Are you growing fast enough?

This is a post by Cheyenne Richards, head of marketing for Compass and former VP of Marketing for Ancestry.com.


Once upon a time there was a brilliant startup founder who hit upon a great idea, built a product, immediately hit exponential growth and went on to become a billionaire icon.

Who was the lucky founder? Facebook’s Zuckerberg? Groupon’s Mason? AirBnB’s Blecharczyk?

The answer is none of the above. This account is a fairy tale, imbued with as much fantasy as a Grimm’s bedtime story, yet arguably a tale that is at least partially responsible for the vast majority of startup failures—via unrealistic expectations.

We can be forgiven for crafting compelling narratives: As humans, our neurobiology demands it. Tens of thousands of years of evolution developed stories into the vehicles by which our brains derive meaning from the world. If the cavemen had shared data around the campfire, things might have turned out differently.

The problem happens when all the soft nuances are shaved off the story and it hardens into myth. Fine distinctions get warped into broad generalizations and real meaning is distilled to a simplified headline. Currently, myths such as these encourage founders to attempt growth before their business is ready, leading as many as 74% of high growth internet startups to fail due to premature scaling.

This number is so large it can initially be challenging to believe, yet one ultimately finds this incredibly common mistake goes a long way to explaining the dismal 90% failure rate of startups. The lower one’s burn rate, the longer one can survive, using every opportunity to pivot as necessary to achieve a fit between product and market. The higher burn rates of startups pushing for scale take away the safety net.

Of course, there is nothing wrong with growth. The primary distinction between a small business and a startup is the expectation of high growth—or as Paul Graham put it in one of his essays: Startup=Growth—but data shows that attempts to scale must be appropriately timed. Serial entrepreneur Jim Pitkow defined the concept very succinctly: “Premature scaling is growth in anticipation of demand instead of demand-driven growth.”

So the billion dollar question—literally—is when is a startup ready to scale? Until recently, founders have had no objective way to know.

Over the 20 years I’ve spent in marketing, one of my most memorable leadership experiences came while working for a startup that eventually achieved a successful IPO. Sitting down one afternoon with the CEO, I thought I knew our data inside and out: customer acquisition cost, lifetime value, retention, spend, headcount. In fact, I was feeling particularly proud that we’d achieved a user growth figure significantly better than prior years. Yet when I mentioned the number he asked the best possible question, a simple one that left me utterly stumped: “Is that good?”

In one of those lightning bolt moments, I realized that all my detailed internal analysis may have been useful for managing our marketing department, but not leading it. I only knew our growth rate was better than last year, but did that put us in the the 90th percentile of our peers or in the 10th? Did I deserve a pat on the back or a kick in the behind? I had the data, but was missing the most important element: context by which to make sense of it.

I was not alone. For mature industries, growth benchmarks are widely available, but for small and medium businesses trying to set targets or plug figures into a business model, finding a good benchmark for growth has been next to impossible.

In place of relevant benchmarks, founders and investors often encounter myths presented as fact: 22% week-on-week growth for Facebook, 20% for Groupon and 17% for AirBnB. What’s extraordinarily difficult to find are the nuances behind those stories. AirBnB founders spent years getting themselves into credit card debt (then selling political-themed cereal to get themselves out) before their storied growth curve began. Groupon was a struggling activism engine that tested coupons as a skunkworks project to keep the lights on before they pivoted to real growth. Facebook was a side project for Zuckerberg who initially accepted ad revenue to offset the $85 per month server space he rented.

Why does myth and uncertainty lead to failure? Founders are consistently under intense pressure to scale, but have few tools beyond their own instincts to decide if they’re ready. Investors want to see a growth curve. The head of sales wants to hire a team of five. Marketing needs more budget to beat AdWords competitors. Without benchmarks to provide an objective perspective, it’s no wonder so many startups scale too fast. But what if founders weren’t blind to their performance relative to peers? What if they could see an abnormally low retention rate that identified a product issue needing to be solved before the big ad campaign began? Or a lower than average close rate pointing to a valid need for more sales staff? Or that peers relying more heavily on PR achieved better results than pay-per-click anyway?

Startups that wait for the right time to scale have much higher rates of both survival and success, whereas those likely to fail overspend on customer acquisition, hiring, product development and several other key metrics before they’re ready.

The graph below demonstrates that those that those who start strongest are not necessarily those who finish strongest. Here we can finally bring in a fairy tale that is valid for comparison: that of the Tortoise and the Hare.



Startup failure rates aren’t just a problem for entrepreneurs or Silicon Valley. The Kauffman Foundation Study showed that net job growth in the US was driven entirely by technology startups. Thus, it is not a stretch to say that if we could improve the success rate of startups by giving founders context about when to scale, the economic future of the country could be significantly improved. Even the globe.

