I’ve only made it partway through his first lecture, but have already found some of his insights compelling.

Here are my Top 3 Take-aways from Sam’s talk about Why the Idea is Important (0:00 to 15:02 in the video above):

The best startups seem like a bad idea, but are really a good idea.

This statement is basically saying that you should be a contrarian investor with your own sweat equity. If an idea is an obviously good idea, it probably means that a lot of other teams are chasing it, and it will be difficult to differentiate and compete. On the other hand, if you’re pursing something that seems like a bad idea, it means you have probably discovered some insight before others have — and that insight gives you the competitive advantage of time. You can occupy a position, start to build your solution, and acquire an installed base of customers, all before competitors realize that the opportunity exists. By the time the idea is obviously a good idea, you have become the first-mover and built momentum, and it’s harder for others to dislodge you.

The current market size doesn’t matter. The market size in 10 years is what really matters. You want to be in a small but rapidly growing market.

For B2C opportunities, this statement makes perfect sense. It sort of relates to the previous idea, that you want to pursue opportunities that seem like a bad idea today. If you tackle an existing large market, it will be difficult to dislodge existing incumbents. Instead, focus on a small (but potentially non-existent) market that will grow rapidly over the next 10 years. When Airbnb first started, the market for renting out an extra room in your apartment didn’t exist. Same story when Uber first started—the market for on-demand car transportation didn’t exist.

For B2B opportunities, I would add a caveat. Sometimes it’s easier to disrupt a large existing market than it is to create a brand new market from scratch. The reason is that B2B buyers already have existing budgets, that they can re-allocate to your startup if it disrupts an existing solution. It’s harder for them to “create” new budget than it is to re-allocate an existing budget. This is why business model innovation (e.g. open-source, cloud v. on-premise, freemium v. upfront license, etc.) often succeeds in B2B.

You can change everything in your startup except the market. So spend a lot of time up front to make sure you’ve thought through your market.

In my view, this is one of the most important take-aways from Sam’s talk. I wrote a post last year called “The Market Always Wins (Part 1).” I’ve expressed my perspective here in the title, but here are some key points from my post where I quote some respected investors:

In a great market — a market with lots of real potential customers — the market pulls product out of the startup.

The market needs to be fulfilled and the market will be fulfilled, by the first viable product that comes along.

The product doesn’t need to be great; it just has to basically work. And, the market doesn’t care how good the team is, as long as the team can produce that viable product.

Conversely, in a terrible market, you can have the best product in the world and an absolutely killer team, and it doesn’t matter — you’re going to fail.

You’ll break your pick for years trying to find customers who don’t exist for your marvelous product, and your wonderful team will eventually get demoralized and quit, and your startup will die.

(Quote from Marc Andreesen, “The Pmarca Guide to Startups: The Only Thing That Matters”)

The #1 company-killer is lack of market.

When a great team meets a lousy market, market wins.

When a lousy team meets a great market, market wins.

When a great team meets a great market, something special happens.

(Attributed to Andy Rachleff, Laws of Startup Success.)

Overall, a great talk by Sam Altman so far. I’m still to get through the entire talk, but the section on “Why the Idea is Important” had a few key take-aways:

1. The best startups seem like a bad idea, but are really a good idea.
2. The current market size doesn’t matter. The market size in 10 years is what really matters. You want to be in a small but rapidly growing market.
3. You can change everything in your startup except the market. So spend a lot of time up front to make sure you’ve thought through your market.

Why the Idea is Important (notes from “How to Start a Startup” Lecture 1) was originally published in Startup lessons on Medium, where people are continuing the conversation by highlighting and responding to this story.

How constraint breeds creativity

“Man built most nobly when limitations were at their greatest” — Frank Lloyd Wright

In 1519, the Spanish conquistador Hernan Cortes landed in what today is Mexico, and what back then was the heart of the Aztec Empire. He explored various parts of the Yucatan Peninsula, encountering Aztec warriors along the way. At one point, Cortes faced possible mutiny and retreat from some of his soldiers, who wearied of the expedition and longed to return to the relative stability of Cuba. Cortes responded by burning his ships and effectively stranding his party in Mexico. His soldiers now knew that they faced a point of no return — either they continue their expedition and emerge victorious against the Aztecs, or they would perish. They fought on, maneuvered through many difficult situations and battles, and prevailed.

