How to Create the Next Facebook: Seeing Your Startup Through, From Idea to IPO Read online

  I could go on for several pages documenting all the dud presentations I’ve seen and heard, but let’s focus on the positive, shall we? Let’s look at one of the exchanges I’ve had that stood out. In September 2007, I had a phone interview with Mint.com’s founder, Aaron Patzer. The company, as most people know by now, allows users to manage their finances better by importing their financial information from banks and credit cards into one central database. Mint.com then provides helpful reports, charts, and financial tips and suggestions to its users.

  Although the product itself was intriguing—and a possible disruption to Intuit’s Quicken franchise—this was not what made the call memorable. Instead, it was Patzer’s pure enthusiasm for what he had created. He talked about how Quicken didn’t work for him and how he wanted a product that could help solve his own problems with managing his finances. Simply put, Patzer had made it his mission to make it easier for people to manage their finances.

  During a later demonstration of the product, Patzer showed me his personal Mint.com account. His enthusiastic presentation revealed that he had a classic case of “eating his own dog food”—that is, he had become a passionate user of his own product. What’s more, by showing me that he, himself, used Mint.com to manage his personal finances, Patzer was making another statement to bolster his product: It was secure. Security is a big-time concern for users, but Patzer talked about some of the Herculean efforts he had made to ensure that Mint.com would keep its users’ personal financial information safe. All in all, it was an impressive demonstration and I was not surprised that Mint.com became an instant hit. Fearing the disruption, Intuit shelled out $170 million to buy Mint.com in September 2009.

  Although passion is not a prerequisite for success—I personally think nothing really is—passion is high on my list of factors that ultimately help good companies thrive. Passion is infectious. It fosters enthusiasm among the employees, the customers, and the media. It’s a powerful force. Perhaps most important, passion helps founders maintain their drive to work hard and succeed. Wouldn’t you rather spend your time working on something you love? No wonder top entrepreneurs often say they would work for free.

  There are few entrepreneurs who are more passionate about what they do than Rick Alden, who took up skiing at a young age in 1970 and then got hooked on snowboarding in 1985. Wanting to bolster the sport, Alden formed National Snowboard, a marketing company that specialized in snowboarding events. Ultimately, National Snowboard’s work became a key factor in making the sport a huge success. After he sold the company in the mid 1990s, Alden then started Device Manufacturing, which focused on developing snowboard boots and bindings. He sold that company as well. Then, in 2003, Alden got the idea for his next venture, and it would be his breakout hit. At the time, he was listening to his iPod while on a chairlift in Park City, Utah, and he wondered: Why aren’t there premium headphones for this device? Again, Alden wasted little time and started a company called Skullcandy. In the company’s early days, it was not easy to get traction in the market, but he was persistent. It was his passion, after all! Over time, Skullcandy caught on and became a top lifestyle brand. By 2010, sales reached $35.7 million; a year later, the company went public. Cool, huh?

  Let’s look at another example. When Zuckerberg started Facebook, it was not his full-time gig. He was a student at Harvard and had his hands full with a number of other projects, one of which was Wirehog, an app that enabled users to share files of all types, with a focus on music files, and Zuckerberg found it to be more interesting than Facebook. Even as Facebook began to take off, Zuckerberg still thought Wirehog would be his breakout idea. Eventually, though, he realized it was a mistake and abandoned the project. Wirehog never caught on, and this was probably for the best, because Zuckerberg was concerned that entertainment companies might sue him and his company for copyright infringement. In addition to Facebook and Wirehog, Zuckerberg created a tool called Synapse, which played music based on user’s interests and which caught the eye of companies like Microsoft. He also built some other highly popular apps, all of which allowed users to share with one another. CourseMatch, for example, made it easy to see who was taking what courses in a given semester, whereas Facemesh showed pictures of two students of the same gender side by side and allowed viewers to vote on who was the more attractive of the two. Even though not all of his programs and applications proved to be enduring, the fact is that all of Zuckerberg’s entrepreneurial activities revolved around his deep passion for coding and his special interest in creating apps that allowed for sharing with other people. The software apps he developed were tools that allowed him to pursue his goal of connecting and sharing with others.

  Be Committed to What You Do

  Changing the world is not a part-time gig. It needs to be an obsession. When Jeff Bezos saw an opportunity to create an e-commerce company that sells books, he quit his high-paying job as a hedge fund manager, took his family across the country to Seattle, and along the way created the business plan for Amazon.com. Bezos (rightly) thought the Internet was a megatrend. Zuckerberg had a similar experience. He and several of his Harvard pals left school during the summer of 2004 and rented a house in Palo Alto to build Facebook. There was not much of a plan but he wanted to devote his full attention to the website. By the end of the year, he decided to drop out of college.

  These stories are fairly common. Consider Steve Streit, who lost his job in 1999 as a disc jockey. At the time, he had six kids and no job lined up. But he was passionate about his idea for a prepaid debit card. He put all his savings into creating a company, called Green Dot, to realize his dream. He eventually raised venture capital, struck a major distribution agreement with Walmart and took the company public in 2010 at a billion dollar valuation.

