FingerlSamwer America's Most Successful Startups

Max Finger/Oliver Samwer

America's Most Successful Startups

Lessons for Entrepreneurs

SPRINGER FACHMEDIEN WIESBADEN GMBH

Max Finger and Oliver Samwer graduated from the Wissenschaftliche Hochschule fUr UntemehmensfUhrung (WHU) in Koblenz with a dregree in Business Administration. Fascinated by entrepreneurship they both want to start their own companies in the near future.

Die Deutsche Bibliothek - CIP-Einheitsaufnahme

Finger, Max: America's most successful startups : lessons for entrepreneurs I Max Finger/Oliver Samwer.

ISBN 978-3-409-11409-7 ISBN 978-3-663-09252-0 (eBook) DOI 10.1007/978-3-663-09252-0

AII rights reserved

© Springer Fachmedien Wiesbaden 1998 Originally published by Betriebswirtschaftlicher Verlag DT. Th. Gabler GmbH, Wiesbaden in 1998

Publishing editors: RalfWettlaufer / Annegret Heckmann

No part ofthis publication may be reproduced, stored in a retrieval system or transmitted, mechanical, photocopying or otherwise without prior per­mission of the copyright holder.

http://www.gabler-online.de

ISBN 978-3-409-11409-7

Preface

Leaving school and standing at the threshold of the next stage in our life, through this study we have had the chance to take a glance at the 21 st century. We hope to be able to communicate some of those impressions to a wider audience through this book. For entrepreneurs, the book develops a series of concrete propositions which provide hands­on lessons for creating a successful venture.

Thus we hope that this book will be used again and again as an Entrepreneur's Handbook. If we have done our job well, it will soon be full of underlinings, marginal notations and highlighting. It is meant to provide useful advice for people like us, people who want to be entrepreneurs.

The book documents empirical research bearing on the question of how to start, build and grow a successful venture. The research is based exclusively on interviews with America's most successful high-tech startups in Silicon Valley and Massachusetts.

In these interviews we came across the most tremendous people, entrepreneurs of the 21 st

century, first-tier venture capitalists, investment bankers, lawyers and technologists. People who will be driving the economy of tomorrow.

We spotted a great number of traps and pitfalls on the way to a successful company and learned crucial lessons, which we are trying to communicate in this book. Some of the lessons may appear to be obvious, common sense, but the reader should most carefully think about the far reaching consequences those propositions will have once they are implemented. Writing on this book, the authors themselves had the opportunity to put some of these propositions into practice. The lessons were a tremendous inspiration for us but we also realized that they are very difficult to live. If the reader really wants to implement this advice, he must be ready to actively change his behavior.

Obviously the American model cannot be reproduced one-to-one in Europe, especially since the environment is not as supportive for entrepreneurial success as it is in the United States. That is the reason why our field research and ultimately this book focuses exclusively on the specific hands-on lessons which will help to build a successful company, no matter what the environment looks like, no matter where you are in the world. Anybody should feel perfectly free to pick whatever they consider to be valuable. The book is not meant to be categorical. The most important thing for us is that the

VI Preface

people who read this book learn from these lessons and go out to create their own ventures. There are many different ways to succeed, but we are convinced that when applying these lessons an entrepreneur will be more likely to succeed on the threshold of the 21 st century.

Vallendar, Germany, September 1998

Max Finger (max_finger@whu-koblenz.de)

Oliver Samwer (oliver_samwer@whu-koblenz.de)

Acknow ledgment

A report of this scope would not have been possible without a lot of hard work and a lot of support from many people and the authors would like to thank the individuals who helped to make this book possible.

First, without the support of Professor Dr. Dr. h.c. Horst Albach from the WHU Koblenz the study would not have been possible. We are particularly thankful to Hans-Botho von Portatius as well as Bolko von Oetinger and Andy Blackburn from The Boston Consulting Group for some outstanding contacts. Thanks also to Gert Purkert, Rainer Gawlick, Ralf MUller and Sigurd Strack from McKinsey&Company as well as Gerhard Schulmeyer from Siemens Nixdorf Informationssysteme for their support of the study and Walter KUmmerle who generously supported our initial research by granting us admission to the Baker Library of the Harvard Business School.

In addition, we would especially like to thank our School, the Wisschenschaftliche Hochschule fUr Unternehmensftihrung, Otto Beisheim Graduate School of Management, and McKinsey&Company which provided the funding for this project.

