When I look at the largest entrepreneurial success-cases in the tech-industry of the past decades, my focus is on two questions: What was the “secret-sauce” of each particular case? But also what is it that these entrepreneurs and their companies have in common in terms of patterns? In this post, I am condensing my observations from a number of companies from the US including Space X, Apple, Tesla, Google and Amazon, but also from European showcases like Zalando or Spotify.
1. Start with a strong “Why”: Align company purpose with your drivers
In the early days of my career as a tech-entrepreneur (2008 – 2012), I have been influenced by the Berlin tech-ecosystem which at the time was dominated by a few company builders with the strategy of taking mostly B2C success-stories from the US and launching identical businesses for the European market (dubbed as “copy-cats“). Most of these companies where founded by first-time founders who were driven by the idea of becoming a „successful entrepreneur“, casted by the company builders based on criteria like having previously worked for a reputable consulting firm or investment bank. To most of these founders, “success” meant first and foremost to build a sizeable company and measure its success in the currency of revenues and financial wealth. Neither were they obsessed about solving a specific problem nor about creating value in a larger context such as society or environment.
In all honestly, I was myself part of this category at the time. Not that I had ever founded one of my companies in the ecosystem of a company builder, but because these where the same drivers that also lead my brother Ferry and myself to start our B2C couponing marketplace DailyDeal in 2009. We wanted to be “successful entrepreneurs” but we had little intrinsic connection to the problem we were solving and to the product we were building. DailyDeal by the way was the company which we sold to Google Inc. in late 2011, bought back in early 2013, restructured it and took it to break-even. We sold it again in late 2015 and sadly witnessed it go out-of-business in 2019. It was a roller-coaster-ride that taught us a lot about the ups and downs of entrepreneurship. Today, we acknowledge it as a valuable part of our journey.
The big problem with most of these types of companies was that they were lacking a strong cohesion between the product they were building and the personal intrinsic drivers of the founders. This led most of these companies to ultimately fail and the teams losing motivation once they realised the copy-cat-strategy did not work too well and would require major pivots to preserve a chance to ultimately succeed. In other words: If you do not genuinely and deeply care about the problem you are solving as an entrepreneur, then you have limited stamina to cope with the trouble that will arise along the way.
Entrepreneurs like Elon Musk, Steve Jobs or Larry Page (whom I once had the honour to meet personally in 2012 in the Google-Plex in Mountainview) in contrast where always fanatically driven by the desire to solve problem that was of fundamental importance to them. They would make as many adjustments and pivots as it would take along the way, always having their north star firmly in sight. This clarity about your own set of drivers and the alignment of these drivers with the culture and strategy of the company you are building is in my point of view a must-have ingredient for any company that wants to sustain at scale in the long-run.
2. Think Big: Solve valuable problems in large markets
In order to be able to attract venture capital funding at scale, it is important to target a large to very large market. At least a € 20 bn. (better € 50+ bn.) market should be addressable with the 5-10 year go-to-market and product strategy that the company has developed. If you go for too small addressable markets, you will already from Series A onwards be turned down by Tier-1 VCs and will have a hard time raising substantial capital. This is because for the institutional VCs in order to fulfill the 20+ % Net IRR return-expectation that they are facing vis-à-vis their investors, they must ensure that all of the bets they are making can at best end up becoming a € 10+ bn. company once taken public 6-8 years after their initial investment, creating a money multiple on invested capital anywhere in the range from 10 – 100x. This is simply impossible if the addressed market is either too small per se or if the depths of the specific value-creation and value-capture resulting from the product-strategy is too shallow.
The former does not mean that the market must be exactly quantifiable early on, but it must be obvious that if the company scores a perfect product-market-fit, then it will be homerun aka billion-€-business. A good example for such type of “blue ocean market” success is Facebook, which created a completely new category and the associated market from scratch. The latter means that even if you address a per se large market, it is important to make sure that a significant amount of the overall value created in this market can be captured with the product your company is building. Looking at our digital freight-forwarding company Forto (which we co-founded in 2016 and which raised > € 125 mn. in equity to date), this means that it is a huge difference whether you generate leads for incumbent freight-forwarders (capturing maybe 2-5 % of the overall value created in the industry) or whether you build a cloud-based next-generation forwarder (being able to capture 60-80 % of the value in your own P&L instead).
