Startup Myths and Models by Rizwan Virk (introduction)

Startup Myths and Models 30

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RIZWAN VIRK

introduction

Who Needs This Book?

Startup Myths and Models is a book I wish I’d had when I started my first company. It could have saved me a lot of pain. Well, now that I think about it, I wish I’d had it when I started my second and third ventures too!

Although every entrepreneurial adventure follows different roads, the challenges that crop up along the way are often similar. And often, these challenges aren’t just external—they exist in our minds and are based on everything we have heard and learned about how startups should work.

This book is about the challenges faced by entrepreneurs who are embarking on the startup journey. More specifically, this book focuses on the internal responses to those external challenges, each presented as a “myth”—a rule of thumb that gets tossed around in the startup world as if it’s gospel, but it is actually a mental trap.

Here are some examples of these myths: • • • • •

You have to build a billion-dollar company.

Hire the most experienced people you can find.

Raise as little (or as much) money as possible.

Focus, focus, focus.

Fail fast, pivot quickly.

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All of these seem to make sense for any startup, obviously! Correct?

Wrong. These are some of the common myths that are debunked in this book.

Each of these myths represent common wisdom that is likely to involve a very serious dilemma for you at key points in your startup adventure (whether to raise money, with whom to start a company, whom to hire or fire, whether and when to sell the company, etc.). If you simply follow the “rule of thumb” without understanding what’s behind it, you may find yourself the unwitting victim of the myth.

Myths and Models in Startup Land

These myths are prevalent in Startup Land, a mythical version of Silicon Valley that is supported by numerous blogs, residents, and success stories, all packaged for the world at large.

Startup Land comes with its own mythology about famous heroes (the founders of Google or Facebook or Apple, for example), villains (greedy venture capitalists and unethical founders), as well colorful characters who crop up around the main protagonists of startup stories.

Startup Land really consists of an ecosystem that’s grown up around Silicon Valley: a large number of venture capitalists, angel investors, founders, lawyers, managers, accountants, and an endless number of consultants/ advisors/mentors all gathered in one place. Like the characters in any good adventure, the colorful residents of Startup Land can either help you along your path or hinder your progress. Some may even look like they are there to help, but often have their own hidden agendas.

Of course, Startup Land reaches well beyond the geographical limits of Silicon Valley itself, and now includes places like Boston, New York, Austin, Los Angeles, and Seattle, among others. Many countries in Europe and Asia are currently trying to reproduce the innovation and dynamism in their own versions of Startup Land, albeit with a nod to their local culture, often incorporating many of the legends, mythology, and philosophy of Silicon Valley in the process.

This common mythology leads to “groupthink” on the one hand (everyone spouts the same platitudes), and on the other hand, it sometimes leads to completely contradictory advice. As a simple example, here are two pieces of advice I’ve heard (and sometimes given): “Raise as little money as you can” and “Raise as much money as you can!”

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If there were academic models for how startups should work, which were backed up by real-world experience, then it would be possible to evaluate the myths against these models. You would think that given the popularity of startups today, business schools would teach some of these important lessons and Startup Models, which could help residents of Startup Land think critically about the major decisions they need to make in the life of a startup.

But they don’t. So what’s a budding entrepreneur to do?

The Times They Are a-Changing: Harvard Versus Stanford Business School

In 1980s popular culture, Harvard Business School was considered the pinnacle of business thought, and many ambitious future businesspersons wanted to get admitted there (which was no easy task, since it had a 10 percent admission rate). Those who wanted to succeed in business wanted to leverage the power of the HBS alumni network and curriculum so they could become the next captains of industry, running a division of (and eventually becoming CEO of) a large company like General Motors or General Electric or Exxon, which were the most valuable companies in the world at that time. The other big ambition in the 1980s was to enter Wall Street and become a finance wizard (as exemplified in Oliver Stone’s nowclassic movie about the period, Wall Street).

As a result, most business schools’ curricula were tailored to one of these goals—to produce either managers of Fortune 1000 companies or Wall Street wizards (traders or fund managers).