This story is often recounted as an example of how effective it is to make “point of no return” decisions. By “burning the ships,” you are removing any option other than to continue and win. Failure is not an option.

Another way to interpret this story is that constraint breeds creativity (and focus). Removing the option to retreat introduces a rather extreme constraint, but not all constraints need to be this dramatic. Any time you are pursuing a new project—whether it’s launching a product, starting a company, closing a deal—you will undoubtedly have limited time and resources. Rather than bemoaning the lack of resources, use these constraints as the forcing function to foster creative solutions.

Ev Williams, the founder of Medium and co-founder of Twitter, wrote about constraints in “What I Learned Building Medium (So Far).” One of the key constraints that Ev used to galvanize his team was time. He picked a date to ship the first version of Medium, which introduced focus and helped identify critical technology that his team would need to build a scalable service.

“Nothing clarifies focus like a date. (Or: If you don’t have a tough constraint, make one up.)

“Historically, I’ve been constrained by engineering resources and money. These are good forcing functions to drive simplicity.

“How do we ensure we don’t create something overly complex and/or fail to ship at all? By picking a date.

“As soon as we picked the date and a minimal feature set, we got rid of loads of other features we were playing with (some of which we’ll bring back, some of which we won’t). We also identified and built a bunch of infrastructure we’d need to host real users. And we got more done in less time than I’d ever seen any team do. It was magical and fun. Before we had the date, frankly, we were drifting.”

The team at 37 Signals, in their book “Getting Real,” also discussed the benefits of constraints in their chapter “Embrace Constraints”.

“Let limitations guide you to creative solutions…There’s never enough to go around. Not enough time. Not enough money. Not enough people. That’s a good thing. Instead of freaking out about these constraints, embrace them. Let them guide you. Constraints drive innovation and force focus. Instead of trying to remove them, use them to your advantage.”

What is it about constraint that fosters creativity?

According to research from psychology researchers John Kounios and Mark Beeman, a particular region of the right-hemisphere of the brain may be highly involved in the development of insight. We use our “right-brain” in order to integrate distantly related information, resulting in “the sudden flash of insight that allows [us] to see connections that previously eluded” us.

In an old blog post, Kathy Sierra wrote about how time constraints drive us to use the right-brain, which results in more insight and creativity.

“One of the best ways to be truly creative—breakthrough creative—is to be forced to go fast. Really, really, really fast. From the brain’s perspective, it makes sense that extreme speed can unlock creativity. When forced to come up with something under extreme time constraints, we’re forced to rely on the more intuitive, subconscious parts of our brain. The time pressure can help suppress the logical/rational/critical parts of your brain. It helps you EQ up subconscious creativity (so-called ‘right brain’) and EQ down conscious thought (‘left brain’)”

So next time you’re faced with a big challenge that requires creative solutions — burn the ships. Introduce constraints—particularly time constraints—as a way to increase urgency, bring focus and foster creativity. Embrace constraints, don’t avoid them.

Burn the Ships was originally published in Startup lessons on Medium, where people are continuing the conversation by highlighting and responding to this story.

Passion has to be part of your decision to start a company

“Nothing great in the world has ever been accomplished without passion.” — Georg Wilhelm Friedrich Hegel

I’ve recently had a few friends approach me to get advice about starting a company. These are friends who currently have day jobs, but are starting to brainstorm startup ideas on the side with people they know.

I always give them the same advice: Only start a company if you’re truly passionate about the market, product, and technology. Think with your heart AND your head.

John Doerr used to give a speech about how it’s important to be a “missionary, not a mercenary.” His point was that he invests in entrepreneurs who are truly passionate about their mission. They want to change the world. They want to solve a big problem. They’re not in it just for the money. They’ve got a burning passion inside of them for this market, to solve this problem.