  An entrepreneur needs to be highly committed and focused. Distractions can be fatal. True, there are some exceptions. Steve Jobs was able to run Apple and Pixar at the same time. But as we all know, people like Steve Jobs do not come around often.

  Aim High

  As an up-and-coming entrepreneur, you need to care more about your mission than you do about anything else—including your company. Marc Bennioff, the founder of Salesforce.com, certainly does. I had a chance to talk to Bennioff during the early days when he founded his company, and I watched as its growth skyrocketed. For the most part, Salesforce.com created software for customer relationship management (CRM). CRM software is not very exciting to most people, but Bennioff found a unique way to deliver it to companies: He pioneered the cloud computing model, which meant that companies could access Bennioff’s CRM software via the Internet. This approach to distribution was disruptive, because traditionally software was installed on corporate networks and required lots of hardware and servers—not to mention high-paid consultants. Bennioff was convinced that the cloud would be much better. When I spoke with Bennioff, he rarely mentioned CRM. Instead, he railed against traditional software. To me, this was a much more interesting message than hearing about the features of a CRM suite.

  As I got to know others at Salesforce.com, I quickly realized that they also deeply understood the company’s message about the power of cloud-computing and believed in it. There was never any confusion regarding this when I was talking to someone from Salesforce.com. Over time, Salesforce.com became the symbol of cloud computing. When businesses decided they wanted to adopt cloud-based solutions, the first place they turned was Salesforce.com. This brand advantage has allowed Salesforce.com to expand its platform to other software categories. As of 2012, Salesforce.com has a market value of more than $20 billion.

  Think Big

  Many entrepreneurs want lifestyle businesses, which are not focused on strong growth. It is really about having an operation that provides enough profits to allow much more time for other interests. Who wouldn’t want to run a web site from, say, Maui, and spend a few hours a day working? Some people actually do this, and the endeavor can be lucrative, but these types of businesses do not generat
e much wealth. In this book, I look at those businesses that create wealth that is life changing. This means that there is often little time for anything but the business, so it helps to be passionate about the business in the first place.

  Building a megabusiness may seem like a huge risk, but there are certainly some benefits from doing so. For example, large companies have a much easier time recruiting talent. Who doesn’t want to work for a company that has a big opportunity ahead of it? In addition, it is much easier to secure venture capital if you are seeking funding to create a large company. Few venture capitalists (VCs) even consider supporting a company that is gunning for a market opportunity less than $1 billion. For them, investing in smaller companies is just not worth the risk.

  Despite this basic reality, I run into a lot of entrepreneurs who do not realize the importance of size and who try constantly to nab introductions to VCs to no avail. I do my best to steer them in the right direction and mention that they might need to rethink their goals—that is, to think on a grand scale. For the most part, thinking big is not easy for entrepreneurs, and as a result, their efforts to raise venture capital are often quixotic.

  Now, thinking big does not mean you become a success automatically, but doing so will likely give you some downside protection. How? Let’s consider an example: Suppose you start a company that is focused on a market that has a $2 billion potential. After several years of hard work, you reach revenues of $50 million. Although your company is nowhere near to becoming the next Facebook, you have still achieved a great outcome and your company certainly has value! Now let’s say you decide to sell it. Even if you do not make a substantial amount from this deal, because your VCs will probably get the lion’s share from the sale, you are still considered “bankable.” You can take your lessons learned from this experience and then roll them over into your next venture. You probably have a few million bucks in the bank, as well, to start your next business.

  This is the process that Mark Pincus, one of the original investors in Facebook, went through with several ho-hum startups. However, by 2007, he had leveraged his experience and network to create Zynga. By late 2011, he had raised $1 billion in an IPO and was put on the Forbes Billionaires List.

  Someone else who thinks big is Elon Musk, who has affected various industries and millions of people across the world. His entrepreneurial journey has been far from easy—and his ventures have endured several near-death experiences—but he has learned from every step along the way. Musk started coding when he was 10 years old. He sold his first program, a game about space, 2 years later for $500. Then, in the mid 1990s, Musk started an Internet content publisher, called Zip2, which he sold for $300 million. His next venture was X.com, which focused on online financial services. To bolster growth, he merged the company with rival Confinity, which was cofounded by Max Levchin and Peter Thiel (the latter was an original investor in Facebook). The new company became known as PayPal, but it had a high burn rate and nearly ran out of cash. Thiel managed to raise some much-needed capital in April 2000. The company went public and was sold for $1.5 billion to eBay in late 2002.

  Although Musk could have retired easily after the sale of PayPal, he was still restless to change the world, so he invested much of his net worth in several megaconcepts. One was Tesla Motors, which develops electric cars. However, during the financial crisis of 2008, the company very nearly went bankrupt, endangering Musk’s finances in the process. Somehow, though, Musk was able to raise enough capital to save the company, and in June 2010, he took Tesla Motors public in the first IPO of a U.S. automaker since Ford went public in the mid 1950s.

