1. “Swing for the fences when your time is right.” What John Doerr is talking about is the so-called Babe Ruth Effect. Michael Mauboussin writes: “a lesson inherent in any probabilistic exercise: the frequency of correctness does not matter; it is the magnitude of correctness that matters.” When you find an obvious bet with a big upside and a relatively small downside (i.e., positive optionality), bet big! That won’t happen very often, but when it does, you must be ready to act aggressively. The wise investor is patient, but aggressive when the time is right. Venture capital, like all forms of investing, is an activity in which a knowledge of probability and statistics is essential. Charlie Munger said once: “If you don’t get elementary probability into your repertoire you go through life a one-legged man in an ass-kicking contest.”
2. “We believe that ideas are easy, execution is everything.” A good idea or invention is necessary, but it is far from sufficient to achieve success in business. For a good primer on the importance of execution in a business see my post on Jim Barksdale. It takes an entrepreneur to take an idea or innovation and turn into genuinely scalable business. That means a “roll up your sleeves” and a “make the trains run on time” effort from a team of people. Bill Gates said once: “Being a visionary is trivial. Being a CEO is hard. All you have to do to be a visionary is to give the old ‘MIPS to the moon’ speech — everything will be everywhere, everything will be converged. Everybody knows that. Which is different from being the CEO of a company and seeing where the profits are.”
3. “Believe me, selling is honorable work — particularly in a startup, where it’s the difference between life and death.” How could someone describe the importance of sales to a startup more starkly? Poor sales results means inevitable death for a startup. When it comes to sales success I have seen just about everything from great to nonexistent. At one end of the spectrum I have seen startups composed of all engineers in which no one who knew how to sell. The result in a situation like that is not pretty. I have also seen sales teams that were able to sell products and services at seemingly superhuman levels given competition and the nature of the offerings. Spending what it takes to drive sales success is essential. As an example, take a look at any software-as-a-service company to see how much is being spent on sales and marketing by industry leaders. More than 50% and in some cases more than 100% of revenue is being devoted to sales and marketing by some companies. I’m not saying that these levels are always rational, but if your competitor is doing this you need to pay attention and respond. Sales skills are not just required for selling goods and services to customers. As part of building a startup into a real business you are selling different things all the time to a range of people, including investors, employees, distributors, suppliers and customers.
4. “The best entrepreneurs …don’t know what they don’t know, so they attempt to do the impossible. They often succeed.” Optionality is often found in what seems impossible. If a new business does not seem a little impossible there would inevitably be many people already pursuing the opportunity already. Many entrepreneurs fail as they attempt the impossible and are forgotten by history as survivor bias kicks in. Failure is an essential part of human progress.
5. “The best entrepreneurs don’t focus on success. They focus on building a company that can be a leader in the global economy. They know success will follow. If you focus on success, you won’t get there. If you focus on contribution and customer value, then you can win.” “Mercenaries are driven by paranoia; missionaries are driven by passion. Mercenaries think opportunistically; missionaries think strategically. Mercenaries go for the sprint; missionaries go for the marathon. Mercenaries focus on their competitors and financial statements; missionaries focus on their customers and value statements. Mercenaries are bosses of wolf packs; missionaries are mentors or coaches of teams. Mercenaries worry about entitlements; missionaries are obsessed with making a contribution. Mercenaries are motivated by the lust for making money; missionaries, while recognizing the importance of money, are fundamentally driven by the desire to make meaning.” John Doerr clearly prefers the missionary approach to starting a business, but recognizes that mercenaries can sometimes succeed. My posts on other venture capitalists reveal that they often have a similar view. Missionaries tend to hang in there longer since they are pursuing a cause and not just wealth. Some fail and some succeed. Missionaries who win are remembered and the one that lose are forgotten (survivor bias).
6. “The best entrepreneurs are the ones who really go the distance with their companies, who are always learning…”“Great leaders are great communicators. They have incredible integrity: they’re usually the first to recognize problems. They’re ruthlessly, absolutely intellectually honest. They are great recruiters: They’re always building their network of talented people. And they’re great sales executives: They’re always selling the value proposition of the enterprise.” Great leaders and entrepreneurs have a big bag of skills. Having just one skill, or even a few, is not enough. The best way to create a big bag of skills is to be a learning machine. A corollary to this point is that a diverse team in the broadest possible sense is a stronger team. Great founders and CEOs hire people who complement their skills and are multipliers of what the CEO can do on their own.
7. “In anything worth doing, it takes a team to win.” “In the world today, there’s plenty of technology, plenty of entrepreneurs, plenty of money, plenty of venture capital. What’s in short supply is great teams. Your biggest challenge will be building a great team.” Recruiting is such a huge part of the success of a startups it is hardly possible to emphasize it enough. Great people attract other great people [repeat]. As Bill Gates wrote recently: “there’s an essential human factor in every business endeavor. It doesn’t matter if you have a perfect product, production plan, and marketing pitch; you’ll still need the right people to lead and implement those plans.”
8. “If you can’t invent the future, the next best thing is to fund it.” Some venture capitalists are honest enough to admit that they would make a lousy entrepreneur or that they don’t currently want to go through the intense start up process at this point in their lives. John Doerr is saying funding innovation and economic growth is a noble profession.
9. “No conflict, no interest.” This quotation may be apocryphal since no one seems to be able to cite a source. Whether John Doerr said this or not, it is certainly true that in private markets investors can look for a proprietary edge that would not exist in public markets since there is no Regulation FD.
10. “The old economy was about people acquiring a single skill for life; the new economy is about life-long learning.” “Choose your first job based on the experience, not how much money you will make. Carry a bag (sell something), launch a product, manage a dozen people, learn from great companies. You will be judged on your ability to listen and think critically. Confront problems, not people. Learn. You’ll get extra points for a sense of humor. Always network. That means learn about people and what they do. Also, develop a couple of mentors.” See my post on Reid Hoffman for views on the ever-increasing value of networks of all kinds. People with access to better networks have better information which they can turn into achievement [repeat]. Success feeds back on itself which is why we are seeing more winner-take-all outcomes (Extremistan).
11. “Everyone who is a practitioner of the venture business knows most of the returns accrue to a small group of firms. And I don’t think that’s ever going to change.” I repeat this point about the power law distribution of financial returns in venture capital nearly every time I do a post on venture capitalists since it is so fundamental. Returns in the venture capital business are not spread evenly like peanut butter, but rather reflect a power law distribution. People have a hard time with this fact since they tend to assume that activities, phenomena and outcomes reflect Gaussian distributions. Zero limited partners use an industry average in making a decision to invest in a new fund started by a top ten venture capital firm.
12. “[Stanford is] the germplasm for innovation. I can’t imagine Silicon Valley without Stanford University.” When I talk about economic development, I like to tell the story about how the spoils were politically distributed when the Washington Territory joined the United States as a state in 1889. Tacoma was the terminus for the railroad before it ever reached Seattle. Olympia was awarded the state capital, Walla Walla received the penitentiary and Port Townsend, which had a thriving port closest to San Francisco, received a customs house. All Seattle received in the political process that resulted in statehood was more funding and support for the University of Washington which had been founded in 1861. In terms of economic development having the university in Seattle made all the difference. Great cities get built around great universities. Seattle without the University of Washington would not be Seattle. John Doerr is saying Silicon Valley without Stanford wouldn’t be Silicon Valley.