Chapter 19 - The Five Critical Ingredients to Build a Big Company
To read:
Bootstrapper’s Bible: Metabolize this manifesto to make your company more focused, more efficient, and more grassroots. All with author Seth Godin.
What is a TAM?: Measuring your Total Addressable Market is a crucial first step you must take. It’s a lot easier with this free how-to kit from Hubspot.
Sizing up GitHub: Stanford University’s Paul V. Weinstein explains why Microsoft’s $7.5 billion acquisition of GitHub is a perfect illustration of how value is ascribed differently in Silicon Valley than in the rest of the world.
Building the business model: When you get ready to build your business model, don’t leave home without this free, how-to primer from Isaac Jeffries.
Building the business model II: Pitching, building, planning: You name it, you’ll find an affordable guide to help you do at upmetrics.
America’s longest-running affirmation action program: An estimated $10 trillion, in today’s dollars, was transferred to white homesteaders, essentially for free.
Thiel on Thiel: And many more subjects if you stroll through his lecture notes on how to build bigger, better, faster businesses.
Measure what matters: There are different ways to set up your scoring for OKRs. Here’s how Google does it.
Benioff on public benefit: Before his company Salesforce.com made a dime, Marc Benioff built the notion of public benefit and social responsibility into his company. Watch him explain how he did it.
How Doerr does it: Setting the right goals, and measuring them, is the key to avoiding failure and achieving success, says legendary VC investor John Doerr.
Chapter 19
The Five Critical Ingredients to Build a Big Company
"To be successful, you have to have your heart in your business, and your business in your heart."
— Thomas Watson, Sr., former CEO of IBM
More than a century ago, the famous architect Louis Sullivan, sometimes called the “Father of Skyscrapers,” coined a phrase that has been a key tenet of building design ever since: “Form should follow function.” His point was that no beautiful building could ever be constructed without a design that began with its ultimate function, the essential beauty, at the center. I feel much the same about the process of building businesses — the beautiful ones get the critical ingredients of function right from the outset.
Beyond my businesses, past and present, I’ve sat through countless pitches for investment, virtually all accompanied by a slide deck. I’ll get to what I’ve learned about angel investing in Chapter 22, Seven Critical Lessons Learned in Angel Investing. But for now, I want to make the point that I’ve come to believe the culprit in bad business design is the emphasis on Sullivan’s “form.” This usually comes as the “deck” of the startup idea, before thorough consideration of the critical function of the business. Readers of this book, wherever they are on their entrepreneurial journey, have no doubt spent countless hours either studying the many online business plan tutorials available, or have deep experience in the tedious task of producing one. Standard or lean? Operational or feasible? Internal and external? Don’t get me wrong, you need your “deck.” In fact, I include a few helpful prototype guides to assist on the Digital Companion. But please, please, please… clear your mind of any consideration of form until you, your partners, and early collaborators have thoroughly worked out and mapped the function. What will you do, and how will you do it?
The function needs to be framed around five elements: the business model, the team on opening day, the mindset that includes your passion and vision, the funding that you’ll ultimately need, and the culture that you envision.
Not long ago, I passed on a new startup for two reasons. They had a great deck and the form of the business was duly considered. The founders had the skills to build it. They had passion and drive. They also had the skills to service the business they envisioned. But I passed because first, they hadn’t thought through the market for their product, or the Total Addressable Market (or TAM in VC-speak). Second, they had no one on their initial team with the skills to sell to that yet-to-be-defined market. Alas, I quickly moved on to the next pitch though I also gave them critical, and honest, feedback to improve their team.
So let’s walk through those five most critical ingredients to build a big company — one that changes the world, creates many jobs, and has a deep and lasting economic impact.
Business model: The most important of the five ingredients, as this is both the superstructure of the business and the ecosystem with which it will interface. To carry my metaphor of architecture, it’s both the schematic diagram of the business, and the topographical map that contours the landscape in which it will operate.
