion to read Four Steps to the Epiphany.

    Here's an intro from Venture Hacks.

  • http://blog.jamiequint.com jamiequint

    The customer development process is different than the waterfall model, in fact its contrasted directly against it. I haven't read any of Eric Ries' stuff, but I didn't understand Customer Development as a marketing first process. As Venturehacks mentioned Customer Development was first laid out in Steve Blank's “Four Steps to the Epiphany.” (excellent book – http://www.amazon.com/Four-Steps-Epiphany-Steve…)

    I think for consumer internet startups the “throw an early version of a product at users” model tends to work well because it lets your target customer find you. A lot of what Blank describes in the early chapters of his book is similar to what you advocate. He suggests finding a market for the product you have developed rather than the focus group approach of trying to develop a product for the market you have identified.

    For non-consumer-internet startups that are B2B or requires sales processes and purchasing decisions that may not rest with the end user it is sometimes not as simple as throw it out there and see what works. You may have limited resources to target sales calls, and you may not even know how to best sell the customer. Learning who your true visionary customers are and how they state the problem they have *before selling them* is what he advocates. However, his disclaimer is that you find a market for the product you have created, rather than modifying the product you have created to fit a certain customer set. It is only when you don't find any market or visionary customers for what you have created that you reanalyze the product itself.

    A purely market first model seems to be a contradiction of Blank's book, although I haven't looked at his new slideshow in depth, so perhaps the Four Steps have changed.

  • http://www.rescuetime.com webwright

    Super interesting stuff, guys– many thanks for the great comments! I'd breezed over the customer development stuff on VH (it came at a busy couple o' weeks) but I plant o dig back in.

  • http://www.HubSpot.com Dharmesh Shah

    I have actually had this on my bookshelf for over a year now — but never got into it. Will have to make another attempt.

  • Joe

    A business guy can be invaluable at the very early stages!

    At DreamIt Ventures they provide hackers the option to interview and bring a business guy into your fold. One of the teams did so and it transformed their idea into a business right over the summer!

    It was a great idea that got even better via the innovative business model the biz dev guy created and executed on!

  • http://www.workpost.com Workpost

    This is an awesome and informative post. There's a huge emphasis on technical skills in early-stage startups but.. the graphs say it all!

  • http://www.rescuetime.com webwright

    Certainly any rule has exceptions. I'm not even convinced it's a rule. The question at hand is: “what percentage of small/scrappy teams which had a dedicated biz guy were glad they did after the fact?” An extra person can be expensive in cash and time/attention…

  • http://www.rescuetime.com webwright

    Good stuff– I'm digging into the videos and have purchased the book. I'm pretty excited based on your and Nivi's endorsements, though I'm bracing for the dull read! :-)

  • http://500hats.typepad.com davemc500hats

    third endorsement for Steve Blank & 4 Steps to the Epiphany… tho to be honest i haven't read the book yet, only heard Steve in person and checked out his presentation on SlideShare:
    http://www.slideshare.net/venturehacks/customer

    (& thanks for the kind words Tony)

  • Saul_Lieberman

    I hadn't thought about it this way but — I suppose one of the risks of “bootstrapping” is that you are more likely to lock in the product direction too early.

  • http://www.rescuetime.com webwright

    That's a really interesting point. Jeff Clavier (rockstar early investor)
    once got into a bit of trouble saying that early revenue was “noise” (I
    think the comment was taken WAY out of context):

    http://news.cnet.com/8301-10784_3-9886549-7.html

    Bootstrapping means getting customers early– which can certainly keep you
    from dying, but it also might keep you from seeing attacking a bigger
    opportunity in your market because your product is already tuned to those
    early customers.