To meet that need, Compass has built a benchmarking engine to allow startup founders to compare themselves to relevant peers, based on multiple criteria. Our mission is no less than to shine the light of transparency into the dark corners of myth and uncertainty, to provide a platform to allow founders and investors to access the critical context they need to make effective strategic decisions. Our 30,000+ CEOs now have a simple tool that helps answer the most fundamental question—“Is that good?”—with real-time benchmarks against a customized group of peers.

Outside the tool, we can provide aggregate figures which are less uniquely relevant, but still provide critical transparency into an otherwise opaque world.

The median user growth rate for startups is 9% per month and those in the 90th percentile hit at least 65.2%.

Having this clear range is a good first step, but to make decisions with figures aggregated from thousands of startups with different customers, business models, products, acquisition channels, user bases and levels of funding would be about as effective as blending all the food in your fridge together and calling it soup. You can forget talking about the nuance of flavors when you’ve got mustard, peanut butter and last week’s burrito in the same bowl.

So here is a more refined breakdown.

User growth by user base

In the graph below, we broke down the growth rates of software businesses by the size of their existing user base and displayed both the median and 90th percentile values. What can we learn from this? First is a 5-10x difference between the median and the fastest growers, which shows significant variation in acceptable results. We can also see some trending, where median growth rates tend to peak around 1000 users but the fastest growers keep getting bigger until at least a million.

User growth by acquisition channel

Here we see data from the ten most popular acquisition channels for startups (listed in order of popularity). Again, we see significant variation from the median to the fastest growers, as well as among channels. 


User growth by funding level

Another interesting perspective on user growth is to look at the data broken out by funding levels. For those who’ve received some level of funding, the following breakdown represents the user growth they are experiencing.

The most heartening thing about this graph is how similar it looks to those above. The median growers are around 9% per month and the fastest growers are 50-60%, showing that plenty of investors are looking at other factors in addition to growth rate when funding companies.

Of course, we are still looking at aggregates. You may be an enterprise software company for whom 10 corporate users generates significant revenue, comparing yourself to a freemium mobile app who needs a million users before they break-even, or vice-versa. What you really want is not data from thousands of startups but the 50-100 that are relevant to you via your customized Compass peer group.

Using Compass, I can finally answer that our growth rate at that previous company was in the 80th percentile of our relevant peer group and 3x the median of our peers, so yes—pretty darned good. I wish I'd had access to that information back when it would have been helpful with decision-making.

Luckily, leaders today have more tools at their disposal. Finally, we can move past the fairy tales and embrace the nuance by providing context to our data. Welcome to the new world of growth: measured through the lens of real-time, relevant benchmarks.

State of SaaS 2014 and its Challenges

by Bjoern Lasse Herrman, CEO of Compass

I recently gave a presentation in front of leaders from many of the SaaS players at The Small Business Web Summit. The feedback was so positive — clearly many people are struggling with the same issues — that I decided to make the presentation available to everyone in the SaaS community.

As a SaaS business ourselves, those of us at Compass are intimately familiar with both the unprecedented opportunities and heavy challenges in our market. But we also have a unique perspective to offer — our own data.

In the 10-15 years since the birth of SaaS as an industry, it’s now been planted firmly in the mainstream of conversation, but it’s disruptive wave is still getting started.

When we look into Compass data we see that nearly half of SaaS startups have received funding, which indicates a significant amount of investment capital being channeled into the category. There’s a clear reason why. Gartner forecasts the SaaS market will grow at 20% through at least 2020, almost 3 times as fast as software overall, and there remains ample opportunity for greater global penetration over time. Salesforce represents the shining star of possibility, consistently growing at more than 30%.

At the same time, at just 17 billion dollars, the SaaS pool is still relatively small and the field is very crowded. While Compass data indicates that half of SaaS companies are profitable, the statistic also measures a push for profitability over growth, often limiting size. Of all SaaS companies in Compass, only 7% achieve even 10,000 users.

The biggest challenge is distribution. Our data shows SaaS companies rely heavily on direct sales — at nearly twice the rates of every other channel, but can afford only modest sales teams of 1 or 2. The vast majority pay nothing for marketing or advertising.

This means many salespeople out there fighting, one by one, client by client, for the same turf. These crowded market challenges are also driving a push away from SMB audiences and into more lucrative enterprise markets. But it is primarily the packaged software industry titans that dominate SaaS revenue — Intuit, Oracle, Adobe, Microsoft, Google, SAP.

