Why fail if you can succeed? Building a thriving high-tech startup company is easier than you think. Founders who build high-tech startup companies dream of great success, of fame and big headlines, of an exit worth hundreds of millions of dollars. But the reality is much darker. Only one in ten companies have an exit, and only a handful of those will be a huge exit. And my first company, Rosh Intelligence Systems, was one of the nine that failed. And here is me in my late twenties, standing in front of the office.
Rosh developed an advanced AI system. Back then, it was called an expert system. Sales grew nicely quarter after quarter, and so did our expenses, and we lost money every single quarter. That forced us to keep raising money. We raised eleven million dollars in four rounds of financing, until it became practically impossible to raise more money. And we ran out of money and the company shut down. After seven years of hard work and sleepless nights, the company collapsed. Let me share with you, failure feels horrible and humiliating. Took me six months to gain enough confidence to start another company, CardScan. Rosh failed because it ran out of money, and the first lesson I learned the hard way was to bring the company to profitability as quickly as possible. It became profitable within three years and started generating real money thereafter. Using that money, we spun off another company, ZoomInfo, which also became profitable in three years and generated excess cash, which we used to spin off a third company, BizO. Successful companies attract buyers, and we sold CardScan in two thousand and six. BizO was acquired in two thousand and fourteen by LinkedIn. And ZoomInfo is now a public company valued about three and a half billion dollars. The power of being profitable and of generating cash. Being a scientist and an engineer, I started thinking about and researching why nine out of ten companies fails.
Venture capital firms see hundreds of startup companies every year and invest in just a handful, maybe one or two percent of the top talents. And then over time, they invest tens of millions of dollars in them. These teams are the top of the top and well-funded. And then nine out of ten fail. Why? It makes no sense. If a real estate developer would build ten buildings and nine out of them collapse, he will not be in business for long. So what’s the difference? The difference between building buildings and building startups is obviously that building buildings is a clear engineering discipline and a tested process for it, but there is none for building startups. And it might make sense to develop an engineering discipline guiding the development of startups. I want to share with you our research and conclusions, which are based on working with dozens of startups on my own personal experience. The first conclusion, not surprisingly, is that building a startup is a complex process involving many domains, from branding to marketing to sales, pricing, packaging, product development, finance, hiring, legal, and many more, which all must play together. We saw that many founding team lack basic knowledge in some of these areas and decided to establish a school for founders called Smartup, where we work with dozens of companies, teaching courses and workshops, and we also run a residency program with dozens of sta- of startups and growing. In this short presentation, I want to share with you just four of the principles guiding the discipline of building startup companies. First principle, not surprising, is to become profitable as quickly as possible. There are only two ways to accomplish this. Either your sales are higher than your expenses or your expenses are lower than your sales. What you really want is to increase your sales as much as possible while keeping your expenses to the minimum. But how you do that? So the first thing you need to understand is that the first thing you do in a company is not product development, it is marketing.
Well, that sound like a totally absurd concept. How can you do marketing before you have a product? Makes no sense, right? So let me take you through a thought experiment like Einstein used to do, and by the way, I’m not an Einstein.Just assume for a moment that you already have the product and you want to start marketing it. There are three questions you probably already ask yourself: Who are your prospects? How do you reach your prospects? And what do you tell them? What benefits do you advertise? And once you answer these questions, you will choose some of these advertising channels and place your ads. But ads are such– so– are just words. Nothing stops you from doing such campaigns before you have a product. You can do that at home. So but if you do that, you gain four critical insights. First, you verify there is demand. Is there any market for your solution? If nobody responded, maybe you should not proceed. Second, you test different messages and different benefits to different audiences to see which ones resonate to which prospects. That defines your core market. Third, now that you know which benefits or features customers want, you can save time and money by developing just those features that your prospects need. And fourth, along the way, you have developed a tried and tested marketing process. And all of that before spending any real money on product development and how do you reduce expenses?
Principle three is don’t build disruptive technology. Use off-the-shelf components. It is much cheaper and easier. But does the work really do that? So Spotify, they did not invent streaming of music, but they got revolutionary licensing deals with major music labels. Same Netflix. They did not invent streaming movies, but they did negotiate creative licensing deals with major movie studios. Uber did not invent taxis, but it convinced us to ride with a total stranger. Amazon did not invent e-commerce, but it did develop superb and efficient operations coupled with ideas like Amazon Prime. So what does that teach us? Basically, it says disruptive business models are far more important and valuable than disruptive technology.
The next principle is don’t be first. Okay, well, I have first mover advantage, and I have pioneers have arrows in their backs. Which one is the right answer? So let’s look at the some of the most successful companies now and in the past. Google did not invent search engines. It was preceded by Lycos, Infoseek, and others. But it, it was much better. Facebook did not invent social networking. It was preceded by Friendster, Classmates, MySpace, and others, but it did develop social media. But let’s go back in time. Let’s look at Ford. Ford was not the first manufacturer. It was preceded by Mercedes-Benz, Cadillac, Peugeot, and many others. But it did invent and develop the production line and a new business models, making cars available to the average American.
Now imagine, what if we can double or triple the number of successful companies? What if instead of one out of ten, we make one out of five succeed, or maybe even one out of three? What impact will that have on the companies, the founders, the investors, and the economy? Just imagine that. Thank you.
