A VC’s 10 startup secrets he wishes he had known as an entrepreneur

By Michael Skok , written on January 10, 2014

From The News Desk

Entrepreneurs are in a position to make a significant impact on the world, but they’re also faced with intense challenges that aren’t typically encountered in any other situation. Over the course of my career, I have confronted and seen many roadblocks that can arise on an entrepreneur’s path.

As a teen, I taught myself programming and built a variety of applications, from stock and bond portfolio management to retail and inventory control – learning with each success, and more importantly, each failure. Later, as an entrepreneur and VC, together with some great co-founders and teams, we founded and built companies that were acquired by some of the world’s largest technology corporations or went public and became leaders themselves.

Much of what I’ve learned during this multi-decade-long adventure I’m sharing openly as some simple “Startup Secrets” and Case Examples to frame discussion with the goal of helping entrepreneurs to avoid common pitfalls. Here are ten to get you going.

Startup Secret #1: Don’t be afraid to say “no” more than “yes.”

As a startup, you will be defined as much (or more) by what you say “No” to as what you say “Yes” to. Perhaps the single most important Startup Secret is to find your focal point. As an entrepreneur, you are naturally inclined to be ambitious, and to want to tackle any and all challenges. However, as you build your company, focus in on domains, segments, problems and other areas where you can specifically and uniquely differentiate yourself from the competition and gain repeatable traction. Don’t fall into the trap of being all things to all people: doing so can delay, distract or even lead to failure for your enterprise.

Startup Secret #2: Recognize what is right “4U”

As you work to position your startup and develop your Value Proposition, focus on addressing what I like to call the 4Us:

  • Is the problem Unworkable? Does your solution fix a broken business process where there are real, measureable consequences to inaction? Will someone get fired if the issue is not addressed?  
  • Is fixing the problem Unavoidable? For example, is it driven by a mandate with implications associated with governance or regulatory control?
  • Is the problem Urgent? Is it one of the top three priorities for spend? 
  • Is the problem Underserved? Is there a conspicuous absence of valid solutions to the problem you’re looking to solve?
To bring this to life, in a recent Startup Secrets workshop on value proposition, we featured a storage company whose ability to address the 4Us has propelled them to the top of their industry. The company explained how they uniquely addressed each of the 4Us:
  • Unworkable – There was no way to solve the problem with conventional storage architectures;
  • Unavoidable – Every enterprise with data to be accessed and protected creates the problem;
  • Urgent – Consuming the majority of storage budgets in an environment of constrained IT resources;
  • Underserved – Big players have a concrete dis-incentive to tackle in a way that serves the customer.
Startup Secret #3: Think in 3D

Once you have determined the problem your venture is solving, define your solution. The most immediate question to ask is: What is your compelling breakthrough? A useful approach is to think of 3Ds: What unique combination of Discontinuous innovation, Defensible technology and Disruptive business model are you bringing to bear, and what makes it truly compelling?

  • Discontinuous innovations offer transformative benefits over the status quo by looking at a problem differently.
  • Defensible technology offers intellectual property, for example, that can be protected to create a barrier to entry and an unfair competitive advantage.
  • Disruptive business models cause an “innovators’ dilemma” and/or yield value and cost rewards that help catalyze the growth of a business.
A fascinating example of 3D impact is around Google and how it changed the game for Microsoft. Years ago, Microsoft was dominant. However, through a disruptive business model, simple (defensible) technology and innovative applications, Google has (and continues to) significantly cut into Microsoft’s business. Examples of Google’s 3D impact in action include Google Docs versus Microsoft Office and the disruptions of the phone business from Blackberry to iPhone to Android.

"Faster, cheaper and better" is likely a temporary advantage that is easily overcome by a competitor with deep pockets, but building an innovative business model can be a game changer.

Startup Secret #4: Look for non-disruptive disruptions

Evaluate the potential for success using the Gain/Pain ratio, which involves measuring the gain you deliver a customer versus the pain and cost for a customer to adopt, as illustrated in the diagram below. As an investor, I look for non-disruptive disruptions: technologies that offer game-changing benefits without requiring major modifications to existing processes or environments.  Simply put: disruptive innovation should not be disruptive to adopt.

Non-disruptive is critical because whatever gain you deliver will be discounted by the pain of adopting your solution PLUS the inertia of vendor risk that every startup levies by the virtue of being small and unknown. A successful venture delivers an order of magnitude improvement over the status quo. If you can’t deliver a 10x promise, customers will typically default to “do nothing” rather than risk working with a startup or risk changing their current configurations.

I’ve created many case examples for startups that have experienced great success employing the Gain/Pain ratio methodology. From mobile app management leaders’ offerings  to the largest web discussion platform, the Gain/Pain ratio can prove useful across a broad spectrum of industries.

Startup Secret #5: Focus on a blatant, critical need. Ask: “Is it BLAC and White?”

Ideally, you want to be in the position of addressing problems that are blatant and critical (especially for B2B), as those problems are far more acute than ones that are latent and aspirational. Blatant and critical problems stand in the way of business. They put careers and reputations at risk. Latent problems are unacknowledged, which means they often require costly missionary selling. Aspirational problems are optional, which is often the hardest place for a startup to sell.