Most broadly, this is your “category,” so begin your work there. It’s often said that great entrepreneurs don’t start companies, they start categories. Visionaries from Henry Ford to Steve Jobs to Elon Musk are among the best examples of category creators, with Musk even going so far as to release his company’s 200 patents in 2014; he aimed to incentivize the creation of a mass market of electric cars and battery charging infrastructure to create the EV category that Tesla could lead and dominate. Recall our work in Chapter 14, Seven Lessons Learned on the Journey from Founder to CEO, and our discussion of developing your “Point of View” (or POV), referenced in the great book, Play Bigger — How Pirates, Dreamers, and Innovators Create and Dominate Markets. For your business model, you’ll need to fully identify and internalize your “category” in the marketplace and no book will help you more. In particular, read its study of the “Category Ecosystem” — the customers, competitors, developers, suppliers, analysts, media, and everyone else who would plug into the category.
Said differently, your category sets the boundaries of the sandbox in which you intend to play. And it is within this frame that you will begin to assemble your business model. There are two elements of the business model that are essential, and which I focus on most to determine a viable investment or a business that I would start myself. The first of these is the TAM. It should be large. But large in ways that you can uniquely address. These two imperatives — large and unique — are the core tension in your business model as they bind together two often-incompatible tasks. This is because in general, bigger means more competition. What you are seeking in your TAM is essentially the largest niche possible. The point is that the business needs the ability to scale for a significantly long period of time to become big. But it should ideally be in a niche, to avoid too much competition. However, if the niche is too small, it isn’t a viable business to back.
So how do you resolve these two seemingly incompatible challenges within the larger mission of building a business centered and focused on function? Some of the best thinking on this comes from famed entrepreneur Peter Thiel. I encourage you to read his book, One to Zero, and the notes from which he wrote the book are linked on the Digital Companion. His broad call to action is to seek niches that are monopolies, or close to it, in the category ecosystem. To illustrate, he makes the case with a comparison of restaurants in Palo Alto, California, and his first major company, PayPal. The market for food in Palo Alto is huge. It’s even larger when you consider that nearby Mountain View or Menlo Park are each within reach for lunch. Within that ecosystem, British food might appear a unique niche if it’s the only British restaurant in Greater Palo Alto. But in fact, people can easily migrate to other kinds of restaurant food. And pricing may be a more important determinant for customers than specific menus. “By contrast,” he writes of his company in 2001, PayPal “was at that time the only email-based payments company in the world. It employed fewer people than the Mountain View restaurants did. Yet from a capital formation perspective, PayPal was much more valuable than all the equity of all those restaurants combined.”
This brings me to the second element of a good business model that fits squarely into Thiel’s allegory above. This is the “margin profile” of the competitors you’ve identified within the category you have articulated. You should be able to explain and defend anticipated net and gross margins that are equal to or better than those of your competitors. This would be very difficult, to use Thiel’s example, in the restaurant space. Readers of this book surely see why. Creating a new restaurant with demonstrably higher margins on the back of a unique menu… it’s easy to grasp what a challenge that would be. Yet many business plans actually push entrepreneurs toward this failure of insight.
Which is why when brainstorming Bazaarvoice, we spent a good amount of time studying the margins of SaaS companies. The margins of public tech companies are easy to find online in the benchmarking reports of Morgan Stanley, Goldman Sachs, Deutsche Bank, and/or others. In the case of data.world, we modeled against the financials of GitHub, the internet hosting service for software developers. Our estimate that data.world would have a similarly unlimited TAM was effectively validated in 2018 when Microsoft bought GitHub for $7.5 billion, at a price close to 30x annual recurring revenue (ARR). Now we have even more examples in the data space to point to due to the massive success of Snowflake, Databricks, Tableau, Looker, and many others.
A couple of additional points on this. When modeling our TAM before launching Bazaarvoice, we realized that we would, in time, need additional business and product lines to extend into the fuller ecosystem of retailers and brands. In our case, one of the extensions we anticipated and included in our first business plan was advertising. The fact that we foresaw the need for this extension is really what enabled us to buy the vertical ad network for large retailers, Longboard Media, in 2012, shortly after our IPO. The concept here was that it allowed Bazaarvoice to turbocharge the network effect between brands and retailers, effectively placing brand ads on retail sites. Amazon reported that in 2021 brand advertising became a $31 billion business for the company, up from the $2 billion that we deduced it was earning on the same slice of the ecosystem back in 2012. Unfortunately, this part of the business never worked while I was CEO, or shortly after I left at the end of 2012, due to poor execution. But the idea was sound as Amazon’s $31 billion advertising business line shows today. Keith Nealon, Bazaarvoice’s current CEO and a good friend, has extended in a tighter direction with the acquisition of both Influenster and Curalate; Influenster, in particular, serves as a form of an advertising network to drive traffic.
