At the start of the New Year, I spent some time reflecting on the companies that have achieved the extraordinary outcomes for Floodgate as well as for the industry in general.
Recently, I gave a talk at Stanford that pulled some of these thoughts together. I was hoping to reach the founders who want to create the hyper-exceptional startup — one that is in the super-performing top .01%.
Below is a link to the talk:
For folks who don’t have the time to watch the whole video or the vignettes, I thought I would summarize the main thoughts which are covered in that 60 minute speech in a 5–10 minute read.
Before jumping in, I should mention that this is not a simple matter of “follow these rules and you will be the top ten out of 10,000, guaranteed.” I am also not saying that “100% of the top .01% systematically followed each and every one of these success factors, which explains why they won.” Luck and timing are hugely important and almost all super-performing startups have been beneficiaries of being at the right place with the right product at the right time in a changing and powerful technology cycle.
But I do believe that those who use strong frameworks to commit to being truly legendary have a few big advantages. First off, and perhaps most important, they can eliminate ideas that are not worthy of their talents and time. Second, they can raise their own games by putting the highest possible expectations on themselves and their teams. After all, when Sam Walton once said “High expectations are the key to everything,” he was exactly right. And third, they can accelerate their learning by diagnosing their businesses proactively along the way rather than stumbling ahead through trial and error.
So — you still want to build a legendary company? Here goes:
The most powerful asymmetric weapons for legendary founders are:
Moore’s Law, which states that the performance of computing doubles at the same price roughly every 18 months. This power, in the hands of a great startup team, will breach the advantage of any incumbent or create entirely new categories of breakthrough products. This magical force has animated the technology business for more than 50 years and guarantees that founders will continue to create new digital businesses that are awesome and seem to come out of nowhere.
Metcalfe’s Law, which states that the value of a network is a function of the square of the number of nodes it contains. Want to know why companies like Facebook are among the most valuable in the world? Look no further than the principles of network theory and the value amplification that comes from harnessing network effects.
The Power Law, which is the least understood because it is the most subtle and counter-intuitive. It states that the largest outcome in a group of companies exceeds the outcomes of all the remaining players in the group combined, and the next largest exceeds the total of the remaining players combined — and so on. The power law explains why less than 10 companies out of 10,000 create more than 95% of the value and why the best company created in a given year is usually more valuable by itself than all of the other 9,999 startups created that year combined. While Moore’s Law is about harnessing exponential technology power and Metcalfe’s law is about harnessing strong network effects, the power law is about the hyper-exceptionalism that defines successful startup creation.
Legendary founders harness the power of Moore’s Law (with extraordinary technical depth) and/or Metcalfe’s Law (with strong network effects) to create one of the tiny handful of hyper-exceptional startups that are in the top .01% of great outcomes. This is the fundamental goal of a legendary startup team.
At Floodgate, we use a framework called the “value stack” to orient our thinking around startup exceptionalism. We look at the value stack as a hierarchy of powers. Each of these is powerful on its own, but as these advantages are layered on top of each other they reinforce and amplify each other even further:
Proprietary Power is at the base of the value stack. Proprietary power is necessary because it helps a startup avoid competition once the idea takes hold. This type of power often takes the form of technology depth (generally leveraging Moore’s Law as a proxy) or as a strong network effect (generally leveraging Metcalfe’s Law). Many startups make the mistake of trying to be better rather than different. Having a structural competitive advantage is critical for avoiding mindless competition.
Product Power is about achieving product/market fit. Product/market fit involves creating a “dance” between the product and the market rather than launching something and iterating. It also involves taking the most powerful and compelling aspects of the product and delivering them in the form of “WTF” level features that are not merely compelling — they rise to the level of changing people’s points of view about what’s even possible and create intense delight in customers.
Company Power involves implementing the basic types of foundations that allow the company to avoid management and technical debt. These include the creation of hot teams, company culture, and the right meetings and lightweight processes that streamline the company and make everyone execute better and faster.
Business Model Power involves translating a startup’s innovation into attractive profits that can improve rapidly. A product that is unique and delights customers should always have a set of attractive customers who value the advantages enough to yield increasingly attractive profits as the company reaches critical mass scale. Company power amplifies this by enabling the company to capture the opportunity to do this before larger competitors can co-opt them.
Category Power is the highest level opportunity to create massive value. A great company designs and owns a category, making itself the “Category King.” Category Kings don’t just make something to sell to people. They introduce the world to a new “category” of product or service. They replace our current point of view with a new point of view. And ultimately, they change how people and businesses decide to spend their money. Category Kings usually capture 70–80% of the profit pool in their markets.
At Floodgate, we have been lucky to work with some of the great founders who have mastered many of these elements and taught us so much along the way. In the speech we use a lot of examples. For those of you who are committed to making your startup the most important gift you can offer to the world in your lifetime — I hope some of the info and videos and suggested books throughout the talk are useful.
May you dare to be Legendary….always :-)
Originally published at medium.com on February 19, 2016.