Passion is probably one of the most important ingredients for success in a startup venture. It’s your passion that will pull you through the inevitable ups and downs. Don’t start a company because it sounds good on paper.

“It’s hard to tell with these Internet startups if they’re really interested in building companies or if they’re just interested in the money. I can tell you, though: If they don’t really want to build a company, they won’t luck into it. That’s because it’s so hard that if you don’t have a passion, you’ll give up.” — Steve Jobs

I always counsel my friends who are thinking about starting a company to think a little more with your heart than your head than you normally would. It’s somewhat counter-intuitive, especially for people who are engineers or who come from a technical or analytical background. We’re always told that we should analyze a problem thoroughly and make data-driven decisions. So people will do research — they will identify a few different markets that are taking off, objectively decide that they want to ride the wave, and then think of an idea that sounds great on paper. But they forget to ask themselves — what do I really care about, deep down inside? What drives me? What’s gets me fired up?

If you don’t pick a startup idea that you’re truly passionate about, you’re at risk of being a mercenary, not a missionary. You won’t be able to inspire others to join your mission — not investors, not employees, and not customers. And at the first sign of trouble, you’ll be tempted to fold.

On the contrary, if you pursue an opportunity that you’re passionate about, your passion and excitement will be infectious to others. You will push through tough times because you have a burning desire to succeed. You will be motivated to put in the long, stressful hours that go along with being an entrepreneur. And you won’t stop until your vision to change the world has been achieved.

So when evaluating a startup opportunity, do it with your heart as much as your head. Passion has to be part of your decision.

Passion: Think with your heart AND your head was originally published in Startup lessons on Medium, where people are continuing the conversation by highlighting and responding to this story.

Why market choice mattered so much for my former startup

In my last post, I discussed some of the great posts by others that have convinced me that Market Always Wins.

In this post, I want to share my experiences from co-founding Dasient, a cloud-based security startup that provided a web malware scanning for enterprises (banks, publishers, ad networks).

With Dasient, I would say that we chose an “ok” market. It wasn’t a terrible market—we had signed on as customers a large Fortune 50 bank as well as two of the top 5 global ad networks. We were on our way to doing $3m in revenue, with a credible path to getting to somewhere between $5-10m in revenue the next year.

But, we definitely were not in a great market that pulls product out of a startup, nor in a market where a rising tide lifts all boats. For us, every sale was an evangelical sell, where the founders had to get personally involved in educating and convincing customers that they had a problem that our product could solve. Definitely not an ideal market from that standpoint—the market wasn’t ready for our product.

Furthermore, the product category we were competing in just wasn’t that large. In the late summer of 2010, we began raising our Series A. One of the VCs whom we pitched asked us, “How big is your market?” We shared a detailed bottom-up model showing how we could get to $100m in sales in a few years, but he asked, “No, I mean what market are you in? What budget are you going after?”

That question got us thinking. We had initially been pursuing the security market for SMBs, but we pivoted towards enterprise customers when we began to see traction there. We didn’t realize it at the time, but we had essentially pivoted into the Web Application Security market.

We were pursuing an existing customer who had a budget that was already being allocated to Web Application Security products. There were other Web App Security products competing for this budget as well, like vulnerability scanning and web application firewalls (WAFs). In fact, prospective customers routinely asked us how we compared to some of these other products. So even our customers thought we were in the Web Application Security market. I suppose it never really sank in that we were in the Web Application Security market until the meeting with the VC, because we thought we were creating an entirely new product category. The reality is, we were creating a new category — but within the Web Application Security market.

After that meeting, I started to do some research. I got my hands on an investment bank report sizing up the security market.What I found made me think even more. The size of the overall security market in 2009 was $9 billion. But we weren’t competing at the level of the overall security market, as we may have previously thought. We were actually competing in the Web Application Security market, which was much smaller — only $200m out of the $9 billion. And that $200m was not growing very fast.

If we really wanted to grow into a $100m business, we would need to pivot again. We looked around at adjacent markets we could enter, like mobile security (which appeared to be growing pretty fast) or even the network security market. But it was SO much more difficult to try to pivot into a fast-growing market after we had already planted our flag in the Web Application Security market, and after we had built our product, brought on customers, and hired a bunch of people.