Even with these goals, it was generally recognized that business school couldn’t teach you everything you needed to know about business. In a mark of the times, the 1984 book What They Don’t Teach You at Harvard Business School, by Mark McCormack, was about aspects of management that were hard to teach in a classroom environment and could be acquired only through experience. It became an international best seller.

Fast forward to today.

Not only are today’s most valuable companies different from those of the past, but so are the ambitions of the next generation of business leaders.

The most valuable companies in the world today (largest by market cap) are all tech companies—Apple, Amazon, Microsoft, Facebook, Google— and several of these companies have surpassed $1 trillion in market cap

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for the first time in history. All of these companies were once startups that needed to go through all of the stages of the entrepreneur’s journey that are described in this book. All of them needed to raise money, recruit travel companions, find product-market fit, and make decisions about whether to sell the company at each stage.

The ambitious businessperson today aspires not to become the next Jack Welch or Lee Iacocca or Alfred Sloan, but rather the next Mark Zuckerberg (founder of Facebook) or the next Elon Musk (founder of Tesla and SpaceX).

If the heart of Startup Land is Silicon Valley (even if you aren’t physically located there), then the heart of Silicon Valley is probably Stanford University. Most concentrated areas of tech entrepreneurship are built around a leading technical university. Hewlett-Packard, Google, Yahoo!, and many other successful startups had a Stanford affiliation; even companies that were headquartered in Seattle, like Microsoft and Amazon, recruited heavily from Silicon Valley and Stanford’s business school (also called “the GSB”, short for Stanford’s Graduate School of Business).

As a sign of the changing times, today Stanford’s GSB has replaced Harvard as the most selective business school in the country (with a 6 percent acceptance rate). Moreover, if you want an alumni network and curriculum that are tailored to future founders of the world’s most valuable companies, you would think that Stanford GSB would be the place to go. After attending another great university, MIT, for my undergraduate degree, I went to Stanford GSB when I moved to Silicon Valley, and I can attest that the alumni network is among the best in the world for tech entrepreneurship and venture capital.

Although I found multiple classes on entrepreneurship when I went to the GSB (and many graduates will choose to start a company or go into venture capital as a career), I was surprised to find that entrepreneurship was not one of the main options for concentration. Much of the curriculum at the GSB, even in the heart of Silicon Valley, was still geared toward producing managers of Fortune 1000 companies or finance wizards.

This book is my attempt to reconcile Stanford’s position as the heart of Startup Land, and in the spirit of the classic book, teach those things which can only be taught through the experience.

To that end, the Startup Myths, Startup Models, and Startup Tools in this book are the equivalent of a startup MBA curriculum—complete with secrets and lessons that you can’t really learn in any classroom.

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Startup Myths: Find the Kernel of Truth

Let’s start with the myths, which are the backbone of this book. The reason I wish I had this book when I started my first few companies is not that the myths presented in this book aren’t true. It’s rather that they are true sometimes. This means they are also wrong at other times.

The myths mask a complexity that you need to understand not just about your startup—but about how startup markets evolve and change in general. If you simply follow the rule of thumb without understanding this underlying complexity, this can lead to not just a bad decision but the death of your company. This complexity obscures the kernel of truth in each myth. With this book, you can use the secret behind each myth to extract this kernel of truth and learn how to apply it to your situation.

Let’s take a very common example of advice you hear on the startup journey: Myth #11: Focus, Focus, Focus. It seems pretty obvious, right? But I’ve seen many startups miss a great market opportunity because they had tunnel vision about what they were trying to build.

I’ve seen other startups go from mediocre results to great success by not focusing, but by keeping their eyes and ears open to ancillary opportunities that came up while they were supposed to be following their VC investors’ advice to “focus, focus, focus” (good thing they didn’t focus too much!).

On the other hand, a startup does need to focus to be successful. The real trick is understanding what you should be focused on, and when. To uncover the secret behind this myth, you’ll see that the secret behind this myth is Focus, Explore, Focus. To succeed where others have failed, you’ll need to learn how to apply this secret in your own unique situation.

