Burn the Business Plan

by Carl J Schramm

  Keep Your Vision Flexible

  You can control risk by making sure that your company remains open to opportunity in its earliest days. There is an old Southern expression, a shorthand that describes almost any idea that doesn’t make sense or won’t work, “That dog don’t hunt.” Making reference to pointers and retrievers, it’s an apt way to think about startups that can’t see opportunity in front of them. Remembering that every startup is really created to search for scale opportunity, you should operate with sufficient flexibility so that you are open to considering other ideas as you work on your original concept.

  It is almost impossible to find a company that succeeded by making and marketing an unchanged version of its entrepreneur’s original idea. New companies, like their new products, do not spring from the head of Zeus, perfectly formed. What a quarter of the world’s population knows to be Facebook was not Mark Zuckerberg’s initial vision of his company. “theFacebook,” as it was known in its earliest life, started as a restricted Internet community to help students at Harvard and a few other colleges meet and date. Zuckerberg’s pursuit of growth led him to see the ability of his platform to let anyone self-define a community within which they could share events in their lives. In short order, he realized that his company was reshaping the whole idea of communicating, and began to add feature after feature to make the platform an experience that would meet those needs. Once Facebook was supporting hundreds of millions of users worldwide, he redesigned the company as an advertising platform that is able to target individuals based on the topics that they follow.

  Many of today’s best-known tech companies began with completely different futures in mind. YouTube started as a website for people looking for dates; they could post videos and relate a little about themselves. When that formula wasn’t working, its founders, Chad Hurley, Steve Chen, and Jawed Karim, decided that a wider audience might share videos of anything and everything. Flickr began as a massively multiplayer online game, one feature of which, Game Neverending, permitted players to share pictures. Its popularity led to photo-sharing outside the game. Groupon, which provides great deals if a sufficient number of bidders materializes, started as a way to get users to support social causes. If enough donors expressed interest, The Point, its previous name, would gather donations to fund it.

  Working with a too tightly focused view of your product may prohibit you from seeing larger opportunities. Meals to Heal started with one idea, but the entrepreneur, learning from her evolving experiences, including being frustrated by a market that just couldn’t grow, discovered that her new company could pursue more promising products.

  Recall Michael Levin’s inability to morph his company to exploit the real opportunity that he had spotted—because his investors insisted that he follow the original plan that was not producing any revenue. When a survival opportunity emerged—a “mitigation opportunity” in the parlance of insurance—of shifting from steel trading to selling supply chain software, his investors resisted the chance to pivot to a new future.

  Changing focus early to exploit a better idea often is the best way to mitigate the risk of failing. This is yet another reason not to have investors involved with your company until you have found a scale opportunity to exploit. If you have no choice but to bring on investors, minimizing their control can be very difficult.

  Avoid Stampedes

  Many startups fail because too many would-be entrepreneurs suddenly seize upon the same product or service. Without a truly original idea, they are drawn to what seem explosive new opportunities, hot markets triggered by shifting trends in technology, the appearance of new business models, or the changing focus of investors and politicians. A decade ago, for example, discoveries relating to lithium-ion electrodes caused a stampede of startups making batteries. Similarly, thousands of companies were created to exploit drone technology. In the hypercompetitive markets that ensued, many failed.

  A new business model also can set off a rush of emulators. In 2009, when Angry Birds showed that games for phone apps could be hugely profitable, a new industry grew up overnight. It is estimated that now more than three hundred thousand new game apps appear every year. Waves of startups in the same market space are common. All of a sudden companies selling bedding, pillows, monthly deliveries of cosmetics, bacon and beer, or discounted hotel rooms seem to appear all competing for what seems to be new customer demand.

  Many aspiring entrepreneurs look to signals that they believe indicate shifts in investor interest. If it appears that investors are supporting startups in a new market segment, many aspiring entrepreneurs hurry to enter the space. A few years ago, a revolution in primary healthcare appeared to be underway. Venture investors, some of whom were not knowledgeable the healthcare sector, began to favor healthcare startups. One, Theranos, which had invented on-the-spot blood-testing equipment that could be employed in walk-in clinics, including in drug stores, gathered more than $700 million in backing. The concept was revolutionary, particularly in a medical world where blood testing is clunky and expensive, so its appeal was understandable. The problem was that, amidst the love affair with the idea, the testing equipment didn’t produce accurate results. Even as Theranos melted down, investors continue to search for unicorns in healthcare.4

  Changing government policy often generates entrepreneurial interest in new markets. The healthcare market seemed like a great place for startups when Obamacare became law. With its focus on novel ways of insuring people, its commitment to prevention, and the mandate to collect and employ patient data in pursuit of better health outcomes, many startups were formed. In the uncertain future of the Affordable Care Act, the future for these companies is quite suddenly clouded. Without significant government subsidies, the search for new patient care methodologies is uncertain.

