Hunter Walk is a partner at the seed stage venture capital firm Homebrew Management, which he co-founded in 2013. He previously was head of consumer product management at YouTube. Walk joined Google in 2003 managing product and sales for their contextual advertising business. He was a founding member of the product and marketing team at Linden Lab, the creators of online virtual world Second Life. Earlier in his career he was a management consultant and also spent a year at Late Night with Conan O’ Brien. He has a BA in History from Vassar and an MBA from Stanford University.
1. “The best businesses are being constructed by founders who have empathy for, or a connection to the problem they’re solving. It’s not about disdain for an industry. We like to see founders who have a real connection to the problem that goes beyond excitement about a market opportunity. Founders need a ‘why’ that is very personal.” “When founders have an empathetic understanding of a market and they are connected to the problems they are solving, it’s a more ‘mature’ approach to a starting a startup.”
While it would seem natural for people to understand the importance of “product/founder fit,” startups are often created by people who do not have a passion or connection to the problem they are trying to solve. Why would anyone start a business they are not passionate about? Well, they may have read that the block chain was a big opportunity or thought that virtual reality was an attractive market and concluded that they should start a business take advantage of those opportunities. What a venture capitalist like Walk wants is an emotional connection to the customer problem. Mark Zuckerberg is an example of a founder with deep understanding of the company’s product and a strong vision on where he wants the company to go. Bill Gates and Steve Jobs both had this same set of qualities. Great chief executives inevitably have help that allows them to focus on being a great CEO. Zuckerberg has Sheryl Sandberg to focus on operating the business which makes him a better CEO. My friend Craig McCaw had John Stanton and Jim Barksdale as managers to do many of the things that Sandberg does.
There are lots of great examples demonstrating why not considering product/founder fit can be a huge mistake. Steve Blank talks about his own experience with this set of issues here:
“I was now a CEO of Rocket Science, and having a great time building the company. Unfortunately, while I had gone through phases of video game addiction in my life, in no way could I be described as even a “moderate hard-core gamer,” which ruled me out as a domain expert. I realized that for the first time in my career I had no emotional connection to my customers or channel partners. I was about 90 days into the company when I began to realize there was something very different about this business. In previous companies I could talk about technology details and how the product features could solve a customer problem. But people didn’t buy video games on features and they weren’t looking to solve a problem. I was in a very, very different business. I was in the entertainment business. There couldn’t have been a worse choice for CEO in Silicon Valley. Alarm bell one should have started ringing – for me and my board.”
A deep understanding of and empathy for the problems faced by the customer and the market increases the probability that the business will find a way to successfully deliver core product value (solve a real customer problems that they are willing to pay for). A founder of a startup needs every advantage they can get given the struggle that are going to go through. There is a reason why so many people call building a business from startup a “grind.” Perseverance is an essential attribute in a founder.
2. “Don’t start a tech company just because you ‘want to do a startup.’ Startups are hard! You have to be mission-driven. Be able to understand the ‘why?’ Why do you want to spend, minimally, several years of your life working on a particular problem? If you’ve personally experienced the problem you’re solving, or are connected to it in some meaningful way, you’re more likely to persevere and adapt through the challenges of starting a company.”
Startups are hard. As Ben Horowitz wrote in his book The Hard Thing about Hard Things, the effort to create a successful business is inevitably a series of struggles. The passion that the founders and early employees have for the customer problem will energize and sustain them through the struggles that a startup must conquer to be successful. People who love what they do create, make and sell better products. This idea applies in life generally and not just in startups. Warren Buffett puts it this way: “You really should take a job that if you were independently wealthy that would be the job you would take. You will learn something, you will be excited about, and you will jump out of bed. You can’t miss.”
Why are startups so hard? As Charlie Munger says, if business and investing were easy everyone would be rich. The unfortunate reality is that in an economy there is always a top- down constraint on the amount of profit that can be earned in the aggregate by all businesses. Yes, the size of the pie can get bigger for everyone if an economy is healthy and innovation is taking place, but statistically we have data that shows that there is a top-down constraint to how quickly that can happen. There are many venture capital firms trying hard to increase the size of the pie and that is quite exciting, but we have a ways to go before we see the results of these efforts. One of the best posts on this issue was written by Fred Wilson and is entitled: “The Venture Capital Math Problem.” It would be great if someone solved this math problem Wilson talks about via innovation and growth but it is not something that we can say has already been proven to have happened.
What do I mean by top-down constraint? Understanding this concept is best conveyed by example. Warren Buffett said something once about a single company that I am going to change to be about a cohort of collections of startups:
Think about a cohort of startups with a combined market cap of $500 billion. To justify this price, they would have to collectively earn $50 billion every year until perpetuity, assuming a 10% discount rate. And if the businesses do not begin this payout for a year, the figure rises to $55 billion annually, and if you wait three years, $66.5 billion. Think about how many businesses today earn $50 billion, or $40 billion, or $30 billion. It would require a rather extraordinary change in profitability to justify that price.