One can think of this as a David versus Goliath scenario, except that the David’s are fighting each other. The Goliath’s may not be as nimble, in many cases their products are inferior, but they have the support of an entire distribution ecosystem — from resellers to channel partners to consultants and trainers — who are dependent on the horse they bet on winning.

Enterprises, then, aren’t just larger small businesses. Their needs run far deeper. Any software solution must integrate effectively with multiple legacy systems. Security is a tremendous concern. Training programs must be rolled out. A small business may make decisions for the moment, but enterprises must have confidence in the long-term viability of the vendor.

All of this goes to reinforce the fact that history tells us, sometimes painfully, that the best product does not always win. The best distribution method does.

So returning to the David side of the equation, what can SaaS businesses do to beat the Goliaths?

Target the weaknesses and work together:

Focus on CRM, the fastest growing enterprise market

Specialize in mobile technology that is outside of the core knowledge base of Goliaths

Make liberal use of partnerships, the least expensive growth channel by far

Cross-sell, not just for revenue, but to build distribution networks

Scale fest and build a platform

Band together. Channel partners increase distribution and both scalability and portability attract enterprise buyers.

Alone, the David’s have a hard time competing. Together, they can win.

Compass was founded to bring Moneyball analytics to the 99% of businesses for whom the major information service providers of the world are either too expensive, too slow, irrelevant, or all of the above. We solve these challenges with crowdsourcing. Data from over 30,000 businesses enters into our warehouse through common SaaS business platforms such as Google analytics, Quickbooks, Salesforce and many others. Business leaders feed their own data in and in return get an immediate and reliable perspective about how they are doing on key performance indicators relative to their custom peer group. This allows for instant problem identification and more targeted strategic priorities. You can get your own benchmarks at compass.co.



What determines founder salary levels?

One week ago, Compass.co released results from a survey that showed that 73% of startup founders make less than $50k per year and entrepreneurs around the world have been talking about it ever since. To answer some of the many great questions posed, we went back to our data to bring you more answers.

For all data analyzed, current monthly revenue is the greatest predictor of founder salary, with a more than 3.5x difference between the lowest and highest tiers. Until a company makes more than $10k per month in revenue, the average founder salary does not break the $50k mark, and not until the company reaches over $1 million per month in revenue, does the founder salary break $100k. 


This may relate to the all-important burn rate equation. More revenue coming in means more money available to pay back out again without impacting the long-term sustainability of the company. This would tie in closely with Compass’ earlier findings on premature scaling.

One of the most oft-asked questions related to how much a founder’s salary changed by age. We found this is indeed a significant factor in salary, with older founders paying themselves as much as 71% more than younger ones, though the highest salary age range still barely breaks $60,000 per year.

Perhaps even more significant is the fact that 78% of founders are under the age of 40. This may speak to the rigors of entrepreneurship, conflicting family requirements, ageism, technology literacy or a number of other factors we can leave to others to debate. In any case, it may help provide additional perspective on lower salary needs.

Also contrary to the perception of the serial entrepreneur, Compass data found that 67% of founders were working on their first startup, or at least the first in a significant capacity. (Founders were asked to clarify the number of previous startups where they had been one of the first five team members and the company had raised at least $100,000.)

As shown in the graphs above, since founder salary grows by experience level. This is another reason for low average salaries overall.

In the same way Compass found salaries increased by product phase in the previous report, so to do they increase by team size.

And in the same way most founders are working on their first startup, so too are most teams comprised of five or fewer people.

What are your thoughts on founder salaries? What levels seem appropriate to you? We'd love to hear your thoughts and opinions.

Startup and software leaders can also discover their own benchmarks at Compass.co.


73% of Startup Founders Make $50,000 Per Year or Less

Our survey data shows startup founders are living lean, paying themselves low salaries. Even in Silicon Valley, 75% of founders make less than $75,000 per year.

In 2008, Peter Thiel, venture capitalist and co-founder of PayPal, was the first to publicly propose the idea that higher founder salaries are correlated with lower levels of success. The reason is that founders who sacrifice everything for their startup are more dedicated to their idea, set a strong example for their team and have lower burn rates. More than five years since, the debates continues.

Compass analysis has now made publicly available—for the first time—evidence-based confirmation of this strategy’s validity, with data from more than 11,000 global startups.

We received many questions from founders on the subject of salary, due in part to the extensive online opinions, and wanted to provide fact-based answers back to the community. We don’t expect this will end the debate, but will hopefully help focus it with data. Meanwhile, it seems founders are living lean indeed, and that such frugality is likely to accelerate their success. This also ties in closely with to our previous findings on premature scaling.

