America's Most Successful Startups: Lessons for Entrepreneurs

179 Pages·1998·67.39 MB·English

by  Max Finger

r
Max Finger/Oliver Samwer
America's Most
Successful Startups

Lessons for Entrepreneurs
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GABLER
Preface

Leaving school and standing at the threshold of the next stage in our life, through this
study we have had the chance to tak:e a glance at the 2151 century. We hope tobe 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 hands-
on 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. lt 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 21st
century, first-tier venture capitalists, investment bankers, lawyers and technologists.
People who will be driving the economy of tomorrow.
Wespotted 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. Same 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 Iooks 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 2151 century.
Vallendar, Germany, September 1998
Max Finger ([email protected])
Oliver Samwer ([email protected])
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 Müller and Sigurd Strack from McKinsey&Company as well as Gerhard
Schulmeyer from Siemens Nixdorf Informationssysteme for their support of the study and
W alter Kümmerle 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 für Unternehmensführung, Otto Reisheim 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, Yonald
Cherry, Ronald Croen, Dan Cunningham, Werner Daghofer, Vinod Dham, Tim Dick,
Gaurav Dhillon, Jay Eisenlohr, Michael Eisenson, William Eider, 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 Polese, John Preston, Frank
Quattrone, Jean-Yves Quentel, Arvind Rajan, 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
Vlll Acknowledgment
Shah, Ranjan Sinha, David Skok, Michael Skok, Eric Spitz, Randy Thomae, Jeff Tonkel,
Howard Torf, Lisa Underkoffler, Mahesh Veerina, Iain 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 ([email protected])
Oliver Samwer ([email protected])
Table of Contents
1. Introduction......................................................................................................... 1

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

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 Shift.... .... ..... ........... ........ ..... ..... 7

2.1.2 Opportunities based on a New Productor 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 arefast 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 ofthe Company ..................................................................... 32
7.2 Ownership of the Company .... .... .. .. .. .. .... ...................... ........................ ....... 36
7.3 Building a Sustainable Business................................................................. 37
8. The Ideal Startop ................................................................................................ 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 ofFunding ..................................................................................... 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

14.3.1Recruiting 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

14.5.1 Free 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 Meetingsand Reports.......................................... 83

14.5.1.4 Personal Whiteboards .................................................... 84

14.5.1.5 All-Rands-Meetings....................................................... 84

14.5.1.6 CEO Lunchesand 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 Grientation and Management-by-Objectives.................................... 92

14.9 Key Characteristics of a Successful Culture................................................ 93

14.9.1A TeamWork Culture ...................................................................... 94

14.9.2An Egoless Culture ........................................................................... 94

14.9.3A Meritocracy ofideas ..................................................................... 96

14.9.4A Risk Culture .................................................................................. 97

14.9.5A "no status, no ego, blue-jeans" Culture ......................................... 98

14.9.6A "don't-let-the-others-down" Culture.............................................. 101

14.9.7AFunCulture ................................................................................... 101

14.9.8A Family Culture .............................................................................. 102

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

14.11 Leadership................................................................................................... 104

14.11.1Building a Vision............................................................................ 104

14.11.2Building Teams............................................................................... 107

14.11.3 Reinforcing the Culture ... ... ..... ............ ... .......... ..... ......................... 109

14.11.4Creating a Sense of Urgency........................................................... 110
xn 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
ßl. 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