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Startup Entrepreneurs: Why do more than 90% of startups fail?
(Joanne Tan:)
welcome. I have Steve Hoffman, “Captain Hoff”, a celebrity in Silicon Valley.
So, Steve, known as “Captain Hoff” is the CEO of Founder Space, one of the world’s leading incubators and accelerators. He’s also a serial entrepreneur, an angel investor, limited partner at August Capital, and author of “Make Elephants Fly”, an award winning book on radical innovation, and “The Five Forces”, an extraordinary journey into the minds and ideas of the people and the technology poised to reshape our world. Recently, Mr. Hoffman completed his new book, “Surviving a Startup”, to be published by HarperCollins. Tim Draper, the multi billionaire startup investor said this about the book: “Read this book before you launch your startup. It could save you much emotional turmoil.”
This book answers the question why over 90% of startups fail, and what is needed to succeed? “Surviving a Startup” is full of sage advice, rich stories, cutting edge information. And it’s comprehensive both on a macro and micro levels. It’s not only a sort of “Bible” or a mini encyclopedia for startup founders, in my opinion, but for business leaders of all types in this digital age. I find it really fun to read.
Here’s a generous gift to anyone in my audience: For limited time, Mr. Hoffman will give away access to his full online startup program. For everyone who purchases a book, please visit his website, www.founderspace.com/promo.
Okay, Captain “Hoff”. My questions, we have lots of questions. Okay.
(Steve Hoffman:)
Well, I want to thank you for all the kind words that’s so nice of you.
(Joanne Tan:)
Oh, sure. My pleasure. First question is, during the initial ideation stage, you wisely advised about failing fast, like a serial baby killer. Try to prove everything that may go wrong with the idea (that the baby is the idea,) okay? And after trashing it, and you may cry, but it won’t feel a thing. Only when you have exhausted all possible ways to shatter your vision, should you start to believe in it. That is just wow. Awesome. So my question is, do you see many founders spend too much time fixated about an idea? and not letting go? If yes, how do they get out of that?
(Steve Hoffman:)
So the answers, absolutely. So I’ve been a startup founder, I founded three venture funded startups and two bootstrap startups. And I understand what it’s like to fall in love with your idea.
You know, when you give birth to an idea, it’s like giving birth to a baby, you can’t help but love it, because it’s yours. And your baby always looks the most beautiful, no matter what anybody else thinks. So this creates a problem, a dilemma for entrepreneurs, you really, in order to take the leap into entrepreneurship, you have to be the type of person who can believe in their ideas. If you can’t believe in your ideas, you can’t be an entrepreneur. But the other side of that coin, is that if you believe too much in your ideas, and don’t look at what’s really going on around you in the real world, you will risk failing.
And this is one of the biggest reasons I’ve seen entrepreneurs fail. I work with entrepreneurs all the time, hundreds of entrepreneurs, and all of them love their ideas, but the really good ones, train themselves. They’re disciplined enough to actually put their love aside and say, is this idea worth pursuing? And question and doubt it? And if the evidence shows that the idea will not take them all the way to their dream of building a great company, they kill it at the earliest possible moment. That’s why I say a serial baby killer. Kill it. You have to kill your ideas.
To move forward, now, it may not be the whole idea, it may be like a piece of your idea. But you have to continually do this. And really, if you want to succeed, it’s not how passionately you feel about your idea that will not make you succeed. It’s how it’s actually how quickly and effectively you’re able to understand the implications of your idea, test those out in the real world, get real feedback, and then understand what that feedback means. Should you move forward? Or should you abandon it? Or should you change it, and then take your next step, the startup entrepreneurs who go through that process over and over and over very quickly, are the ones who usually wind up succeeding, because it’s a matter if you just Usually, I mean, 99, out of 100 times, the first idea you have is wrong. And it’s not, it may not be entirely wrong, but there are pieces of it that you don’t understand.