  Meanwhile, at the same time that Musk was building Tesla, he was also creating SpaceX, which develops space launch vehicles. He used innovative engineering techniques to accelerate the manufacturing process and snagged a $1.6 billion contract from the National Aeronautics and Space Administration. In May 2012, SpaceX launched and delivered cargo successfully to the international space station. The only others to do so include the governments of the United States, Russia, and China. Oh, and Musk is only 40 years old.

  Be Prepared to Fail

  It’s a gruesome fact that most startups fail. They go absolutely nowhere. In light of this reality, it is amazing that entrepreneurs even start companies. Something must be wrong with them, right? Well, maybe entrepreneurs are wired differently. Although most people are risk averse, entrepreneurs love risk. They thrive on it. More important, to the most successful entrepreneurs, failure is not a stopping point. Instead, it represents yet another learning experience along the path to eventual success.

  Even Zuckerberg has had his share of failures. Did you know that Facebook tried to launch a social network for the workplace? It was a disaster. So was Zuckerberg’s early mobile product, which used SMS (short message service) messaging to access Facebook. It was so complicated that people needed a chart to understand the functions. Then there was Beacon, which was a downright terrible idea. Beacon showed a user’s purchases to his or her friends, which created lots of problems; some people even found out about their birthday and Christmas presents! Beacon was so bad that it tarnished Facebook’s reputation, but Zuckerberg learned from these experiences and became stronger.

  Success is a paradox: If you are not failing, then you are not succeeding. No one is perfect, including history’s standout business leaders like Steve Jobs and Bill Gates. Table 1-2 presents a few examples of people who made mistakes but still came out on top.

  When you experience a failure, keep that experience at the forefront of your mind. Try to learn helpful lessons from it. Failure isn’t fun, but the process can be extremely valuable, which reminds me of a true story. I won’t go into the names of the founders or the companies they created. Those details are not important. Rather, the lessons that were learned in the aftermath of the failure are what’s key.

  Let’s rewind to the start of the Internet boom, in 1994. Two entrepreneurs, Jane and Joe, started their own Internet companies, both of which grew quickly. The market was certainly big enough for several strong players, and the founders were able to raise several rounds of venture capital before taking their respective companies public. By the late 1990s, Jane and Joe were both worth billions. Then, suddenly, the Internet market gave way—and so did the valuations; Jane and Joe were now facing possible bankruptcy. To avoid the collapse of their companies, they raised money at low valuations and had to fire hundreds of people, many of whom were friends. It was an agonizing experience. However, what happened next was crucial. Joe saw the experience as a failure and became risk adverse. Even though his company was beginning to experience growth again, he moved his business along at a slow pace. He tried to avoid any long-term commitments, such as investing in new technologies or hiring people. Joe ultimately sold his company for about $700 million. True, this is a great deal, but it could have been much better.

  You see, Jane did just the opposite. She continued to believe that her opportunity was huge, and she started to get aggressive with her investments. She hired more employees. She even struck several large acquisitions to add new products and customers. It was risky, but Jane’s company’s growth exploded. When Joe was selling his company for $700 million, Jane was selling hers for nearly $7 billion.

  Put It All Together

  The content of blogs like Techcrunch, VentureBeat, and Pandodaily, and the stories about the entrepreneurs in this book may be intimidating to aspiring entrepreneurs. How can you compete? How can you raise the financing? Is your idea good enough? How do you build the right team? Before you get too overwhelmed, it is important to take some deep breaths and think about how other great entrepreneurs got their start. Steve Jobs and Steve Wozniak started Apple in a garage. Mark Zuckerberg started Facebook in a dorm. So, what is it that sets the Jobs, Wozniaks, and Zuckerbergs of the world apart? The answer is this: These founders started small, but they had lots of energy, passion, and focus. They also had little or no business or startup experience. Instead,
they figured things out along the way.

  So think big, but start small. As seen in the chapter, the “big” part is the mission, which should always be the driving force of the company. You should also be exceptionally passionate about it— almost becoming an obsession. Is your mission something you would quit your job for? If not, you probably should keep your job.

  In the next chapter, we’ll get deeper into the process of building your venture. We’ll take a look at making sure you build a solid legal foundation.

  Legal Structure

  A verbal contract isn’t worth the paper it’s written on.

  —Samuel Goldwyn

  Like many smart young software engineers, Mark Zuckerberg did a lot of contract work for an array of clients while he was in college. Often, these gigs were short term in nature, but they tended to generate thousands of dollars for him. In fact, the money actually helped him pay his way through Harvard.

  However, Zuckerberg did not understand the risks of these engagements. What if he developed a product or program that ultimately conflicted with the creation of Facebook? Might he be giving away his valuable intellectual property? As it turned out, the contract work that Zuckerberg undertook as a college student turned out to be a real source of legal problems for him and his young company, and Zuckerberg ended up making some big-time legal mistakes that cost Facebook dearly before he got the help of a qualified attorney.