What drives great entrepreneurs

If any of you read one of my blog posts entitled “Six Things VCs look for in an Investment,” you may remember that the first entry on the list is “An Extraordinary Entrepreneur with Unique Insight.”

I recently watched an outstanding presentation called “How great leaders inspire action” by Simon Sinek (embedded at the bottom of this post). It inspired me to write about my own experiences as an entrepreneur that relate to his message:

I meet with a lot of would-be entrepreneurs and executives that are looking to get into the world of startups. During those meetings I can often detect which people are truly cut out for this world, and those that are really looking to get in with the hopes of making some fast money. For the latter, I always tell a story about a life changing event that happened to me:

My first and second startups were driven because I was doing something that I was truly passionate about. It was what I believed in. (In Simon Sinkek’s terms, I was doing this “because of the Why”.) After I got married, I mistakenly felt a need to make money, and so I looked around for a situation where I could make money quickly. I found a turnaround, which was a bankrupt hardware company (Xionics). I did care about the industry that they were in, but rapidly found that I personally had no passion the hardware business. I hated it, because as the hardware vendor, I was reliant on the software vendors to drive the innovation that could sell the solutions that would drag through our hardware. The problem was that the software vendors were all old school, and not building anything innovative. This became one of the most unhappy times of my life. Eventually I became so unhappy with the situation, that I created an internal startup software project, that we later spun out as a separate company (Watermark Software). I did this so that I could take charge of my own destiny and become the innovator.

I remained a major shareholder and board member in the hardware company, Xionics, and the board hired a great entrepreneurial CEO who developed a new mission for Xionics that he was passionate about. This led to both companies becoming successful. The hardware company went public, and was eventually acquired at a great price. And the software company was acquired for a 5x return within two and half years.

The big lesson I learned was that, in the startup world, if your primary focus is on making money, you usually won’t make money. When you work because you are passionate about your work, I believe you will maximize your chances of making money. Usually it will happen in a way that is totally unexpected. And it will likely happen at a time that is unexpected.

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In my case, my passion in life at that time was building truly great products that would delight customers and change their lives for the better. (Later on, when I became a VC, my passion changed to helping other entrepreneurs.)

Why building a company for an exit usually won’t work

As a VC, I often hear entrepreneurs making pitches where some part of the presentation focuses on how they are going to exit from their companies. I personally find this to be a turn off. I realize that this viewpoint is unusual for a VC, as many VCs see this as an important attribute of a good investment. I am far more interested in finding entrepreneurs that have no thoughts of exit, and who would love to see their company become a leader in its field, and stay with it as it undergoes that journey. Those are the kinds of entrepreneurs that have the ability to be great leaders. Their passion will inspire their employees and drive customer loyalty.

Whenever you see a company being built for an exit, you will see short term decision making. You will find people thinking about how various moves will be perceived by potential acquirers, or what will get the company to an IPO where they can cash out their shares. That leads to short term decisions that are often in conflict with what makes for great companies, which is a maniacal focus on building spectacular products that delight customers.

It is also important to note that if you are hoping to sell your company, you don’t control that process or decision. As is often repeated in the startup world: companies are bought, not sold. i.e. the acquiring company has to make the decision that they want to buy before there can be an acquisition.

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When you talk to the acquiring companies and ask them what they are looking for in businesses that they want to acquire, they will tell you that they are looking for companies that have been built to remain independent. Those are the businesses that have the loyal and dedicated employees that are passionate about what they do. Those are the employees that they want to have on staff.

They will also tell you that they can usually smell companies that have been set up for a quick sale a mile off, and they usually run away from them. Or at best, they will pay a low price to acquire them as they know the employees are tired and not likely to stay and be excited about the next phase of the company’s life after acquisition.

Why great startups are often started in bad recessions

Around the years 1999 and 2000, the startup world was invaded by a range of newcomers that were attracted by the prospect of making a fast buck. They had seen all sorts of dot com companies with crazy business plans go public and get amazing valuations. In my opinion these newcomers were not really true entrepreneurs. They were not motivated by a powerful inner drive and passion to build something wonderful. They were motivated mostly by money. The net result were some of the worst startups we have seen.