The data shows the vast majority—73% of founders—pay themselves less than $50,000 per year, whether their company has been funded or not (not including any ownership stake or additional benefits). 

In Silicon Valley, even with the reportedly highest rents in the U.S., 66% of founders pay themselves less than $50,000 per year and a full three quarters make less than $75,000.

Average salaries ranged from a low of $30,208 in India to a high of $72,363 in Australia, and as a ratio to funding ranged from 1.98% in Silicon Valley to 4.8% in Australia.

Below is the breakdown for a number of startup ecosystems.

Survey details: 11,160 founders provided their salary ranges in $USD equivalents. For this particular survey, we did not ask for options or additional benefits. All null values were removed. Averages were estimated based on the midpoint of each range and applied equally to all geographies. All ecosystem breakdowns include responses from at least 75 companies.

References:

Startup and software leaders can discover their own benchmarks at Compass.co.

Last note: this story has created a lot of great debate and we're happy to write a follow-up next week to address the many questions, comments and thoughts we're hearing from all corners, so stay tuned.

This post was updated on 21 January 2013 to use consistent blue graphs rather than multi-colored.


Steve Blank helps fund Compass’ future

One month after launching Compass.co, a next-gen benchmarking tool, Compass announces the $700,000 in funding it received in 2012. We’ve also hired a full team of data scientists and engineers to expand functionality for our 30,000 users. 

The team (in above graphic, from top to bottom, left to right): Bjoern Lasse Herrmann, Jason Chuan-Chih Chou, Cheyenne Richards, Jason Kulatunga, Piotr Migdal, Mathieu Ripert, Jean-François Gauthier, Rayo Kniep, Skander Garroum, Ron Berman, Ertan Dagrultan and Robert J. Berger.

Angel investors include Alex Moradi, Allen Morgan, Amir Banifatemi, Anil Sethi, Ben Congleton, Christopher Grey, Clemente Germanetti, Daniel Recanati, Erik Jansen, Everson Lopes, Gianluca Dettori, Henning Lange, Joe Caruso, Kirill Makharinsky, Martin Gedalin, Michael Staton, Nils Herrmann, Oded Hermoni, Oliver Thylmann, Oussama Amar, Rafal Han, Raju Induku, Roger Krakoff, Stefan Glaenzer, Steve Blank, Ullas Naik and Yaron Kniajer.

Compass.co allows startup and software leaders to understand their business results in the context of peer companies.

We hit upon the startup benchmarking need during our Startup Genome research three years ago. After analyzing data from more than 100,000 startups around the globe and conducting hundreds of in-depth qualitative interviews, we discovered that the data pointed to accurate benchmarks being one of the most success critical factors, responsible for up to a 7x increase in success rate. These findings tie closely to Steve Blank’s perspective on evidence-based entrepreneurship, but a solution was needed that didn’t leave founders casting about for random benchmark data from an assortment of mentors, colleagues, blogs and friends. So we founded Compass in order to bring modern data science to entrepreneurship and management.

Aside from an expansive data set of more than 30,000 companies, the real value of Compass is in its precise peer ranking algorithm. Rather than simple classifications, such as B2B or B2C that don’t reflect the complexities in today’s business models, Compass ranks companies along multiple spectrums, such as size, industry, development phase, revenue model and many other criteria. This shift in peer ranking is akin to the revolution Google started in search, the algorithm provides more relevant results in real-time by including the most predictive criteria.

Ken Rudin, Head of Analytics at Facebook helps explain the appeal of Compass: "When CEOs define goals for their company, they need to think about key strategic initiatives as well as improving their performance in problem areas. Often it's hard to figure out if you are doing well in an area or not because you don't have a baseline to compare yourself to. Compass solves that problem.”

You can join the vanguard of evidenced-based leaders at Compass.co.

Announcing the launch of Compass

Friends,

In the past two years, we've achieved unprecedented insights for startup and software CEOs. Our research has demonstrated that premature scaling is the fastest path to failure and that CEOs with mentors to provide benchmarks are 7 times more likely to be successful than those who lack such critical reference points.

Now—continuing on our mission to radically increase the success rate of businesses—we are thrilled to announce the launch of Compass, the next generation leadership tool for startups and software companies that gives CEOs consistent, relevant and powerful benchmarks, those vital guideposts to data-driven decision-making.

Compass launched today, so you can find out where you stand right now.

Benchmarks can help you identify issues, set and prioritize objectives, allocate resources and control results via information that is nearly impossible to find elsewhere. Is your retention rate strong enough to scale? What's a good target for revenue per employee? Could you achieve a stronger conversion rate with a different primary acquisition channel? Compass provides customized insights that are nearly impossible to find elsewhere.