  • http://www.rescuetime.com webwright

    Scott Rafer has an interesting response here:
    http://rafer.tumblr.com/post/59993364/but-what-

    He makes that point that I'm talking about a SALES person, not a biz person. In truth, I guess I sorta am (or more of a sales/marketing/bizdev generalist). In an early stage software startup with 2-5 people(pre-product), I'm hard-pressed to envision a valuable business guy (in the earliest stages of software company) who doesn't largely focus in these areas. I guess there's fundraising, as well….?

    He also makes the point that what I'm really talking about (but didn't say) is FUNDED software startups. Fabulous point– my post is DEAD wrong for a bootstrapped company, a lifestyle business, or any other business that is aiming at a more moderate outcome.

    Quoth the Rafer (nevermore!): “Finally, if you want to build something big, please note that I’ve specified three necessary roles before a startup finds its way — business, product and tech. Almost no one can do any two of those well at the same time. If you think you can do two of them, then you’re taking unnecessary risks that radically lower your probability of success.”

    Exactly my point! :-) In the earliest stages, though– I think most critical part of the company that needs to be absolutely KILLING IT is the product/tech team. That gets you “upwind” and leverages you for business success (having kickass sales/marketing/bizdev/pr success early doesn't not similarly leverage success for product).

  • http://www.technotheory.com Jared Goralnick

    Great points here, Tony! And I went ahead and bought the Four Steps book mentioned a few times in the comments. I think Nivi got some affiliate $$'s…

    You mention that the approach you've discussed isn't really valuable for small businesses looking for moderate income or lifestyle businesses…but I would argue that too many web startups, regardless of their goals, miss the value of business or marketing people. And thus they never get to the point of moderate success and instead fail outright.

    Technology is an important piece, but I think all of us, as our products become more mature, need to think about the next direction, which is often more of a business than a product decision.

  • http://www.rescuetime.com webwright

    (CONGRATS ON YOUR LAUNCH!

    Right on, Jared! I actually think early sales/bizdev smarts IS crucial for more moderately-goaled businesses.

    Lots of semantic challenges in this discussion! The technology piece, for example. For me– it's all about PRODUCT (of which technology is a subset). If you can nail the product, you are way upwind of success and oftentimes just need to throw up your sails for biz success. But you really can't nail your product without really understanding your problem/market/space. That's why I've always contended that entrepreneurs are best served attacking a problem that they have themselves.

    If the hackers don't grok the market, then a biz guy who does (or who has the chops to go out there and analyze it) is certainly crucial.

  • http://passionate-evolution.blogspot.com/ Wendy

    Great Post!

  • http://masonfok.com Mason Fok

    I think this rings true and is relevant more so with today’s startups then that of many existing successes.

    The early success of Gates and Jobs comes from a time where it was ok to fumble around for a couple of months if not a whole year before coming to that realization that you need to evolve to that next level of thinking.

    Today, the transition process can be very unforgiving to many due to the pace of the startup environment.
    Now days, if you are the Product guy you really should have a strategy ready for when you believe that Business guy needs to make an appearance and that plan / point in the cycle needs to be decided upon at the beginning.

    Evolve to late and you risk missing valuable opportunities, market share and possibly everything by falling victim to excessive feature creep.

    Evolve to early and depending on your product you risk among other things not connecting with the consumer and not making it as efficient as mark 1 can be.

    (Sorry if i am a bit out there, first time posting in this space)

  • http://snowedin.net Erik Pukinskis

    Hi Tony!

    I noticed you used the word “guy” here, instead of “person” or something else gender neutral. I think using gendered terms like that is one of the things that contributes to a vibe that all developers are men, which is part of a general climate that makes women feel unwelcome in tech circles.

    I'm assuming you're not deliberately trying to exclude people, and you just didn't think about it much… but I think it would be totally rad if you'd change it to “person”. What do you think?

    All the best,
    Erik

  • http://www.rescuetime.com webwright

    I've never been a fan of going out of my way to be gender neutral in my
    language… Mostly because it's cumbersome (
    http://en.wikipedia.org/wiki/Gender-neutral_pro… ) and
    disrupts the flow and enjoyment of writing (AND READING) for me. Call me
    selfish.

