CC#14: Marc Andreessen on 5 Myths about Early-Stage Startups
Myth #1: The best product always wins. Marc explains "This is backwards--the winning product actually becomes the best product."
On last night’s episode of the GOOD TIME Show, Sriram and Aarthi brought up 5 myths that many startup founders believe to be true and had Marc Andreessen give his take on them. Marc is the Founder and GP at Andreessen-Horowitz, arguably the most successful VC firm in the world. Let’s get into it!
Myth #1: The best product always wins.
Marc: “This is backwards. The winning product actually becomes the best product. Whatever product wins, is the product that is most likely to fuel a level of R&D investment that is going to allow the company to enhance that product to a point that it will become the best product on the market. You can argue that it’s getting harder and harder to win with a lower quality product. In the old days, you’d watch a TV commercial and let the company tell you whether their product was good, today you can go on the internet and see what everyone else has to say about the product.”
Steven Sinofsky, a regular moderator/guest on the GOOD TIME Show, replied “I’m curious Marc, do you think people get confused because once you get the product to market you have all these other attributes? Things such as distribution, price, positioning, etc.”
Marc: “Let me give an example from history. An economical example is the Intel 8086 processor, the one that made the IBM PC in the late 80s. It was a great processor and it was released at the same time as the chip was released by Motorola. If you did a comparison on the product, everyone would have said the Motorola was a better chip. Part of the reason Intel won was the campaign they ran. The intel marketing people were like ‘our actual product is worse, so we’re going to surround this chip with a ton of solutions.’ They created a solutions catalog with around 200 solutions that the processor could be used for, including a control set for a fighter jet, a video game set and one of the applications happened to be for a PC. This made the customer face a decision: Do I buy the better chip or do I buy the better solution?”
Marc went on to add a second example: “Everyone thinks Google just had a better a product. The truth is, they had some big distribution contracts in the early days with Yahoo and AOL. This year, I believe Google will pay Apple over $1b to be the default search engine on Apple devices. In addition, they pay Firefox over 100% revenue share, meaning they actually take a negative margin in order to increase volume which helps drive the network effect.”
Avichal Garg, managing partner at electric capital, added that “Distribution is your product, and if you think of them differently then you’ll likely do things wrong.”
Myth #2: Hiring a very experienced person will solve all of your problems
Marc: “I will say that in certain cases, companies simply need a fundamental skillset and really need a key hire. However, there are 2 giant scenarios where this doesn’t work and often backfires.
When you hire someone experienced, the question always is have they actually done the job you need them to do. For example, executives at larger companies are not constantly innovating and creating new models, they are inheriting a system someone else has built. They may be doing. Great job running it, but they don’t have experience actually building it. Big companies often have administrators that sit at their desks and wait for a large inflow of information in order to react. Taking an approach like this at a startup can be detrimental.
The other more subtle thing is: the way I think about early stage startups is that they’re essentially a scientific experiment—you’re testing a hypothesis. You’re always testing and you’re going to be wrong a lot of the time if you’re doing something new. A successful startup is one that has proven all of its hypothesis. At that point, they really are ready for an injection of a large amount of capital. But often times, founders think ‘who can we hire that will prove the hypothesis better than we can?’ You need to ask yourself—is the answer that the hypothesis is wrong, or is it that we don’t know how to test the hypothesis? The important thing is to stick with the hypothesis you feel is correct and put all of your resources behind that.
Aarthi asked “Then at what stage is it a good time to bring on that big hire?”
Marc: “Generally, after you’ve proven your hypothesis and it’s become clear you can charge a certain amount of money for your product. Once you’ve proven the hypothesis, then the reason you get outside talent is because you’re basically getting ready for growth, and so you want someone who knows how to build a growth engine. You don’t need a CFO until you have a financial model that actually works. For example, when you start climbing towards 50 employees, you definitely want to make your first HR hire.”
Avichal: “Often times, early stage startups bring in an executive hire before they’ve found PMF (product-market-fit). The biggest mistake is thinking that is the only way to get to PMF.”
Garry Tan, founder and managing partner at Initialized capital, added “There’s 2 phases, the first is catching the lightning in a bottle, which is pre-PMF. And doing the same thing you did to get there won’t allow you to keep it. The 2nd is part of Marc’s answer. How do you actually build an engine that allows you to scale, and this is post-PMF.”
Sriram asked about the relation of PMF and revenue.
Marc: “First of all, something you hear a lot is we don’t have anybody in sales, so we should hire a head of sales. You can take 2 other steps before this. You can actually just hire a salesperson. There’s an orbit of these very sharp evangelistic sellers in silicon valley, who are trained at selling brand new products. These individuals are quite open to joining an early stage startup because they see an opportunity to get in on the ground floor of something that could be big. The other thing you can do is bring in a sales manager or sales director—someone who knows how to run a sales team from 10-50 people, but maybe not 1000+ people. This can get you to your first $10m in revenue. If they end up leaving, you can always go hire a head of sales, and when you do, you’ve got more of a proven track record to show potential new hires, and can hire someone even more qualified.”
To finish off Myth #2, Marc added “There’s an assumption in all of this, which is the composition of the founding team. You don’t have to start with a founding team of 100% engineers. You may consider 1 go-to-market person, 1 engineer and 1 product person.”
