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May 1, 2012

Entrepreneurship and optionality don’t mix

Laser focus vs. keeping options open. This is an eternal struggle faced by start-up founders and corporate CEOs alike. While focus brings both purpose and increased odds of meeting a particular goal, leaders are plagued by the fear of “What if the goal I’ve achieved is the wrong goal?  I’ll have hurt the company, my reputation, my ego and my career in one fell swoop.” This dynamic was outlined in a recent Harvard Business Review article discussing Apple’s success in the wake of Steve Jobs’ return:

But then my Apple lunch companion wondered aloud: “Why don’t more CEOs bring greater clarity to what their companies should not be doing?” It’s a significant question. 

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In some ways, it makes perfect sense. CEOs often want to keep their options open. If they put all of their energy behind a single idea and it goes wrong, they will feel the full brunt of the blame. Yet, by pursuing too many priorities, these CEOs may actually be risking future success even more.

My friend and co-investor Mark Suster raised a similar point in a post published today:

It’s tempting to take on new projects, new features, new geographies, new speaking opportunities, whatever. Each one incrementally sounds like a good idea, yet collectively they end up punishing undisciplined teams. I like to counsel that the best teams are often defined by what they choose not to do.

This is an area where we spend a tremendous amount of time with our companies. We are passionate about focus, especially at the earliest stages where distractions often mean not shipping software, and not shipping means not being close to customers and getting feedback, which essentially means flying blind. Once a start-up begins living in its head and not in the market working to make customers happy, the chances of actually achieving happy customers and product/market fit fall off a cliff. This frequently happens in nascent markets, where the possibilites to make customers happy seem endless and inexperienced but eager managements want to keep all options open until it is virtually certain what customers want. In real life, however, this is not the way it works. 

Success - and failure - is bred of having a hypothesis, aggressively testing that hypothesis, collecting feedback, seeing if the original hypothesis has been proven or disproven and going from there. If the hypothesis has been proven, fantastic. Live close to the customer, identify KPIs, use cohort analysis to inform tweaks to optimize the user experience and scale like crazy. If the hypothesis has not been proven, however, there are a few options:

  1. Pack it in - you are far away from something real people care about and the learnings you’ve derived don’t spark a new and better hypothesis;
  2. Refine the original hypothesis - while you haven’t demonstrated product/market fit and created happy users, you have learned enough such that the original hypothesis can be modified in light of user feedback and a new product can be developed an introduced. 

Either of these are perfectly reasonable outcomes, because they involve being in the market, testing with real users and applying the full resources of the company to the challenge of achieving product/market fit with a single product. It is hard to do this in a disciplined manner with even one product much less a diffuse set of products, ideas or hypotheses. In order to really test a hypothesis I believe founding teams need to "burn the boats" - go all-in on a particular hypothesis and see it through. While it might seem smart to keep options open by spreading resources across several initiatives, in reality this only lowers the likelihood of any one initiative actually succeeding. Making customers happy requires maniacal focus, focus that is impossible to achieve when preserving optionality is a primary goal.

Venture capitalists have inherent optionality by virtue of portfolio diversification. Great entrepreneurs have no such luxury. They are all-in on a particular idea or hypothesis. It succeeds or it fails, is proven or disproven. If failure is done well, it can either lead to success in the current venture or spark success in future ventures. Founders who fail well are generally viewed with respect by the angel and venture communities and have the chance to start over. This is where valuable “founder optionality” comes in. But intra-venture founder optionality? I don’t think so.

Founding is hard and scary yet also emancipating. If you’re going to do it, then do it. Don’t hedge. Go all-in and do it well. Because if you do, succeed or fail, you will have the kind of optionality that really matters - the chance to try again. 

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