To put the magnitude of a cohort generating $50 billion in new earnings in context:
New businesses with profits that approximate those generated by a business like Apple, Microsoft, Google and Facebook do not arrive that often. People and organizations have only so much money to spend and competition effectively creates a top down limit on profit. In addition, much of human progress in consumer surplus and generates no profit or even less profit. The economy does not have an unlimited ability to generate new profits to support the income needed by a very large business like Facebook or Google that often. That ability to support new profit streams can be changed in positive ways via innovation and investment, but the historical record is that that power of an economy to absorb new businesses that deliver huge profits to shareholders does not just radically leap ahead. I would be as happy as anyone if this did happen, but some realism about how much the aggregate profit in an economy can scale over a limited period of time is wise. Fred Wilson points out that venture capital is only a small part of the private equity asset class because it has scaling challenges. Venture capital does punch far above its weight in terms of societal benefit, but there are limits to venture capital ecosystem growth that no one has found a solution for yet. My heart is hopeful, but my brain is more cautious.
3. “Write your principles in pen but your strategy in pencil.”
“What is Strategy?” is the title of a famous Michael Porter essay. Porter describes the essence of strategy in a few sentences:
“In many companies strategy is built around the value proposition, which is the demand side of the equation. But …it’s [also] about the supply side.” “If there are no barriers to entry…you won’t be very profitable.” “It’s incredibly arrogant for a company to believe that it can deliver the same sort of product that its rivals do and actually do better for very long.” “Strategy is about making choices, trade-offs; it’s about deliberately choosing to be different.” “The essence of strategy is choosing what not to do.” “Operational effectiveness is about things that you really shouldn’t have to make choices on; it’s about what’s good for everybody and about what every business should be doing.”
Almost anything a business creates and sells can be quickly copied by other businesses and as a result profit will be driven down by competition to the opportunity cost of capital. This is straight up college freshman economics. Increased supply is the killer of value. In other words, without some constraint on supply, price will drop to a point where there is no real profit left. That is why there is so much talk about “sustainable competitive advantage” by people who are actually running a business. People who believe all you need to do to be successful in business is to “make the trains run on time” make me giggle. Creating a sustainable competitive advantage is both rare and hard. Even if you have it you can lose it in a heartbeat. When sustainable competitive advantage is lost by a business it often can be traced to a mistake made five years before.
Regarding the “principles” of a business that Walk should be written in pen Charlie Munger believes: “Firms should have the ethical gumption to police themselves: Every company ought to have a long list of things that are beneath it even though they are perfectly legal. We believe there should be a huge area between everything you should do and everything you can do without getting into legal trouble. I don’t think you should come anywhere near that line.” The bonus says Munger: “You’ll make more money in the end with good ethics than bad. Even though there are some people who do very well, like Marc Rich–who plainly has never had any decent ethics, or seldom anyway. But in the end, Warren Buffett has done better than Marc Rich–in money–not just in reputation.”
4. ‘There’s a big difference in-between ‘smart iteration’ and ‘lack of discipline.’” “Companies which raise too much too early might think they’re de-risking their funding but also may intro a host of other issues.”
“All work and no play makes Jack a dull boy” is a well-known proverb. “All iteration and no discipline will kill Jack’s startup” could also be a proverb. Long-time observers of the startup world often make this same point by saying: “More businesses die from indigestion than starvation.” A pivot is a stomach wrenching shift that should never be undertaken lightly. Similarly, wild goose chases into new areas of business can divert attention for the critical path. Too much cash can be bad for children, adults and startups. It causes people to do silly things. Buffett puts it this way: “Nothing sedates rationality like large doses of effortless money.”
5. “People tend to forget that your company is your first product, and you have to be intentional about building your company before it’s ready to really grow and scale.”
Walk make a a great point here about the importance of people and hiring. The best way to see if someone understands this point is to watch what they do and not what they say. Benchmark Capital’s Bruce Dunlevie is more focused on the strength of the team in a startup than any venture capitalist I have ever met. His sterling record as an investor is proof that his approach can have a huge payoff financially. His close friend Andy Rachleff believes: “When a great team meets a lousy market, market wins. When a lousy team meets a great market, market wins. When a great team meets a great market, something special happens.” The team you build is the business you build. Being especially intentional about how you build your team is wise.
6. “The only decisions that are reliably bad are those made out of fear.”
If you don’t feel some fear it is a clue that you may be dead. This is a more common condition that some people imagine. It is one thing to be conscious of fear, but quite another to make decisions based on fear. Dale Carnegie said once: “Inaction breeds doubt and fear. Action breeds confidence and courage. If you want to conquer fear, do not sit home and think about it. Go out and get busy.” Not only does refusing to let fear drive your decisions cause you to make better decisions, it makes you happier.
