90% of all new businesses fail in the first year itself. They never get to celebrate their anniversary. If you examine such companies, it’s hardly ever a surprise why they fail.
Startups that are designed to scale and be profitable exude this unmistakable vibe of conviction and energy, in addition to clarity and focus. While there is no set formula for building a successful business, there are guidelines that skyrocket your chances of success. Usually, the wisdom to build and grow startups comes at the cost of success itself. What I mean to say is that failure and a string of bad decisions teach us the art of making good decisions.
If you are interested in starting and building a business then I absolutely insist that you read That Will Never Work by Marc Randolph. Marc is the co-founder of Netflix and the journey and lessons he shares in this wonderful book will leave you with a healthy dose of inspiration and wisdom. The book could have been a bit shorter but it is still a powerful read. Thumbing through the book reminded me of many of my own failures and successes in the world of business out there. And, I thought I should pen down a post on this subject.
After all, who knows what may awaken the entrepreneur in you. Here are three guiding principles and three truths of the startup world. I will be quoting from Marc’s book throughout this write-up. Principles first:
1. A Startup must Focus
Focus on creating value
One of the most amusing questions I get occasionally is people saying to me, “I want to start a new business. What should I do?”
My answer always is, “If this is a real question in your head then do anything but a business.”
I can understand if someone says I want to invest money and not sure where to park my chips. It baffles me how even some of the smartest people forget that money is an outcome and not a pursuit. Profits don’t come from chasing money, they come from creating value.
In my humble opinion, the singular most important mission of any sustainable business should be to create value. The more value you create in your industry, the stronger your product and USP. The more your customers will need you. Do only one thing if you will, but do it better than the best. Your only relentless focus should be on creating value.
Reject anything that distracts you or diminishes your mission of value creation. You may be tempted to do many things or be many things to many people, but often this is a recipe for disaster.
When you start a company, what you’re really doing is getting other people to latch on to an idea. You have to convince your future employees, investors, business partners, and board members that your idea is worth spending money, reputation, and time on.
And, you can’t do that if you are not focused on “the” idea. If you have multiple ideas, you are not ready to start a business. Think of trying to thread a needle. There comes a moment when all you see is the eye of the needle, your entire attention is drawn to that one point. That is focus. When you are focused, your attention is only on the thing that matters the most. Creating value is more important than building a valuation of your company.
2. A Startup must Focus
Focus on your core business
Would you be open to losing 99% of your revenue if such income offers you no strategic value? Imagine you are a startup and after a long and tiring journey, you are starting to make some money. But, you discover that the bulk of your revenue is not coming from your core business but from non-core products and services. You know that these offerings will not help you in scaling your business. Should you or will you still continue to focus on that revenue?
Well, Bill Gates said no to consulting and customization in the very early days of Microsoft. He was clear that he wanted to build a product company. 1
When Netflix first started, they used to both sell and rent DVDs. This was somewhat confusing for their customers. Not necessarily in terms of the offering itself but the customers had to decide whether they should rent or buy. And, it goes without saying that if you are going to make it difficult for your customers to make a choice, you’ll lose them. But, that wasn’t the only issue. At Netflix, they realized that DVD sales gave them no edge whatsoever. Anyone could have done that. They sensed that renting and streaming was the way to go. There was only one problem. 99% percent of their revenue was from DVD sales. That’s 99%. Ninety-nine! What do you think they did?
Offering both DVD sales and rentals is confusing for our customers, who arrive at Netflix.com unsure of what, exactly, we do. We have to explain on our homepage that users can either buy or rent most titles — and a general rule of web design is that if you have to explain something, you’ve already lost. The checkout process is cumbersome, too.
Everything is harder than it needs to be, I think, leaning back in my chair. We have to focus.
But on what?
Should we focus on selling DVDs, which is bringing in 99 percent of our revenue, but will slowly – inevitably – evaporate as competitors crowd the field? Or should we throw our limited resources behind renting DVDs – which, if we can make it work, could be a hugely profitable business, but at this point is showing absolutely no signs of life?
There’s no easy answer. 2
The voice of sanity will insist that you do not throw away the revenue from your existing business. But, that’s exactly what they did at Netflix. No more DVD sales. Customers could only rent now. And, this was one of the most important decisions they made to gain the competitive edge.
If you are really serious about growing your business, resist the temptation to diversify. Instead, stay focused and become the absolute best in your niche.
3. A Startup must Focus
Focus on your customer
Ultimately, nothing will mean anything if you don’t know what your customer wants or likes, or worse still, when you don’t know who your customer is to begin with. Some of the world’s most successful companies are driven by sales and service. If you serve your customers well, they will buy from you. If they buy from you, your business makes money. If you do that well, you also log a profit. It’s not that complicated, but we forget.