When things changed in 2001 and the IPOs vanished, the startup world became a very tough survival environment. The visitors disappeared back to other jobs where they thought they could make more money. However the true entrepreneurs stayed. They battled the harsh funding environment even though they realized the chances of making money were slim. They did this because they were passionate about their ideas. Most had to live on substantial pay cuts. Not surprisingly many of the best startups were started in this kind of environment.

So if you are attracted to the world of startups, ask yourself this question: are you here because you are passionate about what you will be doing? Or are you here because you think this is a great way to make money? If it is the latter, I believe your motivations will have the effect of leading you to disappointment.

The best employees are attracted to a big vision

The other lesson that I learned from my own startup experience was that there were two types of employees: the one type saw a startup as just another job, and put in just the right amount of work. The other type bought into the vision, and dedicated most of their waking hours to finding creative ways to make the vision come true. Clearly the second type were the more valuable even if they had less experience than the first.

It wouldn’t be uncommon to find the first type asking questions about how long would it be before the company exited. But the second type would be far more focused on the vision, and the bigger and bolder the vision, the more interesting and exciting were the types of people that would be attracted to join. To hire this level of individual requires a founder and CEO that are able to convey passion for their mission in a way that is credible with smart people who will question whether it is achievable.

What Simon Sinek’s presentation can teach startups

As soon as you watch the presentation below, it will become immediately clear that startups need to be focus energy on selling the Why, and not the What. You all started your businesses because you were passionate about what your product could do to change the world. Don’t be scared to tell the world what your grand vision for change is about.

For a good example of a company that does this very well, take a look at this video: HubSpot acceptance speech after winning Best Place to Work in Boston 2010. You can see Brian Halligan, HubSpot’s CEO clearly express their grand vision for how they want to change the world, and how that has led to a highly motivated workforce that believes in the mission and loves their work.

Let me not steal from Simon’s message. Instead I strongly encourage you to watch him tell this fascinating story.

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  • Mark Sprague

    Hi David,

    This is a very thoughtful post. When I started NorthernLight.com I was told early on by by a couple professors at MIT that I could never scale the indexing technology to deal with the entire Internet. I dismissed the claims as nonsense and plugged away. When we hired people we sold them on the great problems we were solving, and the impact we could have on the industry. We did a good job as we averaged about 2% turnover a year from 1996 to 2000 – an unheard of retention rate for employees in those days. For us it turned out to be about good vision and hiring…very few tourist got through the door.

    Mark

  • http://www.forentrepreneurs.com David Skok

    Nice to hear another person's experiences on this topic. Thanks Mark.

  • http://twitter.com/thyaga Thyaga

    “I often hear entrepreneurs making pitches where some part of the presentation focuses on how they are going to exit from their companies.” – Why ?
    The problem is in the business/revenue model. Most technology start-up ideas can't be realized without VC investments. Hence entrepreneurs are trying to sell business plan to investors and most VCs are looking to maximize their returns – higher multiples, shorter duration and higher ownership.

  • http://twitter.com/bhalligan Brian Halligan

    There is a good story about hiring employees I heard once…

    A man is walking by a work site and sees two men on their knees working away laying bricks. He asks the first man: “What are you doing?” The man responds: “I'm building the world's most beautiful cathedral.” He asks the second man the same question and he responds: “I'm laying bricks so I can feed my family.”

    Where possible, entrepreneurs should look to hire/inspire “cathedral builders” not “brick layers.”

  • antonio_faillace

    David, thanks for this great post. Your views touch on the core of what builds great companies. Entrepreneurs that are driven by a sense of purpose rather money.

    Winning ventures are tribes motivated by a 'cause' rather than by money. It’s about the purpose not the wallet. I always ask my teams that if money was not in the equation would they contribute to the venture just for the sense of its purpose, its thesis for existing…the 'why'…Would they run a 5K race supporting the 'cause' of the company….how about your customers? investors? partners? running the race too. One good question that every entrepreneur should ask is” Would I do this venture for the rest of my life if I had too?”