Had we spent more time up front analyzing the possible markets we could play in more explicitly, and at that time made a good bet on which of those markets would be the fastest-growing, we may have landed in a better market to begin with. For example, we started Dasient in 2008, just a year after the first smartphones hit the market. If we had figured out the mobile security trend early on, we could have started in that market and benefited from the rising tide lifting all boats.

My lesson from this experience is not only that Market Always Wins,but that the time to take this fact into account is at the very beginning. The choice of market is absolutely critical when you are first starting your venture, because it becomes difficult to pivot into a faster growing market later, especially if that faster growing market is unrelated to your original choice. It’s the same observation that I had in the last post on this topic: if you choose the wrong market, no matter how great a product you build or how smart your team is, you won’t be able to iterate your way to a big success.

For all of you who are contemplating starting your own venture, be sure to spend time up front explicitly deciding which market you will be playing in. Don’t make the mistake of finding yourself in a slow-growing market where you don’t have the wind at your back. As you evaluate startup opportunities, keep in mind that — no matter how great your product idea or team is — the market always wins.

Market Always Wins: Part 2 was originally published in Startup lessons on Medium, where people are continuing the conversation by highlighting and responding to this story.

Of market, product, or team, the choice of market is the most important determinant of a startup’s success.

Many aspiring entrepreneurs often ask the question, “What matters most for a startup’s success? Is it the choice of market, the product, or the team behind it?”

My perspective is that market always wins. This view has been reinforced by many respected entrepreneurs and investors who have written that the choice of market is the greatest predictor of startup success. In this post, the first in a series on this topic, I will do a brief roundup of some of these writings that have impacted me the most.

Marc Andreessen’s 2007 post: The only thing that matters

Back in the summer of 2007, I had joined a Kleiner Perkins backed startup called Danoo as a product manager. The late spring and early summer of 2007 was an amazing time. The Facebook Platform launched in May 2007, and the first iPhone went on sale in June 2007. Given these breakthrough developments, many aspiring entrepreneurs, including myself, were dreaming about starting our own companies. In July of 2007, I read a post by Marc Andreessen called “The Pmarca Guide to Startups, part 4: The only thing that matters,” a remarkable post whose impact I really felt only after I started my own company.

Many entrepreneurs may have heard of or even read Andreessen’s post, because it was the first time anyone had really discussed the concept of “Product-Market Fit,” a term that has now been embraced as a basic foundation of entrepreneurship.

In addition to the important “Product-Market Fit” concept, however, Andreessen wrote about the only thing that matters to a startup: the choice of market. To explain more about why market matters most, he wrote about what happens in a great market:

In a great market — a market with lots of real potential customers — the market pulls product out of the startup.

The market needs to be fulfilled and the market will be fulfilled, by the first viable product that comes along.

The product doesn’t need to be great; it just has to basically work. And, the market doesn’t care how good the team is, as long as the team can produce that viable product.

He later went on to explain what happens in a bad market:

Conversely, in a terrible market, you can have the best product in the world and an absolutely killer team, and it doesn’t matter — you’re going to fail.

You’ll break your pick for years trying to find customers who don’t exist for your marvelous product, and your wonderful team will eventually get demoralized and quit, and your startup will die.

Finally, he quoted from venture investor Andy Rachleff’s Law of Startup Success:

The #1 company-killer is lack of market.

When a great team meets a lousy market, market wins.

When a lousy team meets a great market, market wins.

When a great team meets a great market, something special happens.

Until I read this post, I had always assumed that an exceptional team was what mattered most to startup success. After all, a great team would be able to iterate its way to success. However, what I took away from Andreessen’s post was that it didn’t matter how strong the team was, how much they tried to iterate their way to product-market fit—if they started with the wrong market, they were basically doomed. I didn’t realize how right Andreessen was until I was pursuing my own startup venture, a couple of years in the future.

