1. “Even though the numbers [in the entrepreneur’s business model] will likely be wrong, your thinking behind how you arrived at those numbers is critically important. Think of each assumption as a dial. Which ones connect to things that matter, and what impact would they have on your ultimate outcome if they turn out to be only half as effective – or then again twice as effective? Of the ones with the biggest impact, what underlying factors determine their outcome? Which ones can kill your business?” It is amazing how much credibility some people give to numbers once they are in a spreadsheet. The numbers in a spreadsheet are just numbers. Too often they are often someone’s wild guess or goalseek plug in. The reality is that a spreadsheet is all about the assumptions – which are usually hidden, unless you go looking for them. If garbage goes in to a spreadsheet, garbage comes out.
What Heidi Roizen is saying is that it is the relationship between the numbers (and in particular their sensitivity to each other in a financial model) which can provide the greatest insight. For example if it costs a lot to acquire a customer, you can learn from the sensitivity of lifetime value to that number (CAC) that customer churn is very harmful and that investing in customer retention is a very good idea. Similarly, if you are spending >50% of revenue on sales and marketing you need to have low COGs and watch cash flow carefully.
2. “One of the biggest mistakes entrepreneurs made in the last couple of years is; ‘Hey, I own a company and I sold 50% of it for $5 million and the day that $5 million gets in my bank, I’ve got $2.5 million.’ No, you don’t. You have $5 million of debt and usually at three or four liquidity preferences and participation that you got to pay back before you ever see a dime. That money is very dear and very precious, and that’s why I would caution everyone that terms are more important than valuation …. many of our investments will be lost and we won’t ever see that money again. But if there’s any value in the company that gets created as a result of your sweat and our money, it’s our money that’s first.” Inexperienced entrepreneurs pay too little attention to deal terms. Terms that govern issues like ratchet clauses and liquidation preferences are important to understand in a deep way. Money can be much more expensive than many people imagine, especially if all they pay attention to is the cash received up front and not the terms of the financing. Dilution is painful and yet some people think that the best use for money raised is a fancy office with a spectacular view.
3. “When you’re the CEO, you have the least freedom, because you can’t just quit.” “I raised that money. I hired every one of these people. I gave those venture capitalists my commitment that I was going to bring it home for them. I’m not just going to walk out the door. I remember walking into my company every day. We had about 100 employees. And I would count the cars in the parking lot, and I would think about the car payments and the mortgage payments..” You don’t need to be the CEO to feel responsible for fellow employees when involved in a startup. I thought a lot about employees not making their mortgage payments or having to go home to their families without a job as the third employee of a startup. Responsibility is a tremendous motivator, if you are a responsible person. Some people in life were not distributed responsibility or empathy at birth. Recognizing that absence in a person is a very valuable thing. Some people will be there for you in a crisis or when things turn out badly, and others won’t.
4. “Entrepreneurship is a team sport with very many lonely moments.” “I was once an entrepreneur, and I did not live a balanced life. I think we live our lives in a serial fashion — there are periods where you won’t have time to do everything you want. If you’re really excited about something, you can run on that for a while.” I spent five years of my life flying 500,000 (mostly international) air miles a year in the 1990’s, almost always by myself doing business development. My life was not balanced. I felt there were three things I could do: work, family and personal life. I decided to focus on the first two during that period. To say you will make no tradeoffs in building a business is in my view unrealistic. You can say that you will try to balance things out later, but sometimes, or even all too often, that balancing out does not happen. Starting a business is an extreme sport.
5. “If you want to be the smartest person in the room, you’re going to build a crummy team. Do you really want a VP of sales who knows less about sales than you? Do you want a CFO who knows less about accounting? No of course not. You have to take risks to find the right people and then trust in those relationships. Your job becomes to empower those people and make sure they get along. My goal is always to be the dumbest person in the room because I want to be surrounded by really bright, really amazing people. That’s when exciting, world-changing things get done.” The best and most talented people want to work with the best and most talented people. The key to the success of a business is generating positive feedback loops and hiring the very best people is arguably the most important positive feedback loop of all.
6. “The most important thing you have is time because you can’t make more of it.” Time is almost always your scarcest resource. Spend it wisely. Find ways to cut off people and activities that are a time sink. As Peter Drucker once said: “There is nothing so useless as doing efficiently that which should not be done at all.” On a personal level, I plan to take a course on time management just as soon as I can fit it into my schedule.
7. “[Not] every deal should have VCs.” There are lot of businesses which can produce an attractive financial return that are not candidates for venture capital. These businesses can be boot-strapped or built based on sources of capital like bank loans. Lots of people living financially rewarding lives built their business without a penny of venture capital. For another view on this in a recent Harvard Business Review article see here.
8. “When you fail, and we all fail all the time, get over it. Own up to it, make amends, make sure you don’t let it happen again and move on.” Mistakes are a useful part of the process as long as you are making new mistakes. You can’t make an omelet without breaking eggs, but you can also break a lot of eggs without ever making a decent omelet.
9. “Things outside of your control will happen. You need to lean into this fact.” So much in life is determined by luck. If you haven’t been reading the work of people like Mauboussin and Khaneman on luck you should. Daniel Khaneman points out: “Our mind is an instrument for making sense of the world. We make sense of the world by telling causal stories — and causal stories are always going to have heroes in them. The things that could have happened and would have changed events do not come to mind.”
10. “The 20-40-60 rule: In our 20s, we worry about what other people say about us. At 40, we realize it’s not important to worry about what people say and at 60, we acknowledge that no one was thinking about us.” “Your boss is not thinking about you. Your peers are not thinking about you. You need to think about you.” Often when people feel embarrassed about some failure they are the only one who actually noticed what happened. And just as often when you think someone is looking after you, no one is. So take care of you.
11. “Networking is a negative term that means climbing the monkey bars. It’s about building relationships and connecting with people you find interesting.” “[Be] relationship-oriented as opposed to transaction-oriented” “Building your network also means starting with what you can give.” “There is this book called Drive, by Daniel Pink, where he talks about the rule of reciprocity—which means if you do someone a favor, they will feel more obligated to do something for you.” I’ve written a book about this actually – The Global Negotiator. It is free to download. The book’s overall message is simple: build relationships rather than doing deals. It is mostly a bunch of stories about things that happened to me and my co-author while we lived and worked in Asia. We wrote the book before Robert Cialdini’s wonderful book Influence was published, and so we do not refer to important principles like reciprocity using the same terminology. Cialdini describes the reciprocity principle simply: “People will help if they owe you for something you did in the past to advance their goals. That’s the rule of reciprocity.” The reverse is also true: when you do someone a disfavor, you will often find that disfavor is reciprocated.
12. “Negotiation is “the process of finding the maximal intersection of mutual need.” To create a durable relationship, it is best to focus on the intersection of mutual need rather than trying to create a clever legal agreement. The pace of change means anticipating fully how the world will change in an agreement is simply not possible. The chapter in The Global Negotiator on this important point about negotiation (“keep the relationship mutually beneficial”) is here.