Another nuance to keep in mind when working through the alchemy of margin profiles is the difference between financial and strategic customers. For example, our initial pricing calculator for the sales team at Bazaarvoice told us that any deal with less than a 70 percent margin would typically not be worth it. This was in line with the margins of publicly traded SaaS companies we identified. If we couldn’t sell our first product, Bazaarvoice Ratings & Reviews, for that calculation then it wouldn’t be worth it as we tried to build a viable SaaS company. This was our model for “financial” sales. But we also at the outset built in leeway for the sales team to go after “strategic” sales, which are those that could get us into a new vertical, geography, or product line. Having this 70 percent constraint-based model helped us effectively price what was still novel and didn’t yet have any market-set price. And, again, we were smart about it so that we could lower that self-imposed threshold when it made sense to effectively buy into a new vertical market. Sadly, I’ve seen many businesses that have more than $10 million of revenue but with such a low margin profile that it effectively makes them unfundable when they decide to scale with investor capital.
Getting the basic business model right is complicated, and of course, it involves many elements. But the core of the model’s function is first in the definition of the category, and then in these two supporting elements of articulating your TAM and then validating that you will have higher margins relative to your competition. Get these right, convince yourself of the logic and justification, and then you can script out the business plan rationally and compellingly. This will ensure that you have both a backable business and one that can turn into a large company.
Team: Without a great team, you cannot build a great business. My former partners at Austin Ventures, my hometown’s original large VC firm, usually said that this was the first thing for which they looked. And it is true that if you have a good business model without a “complete” and great team, then you need to address this early to be successful. This process of team-building, of course, never stops because people are your biggest variable and high growth actually adds to the pressure that will bring out either the best or the worst in a team.
But what is a great team?
Again, I come back to this word function. In many a startup, there are often one or two founders who are rockstars in a specific function: an engineer with a black belt in software design, a top-flight marketer ready for the next challenge after his employer has a successful IPO, or a business whiz with epaulets earned at McKinsey & Company. A halo around one of the founders is good, though please mind my guidance back in Chapter 3 — Advice for the Middle- Aged Entrepreneur, on the blinders common among those who’ve enjoyed success in a long-established company. Also, keep in mind that luminance often obscures deficiencies that lead to a kind of “start building and they will come” sensibility toward alignment of the team and the task. And since it’s unlikely that any startup in its early days will have the resources to cover every critical task with a rockstar, the logic needs to be inverted. Instead of counting up the rockstars and their pedigrees on your starting roster, it’s much better to map out the critical functions you’ll need to execute from Day 1. and align them with the team you have. Maybe your software engineer, with a little help from your McKinsey alum, can wear the hat of product lead as well. Or perhaps your newly liberated marketer should roll up their sleeves and carry the sales operation until that first or second client’s check clears the bank. In short, multitasking must be almost a religion to a startup’s founders and you need to figure out this functional choreography before you begin crafting that pitch deck.
For example, Brant Barton and I had worked together at Coremetrics and we decided to partner in the founding of Bazaarvoice largely on the realization that we are both utility players with highly complementary skills. At Bazaarvoice, he initially played the lead roles in client services, content moderation, marketing, and product management. He also assisted greatly in sales. After all, we were selling a Software as a Service platform and his composite role combined both the software and the services we were coupling on the platform. The clients wanted to talk with him. I initially played the role of CEO and VP of Sales. I was responsible for hiring the team, fundraising, establishing our Board of Directors and Board of Advisors, and selling our initial clients. I greatly leveraged my eCommerce and broad Shop.org network to do so. I intentionally waited until we were 12 months old and had our first million in annual client bookings to hire our first VP of Sales, Michael Osborne, who left Coremetrics to join us. This was because I wanted to run with my network first and get the business model right before we added too much fuel to the fire. Momentum, both positive and negative, has a way of building. Winning becomes a pattern, and unfortunately so does losing.