7. “Work with smart people you trust. Over-index to the quality and ethics of your coworkers and you’ll never go wrong. Not only does it increase the likelihood of success on current projects, but those are the type of people who will continue to work at amazing companies over the course of their careers.”
A “seamless web of deserved trust” is one of the biggest advantages a business can have. Trust is vastly more efficient than layers of management and control. Unfortunately, a system based on trust only works if you hire people very carefully. In other words, with great trust comes great responsibility to hire well. That someone is smart, hardworking and successful does not mean that they are trustworthy. Charlie Munger sets out the challenge on this set of issues:
“It’s hard to judge the combination of character and intelligence and other things. It’s not at all simple, which explains why we have so many divorces. Think about how much people know about the person they marry, yet so many break up. It’s not easy, but it is in some cases. If people are splashing around with money like Dennis Kozlowski, with vodka at parties coming out of some body part, and if it looks like Sodom and Gomorrah, then maybe this isn’t what you’re looking for. But beyond that, it’s hard. If you have some unfortunate experiences while getting that knowledge, well, welcome to the human race.”
If you have found you have made a mistake about someone’s character, then change course.
8. “Your organizational culture — especially as it relates to diversity — is established the moment you start a company. Once your team grows, once you have your first twenty employees, it’s very difficult to change a culture. Early hires are your culture.”
What is the culture of a business? I view it as a system of beliefs, mental models, values and principles that drive the behavior and actions of the people who are involved in a business. The best cultures are authentic in every sense. When people know what to do and actually do that when no one is looking at them, a healthy functional culture in place. Culture, like trust, allows the business to be more efficient. It also create a a shared sense of mission that breeds the missionaries that create successful businesses.
9. “The importance of adding an outside investor to your board as early as seed stage is more common now than it was when we started the fund early in 2013, there’s still occasional question about whether this slows down a company’s operations or gives investors too much control. My answer is, if it does, you’ve selected the wrong investors, which is a bigger problem. Our emphasis isn’t on slide decks and governance, but instead on helping founders build leadership, steady cadence and periodic strategic discussion into their thinking, which we believes contributes to startups being more prepared for a successful A Round.”
We all need people who can help us grow as a person and make better decisions. No one has perspective on themselves. Some people are obviously more self-aware than others of course, and some people have zero self-awareness. As an example of a healthy balance, Munger says about Buffett: “Warren’s a lot more able than I am, and very disciplined.” Buffett says Munger is “both smarter and wiser.” Well-chosen colleagues can help make you a better investor, business person and human being. The best venture capitalists roll up their sleeves and stand shoulder to shoulder with founders.
10. “At the seed stage there are just some things you can’t outsource and fundraising is one of them. Having a banker or adviser behind the scenes helping you understand the venture process? Maybe (although there’s so much more info out there these days than 10 years ago). But having this person approach me with an ‘I’m representing Company XYZ which is looking for funding’ email? Not the way to start off our relationship.”
The relationship between founders and their venture capitalists is like marriage in that it must last for many years. Personal chemistry is very important. The importance of doing due diligence on the character of venture capitalists and not just their investing acumen will pay big dividends for any founder and the same is true for venture capitalists doing due diligence on the character of founders. How do they treat people? Not just people they feel are “important” or that can help them, but everyone. How do the treat their friends and family? How do they treat a total stranger? Are they still around for friends and family when the chips are down or something has gone wrong? Are they kind? Do they have empathy? Do they stand up for what is right? Do they keep promises? Are they compassionate? Do they pitch in? Do they walk their talk?
11. “Work on projects that matter. If you find yourself treating your job like, well, a job, you should either figure out how to be more passionate about it, or find a new gig.”
Life is short. The older you get, the more you should realize that every minute of every day is precious. I wrote in #2 above about how passion will make you more successful, but there is also the fact that doing what you are passionate about will make you happier. Happiness is highly under-rated. Working with people who are happy is also under-rated.
12. “The Bottom Up Economy is about the global transition from an industrial economy to a technology-based one. It means there’s not really a single ‘technology industry’—every industry is being shaped by tech. Out of both opportunity and necessity, new marketplaces, revenue streams and efficiencies are being created.”
Every company of significant size is now a technology company. They are also all software companies. Not everyone must be a programmer, but everyone must understand the importance of and uses of software. While there are still management teams that do not understand the importance of software, they will not be able to survive as managers much longer. Software is eating the world. And the world is eating software.
Steve Blank: https://steveblank.com/tag/early-stage-startup/page/2/
Fred Wilson: http://avc.com/2009/04/the-venture-capital-math-problem/