    I also suggest readers to take a look at the work of Dr. Raj Sisodia founder of the Conscious Capitalism Institute. He has proven via his research that companies that have this sense of purpose/cause, a grand vision, outperform other companies in a ratio of 9:1 in financial value creation. http://www.cc-institute.com/cci/. My venture AuthorsGlobe is a founding member of the Conscious Entrepreneur Collaborative a new group taking these principles to start-ups. Also I suggest taking a look at the book ‘The Monk & the Riddle’ by Komisar which outlines the difference a compelling vision makes over money.
    http://www.amazon.com/Monk-Riddle-Education-Sil

    When launching AuthorsGlobe out of MIT last year I was very clear I wanted to build the venture based on this principles. The grand vision from the start is very straight forward: “Education without Limits: Everyone should have easy access to high quality education in virtual live format from the world's best thought leaders.” So I decided to put a stake on the ground by writing a manifesto for the venture http://authorsglobe.com/?subseccion=about_us. I interviewed last Friday this Harvard Grad that want to join our team and I asked her. “So why do you want to join our team?” and she responded “I just love the vision of the venture..this is the type of 'cause' I will wake up in the morning happy for”

    Brian & Dharmesh, at Hubspot are the best example of creating a company with a 'cause'. I would say they are the role models in the Boston area. For those entrepreneurs that have not yet visited Hubspot offices I suggest you come to their open house every Friday at 4pm when they do Hubspot TV, a fun show with free beer afterwards. After a tough week building your business this is like 'therapy' for entrepreneurs. And their profits? Well they ensue from there 'cause' ..they have already more than 2500+ customers!

    David, thanks for reminding us again of what is REALLY IMPORTANT !

  • Nathaniel Weiss

    Hey David. Great post as always. I've started two companies, and have thought a lot about the question of doing it based on money or passion. I think the passion is what lights the fuse to any entrepreneurial endeavor, and is a near-cousin to the eccentricity/insanity/hardheadedness that breaks through the walls that others would never approach. That said, I think there is a magic moment/choice in building a company that comes right after the fuse is lit: what market to tackle and how big it is. As someone once said: large markets cover up a lot of sins. Building a company in a small market is very very hard – passion notwithstanding. So – in short – I think there must be some element / compass in starting a company that checks one's passion, and pragmatically points you to the largest market opportunity.

  • http://www.forentrepreneurs.com David Skok

    Nathaniel, agreed.

    This post doesn't tackle the issue that there are many very passionate would-be entrepreneurs who haven't found a good enough market, product idea, funding, etc.

    Best, David

  • http://faramarzhashemi.com faramarz

    Great read! Bookmarked and subscribed :)

    FYI reason why I subscribed to your feed is to get normal text in my email. the low contrast of your websites text makes it very hard to read quickly given the lightness of the grey.

  • http://faramarzhashemi.com faramarz

    Great read! Bookmarked and subscribed :)

    FYI reason why I subscribed to your feed is to get normal text in my email. the low contrast of your websites text makes it very hard to read quickly given the lightness of the grey.

  • Chris

    I'm on board with what Simon's saying but he makes some pretty large generalizations to prove his point, e.g. comparing his golden circle to the brain.

    Good talk but I just think it could have been delivered more effectively a little bit less melodramatically. The drama kind of distracted me from the overall point.

  • nathanbeckord

    Hey David– I absolutely agree that the best startups are founded by passionate entrepreneurs with visions of building great companies, and not just for a “fast buck”. I've been in that seat and know it takes real passion to carry you through all the hurdles, setbacks, low points, and just in general to maintain the required intensity level.

    But I strongly disagree with another key point– I think that when it comes to the exit, ALL companies should be “sold, not bought.” Getting bought implies a passive approach– you're a price taker. “Selling” your company means you're generating interest for your company/deal and thus retaining some leverage. Huge, important difference.

    In other words, let's say you've built a great company, and an acquirer is interested in you….as you describe above, “the acquiring company has to make the decision that they want to buy.”