Jeremy Liew’s 2007 post: A Rising Tide Lifts All Boats

Around the same time, Jeremy Liew from Lightspeed Venture Partners wrote an article called “A Rising Tide Lifts All Boats.” He reflected on a then-recent study by McKinsey which analyzed the factors of growth for 100 companies in a variety of industries.

McKinsey found that the variance in growth rates for the companies in the study were driven by three factors:

1. Overall market growth
2. M&A
3. Market share

According to Liew, the McKinsey study found that overall market growth was responsible for 43% of the difference in growth rates between the companies, while M&A was responsible for 35% and market share was responsible for 22%.

Liew went on to say:

Simply put, a company’s choice of markets and M&A is four times more important than outperforming in its markets. This finding comes as something of a surprise, since many management teams focus on gaining share organically through superior execution and often factor that goal into their business plans.

Startups can also learn a lesson from this. Riding market growth in a fast growing market is a lot easier than trying to take market share in a slow growth market.

Liew’s post further reinforces the view that market selection is one of the most critical decisions that a startup can make. The implication, similar to what Andreesen wrote, is that even a mediocre product/team in a hyper-growth market will benefit from the notion of a rising tide lifting all boats.

Kirill Sheynkman’s 2011 post: Market, Product, Team

A few years later, after I had already co-founded Dasient and was deep into growing my own start-up company, I came across Kirill Sheynkman’s post “Market, Product, Team.”

Sheynkman proposed an interesting framework, contrasting the chances of success for startups with varying degrees of having a great market, product, or team. Here are the eight scenarios Sheynkman wrote about:

1. The dream: Market (yes), Product (yes), Team (yes). Chance of success: 90%. Frequency of happening at Series A: 2%
2. Big market, sweet product, needs “adult supervision”: Market (yes), Product (yes), Team (no). Chance of success: 40%. Frequency of happening at Series A: 20%
3. The business guys: Market (yes), Product (no), Team (yes). Chance of success: 30%. Frequency of happening at Series A: 20%
4. The techies: Market (no), Product (yes), Team (yes). Chance of success: 10%. Frequency of happening at Series A: 25%
5. Nice resumes: Market (no), Product (no), Team (yes). Chance of success: 5%. Frequency of happening at Series A: 10%
6. Obvious idea: Market (yes), Product (no), Team (no). Chance of success: 5%. Frequency of happening at Series A: 10%
7. Nice toy: Market (no), Product (yes), Team (no). Chance of success: 0%. Frequency of happening at Series A: 10%
8. Huh?: Market (no), Product (no), Team (no). Chance of success: 0%. Frequency of happening at Series A: 3%

When I read Sheynkman’s post, I immediately thought that this was an extremely useful framework for entrepreneurs and VCs alike to assess startup and funding opportunities, respectively. Although I didn’t realize it at the time, my startup Dasient was very much in “The techies” category. Our investors thought we were in the “Big market, sweet product, needs ‘adult supervision’” category, but that’s another story, for another post.

What struck me as I read the post was that, according to Sheynkman, if you had either an amazing product or an exceptional team, without a great market your chances for success were no greater than 10%. On the other hand, if you chose a great market from the start, and got either the product or the team right, your chances for success immediately climbed to 30-40%. Granted, the chances for success are estimates made by Sheynkman based on years of pattern-matching through investments, but his framework—and his estimates—seem to make sense, and are consistent with the writings of Andreessen and Liew.

As you consider future startup opportunities, you may ask the question: “What’s most important to a startup’s success? Is it market, product, or team?” In my view, the unequivocal answer is that the choice of market is the single most important determinant of a startup’s success. If you choose the wrong market, no matter how great a product you build or how smart your team is, you won’t be able to iterate your way to a big success. An exceptional market will pull product out of the team. A terrible market will inevitably kill the startup. It’s far better for you to place yourself in the middle of a fast-growing market, where the “rising tide lifts all boats” and the market may compensate for shortcomings in product, team, or execution.

In a future post in this series, I will reflect on my own experiences with Dasient, the market choices we made, and what I learned as a result.

