Entre-Hire: The Ultimate Startup School

*This post was previously published at Fast Company

When considering their next career move, aspiring entrepreneurs generally follow conventional wisdom and start a company. Similarly, most serial entrepreneurs who were unsuccessful in their first attempt to build a business or reach an exit also make the same decision. They simply pick up and start another company, instinctively becoming a career entrepreneur without much distraction. Such persistence, determination and independence are admirable traits, necessary for success as an entrepreneur. However, contrary to popular belief, entrepreneurial individuals do not need to be founders throughout their careers in order to create amazing products or have outsized impacts on companies.

Lately, I find myself pitching and persuading both experienced and first-time entrepreneurs to abandon their project/idea and join an exciting startup already on the path to success… and help make it an even bigger success. Conversely, I find myself cheering for my portfolio companies that make a concerted effort to seek out fellow entrepreneurs as they expand their executive teams. This “entre-hire” trend is just as exciting as the now celebrated “aqui-hire” M&A trend. I have seen too many startups fail to realize their potential because they lost their entrepreneurial edge as they surrounded themselves with minions or corporate execs. There may be such a thing as “too many startups,” but never “too many entrepreneurs” if their talent is properly harnessed by the surrounding ecosystem. Startups always need entrepreneurs.

While there is no substitute for starting your own company, I strongly believe that entrepreneurs are more likely to be successful when they have previously held pivotal positions in successful startups, something often lacking in first-time entrepreneurs. There is something about experiencing a company struggle, grow and succeed from the inside that prepares a future entrepreneur unlike anything else. Although there is no such thing as a school for entrepreneurs, working in a successful startup is as close as one can get to a startup education.

With so many successful startups in our midst, I am curious to know why larger numbers of entrepreneurial minds don’t pad their resumes with interesting positions at more established startups known to be success stories in the making.  While these startups may appear to be past their innovation prime, the reality is often quite different. Many startups use their initial success to rapidly expand their product portfolio and business in multiple directions. These startups are acutely aware that initial success can be a source of complacency, a danger to any high tech company, and are therefore looking for fresh entrepreneurial blood to inspire, lead and execute. Obviously, this is a proverbial “two-way street.” Startups benefit from hiring new entrepreneurial talent as much as those very entrepreneurs do from working – and learning – at an established, successful startup.

I can’t but comment on the so-called “PayPal Mafia,” the group of independent entrepreneurs who emerged from PayPal after its sale to eBay. PayPal’s incredible legacy as a successful startup is not solely defined by its thriving business as a unit of eBay, but also by the numerous successful startups that it ultimately spawned. Former executives and employees at PayPal went on to found LinkedIn (LNKD), Yelp (YELP), Slide (Google), Tesla (TSLA), Yammer (Microsoft), Geni (MyHeritage), and YouTube (Google), among others (incidentally, BVP is an investor in LinkedIn, Yelp and Geni, the latter through MyHeritage). One can only imagine how difficult it must have been to build an organization overflowing with so much raw entrepreneurial talent! But that’s the point. Building a scalable startup that can continue to grow at a breakneck pace requires periodic infusions of both capital and entrepreneurial talent.

As much as entrepreneurs should aspire to match PayPal’s success as a business, they should also dream of spawning the next generation of successful entrepreneurs, even if it means reluctantly supporting employees that leave to start their own companies. Successful founder CEOs should work to continually deepen the management bench with outstanding people. While many roles in a startup require considerable functional and domain expertise, there should also be room for more creative and versatile individuals capable of thinking out of the box and knocking down walls. In short, startups should make an effort to recruit and accommodate former entrepreneurs and aspiring entrepreneurs. It is no easy task to recruit a fellow entrepreneur looking for independence, influence and due reward upon success, but it must be attempted repeatedly until successful. The ideal stage for such recruiting entrepreneurs is when the first product has proven successful and there is a need to start work on additional products and/or business channels. 

One particular company in my portfolio stands out as a role model. While it is not yet obvious to the outside observer, Wix has made a conscious effort to recruit, empower and retain super talented entrepreneurs that would have otherwise created companies of their own. At last count, there are at least 7 former entrepreneurs leading various products and projects at Wix. Two additional portfolio companies of mine embracing this hiring trend are Fiverr and MyHeritage, both of which have hired former entrepreneurs into their most senior executive positions.

This is not just an international trend nor a practice unique to consumer Internet companies, but a hiring strategy we are witnessing across our US portfolio and across industry sectors. Other BVP portfolio companies that have successfully recruited entrepreneurs are SendGrid, Simply Measured and 42Floors. We know this trend is also common among Y-Combinator companies, where stronger startups in the incubator often gobble up talented entrepreneurs from other companies in the class. I suppose that’s reason enough to apply to Y-Combinator.