And this is because it’s only an idea, you haven’t taken it into the world, yet, you haven’t given birth to it, you haven’t seen what it actually can do in the real world. So until you get that information, if you don’t know, you really know very little. And the more information you get, which is your journey, your journey is to fall in love not with your idea, but with the direction you’re headed, the process of gathering information, analyzing information, and making really intelligent decisions based on that,
(Joanne Tan:)
Right. So you also said in your book, that a great forum for entrepreneurs to test their ideas is to present to and pitch to different groups and get feedback, okay, that also exposes them to the risk that their ideas are exposed to the world and may be “stolen” by others. How do you reconcile this?
(Steve Hoffman:)
It’s always a risk to take an idea that’s inside your head and put it out into the real world. Will people copy it? Can they copy it? Absolutely. I mean, all of us copy ideas. And in fact, the idea you had, it’s probably coming from a lot of different places, right? It’s, you’re, you’re probably not the first one to think of it, it’s probably not as original as you want to believe. There are almost surely other people around the world, the world’s a big place with billions of people working on similar ideas. What determines whether you succeed or not, is not having the idea. It’s actually where you go with the idea, the idea is literally just a starting point of a long journey.
So what I tell people is, if you keep the idea to yourself, if you don’t show it to people, if you don’t put it out there and start to get feedback, then you don’t really understand your idea. Because you haven’t gotten rid of it. building a business is not building a business in your head, that’s a fantasy. building a business is building a business in the real world, which means you have to figure out how to put your idea safely into the real world where it can grow.
And you can get all you can see the interactions between what you thought would happen, and what really happens, right? So it’s like you have a baby, right? You don’t want to keep your baby locked in a closet, right? It’s never gonna grow up, it’s never going to learn anything, you’re never going to see what type of baby you could have had leaving it locked in the closet, you have to put that baby into the real world, you want to put it into a safe place. So when I say present your idea to the world, I mean, exactly that you really need to figure out what’s the best place you can put your baby to get. So it can learn and grow as fast as possible, but doesn’t get you know, squashed, killed, eaten by a lion, you know.
So you walk up to a conference filled with competitors, and explain all your ideas to them. That’s not what I’m talking about. getting feedback is actually targeting the people who can really help you write, who can really help you, trusted advisors, potential customers, yes, some of them may, in fact, wind up stealing your idea. But it’s the risk of your idea dying, because it’s undernourished, you haven’t put it out into the real world and it doesn’t grow up healthy, is much greater than the risk of somebody else killing your idea or stealing your idea. So I always say, your friend is information. Your goal is to find information. Your goal isn’t to keep things to yourself.
And I want to give a great example of this to all of you out there. You know, we all know what VR is right? Virtual reality. Well, VR started out as an idea, a lot of people had this idea. It wasn’t just Palmer Luckey, the one who started Oculus, he got all the things right by putting it out there. But actually, that idea was gestating around the world, in research laboratories, universities, people have made VR devices. Palmer Luckey, really wasn’t a scientist, he wasn’t like, at the forefront of the technology, he was actually using technology developed by USC and other sources that they had developed. But he was the first one to take that idea, visualize it, put it out there on Kickstarter for the real world to see, and then start it moving. And he got moving so fast that his company sold for billions of dollars before he even launched a product.
Now all the other people out there, there may have been many smart people, brilliant people in the field, who knew a lot more than he did about this idea. But because they kept it in their labs, they didn’t take it into the real world their babies never grew up with. So they never made that step. And he was willing to take the risk, go out there, articulate this idea in a very clear way, you know, he did a video of what VR could be. And he created this sensation around that idea, and was able to be the one who brought Oculus, which is now part of Facebook, to market. So you need to follow that path rather than the other path.
(Joanne Tan:)
Right. And if people are cautious about their revolutionary ideas, they can always use an NDA and go to a targeted limited audience that, you know, advisors and entrepreneurs and people like you who they trust, to get some feedback, if they don’t want to just flash it to the entire world.
(Steve Hoffman:)
You know, so I would say if you’re presenting your idea to a big corporation, like Microsoft or something or somebody like that, if you can, get them to sign an NDA; if you’re presenting your idea to like a venture capitalists like me, we usually will not sign an NDA. And the reason is not because we want to steal your idea. But because we don’t want to get sued, we see too many ideas from too many startups. And there are too many similarities out there, you may think your ideas totally original, but they’re probably some other startup working on something that has some overlap with that, probably not exactly the same. And we may wind up funding that company over your company. So most VCs I know will not sign NDA as most advisors, maybe you know, they might sign it.