  • Data is collected automatically from more than 30 common cloud-based sources
  • Sophisticated algorithms compare your business to a custom set of peers, based on deep behavioral data
  • A contextual dashboard displays your company’s most critical data in comparison to relevant, aggregated benchmarks

If you created an account with the previous incarnation, Startup Compass, you can log in and update your data. If you haven't yet created an account, now is your chance.

Whatever the case, we're here to help. Feel free to reach out with suggestions and questions to feedback@compass.co.

We would also be extremely grateful if you could pass the word on to entrepreneurs you know. Go on. Tweet your heart out.

Thank you,

Bjoern Lasse Herrmann and the Compass team

Should you bank on Twitter? Yes, if your product is free, Compass benchmark analysis has found.

By Bjoern Lasse Herrmann

After only ten years, social media has a huge global penetration, allowing businesses to reach nearly 2 billion people, practically the entire online population, through just a few platforms. Naturally, there is a lot of hype. The question is whether the hype is deserved.

To allow leaders to make more effective, data-driven decisions, we decided to analyze how important social media really is as a growth engine for businesses. From our active user base of 30,000 businesses, we found that about 30% of the technology companies with between one and a hundred employees (median at eight), and a million dollars in annual revenue, primarily rely on social media to acquire customers with a growing trend.

While there are many ways to measure social media’s impact, such as brand value or informational benefits, we wanted to begin with the core business problem. We put ourselves in the shoes of a software CEO trying to craft a go-to-market strategy or decide whether to hire a traditional or social-focused VP of Marketing. To that end, we defined effectiveness around a common, critical performance indicator: user growth. We looked at the aggregated business metrics of thousands of small to mid-sized, high-growth technology companies at the 6-month stage of evolution, and analyzed the data in several directions. The most significant findings came down to business type:

1. For free products, social media is up to 2x more effective than traditional marketing methods. Overall about 38% of tech companies with free products (monetized indirectly), use social media as their primary acquisition channel.

2. For paid products, traditional marketing is 10% more effective. Only 29% of directly monetized companies rely primarily on social, favoring more traditional methods such as direct sales, partnerships and affiliate marketing, that led to greater success.

In just a few short years, therefore, social media has clearly established itself as part of the marketing mix for small and medium-sized technology companies. For those looking to grow free products with indirect monetization, it is a must as a primary acquisition channel. However, for most paid products, social media still serves better in a supporting role than as the primary channel.

“Finally someone is applying data to the question of social commerce”, says Lutz Finger, Director of Fisheye Analytics and author of the forthcoming book Ask-Measure-Learn, a book on social media decision-making, to be published by O’Reilly Media in January 2014. “Social media is great for creating awareness or reach, but awareness is not intention. Because I know about a product, does not mean I intend to buy it. To make customers purchase still requires more than pure attention.”

To benchmark your own business against relevant peers, visit Compass.co.





Analysis details: Social Media includes includes Facebook, Twitter, Google, Youtube, Linkedin, Pinterest, Tumblr, Instagram, etc. For these findings we picked a representative sample of about 4000 technology companies and examined their trajectory. Free Product examples are companies with indirectly monetized business models, such as Facebook, Techcrunch, Udemy and Wordpress. Paid Product examples are directly monetized companies such as Amazon, Salesforce, Quickbooks and Zendesk.

The Startup Ecosystem Report 2012 is Live!

Today we released the Startup Ecosystem Report 2012.

The report contains the first data-driven Ranking of the World's Top 20 Startup Ecosystems and  a deep dive into the each of the individual Startup Ecosystems.

Check out the initial coverage here on TechCrunch: http://techcrunch.com/2012/11/20/startup-genome-ranks-the-worlds-top-startup-ecosystems-silicon-valley-tel-aviv-l-a-lead-the-way/

And please help us spread the word on Facebook and Twitter by sharing this message:

"The Startup Genome Ranks The World’s Top Startup Ecosystems: Silicon Valley, Tel Aviv & L.A. Lead The Way tcrn.ch/10kSHCc "

You can download part 1 of the report here:

http://blog.startupcompass.co/pages/entrepreneurship-ecosystem-report

We would love to hear your feedback and thoughts once you've looked at report.

 

The Danger of Celebritizing Entrepreneurship


There's no doubt technology entrepreneurship is becoming its own kind of celebrity. Here is a quick rundown of its appearances on the national stage:

The story of the founding of Facebook receiving a feature-length Hollywood portrayal in The Social Network; Hollywood celebrities like Ashton Kutcher, Justin Timberlake, MC Hammer, Lady Gaga and Justin Bieber investing in technology startups and making their presence known in Silicon Valley; the rise of initiatives like the White House-endorsed Startup America Partnership, due to the starring role technology startups in job growth; Bloomberg creating an American Idol-esque TV showbased on the the New York City session of TechStars; Bravo creating a full-blown reality TV showcalled "Silicon Valley"; and a surge of new technology companies offering their stocks on the public markets, from Facebook to Zynga, Groupon, Pandora and LinkedIn.

