4. Internet Startups: The Berkeley Stanford Genome Reports, an annotated summary
I. Introduction & Origins - how the project was started and by whom
II. Setting the Scene - a venture capital diagram
III. A Recommendation, The Primary Key Finding, and a Caveat
IV. Authors - three primary and three secondary
V. Summary - of the three main sections of the report
VI. The Role of Mentoring/Coaching - versus advice from the investors
VII. Conclusion - about thought leadership as a key factor for success
I. Introduction & Origins
The goal of the Startup Genome* project is to decipher the DNA of Silicon Valley innovation and disseminate it to the world to increase the success rates of new ventures. The analysis is based on data from 650 web-based startups in Silicon Valley. Essentially the reports are about the key factors for success for early stage startups in Silicon Valley. The first report, 67 pages, was published May 28th, 2011. To view the full report, click on the preceding link. If that does not work, one should be able to access it over Gigaom or Blackbox.vc.
* A genome is an organism's hereditary information, encoded in its DNA.
The progenitor is the remarkable Max Marmer1 (cf. below). Steve Blank, known as an entrepreneurial thought leader in Silicon Valley, helped organize the project. It includes contributions from Berkeley and Stanford faculty, the Sandbox network, and ten accelerators from around the world.
For those outside of Silicon Valley unfamiliar with Steve Blank, as a young man he received a college scholarship, but dropped out his first semester. He learned to love technology in the U.S. Air Force. Afterwards, he started eight companies in Silicon Valley. The seventh, a video game venture, was a messy, and very public, $12 million failure. He wryly commented that a key mistake was that, in contrast to his other ventures, he had not "loved the customers." (The customers were mostly 14 to 18 year old boys hooked on playing video games.) The eighth was a $100 million + success. He fortuitously sold it just before the .com bubble burst. (The sisters Luck, Fortuna and their niece Fortuitous liked his getting up off the floor to try again.) He now teaches entrepreneurship at Berkeley and Stanford.
”The problem I’m working on is that many founders are either making uninformed decisions or inefficiently learning the new skills they need. The solution I’m exploring is a just in time learning methodology that accelerates founders’ learning curve by aggregating relevant content, peers and mentors.”
The above was not written by Steve Blank. It is a quote from an E-Mail he received, which he describes in a blog on his website May 29th, 2011. A Max Marmer had signed the E-Mail. Steve Blank continues: "This sounded like one heck of an interesting guy and it’s a subject I care about. I wondered where he got his MBA from?" A meeting is arranged. Notable excerpts from the blog are:
Some kid who looked 18-years old came up to me and introduced himself as Max. “How old are you? I asked. “18,” he replied.
Max dropped out of Stanford after his first quarter.
But he left to work on what he told me he came to do - crack the innovation code of Silicon Valley and share it with the rest of the world.
II. Setting the Scene
Max Marmer set up blackbox.vc (previously linked) as a seed accelerator for the black boxes shown above, specifically for technology startups.
III. A Recommendation, The Primary Key Finding, and a Caveat
Regardless of whether Bridges coaching is a good fit for any particular high-tech web-based venture, we make a strong recommendation. We urge start-up teams to take three actions. Get a coach or mentor, precisely track your metrics and educate yourselves about entrepreneurship. With what justification?
Primary Key Finding
- "Startups that have helpful mentors, track metrics effectively, and learn from startup thought leaders raise 7x more money and have 3.5x better user growth (than those that do not)."
The data on which this finding is based were drawn from from 650 early stage web-based startups in Silicon Valley. Metrics does not means balance sheets and income statements, but rather cash burn rate and cash balance. We go into more detail about some of the report's other findings in the last section of this summary, The Role of Mentoring/Coaching.
Of course Silicon Valley data do not translate one-to-one to Europe, Germany, Bayern or Munich. On the one hand, to dismiss the conclusions drawn from them as irrelevant, given the Silicon Valley track record of growing phenomenal companies "out of thin air," would be foolhardy. On the other hand, one must take care in applying the conclusions of the Genome Report elsewhere, especially in cultures very different from Silicon Valley, such as the rust belt of Detroit or a warlord`s enclave in the South Bronx of New York or Central Africa.
Steve Blank made a comment in a video on his website's homepage about just how unusual the Silicon Valley culture is: "Where else in the world do you give a 22 year old $4 million, with no collateral, and he thinks working 100 hours a week is a better use of his time than taking it to Brazil?" These are the very same entrepreneurs who overwhelmingly state (over 80%): "I don't care about rules."
The authors all have profiles at Linked-In.
- Max Marmer, discussed above
- Ron Berman, a doctoral student in marketing at UC Berkeley
with contributions from
- Steve Blank, discussed above
- Chuck Eesley, an MIT PhD who is a professor at Stanford
First, the report classifies startups as 1) Automizers (Google), 2) Social Transformers (Facebook) and 3) Integrators/Challengers (Oracle).