If you go out to potential customers, you know, my gut feeling is don’t waste your time with NDAs, they’re usually not worth the paper they’re printed on, you know, what kills your idea usually is not somebody stealing it. It’s you fumbling the execution of your idea, not learning how to put all the right pieces together, not moving fast enough, not gaining money and momentum. That’s what kills your idea, not somebody copying it. So worry less about the copying, and more about your own execution.
(Joanne Tan:)
That is such a good segway to the next question. I’m completely with you that ideas are just the starting point. The entrepreneurs need to focus on bringing in the best talents who are all in. So my question is, if “all in” means that they may have to ”starve” along with a startup without pay, but only the promise of equity, and they’d better not hold a daytime job, and be the founders amplifiers not diminishers, and the talents have to be the best of the best, and have a do-or-die mentality, work for mission over money and give up their six figure jobs and work for equity and be willing to go down with the ship, – How long can this realistically last during the bootstrap stage before getting any investment? Is it too much to ask?
(Steve Hoffman:)
So it can last a very, very short time or an extremely painfully long time. Now, you know, there is no limit as long as you have the will. And the means to keep surviving and funding your own company. You can go on forever in the bootstrap mode, even though you might not be making much progress at all. That’s not the goal, but that I’ve seen it happen. I’ve seen people work on these bootstrap startups for a decade, and they go nowhere.
And then I’ve seen people work on them for a month and they boom, like going at hyper speed. So the point is, I usually say, as a rule of thumb, before you dive into a startup, you should be able to survive without a job in cover all the expenses of the startup for a year, at least six months at the minimum of three, six months, because it’s going to take you at a minimum six months, on average, to raise money. And a lot of times it goes out a full year. So because you think, Oh, I can do this much faster. And then you have problems. And you know, and if things don’t gel, and it and like I said, you know, you could literally have your idea and start bootstrapping it and get funded a week later, that can happen, especially if you know some wealthy people, and you have, you know, something that appeals to them.
But realistically, you know, if you can say, look, I, me, and my team can go for a year on this idea, and iterate on it and change it and test this and test that until we figure it out. That’s a, that’s a good, you’re in a good position to take the leap into doing a startup.
(Joanne Tan:)
Okay, so my next question is, I also see your point of generously giving equity to co-founders at the early stage and other key members. But how much is too much?
(Steve Hoffman:)
To give away the equity? This is a really personal question. And a difficult question and a question I get asked a lot by startup founders, they asked me, you know, how much should I realistically give to them? Well, I will tell you, nine out of 10 times, they are giving too little. So most people think about it, they will err on the side of keeping more for themselves, you know, that’s our nature. And, you know, it’s an actual, if you started the company, if you put in time and money before you bring in other people, you feel like you are owed more than them, because you have taken a bigger risk. And it was you who started this whole thing. So a lot of people will not give enough to their co founders to really make them a part of the core team.
And I will tell you, in the end, when all is said and done, if your company is successful, I guarantee if you if it’s your company, you will wind up with a lot of money, you know, how much money do you realistically need, you know, if that’s, you know, is it 100 million or 200, 300, 500 million, you know, whatever you want, but the hard part is getting the right people onto the team. So I say, figure out… First of all, don’t give less equity, and go for less capable people. Because this is a mistake a lot of people make, they’re like, Oh, this person will work for free, or this person will work for like very little percentage of my company point 01 percent, you know, just give them a few shares, that’s worth it, it’s not worth it, it’s better to give away more of your company, and get on great people.
So I usually say, if you are the founder, and if you started this company, like you’re the founder and CEO, and you started it on your own, and you’ve been going a few months already, before you bring people on, you should have more shares than the other participants. But you don’t have to have disproportionately more. So you may have 20% more shares than them, 30% 50%, you may have doubled them. But you start to get over that. And it really becomes lopsided in the fact that they’re probably if you really want them to take a big risk, if they are really super talented, as talented as you are but in a different area. You know, how much are they worth, they’re worth as much as you write, maybe you put in a few months, maybe you put in a few dollars, but there’s a long road ahead of you. You are just at the very beginning, you may think, oh, I’ve put three months or five months into this company already. You may think that’s a lot. But it’s not, you know, this is a long journey.