A few years later, the exercise was similar when I found myself brainstorming my next startup with my soon-to-be Co-founders of data.world: Matt Laessig and Jon Loyens, both alumni of Bazaarvoice. One of Jon’s best friends from his Trilogy and HomeAway (now Vrbo) days, Bryon Jacob, soon got involved as our fourth. Bryon and Jon could build almost anything. Matt and I could sell and service almost anything. And we could recruit the teams to report to us as resources allowed and buildout required. From the beginning, our dream team of multitaskers was the most experienced founding cast I’d ever been part of. And we’ve gone on to attract other dream-teamers and build data.world into a successful company.
Mindset: Before you proceed in this chapter, here’s an exercise to check your mindset. Go to the Digital Companion. Click on the icon for “Peter O’Toole - Man from La Mancha.” Listen to O’Toole describe the “mission of each true knight” and then sing “To Dream the Impossible Dream” in the 1972 film, the song composed for the original Broadway Play by Mitch Leigh. If you are moved, then this is the spirit that must animate the design of your business model and plan. Do your hopes for your business include changing the world? Will your startup dent the universe? And most importantly, are you and your founding team in it for the long haul? Sprinters do well on Wall Street, or as stars who rise quickly in large corporations. And you will find plenty of sprinters in the startup realm. But their companies are usually the first to be taken over by acquirers. So if you want to go big, then you need to be prepared to go long and this demands the stamina and endurance of marathon runners. Back in Chapter 4, The Importance of an Always Be Learning Life, we discussed having a “growth” mindset in contrast with a “fixed” mindset. There, I introduced the book by Carol Dweck, Mindset: The New Psychology of Success, which I again recommend here. People with a growth mindset enjoy challenges, they strive to learn, and they consistently strive to develop new skills. And this is the mindset of the successful entrepreneur. If you can establish a growth mindset in your organization at the outset, this sets the stage for trust, empowerment, a culture of innovation, and your ability to commit to the perhaps most important test, the long haul of the marathon run.
As just one example, Brant and I could have sold Bazaarvoice for $25 million when the company was a year old and a public company offered to buy us. That discussion between us didn’t last more than five minutes. Instead, we doubled down. We wanted to go for a much bigger outcome, which creates larger ripple effects. If we had sold for $25 million, it would have enriched us personally. But, it wouldn’t have created so many jobs and financial outcomes for so many later. Capitalism can be the greatest force for good, a subject on which I touch in Chapter 1, The Soul of the Entrepreneur. The Conscious Capitalism movement is one about which I’ve extensively written elsewhere and one inseparable from the ethos of entrepreneurship in the 21st century. If we had not adhered to that ethos, and if we had sold early to enrich only ourselves, the company we created wouldn’t have served over 2,000 clients around the world, including over one-third of the Fortune 100 (I’m sure this number is multiples higher today). We wouldn’t have the potential today that the company does. Bazaarvoice wouldn’t be worth over $1.5 billion today and rapidly growing still. We wouldn’t have created over 1,100 jobs. We wouldn’t have offices all around the world. Today, I find myself most proud of all of the jobs we created around the world, as well as the impact we had on commerce overall. It was soul-nourishing work, to say the least.
You also must have the mindset of increasing the pie for all. Today, we are running data.world with this same mindset. We’ve grown very quickly, serving many Fortune 500 and other large companies and helping so many others globally with our free and open data community. As I write this, we just closed our Q4 for the fiscal year 2021-2022 at 135 percent of our goal and beat our sales goals for all four quarters. Broadly, karma is at work here — the belief that deeds and intentions influence the future. So embrace this mindset today for the company you want to have in the future.
As Swamiji Parthasarathy writes in Governing Business and Relationships: “Everything in the cosmos works on the principle of service and sacrifice,” concepts we discussed in Chapter 4, The Importance of an Always Be Learning Life. “The Sun gives us vitality. The clouds provide rain. Earth yields vegetation. Nightingale sings. Rose gives fragrance. With no ax to grind. A leader must emulate this magnificent magnificence of nature. And learn to serve his organization dispassionately for overall growth.” Parthasarathy, under whom I studied at the Vedanta Academy in Malavli, Maharashtra, India some years ago, adds to this: “Give rather than take. Few realize the grandeur and power of serving, giving. The more you give the more you gain is the inexorable law of life…”
This brings me to my next and the fourth of my five elements of functionality, because your mindset should lead you to raise money sufficiently enough to become a very important player in your industry.