Second, the Startup Lifecycle is discussed, partly in terms of six Marmer Stages. Max Marmer is certainly eponymically* responsible for the term. Presumably he was making a word-play with the term Marmor Stages from psychoanalysis. These refer to the six stages of family development from birth to the youngest child leaving the nuclear family to go out on his own (which may be considered analogous a spin off or MBO). Regardless, the Marmer Stages are: 1) Discovery, 2) Validation, 3) Efficiency, 4) Scale, 5) Profit Maximization and (6) Renewal. The last two categories are not treated in the first report.
* Eponym means name-giving.
The category "5) Profit Maximization" seems a misnomer, or at least in need of clarification. Surely the authors, many of them professors, are familiar with the work by the Nobel Prize winning psychologist and economist at Carnigie-Mellon, Herbert A. Simon, who coined the term "satisficing." This term is particularly relevant for these Silicon Valley entrepreneurs. Only 1 in 20 of them reported "money" (i.e. becoming rich) as a key business driver. They were driven by a desire to create something new, to make an impact and to gain experience.
Third, the concept of the startup as a learning organization is discussed. An important aspect of learning is a willingness to get out of the building to talk to customers.
The report also talks about the importance of product development, pivots, traction, network effects, "virality," and team building. Teams are considered in three categories: 1) business, 2) technical and 3) balanced. Future reports will treat further six dimensions critical to startup success: 1) Customer Development, 2) Product Development, 3) Team, 4) Financials, 5) Business Models and 6) Market.
Seed financing, typically $100,000, is excessive! The data indicate that seed financing should be $10,000 to maybe $50,000 at the outside. Although not stated, the evidence in the report strongly supports participation in a Business Plan Competition. The discipline it forces in thinking your venture through could be all the start-up capital you need. You may well be able to bootstrap the first stage.
VI. The Role of Mentoring/Coaching
- "Almost all companies that raised money had helpful mentors." (See the funds/mentoring graph on page 45 of the report.)
- "There are no stage 4 start-ups that raised money without helpful mentors." (Stage 4 startups are those receiving $1.5 million to $7 million to scale the business.)
- "Start-ups with helpful mentors are more successful." (See the graph on p. 46 of the report.)
Qoogol the Elephant says that even if Bridges were a good fit for a web-based venture, we should still not get too excited. Exactly what makes for a "helpful mentor" is not defined in the report. We countered that Bridges of course likes satisfying criteria that are a) very important but b) undefined! However the report does mention that start-ups found mentors helpful whose input was "domain specific" (whatever that is supposed to mean). Start-ups were not particularly interested in receiving introductions or help with recruiting.
- "Investors who provide hands-on help have little or no effect on the company's operational performance. But the right mentors significantly influence the company's performance and its ability to raise money."
The first sentence above is counter-intuitive. Many entrepreneurs are looking for “hands on” venture capitalists and investors, whose experience can help the company. VC partners, private equity CxOs and private investors (business angels) all deal with a portfolio of companies. The catastrophe here, the next HUGE opportunity there, demand their attention. Certainly they can attend board meetings and wlll appear at an existence threatening crisis.
However regular, on-going coaching and mentoring are not always practical for them, or the best use of their time either. They themselves would tend to agree, and the empirical evidence supports this view. Their focus is better directed to investment selection and, with the big hits, to taking them public.
Thought leadership as a Key Factor for Success
- "Start-ups are 80% more likely to raise money if they follow start-up thought leaders like Steve Blank, Eric Ries, Dave McClure and Paul Graham."
As these thought-leaders contributed to or influenced the report, this finding at the report's end sounds suspiciously self-serving. It may be intepreted in three ways. The first is in terms of Jeffrey Gitomer’s Little Black Book of Connections, which is commented upon at the subpage about him at Eminent Referrals. Those entrepreneurs whose game plan included making connections with the “movers and shakers” in Silicon Valley did much better than those who did not.
The second is that even when there was no direct connection, knowing what is “in,” “hot,” “the trend,” in the Venture Capital scene makes an enormous difference. One needs to “speak the language of the members of the club.” For instance in the strategy scene, “Blue Ocean Strategy,” is a popular concept nowadays in the C-Suites. Bridges acknowledges its importance by using the powerful “Blue Ocean/Red Ocean” metaphor itself at "IV. The Strategy Journey” at Services.
The third is that besides studying the market space and industry you will compete in, you should definitely study entrepreneurship in its own right. Google, read, network and interview people about what is involved in founding a company. Above all, seek out and pay close attention to stories of failure and learn from those mistakes.
1 Alexander the Great founded a city at 16 and was conquering countries in his 20s. Max Marmer began conquering Internet worlds at 18. Interestingly, his picture at Linked-In shows him gazing upwards at an angle. That is also the characteristic pose of Alexander the Great as shown in renditions of him, most notably by the Greek sculptor Lysippos.
* © Ronfromyork, @ image, Dreamstime; Urbanrenewal VC diagram, 12 July 2008, (Wiki public domain); Gyan Web Design 2010