Now you can make sure that those shares, you get them vest over time. So you don’t give it to them all at once. You do a four year vesting schedule. So basically, they get some shares every month, that vest, and if they quit, they only are left with what they earned. Yeah. And you can put a cliff on that, a cliff means there’s a certain date by which if they if the relationship doesn’t work out, they don’t get any shares. So if they don’t stick around six months, nine months or a year, whatever you decide, they don’t get any shares. But if they stick around, then they get that full six months or nine months worth of shares at that point, because you really know they’re a good fit with the company and they’re going all the way.
(Joanne Tan:)
Okay, good. So, your book, stated that the number one reason for a startup to fail, accounting for 42%, is no product-market-fit. And you caution against inventing your own market. Okay. But Steve Jobs famously said this, “the market does not know what it wants. We tell the market what they want.” What do you think of that?
(Steve Hoffman:)
So, here’s what I think what Steve Jobs was saying was slightly different, although it sounds the same. So when we say a product-market-fit, we mean your products fly off the shelf, people love them. And every one of Steve Jobs’, his products had a perfect, not everyone, I should say, the Lisa, the Newton, there were ones that didn’t have a product market fit, but never went anywhere. But you look at the iPod, iPod, the iPhone, you know, the Mac, they had product market fit, when people saw them, they went crazy over them. What Steve Jobs was saying there was at the beginning stage, when you have an idea, just an idea, right? You really don’t know what you want to do. You can’t go to your customers and say, What should I build, you know, should I go build this or that you can’t be you’re not going to be able to envision the future. They can’t tell you what it will be like his customers, what you know, the average person, wouldn’t be able to conceptualize the iPhone, that was Steve Jobs’, his job ticket and his team’s job was to conceptualize the iPhone, you know, when I say average person, they’re like, I can’t tell you what I want you to build, right? That’s they’re not good at that. That’s what he meant by not asking the market, don’t go to your customers and ask them what you should build, you need to build it. But then you need to make sure that it’s what they want. So the product market fit is once you build it, you make sure it aligns with their wants and needs. So what you can do, what you can ask the customers is what do you need? Like, what do you need, you know, Henry Ford had this the same, which was similar to Steve Jobs.
You know, if I would have asked my customers what they wanted, they would have said faster horses, because all they knew were horses, they didn’t know, you know that cars weren’t a product that people could afford and buy, they weren’t readily available, they are still experimental. So I would say give me a faster horse. But what they’re really saying is I want to get from point A to point B faster, faster, more conveniently, you know, with, you know, let you know, I don’t have to take all the trouble you have with horses, which we don’t have to deal with anymore. But that’s what they were telling Henry Ford. So he wouldn’t ask them what’d be their product, if he should make a car, he would ask them what they need and what they want, what they want us to get around faster and more conveniently. And then he has to come up with the idea of a car, this car could solve their need, then he has to test the market, like bring the early ones to market and see if people really react the way he thinks they’re going to react. If they do it’s called a product market fit.
(Joanne Tan:)
Yes, Yes, I remember. Right at the time when iPhone first surfaced, I was out of my paper printed calendar space to calendar everything in a day. Because however large is a calendar, there’s only a finite space. And I was like this, this cannot go anywhere because I changed sometimes the appointments, and then what I do? use whiteout. And then boom, iPhone, it solves all these problems. And also video, camera.
It’s just the genius is in detecting the need and matching that need with innovative products.
(Steve Hoffman:)
Steve Jobs was not just brilliant at that, he was brilliant at also really recognizing a products earlier and executing on how to bring them to market and make them better. Because before the iPhone, there were a number of products. I remember using a Palm Pilot. So for those of you in the early days, it was basically you know, a personal digital assistant that you would use. And then they came up with the palm Treo, which would combine that with a phone and that was essentially the iPhone. It was the iPhone before iPhone. So Steve Jobs saw these products. He was immersed in this area he saw when he used those other products. He was like, wow, these things are amazing. You know, this is where the markets headed. So it wasn’t that he came up with all these ideas on his own right. He saw that people he wanted to use, some people around him, all the techies were using them. And then he figured out how to take this mass market and to the next level and make it simpler.
