Startups

March 31, 2015

Reflections

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People often ask what advice would you give your former self after starting a company. I always find it interesting that most answers people give to that question are just generic. Without substance and the stories behind those lessons, that advice almost becomes similar to the words of wisdom from a fortune cookie – interesting to hear, and forgotten moments after.

The 70/20/10 Model for Learning and Development taught to me by Ben Brooks states that 70% of what you learn is from your experiences, 20% is from the people around you, and only 10% is from teachings. With that in mind, I thought I would share the experiences of how I learned each lesson and who taught it to me.

Maximize your Chance of Success

When you start a company, there are so many factors going against you. Any experienced entrepreneur who hears a new idea immediately will think of all of the things that can possibly go wrong, and not necessarily the promise and excitement that you have if everything goes just right. Every idea has executional risk, from building product, acquiring customers, generating profit and scaling an organization. And of course let’s not forget there are almost always existing players in the market that are more mature, with more capital and have more experience than you.

James Currier of Ooga Labs once told me that you have so many factors going against you, in order to be successful as a first time entrepreneur, always maximize your chance of success. He said one of the biggest losses in Silicon Valley is great people working on ideas that are unlikely to succeed. Pick an idea that you can conquer from the beginning and remember, it’s how you grow your idea and evolve it that makes it special.

TouchOfModern is the fourth company I have attempted to build, and the only one to survive past the year mark. The other three companies: Skyara, RAVN and RAVN Events all died. One thing that changed with TouchOfModern is that we added a fourth co-founder to the founding team. Usually, another founder means more dilution, more discussions about decisions and more drama. Every investor will tell you that it is rare for a company to have that many founders, and even more rare for them to all be at the company today.

However I will tell you that our fourth co-founder helped round out the skills in the founding team. He provided that extra hand when things got chaotic, and added a unique perspective in how to re-think the industry we were playing in. I’m a believer that in order to maximize your chance of success, your founding team should have all of the skills needed or at least the ability to learn the skills needed to build the entire business. I know that TouchOfModern would not be the company that it is today had we not added that fourth co-founder.

Valuation Doesn’t Matter

Almost all startups are binary businesses: it is either a 1 or a 0, where success or failure are really the only outcomes you want. If you believe that, then optimizing your valuation is really one of your lowest priorities. At the end of the day if your company is successful, you will likely never notice that extra 1% equity difference. If you do notice that 1%, then you probably didn’t build a successful business.

Jordan Kretchmer of Livefyre taught me that your valuation doesn’t matter. No one remembers your valuation. What people remember is whether or not you built something that mattered. Take a fair valuation with a clean term sheet, with an investor that you trust and can learn from, and just build a business.

Our Series A financing took over 6 months to close the round. We had exceptional metrics with incredible traction and a solid formula for how to scale, but no one would believe that we could compete in such a crowded space with competitors so dominant and so well funded. As a result, for our Series A we took a super low valuation with a massive dilution. The valuation was lower than any company with our scale and metrics, but we were burning cash and defending ourselves from a lawsuit, so we took the round to survive.

Two years later, TouchOfModern has grown to 100 employees, operates at break even with a 10% monthly growth rate, and is on track to turn $100 million in sales this year. If we hadn’t taken that financing round, if we hadn’t taken that dilution, the company would have dissolved just like so many other startups in Silicon Valley. And you know what, if the company had dissolved, I wouldn’t be standing here today. You have no idea how much I own in my company and you probably don’t care; what you do care about is how we built the company and how it succeeded where so many others failed. Your priority should be focused on building a business and building your reputation.

Respect your Competitors.

The most common thing I see in companies is that simple idea that they think their competitors suck. People think that their idea is unique and their plan to execute has never been tried before. In reality, most ideas are not unique. Almost everything has been done before, you just don’t know it yet.

