Jim Goetz is a venture capitalist at Sequoia Capital. His list of accomplishments is long and impressive.
1. “I am looking for unknowns, who are passionate and mission-based.”
Mercenaries are motivated primarily by money. Missionaries, in contrast, are driven by a cause. Missionaries are not only more likely to persevere during hard or challenging times they are more likely to work to keep the business independent – which tends to produce the most “tape measure financial home runs.” Underdogs with huge ambition for their business are rarer than most people imagine. Too often the founder has an idea for a decent or even very good business, but that is not the sort of business that a venture capitalist wants to fund give their need for Unicorn-style financial returns. As an example of what he is talking about here, Jim Goetz said once about Whatsapp: “It was mission-based and very different than what everyone else was doing at the time.”
2. “Many of the entrepreneurs that we back are attacking a personal pain.”
“The common thread [between Sandy Lerner and Len Bosack (the founders of Cisco), Reid Hoffman (LinkedIn) and Omar Hamoui (AdMob)] is that these were all sketchy misfits, unknowns, who all focused on [solving] personal pain points and were all willing to put something out early and iterate.”
Passion for the customer pain point conveys the desired missionary quality. It also means that the founder understand the problem deeply and less research is required. If a business is not solving a genuine customer problem in a unique and compelling way and in a manner that is defendable via a moat, a business is unlikely to succeed.
As an example of this point, Jim Goetz said once about Whatsapp: “they were designing something for themselves first. Jan, for example, wanted to reach out to friends and relatives in Russia and how to do that was the most important part. Both he and Brian were very driven, just not by financials and not by economic outcome.” Great pitches to venture capitalists and customers are inevitably a story and few things make a story more compelling than making it personal. Eating a fish dinner accompanied by a great fish story makes the food taste better.
Here’s the first of several slides in this post from a Jim Goetz presentation (link to all slides is in the notes) that sets out the elements of a good story that may be attractive to a venture capitalist:
“One in 15 entrepreneurs that come through our doors can convey their initial market position in literally 5 minutes.”
Jim Goetz recommends that significant time be spent developing this pitch early in the life of a startup. Can the entrepreneur limit this part of the pitch to only five minutes? How about in just two minutes? Can the idea for the business be conveyed with clarity and focus in 2-3 sentences? He specifically recommends approaches developed by Geoffery Moore. Here’s a slide with an example of a simple elevator pitch that worked:
4. “…existing market category but with a 3 or 5 X improvement in price/performance.”
“Most interesting to us are new categories.”
When you are in a new category there is less likely to be strong competition. Having breathing room at the start of a business is an underrated benefit. Jim Goetz identifies two types of categories that he finds interesting in this slide:
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.
Jim Goetz tells the story of Apple, Cisco and other companies to make this point. In reach case the founders found a solution to a specific customer pain point before they moved on to bigger ambitions. If a business can generate adoption and credibility in solving a single customer problem they can then move to cross-sell and upsell additional services. Product and service extensions will arise naturally. Goetz points out that the founders: “defined WhatsApp by simplicity and that’s spectacular.”
6. “What are your unfair advantages?”
“You need to be able to break into a market and dominate.”
This is where strategy kicks in the hardest. What is it that the entrepreneur will do differently? How can the business create a sustainable competitive advantage? In the technology business the best “moat” of all has at least part of its source in network effects. However, factors other than network effects can contribute to that creating a lollapalooza effect. Moats are so hard to create that Warren Buffett and Charlie Munger admit they buy moats rather than trying to create them. For a look at what it takes to create a moat my post on Michael Porter is here: The Sequoia slide on moats in this presentation is:
One way for a founder to reduce credibility is to not be realistic about existing competitors. Entrepreneurs should be honest about the competition. If you are not truthful about any part of your presentation your entire presentation is immediately suspect. Founders who identifying competitors clearly build trust with stakeholders. Many small businesses outmaneuver large companies. Being first to market is not always essential. For example, Google was not the first search engine. But pretending competitors don’t exist in a presentation 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.”