Funding: At some point, if you want to build a large company, you are almost certainly going to need to take outside funding. Companies like Apple, Facebook, Google, and Microsoft all had to do so. And even if somehow you avoid it until your IPO, remember that an IPO is a fundraising event itself. If you have the mindset of “I need to own it all and I can never give up control,” as explored in Chapter 5, Bootstrap or VC?, it will limit your options when it comes to building a large company. You need capital to hire salespeople to capture your market quickly, or someone else more aggressive will likely take the lead. The expense of salespeople takes a while to recoup, even in the best of business models. And when you think big, you think global, as we did at Bazaarvoice and as we are now doing at data.world. As we also discussed in Chapter 5, it’s akin to that scene out of the movie The Matrix, where Neo takes the red rather than the blue pill from Morpheus on his promise to, “show you how deep the rabbit hole goes."
Remember that whomever you take money from, whether it is an angel investor, a VC, or private equity (PE) firm, the red pill partnership is like a marriage. You better “marry” the right person. Just like you better partner with the right people for your team. But it is easier to part ways with members of your team than it is to move on from your investors. Also, you must maintain a bootstrap mentality to the greatest extent possible after you take funding. I suggest you internalize Seth Godin’s brilliant read, The Bootstrapper’s Bible, which is available for free and linked on the Digital Companion. Brant and I read this book at the beginning of Bazaarvoice, and we really took it to heart. I wish I had done the same at Coremetrics, and it was ironic that I didn’t because I bootstrapped my first three businesses and they all had great cash flow. But it was the dot-com craze and all of the metrics (eyeballs, page views, etc.) that counted back then were squishy at best. Treat your money like it could be your company’s last, because it may be.
Culture: In one sense, culture is the sum of much of what we’ve been talking about in this chapter, even in this book. It’s the mores, the values, the individual and collective pursuit of meaning upon which I’ve repeatedly touched. Culture, in this initial sense, is an abstraction, even an aspiration. As important as this dimension of culture is, because it’s abstract, we too often take it for granted, and regard it as a kind of self-evolving and self-reinforcing. But in another sense, one frankly less discussed in business circles, culture is very concrete because it is foundational. It’s the operating system or “OS” of the company. It’s the set of rules, guideposts, and invisible algorithms that shape and animate virtually the entire business. In this sense, culture is the most profound toolset at the entrepreneur's disposal. Culture, I often argue, needs to be intentional. This abstract side of company culture can be compared to sound waves. The most profound music in the world cannot travel through a vacuum, Beethoven’s 5th would be just futile vibrations in outer space. Sound needs a medium of air, water, or steel. The medium, in this case, is the foundational side of culture, the intentionality. Intentionality is what brings together the systems for expressing culture that I will come to. But first, let’s examine this abstract side of culture, the belief system.
“Every entrepreneur needs to wake up and hear the message that they need to think about what are their highest values that they are really going to anchor their company to,” argued Salesforce.com founder and CEO, Marc Benioff, in a 2019 interview with TechCrunch magazine that I include on the Digital Companion. Benioff’s passion for the importance of culture is further examined in his marvelous book that explores the emerging cultures of dynamic, 21st-century businesses in The Business of Changing the World. While a bit dated now after its first publication in 2007, it is nonetheless a priceless exploration of the ways companies can make the world a better place while enhancing their own company culture. It is an expansive compendium of the principles and moral codes of business leaders from Benioff to Michael Dell of the eponymous computer maker, from the late CEO of Japan’s NEC Corporation’s Akinobu Kanasugi to Laura Scher, who founded Working Assets, the credit card, and internet services company that donates millions to progressive causes. Klaus Schwab, the founder, and CEO of the Davos-based World Economic Forum has a chapter, as does the singer, songwriter, and activist Peter Gabriel. It’s a book I encourage every entrepreneur to have for periodic reference. Pick it up, thumb through with your eyes closed to a page, and just read the insights where you land; every time you will find something new and thought-provoking.