3. Bend, break and rewrite the rules of your industry
If you stick to the rules by which your industry operates, it is almost impossible to surpass the incumbent players. This is because they have a hard-to-overcome set of competitive advantages, that typically include economies-of-scale, a trusted brand, a large set of existing clients and suppliers, access to equity and debt at scale, continuously optimized processes and many more.
Therefore as a startup that is aiming high, you should bend, break and rewrite the rules of your industry. Stick to the law, but rewrite the rules. Your product will likely fail if it brings an incrementally better value proposition to the customer. To succeed, it should in the words of Google’s Larry Page better be “10x” better. Especially when you do not operate in a blue-ocean-market (like Facebook) but in a break-and-replace game where the market is growing slow or moderate and winning new business technically means to convince customers to ditch their legacy solution to sign up with your company. But only if the value proposition is 10x better than the legacy solution will the customer be willing to incur the switching costs. These include onboarding and change-management effort, insecurity about the true performance and reliability of your product, the solvency of your company and so on.
Peter Thiel’s recognized book “zero to one” is a good reference when thinking about the difference between creating incremental innovation and value (from 1 to n) versus creating something entirely new that stands out from the crowd (from 0 to 1). In the spirit of “zero to one” I encourage you to take risks and bet the firm on your vision. If you think and feel you are onto something, then by all means resist peer-pressure and simply follow your north star. Disregard the advice from industry-experts, as they are often themselves part of the “1 to n” legacy system.
4. Focus: Build the best product in a specific category
There is much more value in building the #1 product that is solving a particular problem in a specific category than in building a “swiss knife” type of product that is addressing a multitude of problems at the same time, but is only mediocre in solving each of those.
Look at the story of Tesla, that has built the best-in-class electrified car out there and is worth more than its top-5 competitors combined. In doing so, Tesla has put a sharp focus on building very few different models and refrained from building vans, trucks or busses at the same time. Think of the old adage: “You can have anything but not everything”. Be super specific about the problem you are solving. Only once you have mastered this (often times in the beginning narrow) category, think of expanding your product in concentric circles. This can include vertical and horizontal aspects of expansion (e.g. category, product, international expansion). Think of it like the image of additional layers that are built upon a strong foundation. Value is created by being the sniper – not by being the shotgun.
5. Culture over Strategy over Execution
The single biggest learning I have made in 20 years as an entrepreneur is that culture as a success-factor of a company prevails over strategy which in turn prevails over execution.
Execution is a craft, to some extent even a commodity. If a company is mediocre at execution, there are ways to fix this problem by making good hires, implementing best-practice frameworks or bringing in expert advice. Strategy certainly is very important to the overall success of a company. But it can be fairly easily adapted and modified as needed. Coaching and sparring with the founders about the company’s strategy is a core-part of the value that any good VC investor is delivering on top of putting money in the company’s bank account.
Building a superior culture in a company is the holy grail. It is deeply engrained. It is technically the DNA of the company. If a company has developed a great culture, it has the single biggest pre-requisite for succeeding in the long-run and creating sustainable value for all of its stakeholders. A great culture is typically marked by a strong and intrinsic alignment of the company’s entire team towards the problem that the company is solving. This includes agreement on the relevance of the problem aka about the “Why”.
Modifying the culture of an up-and-running company is a very difficult exercise that can only be lead by the founders and C-suite management. For any outsider or even a VC investor on board-level it is almost impossible to turn a culturally flawed company around. On the other hand, there is no single trait that draws more of my personal attention and excitement as an investor than a company where the alignment on the mission across all departments and levels can be seen and felt everywhere.