[CEO Friday] Startup Best Practices == 95% failure rate

“You have no reason to trust me except that I said you should.”

Nearly everybody in Silicon Valley agrees on how a company is supposed to be run. These are codified into a nebulous set of “best practices” — the pre-packaged advice that is handed out to nearly every startup, in nearly every market, under nearly every set of conditions. But if there’s one thing I’ve come to believe is that “best practices” generally aren’t. 

I do a lot of thinking, but I rarely have the chance to share it. Granted, most of that thinking is probably not worth sharing, so you’re not missing much. But I was suggested to share the below advice sent to an entrepreneur friend, who had remarking on how advice received from another entrepreneur made him feel stupid (is that confusing enough)? Here goes:

Also, I’d suggest avoiding hanging out with people who make you feel stupid. It’s possible that you are stupid and they’re brilliant; I’ll grant. But in my experience, I’ve dealt with countless people over the course of my career who made me feel stupid, and history has shown most of them to be idiots. On the other hand, some of the smartest people I’ve come to trust make me feel smart too — they find a way to build upon and improve my ideas, rather than convincing me my ideas are bad and jamming their own ideas down my throat.

As for enterprise versus individual pricing, I think that is a secondary to a far more important question: what is your strategy to acquire customers? If your plan is to advertise your way to growth, then I’d agree: you’re an enterprise company.

That means you should stop trying to sell to individuals or small businesses, and immediately reorient around a strategy of selling to companies with 1000+ employees. (You’ll have a lot smaller than that, but you’ll lose money on them.) Turn off self serve and instead require everybody to just fill out a marketing form. You’ll likely charge what feels like an absurd amount of money per seat, and you’ll need a heavy top-down sales organization to do it. Customers will pay even though most seats will go unused, and you’ll laugh at their folly. You’ll likely have a classic top-down sales structure: a marketing team that generates “marketing qualified leads (MQL)”, handed to a sales team that has a front-line group of people who just qualify the MQL’s into “sales qualified leads (SQL)” by confirming they have the “BANT” (Budget, Authority, Need, and Timing). You’ll probably sell custom-negotiated annual contracts, sold by a salesperson making a 15% commission on first year’s revenue. Then it’ll be handed over to an account manager who is bonused by reducing churn. You’ll need to get your metrics dialed in pretty early, demonstrate that your CCA>LTV, then raise a ton of money and spend it immediately, then go raise more. It’ll have a pretty heavy management structure — VPs for everything as early as possible, each running a large, aggressive organization underneath it — something like 30% marketing, 50% sales, 20% engineering. The sales team will be super aggressive with huge quotas with minimal base and large commission, but it’ll be hard to hit so you’ll have maybe 30% annual churn, in a boilerroom setup.

Some variation on this is basically how every top-down enterprise company sells. They don’t always start out this way, but they usually end up this way. This is the best practice for a silicon valley startup: it’s what everyone tries to do. It’s what everyone will tell you to do.

It works about 5% of the time.

Remember, 95% of all startups utterly fail. No return to any investors. That’s why VCs have a portfolio theory: they invest in 20 companies with the expectation that 1 will pan out. They really don’t care which one — they have no particular reason to hope that you succeed over the other 19 companies. They just push them all as hard as they can, knowing that 19 will fail, and 1 won’t.

The thing is, as an entrepreneur, you don’t have a portfolio. You have 1 company (a houston auto glass shop in my case). And are you sure you want to bet your whole company on a strategy that has a 95% failure rate?

To be clear, I don’t know that any other plan has a higher success rate. But I don’t know that other strategies necessarily have a *worse* failure rate either. I’ll also say that other strategies are a lot more fun and satisfying, and provide a better balance of risk/reward. (Though “better” is a judgement call: if you have it in you to pump and dump and endless array of startups, each 1-2 years in the making, than the former strategy is perhaps better. But if you want to build a company that users rave about, with people you like and hope to work with for a long time, while enjoying life outside work — you might consider alternatives.)

Furthermore, I will say that most of the truly great companies didn’t follow the above plan. Salesforce didn’t. They do now, of course, but when they started, they were all activity-based pricing and self signup in the SMB — up to something like $14M in revenue — retreating upmarket because churn was high and they couldn’t raise money after 9/11 to weather the storm and thus focused on moving upmarket as fast as possible to address cashflow concerns, essentially abandoning their SMB roots in the process. Concur — our ostensible competitor — was the same, layering on enterprise sales *after* succeeding in the SMB (and eventually leaving it behind entirely). Intuit — our *real* competitor — never did this. DropBox didn’t do it this way, and Box.net didn’t start this way (they were forced to go enterprise after DropBox dominated the individual and SMB — Box’s current business model is Plan B). Yammer does it this way now, but didn’t at the start: they got their start with viral in the SMB, but found their product only really provided value in a large company.

A good story you might investigate is BetterWorks. They bet the whole company on the above model. They had marquis investors, founders with near celebrity status. They were the darlings of “Silicon Beach” in San Diego — a pillar of that entrepreneurial community. They had amazing design, hired fantastic people, executed with extreme aggression. They raised $10M. Read this upbeat coverage: http://techcrunch.com/2011/09/13/betterworks/ Wouldn’t you want your startup to be regarded as highly? But then read this, just *eight months later* http://techcrunch.com/2012/05/24/betterworks-shuts-down/

My only point is: nobody knows what is going to work, and anybody who claims otherwise is an idiot — especially if they make you feel stupid for believing them. At the end of the day, you’re in this because you feel you’re smarter than the next guy. But that’s only true if you stop listening to the next guy, and start listening to yourself.