It’s too early to identify where the next PayPal Mafia will emerge from, but I have little doubt it will be in a company that is willing to take the risk in recruiting entrepreneurial talent long after its founding. As for aspiring entrepreneurs, whether or not you have raised seed capital: consider going to school by seeking successful startups willing to give you the space to make an impact. 

Felda Hardymon's Keynote at Journey 2012

In response to popular demand, I am uploading the keynote presentation of my partner, Felda Hardymon, that was given at E&Y's Journey 2012 high tech conference. The presentation contains some fascinating observations on the state of venture capital.


 

...and some photos doyen of venture capital at the Journey event.

The Other Side of Innovation

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The proverbial “billion dollar company” seems out of reach for many Israeli start-ups, but may just require a different way of thinking about innovation and scaling. I learn a lot of Israeli start-ups and venture investing by observing my American colleagues and of course by studying successful American start-ups, whether or not they are in the BVP portfolio. While many American start-up ideas, particularly in the SaaS and Internet domains, could never have been started and properly executed from Israel, occasionally I come across a company that should have been founded in Israel.

One such example is Ubiquiti Networks (UBNT), founded in 2005 in the apartment of a 26 year-old wireless engineer from Apple, Robert Pera. Ubiquiti has no Israeli connection, but it offers some fantastic lessons for the Israeli entrepreneurial community because of their domain and go-to-market strategy. Ubiquiti operates in fixed wireless broadband, arguably one of least sexy market segments today due to cut throat competition and struggling customers (but one familiar to many Israelis).

To start off, Ubiquiti didn’t aim to provide the best wireless product, but to create a wireless product that would allow wireless ISPs (WISPs) to better compete with wireline competitors. Ubiquiti realized that its customers’ businesses were failing precisely because existing wireless gear and was too expensive (product cost including costs of service, customization, support, etc.). And so Ubiquiti set out to take over a billion-dollar market by solving this key issue of cost essentially throwing a lifeline to the vanishing WISP.

Ubiquiti’s disruption to the market came from the fact that it was to sell its wireless ‘kit’ for less than 1/10^th the competition without a significant tradeoff in quality and performance. They were able to do this with a unique development and business development model that lowered their own cost structure, which they then passed on to the customer. This not only includes the cost of goods sold, but cost of manufacturing, marketing, selling and supporting that product.

Ubiquiti didn’t hire any salespeople and directed everyone to their website and where they could easily find local distributors around the globe. Ubiquiti didn’t have a support organization, and instead directed all customers to a detailed online forum which now has 334K posts from 142K members! It helps when your customers don’t really compete with one another and will gladly help, advise and recommend products to one other. And because the product was so cheap and the customers themselves installed and maintained it, there was no need to sell or charge for expensive warranties.

Eliminating most SG&A costs from their model was a radical approach for a telecom equipment company like Ubiquiti, but one that fit very well with their WISP customer base, where the cost of base station and CPE equipment determined whether they had a viable business model or not. The resulting hyper efficient sales model is far more innovative and sustainable than the typical technology advantage that a start-up introduces to the world. That’s not to say there is little technology in their products, because there is. They relied on software to innovate, preferring to ride the downward cost curve of hardware commoditization. Even Chinese vendors have a hard time innovating price reduction like this and several companies had to resort to theft to compete.

Since it’s founding, Ubiquiti has generated over $100M in profits and will soon pass $100M in quarterly revenues. For a communications equipment company to grow this quickly, while maintaining operating margins of 35% is remarkable. 

Moreover, Ubiquiti never raised external money until it raised a $100M private round in 2010. Ubiquiti has since moved into adjacent markets, like enterprise WLAN, surveillance camera, microwave and routers with a similar approach of bargain prices and customer self reliance. So expect more disruption from these guys, and new competition for several Israeli wireless leaders.

To put this story in some perspective for the Israeli audience, in 2005, Israel-based Alvarion was a market leader in fixed broadband wireless and approached a billion dollar market cap.  A mere seven years later, it is Ubiquiti with the billion dollar market cap; and Alvarion is worth $25M, slightly less than its cash position. As for other wireless equipment players, Nokia Siemens Networks is falling apart, Motorola has been gutted, and you can buy both Proxim and Airspan in a package deal for $1M. 

Ubiquiti proves that fantastic outcomes can emerge from any sector, and that technology is not the only source innovation. Ubiquiti might be a wireless equipment company, but its thoughtful strategy provides lessons for all technology companies:  

1.     There is NO long term advantage in technology innovation that doesn’t result in a superior business model 

2.     Embrace the weakness of your competition, by leveraging hardware commoditization and reducing if not eliminating the need for expensive post-sales operations and support

3.     Listening to your customers is more important than talking to them. Leverage the Internet for marketing, sales, support and customer feedback (product definition).