(Joanne Tan:)
and scalable?
(Steve Hoffman:)
Yes. And so Steve, the brilliance of Steve Jobs was, you know, you don’t come up with all the great ideas. You know, most of the great ideas are already out there. It’s what you do with them and where you take them that matters. And he, Steve Jobs was just really good at spotting those ideas. Like when he went to Xerox PARC, he didn’t invent the whole UI for the Mac out of thin air, right? That came out of Xerox PARC, it was all there in the experimental stage, but they didn’t know what to do with it. They were like geeks in the lab. Right. And Steve Jobs saw that and he actually knew how to take that and productize it, that became the Macintosh.
(Joanne Tan:)
Take the idea and productize it. That’s the key.
(Steve Hoffman:)
Yes, yeah. So he took the idea, productized that, but there was always a demand there. Before he went, there was always a product market fit for these products. So there were customers out there who really, really, really wanted those products. And you see Steve Jobs wasn’t perfect. Like he had many things that didn’t work, The Next, you know, the Next computer, you know, was supposed to be this huge, incredible hit that would replace the Macintosh. Well, it never really took off, right? There wasn’t the demand out there. Even though it was an incredible product. There wasn’t the demand for what he was building at the time. He was building it in the way he was building.
(Joanne Tan:)
Right. Okay, so next question is, I’m impressed by your insights about the importance of brand building and marketing. Okay, that’s music to my ears. And you listed that the number two and number three reasons for startup failures are 14% fail because of bad marketing 13% failed from ignoring their customers.
From your experience, what percentage of series A funded startups have the vision and the budget to hire outside brand building experts to establish a brand, brand market, and brand marketing strategies for the right customers from early on?
If these startups are not doing the right thing early on, which is to build the brand systemically, what can be done to bring the founders to the right path?
As you know, a brand is a lot more lucrative and powerful than a mere product or a book of business. You can compare Apple with Microsoft, Apple is a brand and Microsoft is forever a machine. And Apple can command such a higher price because it has faithful followers. Okay. So the question is, if most of the startup founders are either short sighted or they are busy putting out fires in other areas, and they don’t have the vision and the budget, to build a brand early on, what can bring them to the right track?
(Steve Hoffman:)
So this is a mistake a lot of founders make, because they, a lot of them are technical, they’re engineers, they’re really good at building products. But they aren’t necessarily good at branding, or marketing, or even customer acquisition, or any of the other things that you need, ultimately, to be successful. So to go back to Steve Jobs, he was brilliant in multiple areas. That’s what made him so amazing, right? And you look at people like Elon Musk today, you know, they’re brilliant in multiple areas, right? They’re not confined to one that makes them and Bill Gates, even he was still a really good business person, right? But he was also a technical geek, who likes to understand the ins and outs and code and do all that stuff.
So with startup founders, you know, when they get their Series A funding, this is what I like to tell them. So prior to series A is when you are bootstrapping it, when you are Angel funded, when you get your seed funding, which you know, somewhere in between, you know, series A and Angel, those are all times when you’re really working on the product market fit, you’re trying to create the best product possible and find the customers that really need it.
Most VCs today step in once you’ve found the product market fit, meaning they aren’t giving you the money to just develop technology at that point. They are giving you the money to scale your business and scaling your business is all about branding and customer acquisition. Right. So in essence, branding is your message and branding enables you to focus and have a strategy for acquiring customers and embracing them right so that they become yours forever. They become real devotees. So you need to understand that you are in a transition point.
As an entrepreneur, upon the Series A funding, you are going from a primarily r&d oriented company, – you know, that is exploring the market and trying to figure everything out,- to a company that is about growth, and growing and reaching out, engaging with your customers at a very deep level. And you ultimately, just like you have an r&d budget, you need to have a budget for brand and marketing.