Many times the innovation that drives the success of a business *is* the business model. Jim Goetz is saying that the business model of software as a service (SaaS) is an example of this phenomenon. One of the key elements of the SaaS business model is that it is so beneficial to customers. Capital and operating expenditures are transferred to the service provider and the customers pay only as they need the service. Paying only for what you need just in time is a huge customer benefit. That creates new challenges for the provider of course. But those challenges can be a source of barriers to entry.
8. “We are looking for depth and substance of passion for the pain and experience.”
“We are very interested in your expertise on the domain.”
It is amazing how much can be accomplished when you know what you are doing. Having a Zen-style “beginner’s mind” toward creating solutions to new problems is helpful, but that does not mean that it is ideal to be clueless about the domain itself. Expertise in the domains relevant to the business are very valuable as is humility about what you do not know. Richard Feynman said once “I can live with doubt, and uncertainty, and not knowing. I think it’s much more interesting to live not knowing than to have answers which might be wrong.” In the case of Whatsapp, the founders domain expertise came “from their lives and frustrations from working at Yahoo (both Koum and Acton worked there) 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. As an example, Whatsapp is a famous example (backed by Jim Goetz) of an empowered team doing amazing things with a very small number of engineers/employees.
10. “Do the numbers make sense?”
“A company which 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 (KPIs) which are relevant to any business. The KPIs are not always the same since business models vary, but they always designed to help the company get to get to the right place. When a team has a clearly defined an understandable set of unit economics, incentives can be created that drive success. Everyone on the team should ideally know what metrics drives success. One aspect of a startup business that makes life far easier is high gross margins. Life is so much letter for a business if gross margins are approach 80-90%.
Sales and marketing, research and development and general and administrative expenses come after that and can kill a business if the gross margins are too low. The customer acquisition cost (CAC) and churn are always critical. Every business has CAC, but sometimes is takes the form of a free services and hides as COGS. Yes, some venture capitalists will claim a business has no CAC, but there’s always COGS and free offering somewhere in the business in those cases. The importance of an entrepreneur knowing and being able to convey numbers to potential investors is the lesson! If the entrepreneurs don’t know their numbers the best investors won’t find the business to be credible. Especially when founders are trying to raise a series A round, it is impossible at that stage to be selling just a dream.
11. “If it begins to work it will exceed wildly everyone expectations. We desperately try to convince the founders to remain independent.”
Venture capital is a business with a lot of failure since success follows a power law. For this reason, when something really succeeds, which is not that often, the financial returns tend to be 10-1,000X. This is the nature of any process where the foundation of the mispricing of the asset is related to optionality. My post on optionality are here and here. Positive feedback as a determinant of results in a business is gaining steam in the world as it becomes more digital (which increases the ability of phenomena to scale).
Nassim Taleb describes this world as Extremistan. Taleb writes: “Almost all social matters are from Extremistan. Another way to say it is that social quantities are informational, not physical: you cannot touch them.” And adds: “A scalable profession “is good only if you succeed. They are competitive, produce monstrous inequities and are far more random, with huge disparities between efforts and rewards — a few can take a large share of the pie, leaving others out entirely…” When you combine Extremistan with the Matthew Effect (cumulative advantage causes the rich to get richer) you can better understand many things that are happening in the world today.
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.”
No venture capitalist can understand all domains and so it is their job to learn from the entrepreneur. Being humble and a life-long learner can pay big dividends for the venture capitalist and the entrepreneur.
Stanford Entrepreneurship Videos Online http://www.adub.net/post/43944867150/stanford-entrepreneurship-videos-online
“In the Studio,” Sequoia’s Jim Goetz Puts A New Spin On Consumerization Of The Enterprise http://techcrunch.com/2012/09/16/in-the-studio-sequoias-jim-goetz-puts-a-new-spin-on-consumerization-of-the-enterprise/
Business Plans: Jim Goetz, Sequoia Capital https://www.youtube.com/watch?v=gnmYSze9M2g
Jim Goetz of Sequoia Capital Talks About What It Takes to be an Entrepreneur http://www.foundersspace.com/a/jim-goetz-of-sequoia-capital-talks-about-what-it-takes-to-be-an-entreprenuer/
Think Big But Start Small http://www.slideshare.net/dealhorizon/jim-goetz-of-sequoia-capital-at-stanford
Writing a Business Plan http://www.sequoiacap.com/grove/posts/6bzx/writing-a-business-plan