    This is true and great– very exciting, very flattering. But– as startup founder, you are completely at their mercy if you take a passive approach and hope to just be “bought.” The acquirer probably has a corp dev team of professional ex-M&A people. And, their incentives are simple and straightforward: i) buy you; and, ii) buy you for as cheap a price as possible.

    So– when it's time to put your startup in play (either because acquirers are sniffing around, or your investors want out, or the market is hot, etc. etc.) it's time to “sell” it…meaning getting multiple buyers in the mix to retain leverage.

    To me, this distinction is so important…and the “companies are bought” myth often leads to founders (or their investors) ultimately getting screwed. A couple times I've seen startups who get courted by acquirers…wined…dined…totally caught up in the excitement about being approached by a large company….go all the way down the path with no other suitors in play…and then the offer comes and it's 1/10th what they hoped. But they're too deeply in bed and have no other option but to accept it.

    Anyway, it's a good article– just wanted to provide some alternative food for thought on this (as you can tell I'm a little bit passionate about the subject; I've been working on a slide deck on Exit Strategy that I put up on Slideshare: http://www.slideshare.net/VentureArchetypes/sta… would love any feedback, it's a work in progress.

    Nathan Beckord, VentureArchetypes LLC

    P.S.– your post brought back some memories– I too was working in silicon valley circa 1999 and 2000 and vividly remember the influx of “visitors” very well…SF apartment vacancy rates under 0.5%, impossible to get a table at good restaurants, etc. Like the shoeshine boy offering stock tips in 1929, I remember taking a vacation in early 2000 to Peru and meeting a guy who was planning to move to SF to start a startup…had no relevant skills, no game changing ideas…but he'd heard everyone was getting rich. I also remember circa 2002-03 there was a huge waiting list for U-hauls heading OUT of CA!

  • http://www.channeltivity.com Jason D. Jacobs

    Nathan, you make a valid point about the dynamics of the sale of a company. I think what David was saying was that as a startup entrepreneur, the compass (Simon's Why, How and What) by which you guide the companies strategic and tactical decisions should be clear of the magnetic force of a hypothesized acquirer or worse a specific target acquirer.

    It would be like building a product with one target customer driving the requirements versus a market and speculating what that target customer wants based solely on observations and anecdotal evidence. Chances are, you wont end up selling that product to that company and you probably wont have a market for it.

    I also agree that once you are seeing the signs of being in play, there is some selling to do to maximize the outcome and you should bring in the right team to do it.

  • http://www.forentrepreneurs.com David Skok

    Nathan,

    I believe that your comments are really synergistic with the points that I raise in my post, and I don't believe that there is actually any disagreement. We are simply talking about two different things that can and should co-exist. My post addresses the motivation that lead to great entrepreneurs. (Note that I use the word “great” in the sentence.) The points that you raise are really about how to optimize your exit when that time comes, or how to position your company well to ensure that time will come.

    I absolutely agree on two topics here:

    1. As good business development practice, all businesses should be mapping out their eco-system to identify potential partners, potential acquirers, etc. Many times the best acquirers are also companies that would make good partners. It usually makes great sense to spend time creating partnerships with those companies. Many good acquisitions spring from these partnerships where companies have learned to work together and seen the synergy, as well as building trust in the people.

    2. In many startup's lifecycles, there will come a stage where a good acquisition offer would be seen as a good outcome for the founders. At that time I would advise them to start considering a business development strategy to get to know each of the players, and ensure that they are aware of your business, and the potential synergy that could come from working with you. The goal would be to get them to bite, and issue an offer to acquire, without them ever sensing that you wanted to sell the business. Once you have the first bite that is at a reasonable enough level that management would consider an attractive exit, then it makes great sense to follow your advice and do a fully pro-active selling campaign which focuses on bringing other buyers to the table, and creating a bidding war. Without at least two buyers counter bidding, or the serious threat of the company not wanting to sell, pricing will not be optimized. This requires a well thought out and executed “sell the company” strategy. (This is not at odds with my comments about what makes for a great, business-building founder, as this is a different phase in the startup lifecycle.)