And you need to also have the expertise on board to actually implement that, because you may be incredible at what you do, and there are certain products that you can just grow virally. They’re designed that way, right? They don’t need a lot of marketing to work. But marketing, put it this way, marketing takes even good product that’s growing, and will just make it if you do it right, with a good brand, and everything will grow much faster, right. So even if you have a viral product that’s out there, you can supercharge that product by focusing on getting the right expertise, those people who are brilliant at it onto your team, either as permanent members, or as consultants to help you to the next step.
(Joanne Tan:)
Yes, I totally agree with that. Okay, so startup founders must be superb sellers from day one, selling their ideas to co-founders, teams, selling to investors, selling to prospects and customers. Yet few have mastered the art, science, and craft of telling inspiring stories that convinced people. From my own experience of mentoring founders to tell their stories in pitch decks and executive summaries, I found that they may be brilliant engineers, or even financially savvy, but often cannot communicate effectively to their target audience. What do you suggest they should do to overcome this deficiency?
(Steve Hoffman:)
What I suggest is, people have their strengths. So most of us are good at certain things, certain types of thinking. So some of us are very good at complex ideas and getting very technical and very deep into subjects. Others are good at taking something very complex, simplifying it, and listening and understanding how to present it to others so that they can relate to it and understand it.
As an entrepreneur, you need to look at your team, right? This is your job as the CEO to look at your team and say, do we have this expertise on our team? If not, how can we bring this DNA into our company? You know, are there people out there, I always say if you’re not the best at something in the world, but you want to build the best company in the world, you need to find the people who are the best at the best at those things, and bring them in.
This is why I tell entrepreneurs, you know, when you’re starting a company, your job is not to worry about fundraising at the beginning, it’s not to worry about your idea at the beginning, because your idea, like I said is probably not right, you’re gonna have to work through this. What you need to worry about is the people, you need to get the right combination of people on your team. And if you can do that, you will iterate on this and everything will come together. Yes.
So most people, most entrepreneurs spend far too little time on figuring out who they need on their team, and then going after those people and incentivizing them to join their team early. And they spend too much time focused on ideas and products, which are very important. But the best idea in the world without the best team, you’ll just fumble the ball, you will fail to implement that, somebody else will implement it better. So you could start with the best idea. But if you don’t, if you don’t implement it, well, somebody else is just going to pass you up. And as you know, it’s kind of a winner take all market out there.
You know, if you’re one of Zoom’s many competitors, that, you know, fumbled the ball didn’t quite get it, right. We’re not using your product. All of us are using Zoom right now. So we’re all using Zoom, and all those other products out there, and they were pretty good. But maybe you know, they didn’t quite get there. They’re going away. They’re dying. You don’t want to be one of them.
(Joanne Tan:)
Yes, totally. I absolutely agree. It seems that angel investors nowadays expect startups to show traction, revenue and profitability, at a level almost like Series A. Angels are no longer the traditionally defined early stage investors who take more risks. What do you think? If you agree with me,Is it getting harder and harder for bootstrapping startups to survive before they get angels to open their wallets?
(Steve Hoffman:)
So it depends on the angels. So there are still traditional angels out there who come in very early. Take a huge risk on a team with just an idea. They are really necessary for startups to succeed. Like you said, without them, it’s very hard on your own money. A lot of times, especially, you know, if your idea isn’t something you can just do super cheaply, and you have enough to survive, it’s really hard to get to the next step. So a lot of the angels are called super angels now, meaning they’re, they’ll put in more money, a lot more money, they won’t put in like 10,000 or 50,000. They’ll put in like some of them a million dollars, one person or even more.
But they often want to wait, because they have found the same way that venture capitalists have found that the hardest part is finding that product market fit and the right team. And that usually takes time, right? It doesn’t happen instantly. Like you wake up one morning, a flash of brilliance and everything works, you know, it just doesn’t happen. It takes time. So they think, well, let’s wait. And when I find the right company, that’s everything is jelling, you know, meaning they have traction, I’ll just put in my money. And then it’s a sure bet, nothing’s a sure bet in this world. But it’s a much surer bet than placing a lot of bets on very early stage startups.