    But, to discuss your idea a little bit: There are plenty of professions
    that are dominated by women, and I'm not sweating that. If someone was
    talking about nursing and was talking about the “gals at the nursing
    station”, for example, I don't think I'd be bent out of shape as a fella or
    worried that men wouldn't feel welcome in the nursing profession as a
    result.

    If people don't FEEL welcome, that sounds like an internal problem. If they
    aren't welcome (or are purposefully treated badly), that's a problem with
    the individual who is treating them badly that deserves correcting.

    Where we differ is whether using male language counts as treating them
    badly. Most of the women I hang out with would shrug and say, “It's because
    the english language is borked and inventing words/conventions isn't going
    to change that. Who cares, really? Judge me on my merits or fuck off”. My
    wife is in senior management, loves to fish, worked at Planned Parenthood
    for years, now works for a land conservation non-profit, and once gutted a
    dead moose– not a stereotypical woman by any measure– and I think she'd
    feel trying to change these conventions is not a great use of time or
    energy.

    Of course, there are all sorts of theories of why women are more rare in
    software circles. For all I know, it's biological. There are delightful
    differences between men and women (http://www.newsweek.com/id/49232 -
    interesting stuff) that are both biological and cultural. I'll never be
    purposefully hurtful to a woman or a man who chooses an uncommon path, but
    I'm also not going to treat them like a delicate little flower… And if I
    joined the nursing profession, I'd hope that people wouldn't treat me that
    way either.

    Interesting topic, to be sure… I agree with you that the english language
    is borked, but I don't think I'm willing to help with the sisiphysian task
    of fixing it. I'm going to float this discussion past a few women who I
    know/respect and get their thoughts. Who knows, maybe they'll agree with
    you and I'll change my ways!

  • http://www.rescuetime.com webwright

    I've never been a fan of going out of my way to be gender neutral in my
    language… Mostly because it's cumbersome (
    http://en.wikipedia.org/wiki/Gender-neutral_pro… ) and
    disrupts the flow and enjoyment of writing (AND READING) for me. Call me
    selfish.

    But, to discuss your idea a little bit: There are plenty of professions
    that are dominated by women, and I'm not sweating that. If someone was
    talking about nursing and was talking about the “gals at the nursing
    station”, for example, I don't think I'd be bent out of shape as a fella or
    worried that men wouldn't feel welcome in the nursing profession as a
    result.

    If people don't FEEL welcome, that sounds like an internal problem. If they
    aren't welcome (or are purposefully treated badly), that's a problem with
    the individual who is treating them badly that deserves correcting.

    Where we differ is whether using male language counts as treating them
    badly. Most of the women I hang out with would shrug and say, “It's because
    the english language is borked and inventing words/conventions isn't going
    to change that. Who cares, really? Judge me on my merits or fuck off”. My
    wife is in senior management, loves to fish, worked at Planned Parenthood
    for years, now works for a land conservation non-profit, and once gutted a
    dead moose– not a stereotypical woman by any measure– and I think she'd
    feel trying to change these conventions is not a great use of time or
    energy.

    Of course, there are all sorts of theories of why women are more rare in
    software circles. For all I know, it's biological. There are delightful
    differences between men and women (http://www.newsweek.com/id/49232 -
    interesting stuff) that are both biological and cultural. I'll never be
    purposefully hurtful to a woman or a man who chooses an uncommon path, but
    I'm also not going to treat them like a delicate little flower… And if I
    joined the nursing profession, I'd hope that people wouldn't treat me that
    way either.

    Interesting topic, to be sure… I agree with you that the english language
    is borked, but I don't think I'm willing to help with the sisiphysian task
    of fixing it. I'm going to float this discussion past a few women who I
    know/respect and get their thoughts. Who knows, maybe they'll agree with
    you and I'll change my ways!

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