  Similar dramas have played out in the past. Federal initiatives aimed at reducing carbon consumptions were accompanied by federal grants and loans intended to induce entrepreneurs to start new companies in the space. Hundreds of companies were formed to advance state-of-the-art alternative energy production and use. Many appeared to flourish as long as government was stimulating demand by subsidizing power companies to buy wind turbines and solar panels. When government support ended, companies like battery maker A123, Abound Solar, which made thin-film solar panels, and Beacon Power, which built energy storing flywheels, failed. Of course, the catastrophic collapse of Solyndra, a company mass producing cylindrical solar panels, became a poster child for the subsidy problem.

  There is little in the way of mitigating the risks that a startup faces in the midst of a stampede in pursuit of the same goal. Whether entrepreneurs are enraptured by a new technology, a novel business model, changing investor interests, or government incentives, chasing market trends, even ones initiated with billions of federal dollars, can be a dangerous pursuit. The rush of talent and money makes competing more difficult. Peter Thiel, a founder of PayPal and the first major investor in Facebook, warns that, “Any fast-emerging industry can become so noisy that an innovation with real promise can’t break through.”

  Protect Your Idea by Growing It

  Investors often want startups to describe the “barriers to entry” that a new company can claim. They want to know how difficult it will be for others to copy your great idea either while in development or, even more important, once it hits the market. What mechanisms or barriers will make it expensive, time-consuming, or otherwise too difficult for copycats to swoop in and grab the fruits of your labor?

  Historically, patents have been viewed as the best protection. Once your startup’s intellectual property has been recognized by the government, no one else is entitled to use it without paying you for its use, and you’re in the position to refuse to sell and thus maintain your exclusive rights.

  The presumed strength of patent protection in the United States has been gradually eroding in the face of multiple challenges, including from foreign competitors whose home jurisdictions may not rec
ognize U.S. patent validity. For a startup, protecting and defending against patent infringement can involve expensive litigation that can drag on for years, a kiss of death for a lean startup and a system that now operates in favor of large companies that can afford teams of expensive lawyers. Is there a better way to mitigate the risk of having your idea stolen?

  Increasingly the answer lies in developing your idea very carefully, testing markets as quietly as possible, and working through your startup’s production and distribution mechanisms in anticipation of an all-in start, one that makes clear your intent to own the market that your innovation is targeting. Hamdi Ulukaya, the founder of Greek-style yogurt company Chobani, used this strategy to protect his idea. A Turkish immigrant whose family had settled in rural upstate New York, his first business was making feta cheese, a product that he concluded had a limited market and would not support his hopes of building a big company.

  After studying the growing interest in healthy, lower-fat foods, Ulukaya decided to focus on yogurt. While yogurt had been introduced to the American diet in the 1960s and had been widely accepted in the market, there was, in Ulukaya’s view, an opening for a better product—one that was lower in fat and offered the distinctive hook of being significantly higher in protein, in addition to providing a more substantial texture. In 2005, he bought a huge dairy plant in South Edmeston, New York, that had been abandoned by Kraft. For five hundred forty days and nights, he and a small team worked on perfecting the recipe for his product and retooling the factory to make nothing but Chobani Greek yogurt.

  The new yogurt entered the market in 2007. Six years later, it was the largest producer of Greek yogurt in the country. Patent protection would not have been possible for Ulukaya, and he knew it; his recipe for yogurt, while unique, could be copied. Instead, Ulukaya decided he had to move fast and at a scale to become a major player so that other dairy producers would be caught off guard. That way, he could fend off competitors until he was firmly established in the market as the leading Greek yogurt.

  Hire a Great Manager

  I hope that someday Professor Bruce German will be known as the scientist who improved the lives of tens of millions of newborns. A nutrition researcher at the University of California, Davis, German had studied mother’s milk for nearly two decades. His breakthrough came in 2012, when he was comparing the microbiology of milk collected from around the world. German discovered that mothers in the developed world, who had routinely taken antibiotics prescribed for infections and colds since they were children, were producing milk that was deficient in several microbes that protect infants from a variety of diseases and conditions, including asthma, food allergies, obesity, Type I diabetes, and atopic ailments. What had piqued German’s curiosity was that many of these conditions, so common in America and much of the Western world, are not found in children in the developing world.

  German and his colleagues devised an ingenious prebiotic, a few drops of which, delivered just once shortly after birth, can help colonize the missing protective microbes in any newborn’s stomach. Much like Franano, German’s attempt to interest a major drug company fell on deaf ears. Companies reasoned that a one-dose drug would hardly pay back the significant development costs, including clinical trials.