Market Always Wins: Part 1 was originally published in Startup lessons on Medium, where people are continuing the conversation by highlighting and responding to this story.

I was fortunate enough to choose two amazing co-founders for my startup Dasient, Neil Daswani and Shariq Rizvi. When people ask me what the most important decision was from my startup experience, I think that the choice of cofounders ranks as probably one of the most important (along with choice of market and maybe choice of investors — more on this later).

Your cofounders will be like your family for the next few years. You may in fact spend a lot more time with them than with your real family. Like with any family, you will go through ups and downs. You will disagree with each other. You will have fights. You will face difficult decisions together. But at the end of the day, if you can still work together and pull through the “downs,” you will have a much higher chance of success.

So one question I often get is, “How do I choose a cofounder?”

1. Choose someone you know well and trust.

First, I believe that you are better off choosing someone you know well. This is going to be someone you have to trust implicitly, so having known them well for a long time helps. Think back to people with whom you have studied in college, or even better worked with in a professional capacity. I had worked with Neil in a company called Yodlee for two years about 6 years before we decided to start Dasient together. And I knew Shariq from my grad school days at Berkeley— he was working on his PhD in computer science and I was working on my MBA. We had a history together, which helped to start with a foundation of trust. Plus, with both Neil and Shariq, we had a lot of common friends and acquaintances, which further increased the level of trust. It wasn’t as if we had found each other by posting a “co-founder wanted” ad on a job board.

2. Make sure that you work well together.

Second, screen for how well you actually work well together, and for each person’s level of commitment. Although you may have known someone for a while, unless you have actually worked on a project, you don’t know how well you work together. We did a bunch of “warm up exercises” to see how well we worked together. In 2007-2008, I worked with Neil and Shariq separately on a bunch of Facebook applications. These did not end up as ideas that we built our business around, but they were extremely helpful warm ups for us to get to know each other’s working style. Did each of us take on a fair share of responsibility, and did we deliver on commitments to each other? Were we willing to roll up our sleeves and do whatever it took to build the product? Were we able to solve problems together? Did we have the commitment to spend nights and weekends working on a side project? What was our philosophy about building a company together? We learned the answers to each of these questions by working on the “warm up” Facebook apps together over the course of several months.

In their book “Getting Real,” the 37Signals team have a chapter called “Kick the Tires.” Here is a direct quote from the book: “Work with prospective employees on a test-basis first. It’s one thing to look at a portfolio, résumé, code example, or previous work. It’s another thing to actually work with someone. Whenever possible, take potential new team members out for a ‘test drive.’” I think that this advice makes a lot of sense, and I would even extend the advice to “work with prospective cofounders on a test-basis first.” (BTW, “Getting Real” is a really awesome read. If you haven’t read it yet, check it out.)

3. Find cofounders who are complementary.

Third, make sure you find cofounders that are complementary to you and that can add value on day 1. One of the big mistakes that I see a lot of MBA-types make is that they find other MBAs to be their partners in a startup venture. Then you have a bunch of cofounders with a very similar skill set, and not enough cofounders with the skill set that is most needed when first starting a venture: the ability to write code.

When you’re first getting started, you definitely don’t need more “business cofounders” than technical cofounders. Depending on the type of startup, you’re better off with 1-2 technical cofounders and 1 business cofounder. Nowadays it has become easier for even fairly non-technical people to at least make prototypes, if not write fully functional code. Get the business cofounder to contribute to the actual product development by creating mockups/wireframes, or writing some of the front-end code. What you don’t need in a business cofounder is someone who is only focused on “strategy,” “business plan,” or “partnerships.” The business cofounder can take primary responsibility for strategy and fundraising, but should also actively contribute to the product development.

On the flip side, I have seen many really talented engineers who don’t appreciate the value of having a business cofounder. These same engineers will often pursue a startup opportunity for the wrong reasons— it seems cool and sexy, or it’s something that that they are excited about, for example. (Being excited about an opportunity is, of course, really important, but should not be the sole reason for pursuing a startup.) At the end of the day, though, does the opportunity represent a large enough market opportunity? This is where having a business/product cofounder can help. The business cofounder can help identify customer pain points, size the market opportunity, ensure that the positioning is correct. These skills are probably more important for B2B tech opportunities than consumer.

