The Monk and the Riddle: The Art of Creating a Life While Making a Living (6 page)

“But I figured we could show that, even conservatively, we can build a nice, profitable business.”

“Fine, but make that the ‘worst case’ in your plan. Maybe it reduces some risk, but those market share numbers won't inspire investors. Don't even try to do this if you aren't planning to take it all. Then allow for some competitors, but hold the leadership spot. Nothing else is worth investing in.”

“Good. That's good.” He scribbled notes.

I put my feet up on one of the white plastic garden chairs that serve as café furniture in Portola Valley. When he was done, I asked, “Lenny, why is this a big idea?”

“It's a big market, big dollars.”

“Will it change the way the world operates? Will it change people's lives in any meaningful way?”

“Change the world? We're saving some people from the sharks that prey on grief. The current system is awful.”

“But basically you're just changing the way the product is sold and bought, substituting yourself for some brick-and-mortar intermediaries.”

“What's wrong with that?”

“Nothing, it's probably a good business strategy. How do you see this business in five years, though?”

“$400 million? $500 million!? Who knows?”

“But it's the same thing, right? Same products sold the same way?”

“Yes,” he said hesitantly, as though he were missing something. “Is that a problem?” he asked.

“Not necessarily, at least for some VCs,” I said. “Let's go to the second question. What kind of competitive position will you have? What makes your products or services unique and compelling enough to ward off copycats? Can you stake out a significant chunk of your market and defend it? Or can someone reproduce what you're doing overnight?”

Lenny explained that federal regulations aimed specifically at the funeral business created an opportunity for his venture. Funeral homes must accept caskets provided by third parties without fee. The trouble is that the regulations extend that opportunity to everybody, not just Lenny. Like other Internet merchants, he would bank on the limited ability of brick-and-mortar merchants to cut prices. But with these margins, who knows? And what about Internet-based competition? Where were the barriers to entry?

His answers were not satisfactory. He was offering nothing that another competitor couldn't also develop. The key to his business was swift execution. There's nothing inherently wrong with that. But fundamentally, there was a risk that, after Funerals.com gentrified the neighborhood, some brick-and-mortar heavyweight would sweep into town, or some Internet speed freaks would catch Funerals.com from behind. There were no safe havens unless Lenny could achieve Silicon Valley's new mantra, “Build Brand.”

“How will people find you when they need you?” I asked. “How will Funerals.com establish a brand and presence? E-commerce is all about distribution, building awareness, being seen, and the Web gatekeepers take a hefty toll before granting you access to their traffic.”

His plan was to work with the existing non-virtual infrastructure—social service departments, hospitals, clergy, and hospices—the people who know when someone dies. They would serve as referral points. But would they tell people about Funerals.com? Would that word of mouth suffice in an age of Internet portals?

“Price, convenience, no pressure,” he said. “They'll refer people because it's a better way to shop.”

“You said a while ago when someone dies, no one wants to shop around,” I pointed out.

He made a note, probably a reminder to take that sentence out of his pitch.

“Some won't. Some will,” he said.

“Besides, nothing prevents someone else from making the same offer,” I challenged. “If that happens, where are you?”

“So far ahead, nobody can catch us,” he said.

First-mover status might confer some advantage, but how much wasn't clear. The need to move with ferocious speed is the Internet's legacy. If nothing else, e-commerce forces every business to accelerate to defend its turf or cede precious market share to the fleet-footed mammals of the Web.

“If we beef up that point in the plan, will it make a difference to Frank?”

“You need to address it. It's a threshold question.”

He made some more notes. My chai was getting cold. Maybe Connie would be so kind as to warm it up. I turned toward the window and waved to her inside. She ignored me, deliberately not looking my way. No respect.

“That takes us to the third question,” I said, turning back to Lenny. “You and your team. Your first-mover status relies on rapid execution. That means the composition of your team is even more crucial than usual, because you won't have time to learn on the job.”

“It'll be a good team.”

He reached into his case of files and handed me a copy of his business plan. “There's a summary of people in here,” he said.

So there was. Unfortunately, besides Lenny, there was only one other founder identified by name. She was a marketing manager for one of the biggest funeral home chains, so she would be the domain expert. He obviously didn't suspect I had overheard his earlier conversation regarding his teammate bailing.

I told Lenny I was troubled by his and his partner's lack of startup experience. It heightens the risk. Startups are unique animals. We take them pretty much for granted out here now, but they are still endeavors that require very different skills from the ones needed in established companies.

Like tourists on safari, senior executives from some of America's largest corporations come to the Valley to study the exotic ways of the natives. Arriving from Chicago or New York or Dallas, they think they need to be more like Silicon Valley startups, but they usually end up scratching their heads. I recently met with some senior managers from a world-class package goods company who had been up and down the Valley. “We thought we could take a crash course in the Valley way and apply the lessons to our business. But this place is extremely foreign to us. We'll have to partner with experienced startup talent and Valley VCs if we really want to try our hand at being entrepreneurial,” a senior manager confessed.

Even when large companies try to set up small, intrapreneurial units, they are hard-pressed to find people inside the company who will drive them with the same fervor and penny-pinching zeal that desperation demands of independent startups. The accoutrements of established businesses— the company cafeteria, the clerical support, the illusory job security, the pension plans, and everything else a large organization can provide—are inconsistent with Valley startup mentality.

“I'm not concerned about it,” Lenny shot back. “We have a good plan, and we know how to work a plan.”

I thumbed through the material. It was a fairly polished presentation: market description, customer need, product strategy, competitive positioning, launch schedule, sales projections, expense forecasts, IRR and other rates of return, investment required, discounted cash flow. All the numbers you'd want. Year one. Year two. Year three. Everything worked out with an inevitable logic. Lenny had outlined in some detail how he planned to run this business.