A classic sign of businesses that are waiting to fail is that they are heavily focused on themselves rather than their customers. Startups heading for failure are not always distracted. They can be extremely focused too, it’s just that they are focused on the wrong thing. Often, their energy is spent on building products and features without any understanding of whether the market even wants them. Their entire focus is on internal issues relating to people, operations and administration. I can’t even begin to tell you how damaging that is for any organization. Great startups focus on innovation, sales and customers.
I remember when I moved back to India in 2007 and started Bloom. At times I found myself sucked into the internal issues. One day I sat all my managers down and said, “If this company has to be profitable then I’ve got to be on the road meeting my prospects and customers. If I’m sitting in my office any more than a day per week, this company will shut down in the not too distant future.” It was this culture and our commitment to focus on our customers that helped us first reach a point of breakeven and then profitability within less than 18 months.
So, the three golden principles of building a company are: focus, focus, and focus.
And, here are the three truths of running a startup:
1. Nobody Knows Anything
Marc Randolph quotes these words from a screenplay writer, William Goldman: Nobody. Knows. Anything.
According to Goldman, those three words are the key to understanding everything about Hollywood. Nobody really knows how well a movie is going to do…until after it’s already done it.
For instance, how is it possible that you can have a film directed by an Academy Award-winning director (Michael Cimino), starring a best-actor Academy Award winner (Christopher Walken), with a can’t-miss script and a $50 million budget…and end up with Heaven’s Gate, one of the biggest Hollywood flops of all time?
On the other hand, how can you have a film with a first-time director, a handful of amateur actors, no script at all, a budget under $50,000…and end up with The Blair Witch Project, which, after grossing more than $250 million, is one of the most successful independent films of all time?
There’s a simple explanation.
It’s because Nobody Knows Anything.
“Nobody Knows Anything” isn’t an indictment. It’s a reminder. An encouragement.
Nobody-knows-anything doesn’t mean you can’t plan or bank on your conviction. It simply means we can’t afford to lose our focus or give up, because you just never know what good may come out of your effort. Besides, there’s a fundamental difference between focus and delusion. It’s not uncommon to see many entrepreneurs deluded about their product or offering. In the name of focus, they forget to listen to their customers or the market. What I have realized is that no one can give you this wisdom, it’s something an entrepreneur acquires with time and experience, often painstakingly.
2. You can’t do it alone
You can have all the powers and qualities of Spiderman, Superman, Batman and all the other superheroes put together, and yet if you think you can build the company of your dreams on your own, you couldn’t be further from the truth.
You see, a startup is a lonely place. You are working on something that no one believes in, that you’ve been told time and time again will never work. It’s you against the world. But the reality is that you can’t really do it on your own. You need to enlist help. Bring others around to your way of thinking. Let them share in your enthusiasm. Give them the magic glasses that will let them see your vision of the future.
Founders or leaders who avoid uncomfortable questions and confrontation are setting up themselves and the company up for failure. I have seen so many companies fall apart because the stakeholders can’t seem to agree or even agree to disagree. Big egos and taking things personally act like salt on injury. If your startup is full of upstart people, it’ll die a painful death.
3. Don’t expect a second chance
Your investors may be a bit more patient with you and give you the money even when your company’s valuation is down. Your board may be a bit more sympathetic with you and give you another chance, but your customers, my friend, once you lose them, it’s very unlikely you’ll ever get them back. Sure, you may gain new customers in new markets with new offerings, but the ones you lose will tell many others why it’s better to stay away from your company.
To get it right the first time requires an open mind, and, as Marc would say, radical honesty. It takes courage to face the uncomfortable questions and honesty to admit that we need to make changes.
Our usual Tuesday E-Staff meetings always began with the same agenda item: who f****d up? That wasn’t the official name for it, of course – but that’s what I called it. In the interest of transparency and radical honesty, each of us would go around the room and say something that wasn’t working.
We didn’t need to know what was going well – things that were working didn’t need any attention from the rest of us. Instead, we wanted to know what wasn’t working. Who, in my elevated parlance, was f*****g up. It’s a maxim of startup life: you’re going to get things wrong. You just don’t want to get the same things wrong twice.
You are only going to get one shot at your customers. Get it right the first time.
Building a startup is an exhilarating journey. Each day is a new day. You just never know what may click, but that’s never an excuse to dilute your focus. If you are focused and you have what the market needs, you will eventually find success.
I’ve quoted Marc so extensively in this post, I may as well have called this post, a Tribute to Marc Randolph. Now to close this post with my own words would be injustice to his wisdom, I thought. So, here is another beautiful quote from his book:
As you get older, if you’re at all self-aware, you learn two important things about yourself: what you like and what you’re good at. Anyone who gets to spend his day doing both of those things is a lucky man.
Go on, find out what you like and get better at it. Your life will never be the same again.
Finally, I’ve an important announcement. Well, it’s more of an experiment, a sort of idea I’m toying with. Details here.