However, that leaves you with the problem, you still need the money. Now, what I will tell entrepreneurs is that it’s always been hard to raise that first money. Always, it might feel harder now, it was never easy, right? As if there was no time in history. In fact, honestly, now, it’s easier than it ever was before. It’s not harder. So it’s still not easy. But it’s not hard. It feels harder, because there’s a lot more money coming into later stage companies. But there was always a saying that there’s never enough money for these early stage companies, never. They’re always struggling.
But because there’s so many successes now in the tech sector, you know, and later on that there’s still more people actually angel-investing than there ever were before, way more people. But there’s a lot more companies too, there’s a lot more competition for that money. So you’re getting a lot of competition, a lot more angel investors at the early stage, meaning it’s still hard. But if you have the right idea, and you can put together the right team, and you can get that early evidence, the money’s there.
(Joanne Tan:)
In your book, you said that startups need “ either a big win, or the creditors and the investors will gobble everything up.” Could you explain it?
(Steve Hoffman:)
So investors typically want to protect their investment. So if your company goes nowhere, they want their money back, right. So they put in terms into the agreements you make, like what are called liquidation preferences and other terms, so that any money that comes in, if you sell your company for, you know, a fire sale or a low price they get first, they get first dibs on that money that’s like “we put the money in, we want to get that money back”. And they do this by having two shares of stock, common stock and preferred stock. Now, the preferred stock has special rights to that early money. So that means that, I’ve known a lot of entrepreneurs who’ve worked for years on their startup, they end up selling for maybe $50 million, which sounds like oh, my God, but they have raised 10X, or even hundreds of millions of dollars. So that 50 million doesn’t go into their pocket, you know, that that 50 million goes back to their investors before they get a penny. And none of the common stock gets money. So that’s the reason if you’re going to sell, if you’re going to raise a lot of money, which startups tend to do, now you have to sell for multiples of the amount you raised. So you have to. So you need a big hit, you need a big hit to get over that threshold, to start to see money flowing into your pocket. When you get over that threshold, what we call liquidation preferences, then the money, all the stock converts into the common stock, so everybody starts being treated equally, but only once you get over that threshold.
(Joanne Tan:)
I see. Monopolies like Google, Apple, Facebook, Amazon, Microsoft, they have all the money to buy Oh, crushed startups in infancy. It seems that more and more startups end up bought by the few big players only to make these monopolies even bigger. What does it take for entrepreneurs to beat monopolies at their own game?
(Steve Hoffman:)
So what the fact is, you can never beat a monopoly at its own game without certain ingredients. So a monopoly has all the advantages, right? So they have the customers out there, they have the marketing, they have the brand, they have the distribution, they have the technology, they have everything right?
There are only two ways to beat an existing player in the market, you know, and they don’t even have to be a monopoly, they could be any, even, you know, just a company that’s doing well in the marketplace, how do you beat them?
So the only two ways are, one, you have to have an idea that isn’t a little better, you know, a product that isn’t a little better than them. But that is exponentially better, so much better that all their customers like I’ve been using this for years, I feel comfortable with it, you know, we have it integrated into our workflow. But I am going to switch to this new product, because this new product is SO much better that I have to switch. So it’s not incremental innovation, you need, you need exponential exponential innovation. And this is what we call radical innovation. And that’s my first book I wrote, “Make Elephants Fly”. The process of radical innovation is about how entrepreneurs make these leaps to products that are so much better, that they can actually start to steal market share away from existing players.
And then the other way is, if it can’t be so much better than it has to be different, literally, you can’t play in the same ballpark they’re playing in, right, because they’re a monopoly there. So you have to have a product that is in the market that is new, right, that they haven’t touched yet. And so if it’s not exponentially better, or very, very different, not a little different, but like it solves a fundamentally different problem than them. Those are the two ways to beat the big monopolies.
(Joanne Tan:)
You know, that’s how branding works. As a branding expert, when I build a brand or business brand, I seek to differentiate it from all your peers and competitors. Or you are way better and focused on doing certain things, with your products and services. It’s the same thing.