When to Follow Advice and When Not To

You’ll see that these myths aren’t a matter of simple “do’s and don’ts”; rather, each myth in this book encapsulates a point of view that we can easily find ourselves in as entrepreneurs (and as investors, too!).

This point of view, if followed blindly, will get you into a dilemma. The secret behind each myth is a different way to think about the dilemma; if you do that, you might find yourself successfully overcoming that particular challenge and continuing happily on your startup journey.

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How do you shift a point of view? As on all good journeys, you need good mentors and advisors to help along the path. Bilbo needed Gandalf; Luke needed Obi-Wan Kenobi (yes, I mean that “crazy old wizard, Ben”).

Good mentors—usually in the form of advisors, board members, and investors—can give you advice, help you get perspective, and tell you their secrets. And more important, good mentors have a sense of how things should work in successful startups, which is often encapsulated into a mental model they can teach you to apply. But they’re not always available, and unlike in mythological journeys where the mentor shows up early, in the real world, finding the right mentors at the right time can be challenging.

This book is meant to help in these situations: it can be a mentor and advisor for you along your journey and can reveal the secrets that can get you past the ogres and demons that crop up along the entrepreneurial adventure.

But don’t just take my word for it. The myths that made it into this book (and their corresponding secrets) have been culled from interviews with many other entrepreneurs, angel investors, lawyers, and venture capitalists from Silicon Valley and beyond (the “experts”), who are profiled in Appendix B: Meet Our Cast of Characters and Startups.

Startup Models: What They Should Teach at Startup Business School

In addition to the myths themselves, this book will introduce you to several important Startup Models and Startup Tools, which can help you to make sense of the lessons inside each myth.

When I was at the GSB, we learned many models of how economics and finance worked. Of particular interest to me were the supply and demand curves that economists use in both macro- and microeconomics.

Unlike financial equations that rely on precise numbers, these models provide ways to think about the world of economics, which apply equally to markets of goods as well as money markets, showing how supply and demand create an equilibrium point.

I remember my professors telling me that the direction of the curves was the most important thing—they helped us to visualize what was going on in a particular market, and helped us figure out how things might change over time.

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I lamented that there was no corresponding set of formal models for startups that would help entrepreneurs and investors figure out what was happening not just to a particular startup, but to a market as a whole.

The Startup Models in this book are conceptual frameworks for thinking about startups and startup markets, which account for the fact that startup markets follow different rules than mature markets. There are two kinds of models presented in this book: • Startup Market Lifecycle. In this model, which is fully developed through the course of the book, I’ve put together my observations of how startup markets evolve. This is based on what I’ve seen in my twenty-five–plus years of founding and investing in startups: that very different startup markets evolve through very similar stages. These stages aren’t just theoretical; investors and acquirers intuitively base their valuations and put their money into companies completely differently depending on what stage the market is in. Many of the myths (and corresponding bad decisions made by entrepreneurs) derive from not understanding this model and where in the model a particular market is.

• Mental Models for Startup Challenges. These are models that help you think about different aspects of your startup experience—including hiring, firing, pivoting, and even selling your company. Two examples of these models are the Four Quadrants of Pivoting and the Four Quadrants of Hiring. Some of these models have been passed down from advisor/investor to entrepreneur, and I learned them from my mentors. Others I have put together in the course of mentoring entrepreneurs as a way to explain how they should think about today’s fast moving startup markets.

Startup Tools You Should Dig Into

In addition to the models, many chapters include Startup Tools—checklists and questions that can help you recognize your priorities and biases about important aspects of starting and growing a company.

For example, Startup Tool #1: Prioritizing Founder Motivations, and Startup Tool #2: Uncovering Founder Expectations, can be used to explore the motivations of your cofounders as well as the implicit expectations that each of you is carrying into your startup adventure.