But how would he react when reality swept over his PowerPoint slides?

It was becoming clear that he believed his task was to raise money and then follow his plan. As far as he was concerned, the answers were all there. That's the drill in large companies: “work” the plan. Every week or month or quarter, the head of a new venture will meet with senior management and report progress against plan.

I once sat on the board of a startup that had raised an initial round of funding from a wealthy Hollywood financier. This was the kind of startup the Valley fondly refers to as “Brave New World.” (The other kind is more soberly called “Better-Faster-Cheaper.”) This particular startup envisioned a business based on a radically new product and service. Naturally the business plan laid out detailed projections, but everything was based on assumptions that could not be tested, short of actually starting the business. Of course, the business at that time was nowhere near the place specified in the plan. Crucial distribution partners were not moving as quickly as expected, and their involvement remained outside our control. The financier, who had made billions in oil and gas, was troubled and became progressively more upset when he learned the company was falling farther behind and away from the plan. He was a savvy investor, but he was not acquainted with technology startups and was increasingly rattled by the risk inherent in this venture.

Finally, after yet another hand-wringing board meeting, at which one of the financier's henchmen screamed, threatened to cut off funding, and jumped management through innumerable hoops, I took the fellow aside. I explained that in a Brave New World startup, where there's no existing market, no incumbent competitors, and no economic model, you're literally inventing the business as you go along. It was absurd, I told him, to hold the team to the original plan. Look at the progress they had made on everything within their control, such as the quality of the organization and the status of the product. It was necessary to be vigilant and flexible in order to learn as the business progressed. These were the right indicia of success at this point, not the plan. The management team was obviously working hard to close a deal with distribution partners and was pursuing alternative strategies. By any measure, except the original plan, this team was doing a great job. The principal use of the plan comes at the beginning, I explained, to show that the founders are intelligent, capable of structuring the business concept and expressing a vision of the future. Later the plan can help track problems that may reflect on the startup strategy itself. The financier's henchman calmed down, but his boss never really got the point; he dropped out before the company went on to be sold for more than half a billion dollars.

“Lenny,” I said, “I doubt your plan will take you all the way. There are too many unknowns. You'll need people capable of navigating without street signs. The composition and experience of the team are something VCs will look at hard.”

VCs invest first and foremost, I explained, in people. The team would have to be intelligent and tireless. They would need to be skilled in their functional areas, though not necessarily highly experienced. Moreover, they would need to be flexible and capable of learning quickly. Heaps of information about the market and the competition would be streaming in after they launched. They would have to course-correct, on the fly. Refine the strategy, maybe even radically. This team would have to be comfortable with uncertainty and change. That's why VCs look for people with some startup experience, people who have proven they can thrive in chaos. It significantly reduces the risk of failure.

“If we can get a VC to put in the money,” Lenny said, “and then work with us to fill in the gaps in our experience, we should be all right.”

If Lenny was relying on the VC to provide the startup experience his team lacked, he was confused about venture capitalists and their role. He wasn't alone.

Venture capital firms have a great business—the investment business. They bring in money from limited partners, and it's their job to give back to those limited partners a return that reflects the risk taken with that money and exceeds what they are likely to get from other investments. For that effort, the VC gets a fee and a carry, a percent of the deals gratis.

In the early days, VCs often rolled up their own sleeves to make their investments successful. Many had come from operating roles and could actively contribute to the businesses they funded. The total money they had to invest was trivial by today's standards, which meant they could make only a handful of investments annually, a manageable number that allowed them to bring their experience with their money to each venture.

Today's funds are huge in comparison, sometimes approaching a billion dollars. Because of this size, VCs now need to invest larger amounts of money in more companies to produce the returns that attract investors. It's not uncommon for a VC partner to sit on a dozen or more boards. To that they have to add the hefty demands of running their own businesses. Consequently most VCs (even if they insist otherwise) simply don't have the time to give close management attention to the companies they've funded. In addition, in contrast to the original VCs, who often gathered years of operating experience prior to becoming venture capitalists, many partners in today's firms have no executive management experience. They could be working on Wall Street as easily as on Sand Hill Road.

With frenetic energy and a natural penchant for risk taking, these armies of prospectors are smart, hardworking, and aggressive. They do bring connections and contacts to the aid of the companies they fund, in addition to money. Often stereotyped as “vulture” capitalists who drive expensive cars, drink pricey wines, collect extravagant toys, and wish they had the time to indulge in their expensive hobbies, they are reminiscent of Wall Street masters of the universe, or L.A. players—except for one thing: their bets build the future in remarkably tangible ways. While their N.Y. and L.A. counterparts feast on marbled steaks from the corner butcher, VCs birth, fatten, and butcher their own steers before the barbecue. Take them out of the picture, and the Valley and its financial boom collapse. A few of the venture capital firms are beginning to recognize the limitations of the current “stretched thin” situation, and there are, of course, some notable exceptions to the present trend. Regardless of the amount of attention they can spend on any single company, they are still some of the heroes of the new economy.

Nevertheless, for the past few years there has been no shortage of capital and new ideas in the Valley. Management talent has been the limiting factor. Startups require an odd mix of skills and personalities. Many top tier VCs use their credibility to attract big-name talent from corporate America, with the promise of huge payoffs in the Valley. This can ensure that a new venture sails smoothly out the gate. But when a small startup runs into trouble early—and many, if not most, do—carpetbaggers more accustomed to managing a multibillion-dollar business may find they just don't have the skills to make a startup work. Anyone can sail with the wind to his back. Startups usually sail into a stiff wind, leaking like a sieve, in high seas, without food or water. If Lenny got the money he wanted for Funerals.com, he would face that problem right away.