    For feedback on your presentation, I thought it made a lot of valuable points. There is one area that I would comment on: Lean startups that have small lifetime funding needs are only one segment of the startup ecosystem. There are still many companies that want to build businesses that require more capital to realize their dreams. Many companies start out as lean, seed stage deals, and then once their ideas got traction, want to fulfill their dreams by building out full versions of their products, and aggressively taking that to market. Your presentation seems very focused on the small capital, fast exit at low price point deals.

    Thanks for the comment and for stimulating dialog on the exit phase of startup life!
    Best, David

  • nathanbeckord

    Good discussions here, David and Jason. I like the takeaway of remaining focused on the vision while actively building out relationships within the partner / potential acquiring ecosystem, without necessarily becoming pulled into their gravitational field until the startup is really ready to sell.

    Just to throw another perspective into the mix, a startup founder I've been working with referred me to a book by Jon Fisher called “Strategic Entrepreneurism;” the premise is, in brief, that founders should design a company specifically to be acquired by a larger one. I have not read the book yet and don't really agree with the premise (although it could be argued that this strategy works better for startups in the enterprise software world…I saw it work a few times in the '90's when Sun was on an acquisition binge, but it seems to be a rather risky “all or nothing” strategy…if the target company doesn't buy you, the business often doesn't have legs as a standalone business). Anyway, thanks again, looking forward to the next post! Nathan

  • http://www.forentrepreneurs.com David Skok

    I haven't read that book either, but I agree that following the strategy the way you describe it, is extremely risky. The acquiring company will usually be smart enough to realize that you only have one exit, and would leverage that to their advantage in pricing discussions. And if they decided not to acquire, which could happen for a multitude of different reasons, you would not have built a viable stand-alone business. Highly risky, and in my opinion, clearly no way to build a great company.

  • Cathleen Colehour

    David–as usual, thanks very much for the reinforcement to stay centered and focused on communicating the vision. This was an invaluable reminder.

  • http://girlstartup.com Simone

    Great post! I watched your interview on mixergy.com and loved your way of thinking.

    I wholeheartedly believe in passion. I’ve already learnt the lesson of trying to create something just to make money with no “real passion” behind it. Big mistake. But it was a good mistake to learn. It helped me get closer to where I really want to be. Now I am creating something I really enjoy, and love putting time into, even if no one cares :)

    I wrote a blog post about what I learnt from doing something I was not passionate about. I hope you don’t mind me posting the link but might help others http://bit.ly/9W1Z9X

    I’m off to read some more of your posts.

    The problem for me now, like what you spoke about in your interview on mixergy.com, was investment. I am in between creative and technical but I don’t have huge amounts of money to scale my concept, the way I really want it to evolve. I can see that’s going to be an issue for my site ammiki. It’s beginning to get traction, but not sure who to turn to develop it further.

  • Ireadit

    premise is wrong, read the book

  • Ireadit

    premise is wrong, read the book

  • Nathan Beckord

    This is a quote from the author, Jon Fisher, describing the premise:

    How SE Works
    The basic idea behind Strategic Entrepreneurism is to refocus your goal. Instead of trying to become the one dominant company in your market, Strategic Entrepreneurism says that you want to be the one company that a larger, and more dominant company, wants to acquire.

    From day one, create and design your company to become an attractive acquisition candidate. Identify the companies that you believe would most benefit from acquiring your company. Of course, you can never control what another company does, but by understanding which company may acquire you and what their own needs may be, you can steer your company in their direction as an acquisition target. Then when your company gets acquired by this larger corporation, everyone will remark on how lucky you are, not knowing that this was your goal from the beginning.”

  • http://twitter.com/MightyWiseMedia Eric T. Wagner

    Thanks David.  Really appreciate the link to the video.  And love your quote: If you work in an area of passion, you’ll maximize your chances of making money.  What amazes me, is even with this knowledge, you see a ton of incubator and accelerator programs forgetting about core values.  It’s almost like a race to “churn ‘em and burn ‘em” until a golden goose pops out and starts laying eggs.  Of course, looking behind there’s a carnage of people run over and spit out by the program itself.  As a VC, what are your thoughts on this?  Love to hear your input…  Thanks David…  Eric