“Consider what would happen if a top-tier venture capital firm required the companies in which it invested to place 1 percent of the equity into a foundation serving the communities in which they do business,” ponders Benioff. “If we find ways to help the environment, to help workers, to help raise the standard of living in Third World countries, we will all do better,” declares my fellow Austinite Dell. “When we founded the company we thought we would acquire 10,000 customers in our first three years,” writes Scher, of the company she co-founded in 1985. “In fact, we had that many applications after just eight months.” NEC Corporation’s Kanasugi argues expanding the firm’s remit beyond strict business concerns to education, disaster relief, and other activities transformed his corporation. “My work is still of the same importance to me,” he reflects. “I have found, however, that by branching out beyond the basic fundamental principles of business, my career has become more rewarding.” Schwab, who founded the famous World Economic Forum more than half a century ago, notes in the book the rise in anti-business sentiment fueled by headline-making greed, scandal, and fraud. “The only way to stop this wave of antibusiness sentiment is for business to take the lead and to reposition itself clearly and convincingly as part of society.”
Now, of course, I’m sure you’re musing: “Fair enough, admirable convictions, but how to build such virtues into the ‘OS’ of a company?” There are many ways, of course, most of which we’ve discussed throughout this book, including in the previous Chapter 18, Forming Your Company’s Values, where we touched upon the corporate “Magna Carta” — the evolving “Point of View,” or “POV,” document as a repository of values. But even these tools are inadequate without the medium that I described above. Without a systematic way of marrying the abstract elements of culture to the concrete and onto action, your culture is at risk of becoming Beethoven’s 5th broadcasting into the vacuum of space.
One medium to transmit culture is Objectives/Key Results, otherwise known as OKRs. First developed by iconic Andy Grove, the CEO of Intel, OKRs are far more than just another acronym or magic potion. While simple, OKRs are not simplistic and implementation is difficult. But when properly understood and used, like the rock climber’s carabiners, they are the best means ever to anchor lofty goals and aspirations with the face of your culture as you scale toward any commercial mountaintop.
In brief, OKRs are stated goals that are then in turn supported by the key results that, if and when delivered, can propel you toward that goal. Here’s a simple example of just one of data.world’s actual Q1, 2022 OKRs to illustrate:
I hope you’ll notice a few things about this table. First is the difference between objectives and key results. Objectives are broad and aspirational, but they still must be definitive and quantifiable. It’s not just, “let’s increase our revenue” it’s, “let’s increase volume of Qualified deals.” Key results, by contrast, are focused, specific, and binary, meaning you can easily see whether the key result was achieved or not. Did we or did we not generate 68 Qualified deals? And third, this sets the stage for key results to be quantified — as with the objective — but also measured in detail so that the process is of true utility, enables decision-making, and can be refined. It must provide useful metrics. How many deals? How many messages and what positioning in two key verticals? And on and on. This particular example comes from four pages of OKRs, devised for planning in just a single quarter. There are different ways to set up your scoring for OKRs, and I include an essay on the Digital Companion on how Google does this with a 0-1 scale with 10 gradations. You can find your own. The cadence and use of OKRs is also a decision that depends on context. But at data.world we set and report on OKRs quarterly and also have a mid-quarter check-in on how we are progressing.
Without question, the best resource on OKRs is Measure What Matters — How Google, Bono, and the Gates Foundation Rock the World with OKRs. The author is John Doerr, the chair of the famous venture capital firm Kleiner Perkins and a legend who has backed some of the most well-known entrepreneurs, including Larry Page, Sergey Brin, and Eric Schmidt of Google; Jeff Bezos of Amazon; and Mark Zuckerberg of Facebook. I include some links on OKRs on the Digital Companion, including Doerr’s TED talk on the subject. But I truly hope you’ll read his book as well, as it captures the many uses of OKRs and how they can be aligned with one another while aligning teams as well. I think of OKRs as “carabiners” for their utility as you reach for the summit. Doerr calls them “Swiss Army knives, suited for any environment.”
“Objectives and key results are the yin and yang of goal setting — principle and practice, vision and execution,” Doerr writes. “Objectives are the stuff of inspiration and far horizons. Key results are more earthbound and metric-driven. They typically include hard numbers for one or more gauges: revenue, growth, active users, quality, safety, market share, customer engagement.”
If you carefully craft your business model, team, and culture, then the funding will follow if you let it. Then you will create a truly special, big company and change the world in the process.
“Ideas are commodity. Execution of them is not.”
— Michael Dell, Dell Chairman and CEO