  After struggling for several years to successfully organize his startup, German concluded that he didn’t know what was required to become a successful entrepreneur. More important, German realized that he was much happier working on basic research than working on a business plan; yet, he was passionate about getting a company going to make his formula and to undertake the arduous process of FDA approval. He decided to hire a professional CEO for the new firm, someone who had experience getting new compounds approved by the FDA. Within six months, German’s new company had raised $10 million in venture funding and was undertaking the necessary research. Some day, Evolve Biosystem’s prebiotic may be every baby’s first meal. Consider the amount of human morbidity and mortality, and the enormous costs to society of the treatments for these life-long conditions. That situation may someday be diminished or eliminated because German was smart enough to know what he wasn’t smart about.

  CHAPTER 9

  Don’t Waste Time Doing Things That Don’t Work

  We all believe things that aren’t true, deluding ourselves as to cause-and-effect relationships or harboring suspicions that just can’t be. Championship athletes provide many examples. Michael Jordan wore a pair of lucky shorts, a carryover from his playing days at the University of North Carolina, under his Chicago Bulls uniform in every game of his NBA career. Before every home game, the famous Boston Red Sox third baseman Wade Boggs ate chicken, took exactly 150 ground balls during infield practice, and ran wind sprints at precisely 7:17 P.M. Turk Wendell, a relief pitcher for the Mets when they won the 2000 National League pennant, was known as “the most superstitious man in baseball.” He chewed four pieces of licorice when pitching, brushed his teeth after every inning, and never stepped on a foul line. Female athletes are also susceptible to superstition: Tennis superstar Serena Williams always kept her lucky shower slippers close by on the court.

  Athletes aren’t alone in believing in fallacious causality. Richard Feynman, the brilliant and witty Nobel laureate in physics, gave the 1974 graduation speech at Caltech, which he titled, “Learning How Not to Fool Yourself.” Feynman cautioned young scientists to steer clear of what he called “pseudoscience,” which today we call “junk science.” He pointed to all kinds of problems experts claim that they can solve, including how to reduce crime and cure mental illness, without offering any evidence that what they prescribe actually works.

  These and many other theories that make broad claims have no effect on the phenomenon that they are trying to change. The needles just don’t move. In fact, the gap between what we think we know and what we actually know is so big that we are susceptible to mistaking coincidence for causality.

  In his speech, Feynman told a story about the people on a remote island in the Pacific who were as removed from twentieth-century technology as could be imagined. American forces operated an airbase on the island for a brief period during World War II. For a few months airplanes came and went, bringing supplies to the troops, who shared their food, beer, and other goods with the native population. When the war ended, the soldiers left, the airbase closed, and the supplies stopped coming.

  Hoping the deities who had dropped the supplies would return, the tribe began to mimic the behavior of the departed troops. They maintained the airstrips and pretended to drive the abandoned jeeps. They made “headphones” out of coconuts, which they wore while sitting in the decaying control tower. They drilled in formation, wielding bamboo sticks as if they were rifles. In short, they invented what Feynman referred to as a “cargo cult.” The islanders believed the soldiers’ actions on the ground were the reason that cargo came from the sky.

  Feynman’s advice to his audience of young scientists was that, before they try to sell a proposed theory to others, they must eliminate all other possible explanations. He was warning the graduates not to promulgate findings that they could not substantiate by repeated tests: “When you have put a lot of ideas together to make an elaborate theory, you want to make sure, when explaining what it fits, that those things it fits are not just the things that gave you the idea for the theory.”1

  Feynman anticipated the problem with the implicit theory that currently guides many aspiring entrepreneurs. Many would-be entrepreneurs today wear a hoodie as a kind of talisman, in the hope that the gods of entrepreneurship will inspire them, as they did Mark Zuckerberg. They follow the steps they believe will result in a successful startup, including studying entrepreneurship in college.

  Engineering or Entrepreneurship?

  As a high school senior, Denny Foster applied to college to study engineering, following in the footsteps of his father and brothers. He was smart, energetic, disciplined, a talented mechanic, and winner of his high school’s robotics contest.
If anyone was cut out to be an engineer, it was Foster.

  After his second year, Foster decided to change majors and study entrepreneurship. He sought me out shortly before he began his junior year. Presuming that he was delivering me a compliment by emulating my career path, he proudly reported that he was leaving engineering behind and would spend the balance of his college career preparing to become an entrepreneur.

  Before commenting, I asked if he had an idea begging to be turned into a company. He replied, not unexpectedly, that his new plan involved spending a fifth year on campus to work in the college’s business incubator, where he would develop an idea around which to build a startup. He was surprised when I told him that he should continue in engineering.