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These tools aren’t just academic checklists—the answers to these questions can change the direction of your startup. They can make the difference between a founding team breaking up or staying together, and they can make millions of dollars of difference in an acquisition. I’ve used them myself in the Play Labs startup accelerator at MIT, which I founded recently.

I refined them based on my own experience in working with entrepreneurs.

How This Book Is Organized: The Hero’s Journey

Joseph Campbell, the well-known American professor of literature and a student of Carl Jung, analyzed the mythology and heroic epics of many different cultures. He found that although no two adventure stories were exactly the same, the heroes of these myths went through similar stages in their journeys and faced similar challenges.

He outlined these stages in his book, The Hero with a Thousand Faces.

He dubbed these the stages of “the Hero’s Journey” and this became a great way to think about adventure stories. These stages made their way into more modern adventures, like Star Wars and Lord of the Rings.

I’ve always held the point of view that a startup journey is like an adventure. Like all good adventures, no two startup journeys will be exactly the same, but the heroes may go through similar stages and face similar challenges.

Like all good adventurers, every entrepreneur has to find their own way through these stages, just like in the old myths. Like all good adventures, the hero (or heroine) will be joined on the journey by colorful characters, some of whom are there to help, some who are there to hinder, and some who have hidden motivations.

Thus, I’ve chosen to organize this book by adapting the stages of the Hero’s Journey to the most common stages of the Startup Journey. These stages make it easy to organize, read and digest the myths in this book: 1.

2.

3.

4.

5.

6.

The Call to Adventure: Myths About Starting a Company Fuel for the Journey: Myths About Raising Money Travel Companions: Myths About Hiring and Management The Road of Trials: Myths About Going to Market Acquiring the Treasure: Myths About Exiting Your Company The Underworld and the Return: Myths About Life and Death in a Startup

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In each stage, I’ve chosen the top few “myths” based on my own experience as an entrepreneur, the numerous startups I’ve invested in and advised, and through consultation with some of the top venture capitalists, angel investors, and entrepreneurs in Silicon Valley (the experts that I interviewed for this book). Unless otherwise indicated in a note, the quotes from these experts were taken from direct interviews I did with them, or in some cases, from their writings. The experts’ advice is featured in the text and in sidebars after many of the main myths.

The Biggest Startup Myth

In addition to these individual myths, there is an overriding myth about startups that is prevalent in Startup Land and beyond. It comes from the fact that in the press we usually hear only about the standouts—the startups that have become famous because of their success: Microsoft, Apple, Oracle, Google, Facebook. This “Big Startup Myth” goes something like this: 1.

2.

3.

4.

5.

Entrepreneur comes up with great idea, quits job to start company; investors believe in entrepreneur’s idea and invest; small team completes product quickly; product is released and is a big success; company experiences straight-line growth, year after year.

Of course, shortly thereafter, the company has an IPO or is acquired, and as a result everyone is fat, rich, and happy!

You’ll notice that this modern myth is missing some of the key elements of the Hero’s Journey—namely, the negative ones: the “refusal of the call” (where the hero turns down the adventure), “the road of trials” (where the hero must slay monsters or overcome serious hardships), and the “trip to the underworld” (where the hero faces mortality and becomes a different person). Ignoring these challenging times is perhaps the biggest myth of all; this book is all about how to navigate these difficult stages.

My Own Startup Journey

I started my first company well before I went to business school. As a fresh graduate from MIT in the 1990s, just before the dot-com revolution,

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I certainly believed this “Big Startup Myth” when I cofounded my first startup with my college roommate, Mitch, and my brother, Irfan. We didn’t need any outside investment initially, and we built the product ourselves in a few months.

At first, it seemed like everything was proceeding according to plan.

We released the product and it was a big hit! All the computer magazines wrote about us and we had more leads than we could handle. All in all, over a thousand companies adopted our first product, which was a link between Microsoft’s Visual Basic and Lotus Notes (which later became a part of IBM).