A lesson I learned from Sam Walton through his autobiography Made in America is that you should always respect your competitors and you should ingrain that within your culture. While they may be doing 10 things wrong, they are probably doing at least 1 thing right. And if you take that 1 thing from each of your competitors and incorporate it into your idea, you will have a stronger business than any other company in the industry.

When we first started we thought we were better than our competitors. With Skyara, we had the first mover advantage and we had PR momentum behind us. Yet when it came down to it, we had no idea how we were going to build either side of the marketplace and it failed. With RAVN, we thought building a mass curated activities database from scratch would give us an edge against our competitors. Yet when we launched, turns out no one really cared about what we were offering in the first place and it failed. A pivot into RAVN Events showed promise with high repeat visitors and slow organic growth. But when we thought about the space we were playing in and the business that might be, we gave up. Our competitors at the time such as Skillshare, Peek and Sosh all survived in the industry we gave up on, with similar ideas that we failed on. At the time, we thought our strategy and ideas for execution were better than theirs and simply ignored what they were doing, but look who is still standing in the space.

TouchOfModern was our first company where we took lessons from the companies that came before us. We studied all of the competitors in the market to understand what gave them their edge, what was unique vs. what elements could be adapted. Every element of TouchOfModern was methodically planned, from our business model and sale mechanics to our demographic to how we merchandise and how we operate. Our business model is inspired by Fab, focused on the element of discovery of up and coming brands. Our sale mechanics are inspired by Vente Privee, the original pioneer of the flash sale mechanic. Our demographic is inspired by Gilt, with a sense of exclusivity and style. Our merchandising is inspired by Walmart, with the idea of always testing and experimenting with new products and categories. Our operations are inspired by Zulily, an example of discipline and efficiency and knowing how to stretch a dollar.

2 to Hire, 1 to Fire

Hiring is your most important responsibility as a founder. With hiring, you set the culture that you want in your team and what important qualities you want represented. After you raise funding, people always say to hire fast and fire fast. But in reality, things are moving so quickly that firing fast never really happens, no matter how well intentioned you may want to be.

Sujata Gosalia of Oliver Wyman taught me the concept of two to hire, one to fire. In theory, hires should require the sign off of at least two founders, but only one founder is needed to fire someone. In practice, she taught me the idea that it should be more difficult to add someone to the team than it is to remove someone from the company.

Why is this important? Poor performers are easy to spot. It may take a month or two, but after some time has passed, you can definitely tell from a performance level who is not keeping pace with the rest of the team. Cultural mis-hires are without a doubt the most difficult thing in an organization to spot. They can go undetected for months, and it is even harder to remove them once you find them because you can’t necessarily highlight a performance issue of why they should be terminated. One mis-hire we made at a Director level almost caused half our team to quit. Our entire mid-level management layer was too afraid to tell us what was going on from their perspective, and it wasn’t until they came to us as a last ditch effort that we finally had a clue and could fix it. Cultural mis-hires are a plague to an organization; they can create a toxic environment that inevitably creates cultural conflicts, internal politics and drama. These are the things that keep me up at night, and what drags an organization down over time.

Removing cultural mis-hires is a unique responsibility that falls exclusively to the founding team. As a founder, your interests are aligned 100% with the success of the company; you are not biased by internal politics like other executives. It is your responsibility to determine when someone is not representing the company’s best interests, and remove them immediately.

Build an Independent Board

The fallacy of every first time founder is that they think they can maintain control of the Board of Directors. In the first round of financing, typically you will negotiate to have two founders for one investor. In your second round, you might have two founders for two investors. But by your third round, there are almost always more investors than founders. But actually if you go down this path, you pretty much lost control at the beginning.

Scott Weiss from Andreesen Horowitz taught me that for every investor that sits on your board, you should have a CEO on your board as well. For a first time founder, give up on the idea of trying to maintain control of your board, and aim to build an independent Board of Directors.

This is the one piece of advice that I wish I had known earlier, because for us, this is something that is too late to change.

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