The point of view in this book represents not only our research efforts but the active involvement and support of a large number of practitioners. Our work would not have been possible without the cooperation of the large number of companies and managers who generously gave their time and shared their perspective: Michael Allen, Jeffrey Beir, Prakash Bhalearao, David Bohnett, Joost Bonsen, Doug Brackbill, Jean-Pierre Braun, Daniel Bricklin, David Cane, Nassib Chamoun, Hal Charnley, Pehong Chen, Yon aid Cherry, Ronald Croen, Dan Cunningham, Werner Daghofer, Vinod Dham, Tim Dick, Gaurav Dhillon, Jay Eisenlohr, Michael Eisenson, William Elder, Nancy Ellickson, Ian Eslick, Bob Evans, Gregg Favalora, Peter Fenner, David Fischer, Richard Fleischmann, John Freeman, Dale Fuller, Terry Garnett, Bill Giudice, Mark Gorenberg, Ralph Grabowski, Jonathan Gworek, John Hamm, John Harrington, Tom Henn, Mark Hoffman, Ven-Jai Hsieh, Wes Patterson, Bill Porter, Mitchell Kapor, Daniel Keshian, Keith Krach, Richard Kramlich, Scott Kriens, Rob Kuhling, Tsu-Chang Lee , Paul Lego, Pamela Lipson, Andy Ludwick, Rakesh Mathur, James McCoy, Roger McNamee, Tom Melcher, Kenneth Miller, Kenneth Morse, Douglas Murphy-Chutorian , Leon Navickas, Nico Nierenberg, Donald Parker, Dave Peterschmidt, Kim Palese, John Preston, Frank Quattrone, Jean-Yves Quentel, Arvind Raj an, Narayanan Ram, Alan Ramadan, M. Rangaswami, Douglas Ranalli, Sajit Rao, Pamela Reeve, Alex Rigopulos, Zack Rinat, Kevin Rivette, Brian Robertson, David Robertson, Mario Rosati, Sharam Sasson, Mitchell Sayare, Mathias Schilling, Peter H. Schmidt, John Scott, Ravi Sethi, Nimish

VIII Acknowledgment

Shah, Ranjan Sinha, David Skok, Michael Skok, Eric Spitz, Randy Thomae, Jeff Tonkel, Howard Torf, Lisa Underkoffler, Mahesh Veerina, lain Watson, David Whorton, Emerick Woods and Chris Zuleeg.

To you, we hope that this book helps all the people who hold the dream of building a successful and enduring company.

Vallendar, Germany, September 1998

Max Finger (max_finger@whu-koblenz.de)

Oliver Samwer (olivecsamwer@whu-koblenz.de)

Table of Contents

1. Introduction......................................................................................................... 1 1.1 Purpose of the Study .................................................................................. .

1.2 Research Design ......................................................................................... .

I. CREATING A BUSINESS

2. The Opportunities ............................................................................................... 7 2.1 Types of Opportunities............ .................. ............................ ...... ................ 7

2.1.1 Opportunities based on a Paradigm ShifL............ .......... .................. 7 2.1.2 Opportunities based on a New Product or Business Model.............. 8 2.1.3 Opportunities based on a Me-too Product......................................... 8

2.2 Opportunity Recognition............................................................................. 8 2.2.1 Markets that change.. .......... ...... .............. ........ ........ ............ .............. 9 2.2.2 Markets that are badly understood ................................ ............ ........ 9 2.2.3 Markets that are large.... ...... ...................... ........ ........................ ........ 9 2.2.4 Markets that are fast growing............................................................ 10 2.2.5 Markets where the Incumbent Players cannot move .................... ..... 11 2.2.6 Markets where there is little Competition ......................................... 12

2.3 Process of Opportunity Recognition .................... ........ .............. ...... ........... 13 2.3.1 Intuitive Approach ............................................................................ 13 2.3.2 Analytical Approach ......................................................................... 13

2.4 Refinement Process..................................................................................... 14

2.5 Research Process......................................................................................... 14

2.6 General Advice on the Idea Generation Process ......................................... 16

2.7 Evaluation of a Business Idea ..................................................................... 19

3. The Homework.................................................................................................... 20 3.1 Defining the Market Need........................................................................... 20

3.2 Defining the Customer ................................................................................ 23

3.3 Defining the Market Size ............................................................................ 23

3.4 Defining the Market Timing ....................................................................... 24

x Table of Contents

4. The Window of Opportunity.............................................................................. 26

5. The Background of the Entrepreneur ............................................................... 28

6. The Founders....................................................................................................... 30

7. The Role of the Founder ..................................................................................... 32

7.1 Management of the Company... .... ............ .... .................... ............... ... ........ 32

7.2 Ownership of the Company.. ..... ..... ....... ........... ............ ........ .... ........... ........ 36

7.3 Building a Sustainable Business ................................................................. 37

8. The Ideal Startup ................................................................................................ 38

II. LAUNCHING THE BUSINESS

9. The Location........................................................................................................ 39

10. The Advisors........................................................................................................ 41

11. The Support Players ........................................................................................... 43

11.1 Legal Counsel ............................................................................................. 43

12. Intellectual Property ........................................................................................... 45

13. The Funding......................................................................................................... 46