(Steve Hffman:)
People need to know you are the best person in doing one thing, you are SO much better than everyone else, they will all come to you for this one thing they really need, or you just do something they don’t do, so they are gonna come to you, because there aren’t a lot of people doing it, and you are the right one.
(Joanne Tan:)
It seems that for a startup to survive and thrive, not only all stars must be in alignment – team of talents, right product/services, investment, the right business model that can be scaled up fast, brand building and marketing, … and most of all, the founder must be made of rubber rather than steel, to keep bouncing back. Among all the attributes such as resilience, certain craziness, risk taking, business savviness, ability to gather the best team and let them buy in the founder’s vision, ability to know what the market needs are and come up with the GREAT solution that can be “blitzscaled”… which is the single most important attribute for a successful entrepreneur? Is entrepreneurship an innate gift? Or a lifestyle? Or both? How much is nature and how much is nurture?
(Steve Hoffman:)
I always say startup entrepreneurship is both. There are certain people who are just gifted with being an entrepreneur. In their genes they have the hustle, the drive, the creativity, all the right elements, to be a natural entrepreneur. It’s sort of like a sports team. If you want to get on a sports team, you get on a major league, you have to have a certain physical build, you can’t change that. There are some people I believe who were never born to be entrepreneurs. They maybe people who don’t like risk, who get extremely stressed out about uncertainty, people who have a really hard time communicating with other people, managing other people, they shouldn’t be an entrepreneur, let other people do that and figure out what they are really good at, if they want to be really really successful.
But even if you have all the right pieces, like the right genetic pieces, genetic jackpot, even if you have those, if you are not open to learning, you aren’t ready to put in the time and energy to really make it a focus, you still will not succeed. I know a lot of people who aren’t given the right pieces, but they are given enough of the right pieces, and they work on themselves, and they improve themselves, and they fill in the things, you don’t necessarily have to be born with something, to be able to learn it.
One personal example, I used to be extremely shy, people don’t believe me when I say that, I used to be an incredibly awful public speaker, but I worked on it and trained myself, and now I think I am above average in actually being able to public speak, my shyness went away, but literally all the way through college I was terrible, only in college I made concerted efforts to change myself and it didn’t happen overnight. It’s a lot of work.
Yes, you can learn to become a great entrepreneur. It’s a struggle. You have to put in a lot of work, and be really committed to doing it. I have seen entrepreneurs who are not naturally that good, but they are smart enough. You have to have this base level in certain areas, if you don’t have that, it’s really hard. But in you is that base level, then you can take yourself much much further. I have seen this with athletes too, they might not be born as the fastest runners, the strongest person on the team, but they trained like crazy, some of them become better than those actually gifted, because they didn’t really have to put in the hard work, have to figure it all out themselves.
So I tell entrepreneurs, if you have that drive, you can probably go a lot further than you think you can, if you put in the effort.
(Joanne Tan:)
Do you believe that technology has borders? What part does nationalism play in technological innovation? Do you think America is falling behind comparing with China’s national policies and direct governmental investment to stimulate technology advancement? What do you think of the competition between US and China?
(Steve Hoffman:)
… China within 30 years, … we can learn from China too instead of blaming….
(Joanne Tan:)
I ask all my guests for the “Interview of the Notables and Influencers” this question: What does your brand stand for?
(Steve Hoffman:)
I want to create a space for the founders to learn and grow. That’s what my brand means.
(Joanne Tan:)
Lastly, allow me to circle back to my own passion for brand-building, by quoting your insightful words: ”It must either be exponentially better than their competition, or else it must be radically different.” Brand is for GREAT companies and GREAT founders, so I’d like those top 5% VISIONARY founders to know that
10 Plus Brand Inc. is a full service branding and marketing agency, we decode brand DNA and product-market fit, and make it stand for something, create brand structure, strategies and stories, and amplify with AI-enabled inbound marketing and content marketing. We design look and feel, emotional undertone… AND we thrive at VIDEO PRODUCTION – to give a brand its heart, soul and the mind that enables great user experience and make products and services emotionally attachable and delightable, with visual, audio, sensory and verbal beauty.
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