Companies that view their value proposition through a “BLAC and White” lens are able to accelerate growth considerably. In fact, the same storage startup I referenced in Secret #2 did just that. They addressed blatant and critical storage issues tied to geometric data growth, unmet recovery times and the unwieldiness of petabyte-scale “Big Data.” The company addressed a white space that called for a solution that would address the “root cause” of the copy data problem. The result? Customers have embraced the new concept and the company has been on an upward trajectory ever since.

Startup Secret #6: If you are going to pick a fight, pick a BIG fight

Big problems can lead to big opportunities. It often requires just as much work to go after a small market. Significantly painful problems are the source of great opportunity for entrepreneurs and have the potential to turn into really valuable solutions. They may not be easy to solve but often lead to true innovation.

The key is to look around, get in front of a mega-trend and then look to solve a related major problem or issue in order to fully leverage that trend.

 Startup Secret #7: Focus on your Minimum Viable Segment (MVS)

I find too many entrepreneurs who follow the lean methodology stuck in a product spin and become consumed with their Minimum Viable Product. While I often hear about the importance of product/market fit, I don’t believe enough consideration is given to the market side of this equation.  While the MVP is critical, it’s missing its dance partner, what I call the Minimum Viable Segment (MVS).

Supporting Startup Secret #1, don’t be afraid to say no, MVS is about focusing on a market segment of potential customers that have the same needs into which you can repeatedly sell. Defining and focusing on your MVS is vital because without it, potential users who have divergent needs will quickly pull your MVP in many different directions. In addition, since securing strong reference customers is critical in the early days of your Go to Market activities, you want them to reference each other, and they can’t if they don’t have the same needs.

In fact, one of the companies in my portfolio, Demandware, placed a significant emphasis on segmentation to find its initial customers. They remained true to the guiding principal of starting small within a niche before getting big within that market. With a goal of delivering with distinction, they focused on segments within segments, including high-growth retailers and brands within the segments luxury, home and lifestyle. Aligning the efforts of their sales and marketing teams behind that focus, they started with one brand; then that brand ambassador would talk to friends. Endorsements grew within retail segments and then beyond.  Focusing on their MVS has today enabled them to break through the two billion dollar valuation mark.

Startup Secret #8: Hire for CQ (Cultural Quality)… do QC (Quality Control) 

Ideas are worth very little without people to execute them, a culture to guide the selection of talent and a big, bold vision to attract and unify the team. Human capital is what separates good companies from great ones – which is why establishing a strong culture to attract and retain the right people, while unifying them behind an inspiring vision, is essential to any significant venture.

When evaluating a potential new hire for CQ, you need to ask yourself: does this person naturally align with your cultural values, work ethic and style of working? As part of this process, you should feel comfortable with (or better yet, inspired by) their passions, beliefs and aspirations.

There are specific interview questions designed to help you assess CQ, which you can find here. The result of being mindful of CQ? A hire who will be additive to the culture you’ve worked hard to establish and who will have a positive impact on company morale and success.

A great example of culture fueling success is that of Amazon: the company’s physical manifestation of thrift underscores its approach to business.  In fact, Jeff Bezos and the “door desk” came to symbolize Amazon’s frugal culture, which has been at the core of the company’s success.

Startup Secret #9: Hire 3 As (attitude, aptitude, and ability) and 3+s (+aware, +authentic, +athlete)

We all want to hire ‘A’ players – and this can be accomplished by looking at three important ‘A’s:

  • Ability – Does the person have the right balance of IQ and Experience, Knowledge and Skills (EKS) required for the job?
  • Aptitude – Being able to rapidly adapt and learn new skills and knowledge.
  • Attitude – Pursuing breakout opportunities requires the right attitude toward things like problem solving, persistence, and participation in a team.
Taking things a step further, most want to extend the notion of A players to look for A+ players. These attributes can vary based on role, but the three A+ traits I look for are: Athletes who are Self-Aware and truly Authentic:
  • Athletes often triumph over experience and possess the agility to adopt to change.
  • Self-Aware people are easy to work with, are open about their self-professed strengths and weaknesses, work well with others and are amenable to mentoring and coaching.
  • Authentic people are genuine in all they do and demonstrate a sincere passion for their roles.
Startup Secret #10: Incomplete stand outs are better than complete stand ups!

Many entrepreneurs think they need to have all answers, when, in fact, they don't – especially when they seek funding. The nature of venture capital is high-risk. Part of that risk is not knowing the answers before you start. As VCs, we're fine with the unknown, as long as people have the self-awareness and conviction to work through challenges as they arise. In fact, we expect there to be many gaps in thinking, in a variety of areas ranging from team strategy to business model during a company’s early stages.

Overall, it’s easy to start a company, but hard to start a business. From capital constraints to sales challenges, one needs to be able to accept that not having all of the pieces at the onset is okay, and these elements can be built out as you grow, as long as you have a clear roadmap and unifying culture.

It is probably apparent from this article that VCs like me love companies in their formative stage: they enable us to really collaborate with the entrepreneurs and get to know them as the business comes together. That said, even at that inception stage, there are some fundamental requirements VCs DO look for:

  • A uniquely qualified person to back
  • A great idea or insight into solving a significant problem or addressing a clear opportunity
  • The beginning of a long-term vision
 These 10 Startup Secrets, while hopefully helpful, are not designed to be prescriptive. In your unique situation, they may not apply. Listen to your market and learn from it as you engage your stakeholders, but don’t forget that, as a founder, you are instrumental to your venture’s success.

 [image via thinkstock]