Venture capitalists took note, and we thought we were on to the rest of the growth curve that appears on the left side of figure 0.1. But then, as inevitably happens on the startup journey, we came face to face with our own “road of trials” as the market changed and our growth slowed well below our (overly) optimistic projections. Our burn rate had increased and we were suddenly in danger of running out of money, facing our own startup’s mortality, our own personal “trip to the underworld.”

That’s when I realized that any realistic startup journey really looks more like the right side of figure 0.1—with lots of unexpected twists and turns.

I went on to create multiple startups, including both enterprise software companies and direct to consumer companies, some of which went on to be sold successfully, and some of which failed. Ironically, I learned just as

Startup success

What people think it looks like

Startup success

What it really looks like

Figure 0.1

What Success Looks Like. This popular internet meme applies to startups perfectly!

Recreated by the author

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much (if not more) from the failures. It was through seeing the same lessons apply in different markets to different entrepreneurs over many years that I started to develop the frameworks in this book.

In particular, the mobile gaming revolution that kicked off with the release of the iPhone in 2008 was a time when I really started to see patterns based on previous startup markets I had been a part of. I started to see how startup markets evolve similarly, and I learned how to ride this wave.

My cofounders (Mitch and Irfan again) and I created one of the top games in the early days of the Apple iTunes app store called Tap Fish, which had over 30 million downloads. I then went on to invest in many other startups, including some that went on to be worth billions, and others that looked like they were going to be big successes but had their own “trip to the underworld” and unexpectedly died.

Years later I found myself teaching many first-time (and sometimes repeat) entrepreneurs the same lessons I had learned on my startup journeys—lessons about founding a company, gauging the market, launching a product, building an organization, and selling a startup.

I traveled back to MIT in the summer to start my accelerator, Play Labs, so that I could work with groups of entrepreneurs, many of whom were going on the entrepreneur’s journey for the first time, and I battle-tested out the lessons in this book.

The hard truth about entrepreneurship is that most startups fail. Even those that succeed must still go down their own “road of trials” and have their own “trip to the underworld.” By arming yourself with the Startup Models, tools, and the secrets behind each Startup Myth, you can give yourself an edge by learning from the success and failure of many who have gone before you on this adventure.

Bonus Myths

In my research and writing, I found many more myths and secrets than I could fit into this book. Practical considerations required me to choose the top few myths for each stage of the Hero’s Journey. In some cases, I felt the myths we needed to cut were important enough to deserve a mention, even if I wasn’t able to include a full text. I have included these in the “Bonus Myths” supplement to this book, which is available online to download on my website (www.zenentrepreneur.com). Over time, this supplemental material may grow, so you may want to sign up to the

P RAISE FO R

Startup Myths and Models “Fortify yourself on this book’s rich experience and insights before you set out.”

R ANDY KOMISAR , partner, Kleiner Perkins Caufield & Byers, author of The Monk and the Riddle and Straight Talk for Startups

“If you are going on the entrepreneur’s journey, this book is a great companion for every stage of the adventure!”

BR AD FELD , cofounder of Foundry Group and author of #GiveFirst and Venture Deals

“When launching a new business, there’s no one I’d rather have at my side than Riz Virk.

His book Startup Myths and Models is the next-best thing.”

MITCHELL LIU , cofounder of SLIVER.tv, Theta Labs, and Tapjoy

“In Startup Myths and Models, Rizwan Virk debunks common misconceptions about life in Startup Land. Both funny and wise, this book is a worthwhile read for any entrepreneur.”

JEFFREY BUSSGANG , Harvard Business School, general partner at

Flybridge Capital Partners, and author of Mastering the VC Game

“I’ve founded five companies, made angel investments in over one hundred, and served on numerous startup boards—I wish I’d had a book like this before I started!”

MICHAEL DORNBROOK , COO of Harmonix (makers of Guitar Hero), member of

Common Angels, and VP of marketing at InfoCom (makers of Zork)

“Startup Myths and Models is one of the best textbooks for founders who are going through accelerators (and, of course, for those who aren’t).”

PAT RILEY , CEO of GAN (Global Accelerator Network)

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