As a result of all the attention, we have a phenomenon TechCrunch has dubbed "The New Silicon Valley Douchebag." Everyone and their mother is now an angel investor, and it is safe to say the celebritization of entrepreneurship is only going to get stronger.


We need to start the conversation now about how to handle this double-edged sword, so that the soul of Silicon Valley doesn't get vaporized from the heat of the limelight.

Why is it a double-edged sword? On one hand, celebritization will attract a huge new wave of talent from around globe to Silicon Valley and inspire many impressionable young people to aspire to become an entrepreneur rather than a Wall Street banker or a Hollywood actress. This undoubtedly is a very good thing. The Silicon Valley ethos is a lot more empowering than the narratives most young people are being told around the world. A few months ago, we had a group of Danish Entrepreneurs over at our startup house who told us that when young people in Denmark talk about changing the world, most people tell them, "Who are you to try to change the world? Sit down. Go to school. Get a job. Learn your place."

I hope we abolish that narrative completely. But let's not swing the pendulum too far in the other direction and spread the delusion that starting a company is something anyone can do to get rich and famous quickly. Eric Ries has recently become fond of saying, "Entrepreneurship is not cool, it's not sexy and it's totally uncomfortable. It's boring and grueling, and that part is never part of the movie." And I don't expect it to be part of the Bravo Reality TV show either.

The celebritization effect has caused a meteoric rise in the type of person we are calling the "Starstruck Entrepreneur." This rise is actually dangerous to the health of the startup ecosystem. A few months ago, College Humor released this brilliant caricature of the Starstruck Entrepreneur that sadly hit a little too close to home.

These creatures seem to come in two types. The first type is an "idea guy" who saunters over from Hollywood ready to wow with you a next-generation social media analytics platform. Or maybe he's a self-proclaimed "business model and monetization expert" fresh off the MBA assembly line. This t

ype has an annoyingly loud mouth, but is relatively harmless.

The second type of Starstruck Entrepreneur is far more dangerous. This type includes engineers and designers who have a lot of talent for building technology products, but, because they've been infected by celebritization hype, limit their ambitions to being able to say, "Hi, I'm the Founder and CEO of Self-Aggrandizing Apps." So instead of applying their talents to a company that is actually poised to solve an important problem and become a transformational company, they build another vapid iPhone app that nobody wants. As a result, many potentially transformational startups are inflicted with dysfunctional teams as a result of the depleted hiring pool. 

We need to quarantine the Starstruck Virus before it leads to an epidemic facepalms — or worse. The reason the Starstuck Virus is so deadly is that it ends up severely circumscribing both the economic potential and societal impact of entrepreneurship by suffocating the early-stage startup ecosystem with increased noise, increased distractions, corrupted motivations and misapplied of talent.

Fortunately both strains of the Starstruck Virus have a similar remedy. I advocate the dual pronged approach of sociological and methodological (note that the Starstruck Entrepreneur falls short on both economic impact and long-term societal impact):

marmer-celebritizing.jpg

One potent approach to eradicating the Starstruck Virus is to ignore the infected person. This deprives the Starstruck Narcissistic Personality Disorder of its lifeblood: your attention.

In more severe cases it may be appropriate to use a more vigorous approach: Take a page out of the book of paranoid conspiracists and fight back through the four-step approach of Identify, Vilify, Nullify, Destroy. When a Starstruck entrepreneur tells you their idea, don't smile and nod or (heaven forbid!) tell them their idea is awesome. Tell them their idea is crap. Or, if that is a bit harsh, at least ask them if it's really the most important thing they could be working on, and whether they'd like to sell sugar water the rest of their lives — or change the world.

Methodologically speaking, both investors and entrepreneurs need to get better at recognizing where companies are in the startup lifecycle and let results speaks for themselves. (The Startup Genome calls the developmental stages of the Startup Lifecycle Discovery, Validation, Efficiency and Scale.) By standardizing the necessity of going through the discovery and validation phase it will be clear in a few months that nobody wants another mediocre to-do list app, and investors can invest appropriate amounts so that these entrepreneurs don’t have the rope to hide in stealth and hang themselves.This approach is practical and avoids unrealistic authoritarianism, like implying people shouldn't have the right to start a company. This does not tell Starstruck Entrepreneurs they can't pursue their flights of fancy; it simply lets gravity quickly pull them and their Hollywood halos back to reality, and towards work that actually matters. This cleans out the junk in the startup ecosystem — an ecosystem that powers tomorrow's economic future.