13.1 Milestone Financing.................................................................................... 46

13.2 Risk Identification and Elimination ............................................................ 47

13.3 Sources of Funding ..................................................................................... 49 13.3.1Bootstrapping.................................................................................... 49 13.3.2Sources of Outside Equity................................................................. 50

13.3.2.1 Angel Investors .............................................................. 50 13.3.2.2 Venture Capital.............................................................. 51 13.3.2.3 Corporate Investors........................................................ 55 13.3.2.4 Initial Public Offering .................................................... 56 13.3.2.5 Funding Strategy............................................................ 58

13.4 Choosing an Investor .................................................................................. 58

13.5 General Advice on the Funding Process ..................................................... 60

Table of Contents XI

14. The Culture.......................................................................................................... 66

14.1 Importance of Culture ... ...... ................ ........ ......... ....... ........ ...... ...... ... ..... .... 66

14.2 Values ......................................................................................................... 67

14.3 People ......................................................................................................... 69 14.3. 1 Recruiting People.............................................................................. 69 14.3.2Attracting People .............................................................................. 76 14.3.3Finding People .................................................................................. 77 14.3.4Keeping People................................................................................. 79 14.3.5Dismissing People............................................................................. 80

14.4 Mission........................................................................................................ 80

14.5 Information Flow ........................................................................................ 81 14.5.1Free flow of information ................................................................... 81

14.5.1.1 Open-door, walk-in Meetings ........................................ 81 14.5.1.2 Sitting in Cubicles.......................................................... 82 14.5.1.3 Status Meetings and Reports.......................................... 83 14.5.1.4 Personal Whiteboards.................................................... 84 14.5.1.5 All-Hands-Meetings....................................................... 84 14.5.1.6 CEO Lunches and Employee Breakfasts ....................... 85

14.6 Communication........................................................................................... 86 14.6. 1 Formal and Informal Communication............................................... 86 14.6.2Direct and Open Communication...................................................... 86

14.7 Decision Making ......................................................................................... 88

14.8 Result Orientation and Management-by-Objectives.................................... 92

14.9 Key Characteristics of a Successful Culture................................................ 93 14.9.1A Team Work Culture ...................................................................... 94 14.9.2An Egoless Culture ........................................................................... 94 14.9.3A Meritocracy of Ideas ..................................................................... 96 14.9.4A Risk Culture .................................................................................. 97 14.9.5A "no status, no ego, blue-jeans" Culture ......................................... 98 14.9.6A "don't-Iet-the-others-down" Culture.............................................. 101 14.9.7A Fun Culture ................................................................................... 101 14.9.8A Family Culture .............................................................................. 102

14.10 Keeping the Culture when the Company is Growing.. ... ... ... ........ ... ....... ..... 103

14.11 Leadership................................................................................................... 104 14.11.1 Building a Vision............................................................................ 104 14.1 1.2 Building Teams............................................................................... 107 14.11.3Reinforcing the Culture .................................................................. 109 14.11.4Creating a Sense of Urgency........................................................... 110

XII Table of Contents

14.11.5 Qualities of a Leader....................................................................... 111

15. The Management Team...................................................................................... 114

16. Technology and Market Orientation................................................................. 118

17. The Flexibility .........................................................................................•............ 120

18. The Focus............................................................................................................. 124

19. The Execution...................................................................................................... 127

20. The Network........................................................................................................ 130

III. GROWING THE BUSINESS

21. The Partners ........................................................................................................ 134

22. The Game for Mindshare .•....................................................................•............ 137

23. The Breakthrough............................................................................................... 140

24. The First Customers............................................................................................ 141

25. The Competition.................................................................................................. 144

26. The Growth Management ...................................•..........•.••................................ 147

26.1 People ......................................................................................................... 147

26.2 Processes..................................................................................................... 148

26.3 Management................................................................................................ 149

26.4 Communication ........................................................................................... 151

IV. THE ENTREPRENEUR

27. The Motivation .................................................................................................... 153

28. The Doubts........................................................................................................... 154

Table of Contents XIII

29. The Sacrifices....................................................................................................... 155

30. The Qualities of an Entrepreneur ...................................................................... 156

30.1 Visionary..................................................................................................... 156

30.2 Confidence .................................................................................................. 157

30.3 Team Spirit ................................................................................................. 158

30.4 Risk attitude ................................................................................................ 159

30.5 No Fear ofFailure....................................................................................... 159

30.6 Ability to Learn........................................................................................... 160

30.7 Entrepreneurship is very personaL............................................................. 160

30.8 Sense of Reality .......................................................................................... 161

30.9 Persistence ......... ..... ........ .... .... ... ... ...... ..................... ... ...... ... ........ ............ ... 161

30.10 Commitment................................................................................................ 162

30.11 Experience .................................................................................................. 163

30.12 Salesmanship............................................................................................... 163

30.13 Standing of an Entrepreneur........................................................................ 164

31. Summary .............................................................................................................. 165

32. Appendix .............................................................................................................. 166