My point is that each cofounding team should have cofounders whose skill sets are unique and complementary. So when looking for cofounders, make sure you don’t find clones of yourself.

In a future post, I will share some stories about how having good cofounders made a big difference in my startup experience, and how having bad cofounders can destroy startups.

Choosing the Right Cofounders was originally published in Startup lessons on Medium, where people are continuing the conversation by highlighting and responding to this story.

October, 2009. The weather outside was beautiful at our headquarters in Palo Alto, CA, but things were about to get stormy in the Dasient board room.

We had been operating for about 1 year, and had launched our cloud-based security-as-a-service product to much fanfare in the press a few months ago.

But there were no sales rolling in. We were initially going direct to SMBs, and were finding that the sales cycle was long and painful to get an SMB to pay even as little as $50 or $100 a month. And the number of SMB prospects and customers we were getting was pitifully low. We were starting to see some traction coming in from reseller/OEMs (a whole other blog post on that), as well as from some enterprise customers (banks, publishers, and ad networks). But it was incredibly slow going to grow our sales.

That particular board meeting was the first time we sensed that our investors were losing their patience. They kept asking what the plan was to grow our pipeline and when we would start seeing sales ramp. At one point, one of our investors said something to the effect of, “You guys don’t really understand sales. You need to hire a good salesperson to help you guys sell more of the product.” They encouraged us to ramp up hiring, especially in sales and marketing.

In retrospect, this was a key moment in our company’s history. Our investors thought we had a sales execution problem. The reality was (although we didn’t want to admit it to ourselves, much less out investors): We didn’t have an execution problem, we had a market problem.

Our sales progress to this point was far below our own expectations. I think we were a little insecure about this — maybe our investors were right. Maybe we didn’t know how to sell. Perhaps if we hired a really good sales leader, things would turn around and sales would start to ramp. After all, here were some really experienced investors who themselves had been CEOs of companies in the past, and they were telling us with a lot of confidence that we had an execution problem that would be fixed if we hired more salespeople. “Salespeople are a different breed. The best ones will figure out how to sell refrigerators to Eskimos.”

So we took their advice. Whereas before, our team had been really lean (3 founders and a few engineers), we now started hiring sales and marketing people. And, of course, sales people are not inexpensive. So our burn rate went up as well.

Problem: We hadn’t found the repeatable, scalable business model.

Steve Blank recently wrote a great article where he proposed a definition of a startup company. He wrote that a startup is in search of a repeatable, scalable business model.

Steve defined “repeatable” in the following way:

“Startups may get orders that come from board members’ customer relationships or heroic, single-shot efforts of the CEO. These are great, but they are not repeatable by a sales organization. What you are searching for is not the one-off revenue hits but rather a repeatable pattern that can be replicated by a sales organization selling off a pricelist or by customers coming to your web site.”

Steve also defined “scalable” in the following way:

“The goal is not to get one customer but many – and to get those customers so each additional customer adds incremental revenue and profit. The test is: If you add one more sales person or spend more marketing dollars, does your sales revenue go up by more than your expenses?”

The problem was that we weren’t there yet — we had not found a repeatable, scalable business model. The founders were personally driving and closing every SMB, enterprise, and reseller deal. And it was taking a lot of heroics to close those deals. We were rapidly iterating even fundamental components of our product based on what we were learning from the market. When we added new salespeople, our revenue was not going up by more than our expenses. In other words, we were still discovering our product-market fit.

After that Oct 2009 board meeting, we made the mistake of going down the path of ramping up our sales and marketing teams and three things happened:

1. We continued to thrash

2. Our burn rate grew and cash became depleted

3. It became more difficult to pivot

Let’s discuss each of these consequences in more detail.