The technology entrepreneurship world is rightfully attracting a lot of press, attention, and money as one of the world's best avenues towards continued economic prosperity, but it must learn to bestow adulation only on the people creating truly transformational companies — otherwise, the Starstruck virus will fester.

As the power of entrepreneurs increases, we would love see the community strive to remember why we do this. It's not about the fame, glory or money. It's about building products that transform the world and drive the humanity forward.

For previous posts in the Transformational Entrepreneurship series, see:
1. Transformational Entrepreneurship: Where Technology Meets Societal Impact (Post 1)
2. Reversing the Decline in Big Ideas (Post 2)

Reversing the Decline in Transformational Ideas

This is post 2 of the Transformational Entrepreneurship series (original on HBR). Post 1 defines Transformational Entrepreneurship and the matrix of socioeconomic value creation used in this post. Post 1 can be found here.

Many venture capitalists are up in the arms because their returns are down, their funds are drying up, and there appear to be a declining number of entrepreneurs pursuing big ideas.

They’ve turned to blaming angel investors for encouraging “an entire generation of entrepreneurs [to build] dipshit companies and hoping that they sell to Google for $25 million”. They say, “this ‘think small’ attitude is driving entrepreneurs who may otherwise build the next Google or Microsoft to create something much less interesting instead.” And this has implications for the whole ecosystem because, “then everyone loses. No IPO. No 20,000 tech jobs. No new buyer out there for the startups that don’t quite make it.”

Unfortunately Venture Capitalists have mixed up their causality. Angel Investors are not the reason more entrepreneurs are thinking small. More entrepreneurs are thinking small, because the costs to starting a company have fallen so dramatically that there is now a whole new class of entrepreneurs creating companies. The founders starting “dipshit companies” are not the same types of founders who would be starting the next billion dollar companies. These founders don’t want to change to world. They just want to make enough money to provide for their family, buy a car, or earn their freedom. These people are the information economy’s Mom & Pop business owners, just more technologically leveraged and profitable than their brick & mortar predecessors. Instead of starting restaurants and hairdressers they build coupon apps that are used by thousands of restaurants and hairdressers.

This is not a bad thing for the startup ecosystem or the economy. Quite the contrary. It means instead of only having companies at the fat head, there are tens of thousands of smaller companies fulfilling demand for the millions of “X for Y” niches along the long tail.  And sometimes they may even find the niche was much bigger than they thought. Ever thought air mattresses in living rooms would grow into a billion dollar company that would take on the vacation rental market and the hotel industry? I know many smart investors didn’t.

The only negative effect this rise of the long tail should have on Venture Capitalists, is that they need to get better at filtering the increased noise in the system. At present, the startup ecosystem’s inability to differentiate Mom & Pop tech entrepreneurs from High Growth Entrepreneurs ready to build the next Billion Dollar Company, wastes a lot of people’s time and energy.

Who Is To Blame For The Lack of Big Ideas?

While the VCs are wrong to blame the Angel Investors for fewer big ideas, and while falling startup costs have enabled many more small thinkers to become entrepreneurs, I don’t think VCs are off the mark in their perception that there is a smaller absolute number of entrepreneurs with big ideas. But I think the cause is a far subtler point. I believe the decrease in big ideas for software companies is the result of homogeneous founding teams in the Valley.

Billion dollar companies do not happen if the founding team is not extremely well suited to the market (now called “Founder Market Fit”). In the past, the magic formula was two engineers or an engineer and a businessman. Most of the big successes followed this pattern. Hewlett and Packard, Jobs and Wozniak, Gates and Allen, Ellison and Miner, Larry and Sergey, Thiel and Levchin, the list goes on.

The innovations that made these companies worth billions of dollar could be classified as computer hardware and software infrastructure. They made calculators, personal computers, databases, search engines and payment processors. The formula worked. Combine a lone technical genius with a mesmerizing sales guy and you had the DNA for a billion dollar technology company.

But times change. These cutting edge applications became today’s infrastructure, and enabled a new wave of billion dollar companies. In the last 7 years it became clear that a technical genius and a mesmerizing sales guy weren’t enough. A new competency started to appear in the DNA of this generations successful founding teams: Design. Design is everywhere. Design thinking. Design Conferences. Designer Funds. Design Celebrities. It’s all there. And if you need a few successful companies who consider design a key competitive differentiator you don’t have to look hard: Mint, Square, Quora, Asana and Path, just to name a few. Design at its best is more than just a beautiful interface, it synthesizes complex technology with a deep understanding of end users’ motivations and abilities into a unified, intuitive product experience.