Although Ubiquiti was not a BVP portfolio company, it represents the kind of innovative, software centric telecom we are fond of. BVP has invested in four telecom companies over the past few years, each one attempting to best its competition with a software technology that supports a superior and more capital efficient business model, including Axis Network Technology (acquired by Ace Technology), Traffix Systems (acquired by F5 Networks), Intucell Systems and Vasona Networks.  I look forward to finding and funding the Israeli Ubiquiti in the years to come.

10 Possible Signs the Good Times are Back

1. There is enough seed money to buy six-figure, five-letter vanity URLs 

2. Entrepreneurs and Hollywood celebrities are invited to the same events

3. VCs invest in Angel rounds Angels invest in VC rounds 

Sliding Into First: Why Israeli Start-Ups Need to Keep Running

(see the Hebrew version in TheMarker.com)

In baseball, players often slide into the base in order to avoid being tagged out, but almost never slide into first base. The reason no one ever slides into first is not because it’s illegal, but because it slows down your momentum if you want the option of running onto the next base. A lot of Israeli high tech companies unwisely “slide into first,” yearning for safety and calm after years of uncertainty and hard work, but inadvertently end up losing the precious momentum necessary for continued growth. With fewer late stage companies generating the kind of momentum and scale that late stage investors look for, it is little surprise that Israel has an underdeveloped growth financing market relative to the US. Maintaining the growth momentum is how big companies are created, and is arguably one of the biggest challenges now facing Israeli high-tech.

"Tech Crutch": The Challenge of Moving Beyond Technology in Israeli High Tech

This is a post that has been in draft for almost a year based on hundreds of interactions I have had with start-ups and high tech execs in Israel and abroad. The issues are broad and provocative, and because a blog post risks being an oversimplification, I welcome my readers’ comments and critique. (see Hebrew version in TheMarker.com)

If there ever is to be a sequel to the book Start-up Nation, Israeli high tech must become as serious about product design, customer experience, and business models as it currently is about technology and R&D. Over the last decade, Israel has mastered an entrepreneurial/venture model, which involves sourcing entrepreneurs from military technology units, creating cutting edge technology products and ultimately selling a company, its IP and personnel to one of many foreign multinationals that have come to appreciate the Israeli brain trust. While this model of start-up creation has served us reliably, it is vulnerable to macroeconomic headwinds and is increasingly unsustainable in the face of technology commoditization that is rapidly approaching our shores in the form of competition from China, Korea and Taiwan. As it turns out, our over reliance on technology creates an endless demand for more technology talent, which prevents us from nurturing vital competencies in product, design and business. The resulting ‘tech crutch’ is a self-perpetuating cycle that threatens the future of Israeli high tech.

TheMarker Recognizes BVP's Israeli Internet Portfolio

Three of my portfolio companies were included among the 10 most promising, young Internet start-ups in Israel, in an article by Guy Grimland in the TheMarker Magazine. In the photo above, you can see Raphael Ouzan, the CTO and co-founder of BillGuard, Ishay Green, the CTO and co-founder of Soluto, and Shai Wininger, the CTO and co-founder of Fiverr.

Hulu from Israel

Breaking the Habit

There are two styles of consumer Internet ventures emerging in Israel: product perfectionists and money chasers. Despite our tendency to celebrate and learn from both of them, one of these has a darker side we should be cautious of.

Product perfectionists are founded upon a belief that a unique and differentiated product will create an avid and loyal customer base, which in turn will help build their brand and business. These companies understand that a great customer experience is paramount, and the result of a corporate strategy and culture that focuses on the customer, not merely the result of good product definition or an unbeatable price. I place a high premium on product perfectionist companies that can deliver a compelling customer experience, though it is far from sufficient to ensure success.

In contrast, money chasers are founded upon a belief that an effective monetization and distribution model can essentially define the product offering. These companies excel at driving traffic, accumulating users and raking in cash, but often at the expense of the end consumer (including the customers’ customer). While many entrepreneurs and investors are attracted to the money chasing model, there is a disturbing side to many of these businesses.

Series B Psychology

Venture investors never like to lose money. But if we must, we prefer to lose it approximately 2-4 years after investing. Why? Losing money after more than 4 years is more painful and expensive because of the opportunity cost of our time and that of everyone else around the table. If a company fails after 4 years, it was either a sudden turn of events or a slow, agonizing death...but in either case, we wish we had recognized it earlier and moved on to the next exciting venture.