We continued to thrash

We brought on salespeople, but we still had not achieved product-market fit and we were thrashing around in search of it. Sales cycles continued to be long; it was difficult for us to find the right customer, and when we did, we needed to really evangelize the product. We were definitely doing “demand generation” rather than “demand fulfillment.” Most customers really did not believe that they needed our product right now. Or, the product needed to be extended to meet some “custom” requirements for each new large customer. As a result, the sales that did come through continued to require heavy involvement from the co-founders. Either we had to use our technical knowledge and/or relationships to convince customers of their need, or we had to be on sales calls to understand new customer requirements.

Moreover, our sales team grew frustrated because they felt the product was not quite “done,” and that we lacked the messaging and sales materials around the product that they could use to execute sales. We started to see some sometimes rapid churn within the sales org. One of our salespeople joined the company and left within 2 weeks.

Our burn rate grew and cash became depleted

Headcount grew, our burn rate increased, but the actual sales ramp still did not occur. We had raised a little over $2m in seed round funding in the fall of 2008. For an entire year, we had kept our team lean— our company consisted of just the co-founders and a couple of engineers, and the co-founders had taken massive salary cuts (on the order of 50% of what we were making in our previous jobs) in order to conserve cash. Before that Oct. 2009 board meeting, we had about 3/4 of the cash we had raised in the seed round still left.

However, with the new expenses from salespeople (and without much additional revenue coming in to offset the expenses), our burn rate grew dramatically. It was amazing how quickly we burned through cash. Less than six months after the decision to hire more salespeople, we had significantly depleted our cash reserves and were facing the prospect of raising a bridge round.

It became more difficult to pivot

In the book “Getting Real” by 37Signals, the authors write about the risks for a startup to gain too much mass.

“Less mass lets you change direction quickly. You can react and evolve. You can focus on the good ideas and drop the bad ones. You can listen and respond to your customers. You can integrate new technologies now instead of later. Instead of an aircraft carrier, you steer a cigarette boat. Revel in that fact.”

We had hired a sales team to execute on our vision of building a cloud-based web security company. With these added employees, it now became harder for us to change our vision and pivot into a new product-market opportunity. We also started to bring on more customers around this initial vision. We didn’t realize it at the time, but the decision to bring on salespeople at this time constrained us, and reduced our ability to pivot.

For example, about a year later, we realized that there could be an application of our technology to solve mobile security problems. We knew that mobile security was “hot”— the threats were growing, our prospects were asking us about it more and more. We began prototyping some offerings that provided mobile security solutions. But it was so difficult for us to fully pivot into this new opportunity. We had a legacy product that was completely unrelated, legacy customers that had our first product, and legacy salespeople that been spending their time with us selling web security products, not mobile security. Although many of the salespeople were willing to adapt, they had been building a pipeline of customers for web security, and it was difficult to get them to let go of those prospects to focus on a new, risky mobile security opportunity.

Why did we make this mistake?

I think there were three reasons we made the mistake of hiring salespeople too early: (1) we were not confronting reality ourselves; (2) we did not clearly communicating to the board our suspicion that we were facing a market problem, not an execution problem. (I will publish another post about lessons learned from board communication at a later time.); and (3) as first-time entrepreneurs, I think we were overly influenced by what our experienced investors were telling us.

A few months after deciding to ramp up our sales team, I had a meeting with Scott Petry, one of the co-founders of Postini (sold to Google in 2007). When I told him that we were in the process of ramping up our sales team, Scott told me that it was important for the co-founders to stay very involved in the sales process until we understood how to do scalable, repeatable sales. He said, “You can’t transition the sales process to a salesperson until you can make sales in your sleep.” He was speaking figuratively, but the message was clear. Don’t start hiring salespeople until your sales process is ready to scale. Unfortunately, we had already started ramping our sales team because we (and our board) thought that we might have an execution problem. Instead, we really should have kept our team lean and focused on solving the market problem.

If you’re a current or aspiring entrepreneur, make sure that you know what kind of problem you need to solve—a market or an execution problem—before you start ramping up your sales team. Don’t hire too many salespeople until you have the scalable, repeatable sales process figured out. Otherwise, you’ll find yourself thrashing, burning through cash, and unable to pivot later.

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