Myth #3: VCs are out to get you, and your founding team will be together forever
Marc: “This is the discussion of: ‘Ok, we’re the founders and we’re brothers and there are these evil VCs and basically if we don’t have total control of the company then we will have to negotiate our way out of all of these things.’ However, what actually happens a lot of the time is that the founding team actually fractures and they turn on each other. There are a lot of ways for this to happen and we’ve seen just about all of them. If you’re a founding member of a startup and you think the VC is the threat to the company, you should be looking at your co-founders, If you can put a lot of thought into what this means in terms of stock, control, etc. Do governance rights continue after being fired? Who can get fired? It would probably make sense to make a ‘founder prenup’, which is not a very common thing. Pre-nups can often times degrade trust. If a founding team were to have one, it might have a similar effect. It would raise questions such as—Why are we worried about this? Which one of us is not serious about this? When you’ve been in this business for a while, you see these splits happen all the time. In some cases, everyone makes a lot of money, but one founder has an inflated ego and starts fighting against the others. You start to think your former co-founders are out to get you. If they wanna get revenge, they don’t have to work. People should be aware of all of these scenarios.”
Aarthi added “Startups are really difficult—you need to be really sure that you can go through all of these things with him/her. Just because you worked with someone for a couple months, doesn’t mean that you guys would make great co-founders. What would be a good indicator is to think about what it would be like to be stranded on an island with that person. If you think they’d be a good person to be stranded with, then they are likely a good co-founder.”
Myth #4: You need a strong technical founding team
Marc: “Culture-fit is extremely important. The version that goes sideways is that we start our company with all engineers and that creates a culture shift. They tend to really love what they do. They tend to be passive-aggressive. So now we need a culture-fit. We go through the list and make sure they fit that culture. Engineering is one of these fields that people love to work in their own craft. However, sales people don’t go home after work and continue trying to close more sales over the weekend. Sales is really hard, because you’re already being told to do a lot. Has culture fit become a straight jacket that says we can only hire people who are similar? This can be a problem because it makes you think these 2 things:
We’re only going to hire super interested, nerdy sales reps.
How hard is this sales thing, can’t we just hire an engineer?
Steven: “I hate salespeople—they’re always trying to be super nice. One of them wanted me to play golf with him/her”
Marc: “Steven, that’s exactly right. Classic introversion vs extraversion. Engineers tend to have lived their life in front of a computer and so they probably haven’t met a lot of people. So this is why it’s important to be as open as possible to people who are from different backgrounds… that’s the formula that works in the world.”
Sriram asked “How do you hire someone who comes from a different cultural background than you?
Marc: “Everyone sees Google as the nerdy company with a bunch of really smart engineers. They even wear the beanies and glasses. However, if you meet the people who run Google’s Sales department—it’s at least 50,000 people at this point. Maybe more. The people who built Google’s sales engine are extremely sharp and do not fit that nerdy mold. For a long time, Oracle was widely perceived as having really sharp salespeople. I always heard they had top of the line engineers. There you have these 2 examples that have people who are polar opposites of what they appear to have.”
Myth #5: The startup founder narrative
Marc: “People tend to believe this narrative that the most successful companies are always started by people who were friends as kids, grew up together, went to college together, and they just happened to stumble upon their idea. An example is Larry & Sergey, the co-founders of Google. Ebay is another classic example. There are all these stories, and they’re basically marketing stories. There’s usually a lot more complex factors at play. It always turns out that there’s some deeper richer story that’s less funny and risky. It’s generally not someone who has an idea and starts a company. It’s generally people who have been thinking about the idea for years and years. Mark Zuckerberg had been doing experiments with social design for years before Facebook. We describe this as the idea maze. Successful founders have probably spent 4-5 years going through the idea maze.”
Avichal: “Everyone thinks that Paul & Rohan built clubhouse and it suddenly blew up. Most people don’t know they’ve both been playing in social for a decade. This didn’t just happen in 6-9 months, they’ve been at this for almost 10 years.”
Sriram: “Didn’t Y-Combinator try funding founders with no idea a long time ago?”
Garry: “It failed so bad that we never even tried it again. They seemed like sharp founders that could maybe start something good. We decided not to invest in it after an incredibly bad batch. We actually ran this in parallel with a batch of founders who did have ideas. The people who came in with no ideas ended up not being able to come up with great ideas in the 10-weeks.”
Aarthi: “A huge misonception is the lack of knowledge regarding the iterative nature of startups. A lot of great products happen because of a lot of iteration. The myth is that people just stumble upon it. Ideas are a dime a dozen, but can you iterate/execute for at least a decade?”
Sriram: “There are many schools of thought on building a successful startup. For example, The Lean Startup is one that is widely adopted and used. What are your thoughts on this Marc?”
Marc: “The lean startup has had a huge net positive effect on startups since its inception. But theres 3 ways it goes wrong
The fail fast thing—part of this is if you can’t prove this hypothesis, you want to jump to a new idea. I worry because I see a loto f examples of people using this as an excuse to give up. Where if you had given it another 5-10 years, it may have succeeded. This makes me think about founders who have started 5 or 6 companies in an 8 year span and all of them failed because they gave up prematurely.
This works well for software. But this does not work for biotech, hardware or building a new computer. There are many cases where in order to get this thing to market, you need a fatter approach, and you’ve simply got to do more up front.
You don’t want to overly constrain ambition. I think there’s a danger with this framework that causes people to pursue smaller ideas.
Steven: “The people who have plans see this and say, let’s build a crappy product and release it. This is generally not a good thing. Whereas others would argue this is old-school philosophy.”
Marc: “This makes me think of The Innovators Dilemma and Disruption Theory, or the ideas that everything needs to be disruptive. I remember when this first became popular and suddenly every startup started to claim they were disrupting an industry. In reality, almost nothing is actually disruptive. It raises the question, who’s actually read the book and who’s just heard about it? There’s a lot of info in that book—how do you coach people out of that? When it comes to talking about your startup, it’s situationally specific. The devil is in the details so much when it comes to product design companies. You need an agile plan that’s very specific for what you’re trying to do.
Aarthi concluded the show by stating that they made it through half the list of Myths, and that they will be hosting a follow-up session at some point to finish the list.