Why has the era of the designer only arrived now?

The Internet and Technology more broadly, progress very developmentally. Infrastructure is built on top infrastructure, which opens up new possibilities that weren’t possible before. For designers to be appreciated, they needed a web that was fast and robust enough to handle pretty AJAX magic shows. They also needed billions of consumers to get online who would happily through down money for a beautiful, intuitive user interface. No longer were technology companies main customers old, white executive managers who got their jollies off on the largest feature set at the cheapest price.

But now I believe the designer led team is on the verge of irrelevancy, too. The Internet has the necessary infrastructure and achieved the global ubiquity to be able to reimagine and disrupt nearly every industry in the world. But Silicon Valley seems to think that all that is required for disruption are a few “Rockstar Engineers” and “Superstar Designers”. This team type used to be able to lock themselves in a room, come up with a big idea and start executing on it. Now, if you throw 2 engineers and a designer together and tell them to come up with a new startup idea, you’ve got better than 50% odds they will come up with another mobile local social photo sharing app. This team competency was exactly what the doctor ordered when the next evolutionary step of the digital world was just creating software that was actually intuitive to ordinary consumers. But now these teams seem to continually run into a creative roadblock.

What gives? Have all the innovative ideas already been done?

The problem is that creativity works by taking what we know and applying it to something new; and what engineers understand is new enabling technology trends like cloud, mobile, social and big data. This worked great when the problems teams were trying to solve were fundamentally technology problems. But now much of the transformational potential of the “pure information technology” possibility space has been exhausted to the point of terminal differentiation. The new frontier for software is applying our highly developed, easily deployable technology stack to a whole new range of industries, where the problems can’t be properly solved just by firing up a text editor and initializing a LAMP stack. The only way out of this innovation gridlock is an expansion in founding team diversity. I believe the missing piece from the DNA in the founding teams of Transformational Companies is now the Domain Expert, who has deep insight into the industry they are trying to disrupt. Without a domain expert attempts at disruption are unimaginative and incremental at best.


There are so many industries ripe for technology startups to disrupt: Education, Health Care, Business, Art and Government just to name a few. But where are the domain experts ready to be paired with a team of rockstar engineers and superstar designers? Most of them appear to be wandering around attempting to spread their ideas through books, speaking engagements, university lectures and consulting gigs, unaware of the possibility now available to them to integrate their ideas into software applications. An approach that has a dramatically better chance at changing behavior and influencing society.

One of the impetuses for this insight was when I was struggling to come up with a good title for my role on the Startup Genome team. My primary function on the team is to build models and prescriptive frameworks that describe the innovation process and how businesses evolve. What was my title? I realized that part of the reason for the lack of good language was that traditionally the type of work I was doing would be packaged as an academic paper or book. Only recently have the enabling factors arrived to let me build this knowledge into a scalable software product, that can be used by millions of businesses to improve their decision making on a daily basis.

Now I look around and see lost opportunities for collaboration everywhere. The world is full of brilliant domain experts and full of people great at building software, but they rarely speak to each other, much less work together. I see people building personal finance software who have never heard of Ramit Sethi’s extremely effective 6 week personal finance program described in his New York Times best selling book. I see people building weight loss apps who have never heard of BJ Fogg’s Behavior Change Model or his Persuasive Technology Lab at Stanford. I see people who want to build software that supports personal growth and spiritual enrichment but have never heard of Integral Life Practice. I see people building productivity apps who have never heard of GTD, or more importantly Energy Management. Product teams seem to believe that all that’s needed for innovative disruption is to add soup du jour technology features such friending, following and sharing. This implicitly imbues primitive, uninspired theory into the design of products. The world is full of great research and theory, it’s time we transplant these ideas from lifeless parchment and their resident isolated ivory towers and “electrify” this knowledge, integrating it into the software tools that power society.

The number of teams working on transformational ideas in Silicon Valley seems to be declining and homogeneity of founding teams is one of biggest reasons why. We started with the dynamic duo of the businessman and the engineer. Recently we added the designer. Now if want to continue to create products that scale into billion dollar companies, create thousands of jobs and transform society, we need to add Domain Experts to the founding DNA of Technology Companies.

*The ideas discussed here are of course not the only the reasons for a decline in big transformational ideas. There is an important argument to be made that there is a decline in breakthrough science and technology due the risk aversion of the scientific establishment and lack of long term thinking. Two good articles include The Innovation Starvation and In Search of Black Swans.