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November 14, 2007

In Search of Inexperience

hpgarage.jpg TechCrunch published a great guest post by Glenn Kelman, the CEO of Redfin, called “Entrepreneur 2.0.” It inspired me to piggyback on his idea that investing in “serial entrepeneurs” who have already been successful might not be all that it’s cracked up to be and write this post.

Both our posts run counter to the theory that many entrepreneurs, wealthy from their previous smashing success but restless and too young to die (or become venture capitalists, which is roughly the same thing) are the best bets for the next big thing.

Superficially, it’s hard to fault this ”back the proven entrepreneur“ theory. For one thing, from a venture capitalist’s point of view, if you fund a serial entrepreneur and she succeeds, you “knew” that she was proven. If she fails, at least you backed someone for a good reason—that is, she was proven—so your limited partners shouldn’t get too bent out of shape.

That’s a lot better than backing a first-time entrepreneur who fails—then you are just stupid. (Also, if you back a first-time entrepeneur, and she’s successful, you take the credit: “It’s because of my hands-on coaching and guidance.”) But, just as Glenn wrote, if you think about it, great, world-changing companies such as Hewlett-Packard, Apple, eBay, Microsoft, Google, Yahoo!, and YouTube were zero for three according to the official venture-capitalist spec sheet: Proven team, proven technology, and proven business model.

Hence, I would like to declare my support for Glenn’s perspective and help him make the case that second-time entrepreneurs are not necessarily the be-alls and end-alls.

  • Serial entrepreneurs try to prove that their first success wasn’t a fluke. Rather than starting from the basis of technology (“isn’t this cool?”) or customers (“there must be a better way”), the reason for existence is “I’m going to prove that I’m talented.” This is a bull shiitake reason for starting company compared to solving people’s problems or changing the world.

  • Serial entrepreneurs cannot distinguish between causation and correlation. The root cause of earlier success may have simply been blind, dumb luck, but few people realize this and even fewer will admit. Thus, they have the hollow arrogance of people who just got lucky instead of people who have been truly tested, and arrogance is a bad thing in entrepreneurs.

  • Serial entrepreneurs are likely to use the same methods again. How can you fault them for using the same methods that made the successful the first time? For example, if they built a high-end computer the first time, they build a high-end computer the NeXt time. If they used dealers the first time, they use dealers the second time. If they gave everything away to get eyeballs and sold the company to a bigger, dumber, richer company, they try try that “business model again.”

  • Serial entrepreneurs don’t (or can’t) work as hard. When you have a 5,000 square foot house, a second house in Montana, a car made by a company whose name ends in “i,” a spouse, and kids, attitudes change. Indeed, attitudes should change or people never grow up. However, it’s one thing to work to survive and another to work for fulfillment. They can say they’re just as hungry this time, but the point is that no one had to ask if they were hungry the first time.

  • Serial entrepreneurs don’t get smacked around enough. Life is good as a serial entrepreneur: they walk in, tell people that their last company was sold for a bazillion dollars, and now they’re starting another one, and it’s a privilege and honor to invest. Who’s going to poke holes in their strategy when Sequioia, Kleiner Perkins, et al are issuing term sheets and ever lesser venture capitalist is sucking up? No one. And that’s too bad because they won’t get anyone checking their sanity.

  • Serial entrepreneurs fill new, unfamiliar roles in their next companies. For example, in the first company the person was an engineer who became the vice-president of engineering who became the CTO. Just because you were good at writing designing chips doesn’t mean you’re CEO material in your next fabulous fabless chip company. As Glenn says in his post, “This means that what I used to be really good at — designing software — I don’t do as much of anymore, and what I never had to learn how to do — manage people – I now do all the time.”

  • Serial entrepreneurs hire their buddies who were with them the first time. Thus, the entire founding team suffers from all the problems listed above. People who don’t know what they don’t know are few and far between, but a startup needs this kind of people to push the boundaries of what’s possible in what ways. Ignorance is not only bliss; it’s also empowering.

I once heard Mike Moritz of Sequoia explain what kind of entrepreneurs he wanted to invest in. I’m paraphrasing: “Guys under thirty who are building a product that they themselves want to use.” Amen, baby! I vote for two guys or gals in a garage who are an unproven team, unproven technology, and unproven market.

Comments

I think Lt. Draper brings up an interesting point - serial entrepreneurs that don't necessarily have a proven track record, but are young, smart and hungry. That would be an good read. Hook it up Guy, I am sure your readers would love to hear what you and the VC community think of this category of people, where they are, where they end up and what they should be doing.

Paul Kedrosky hit the nail on the head over two years ago:
http://paul.kedrosky.com/archives/001208.html

Guy, you should know better. Kelman's post says:

"But to be really great, I wonder if second-timers have to forget some of what it cost us so much to learn."

You two seem to assume real serial entrepreneurs even begin to think this way, but they don't. Real entrepreneurs get inside the OODA loop of major markets and competitors. They have an uncanny ability to see through the fog of war and hit a moving target that lies in the future. It has little to do with knowledge of the immediate past or present. The target has already moved on.

More on my blog:

http://smoothspan.wordpress.com/2007/11/15/skill-or-luck-can-serial-entrepreneurs-succeed/

“Guys under thirty who are building a product that they themselves want to use.”

That's exactly my inspiration. I'm deeply in touch with what I want my product to accomplish because at any point in the growth of my startup I know I'll have at least one customer, myself.

@Linda VandeVrede
Hmmm I maybe guilty for that too. But I found my team of people through the internet and craiglist, but we have developed to become friends.

So we were friends after we became a team in developing a new service.

Is that better?

"he root cause of earlier success may have simply been blind, dumb luck, but few people realize this and even fewer will admit. "

Totally agree with you.

Nicholas Taleb couldn't have said it better.
http://www.fooledbyrandomness.com/

As a first time entrepreneur, I find your post to be heartening. My resume is not impressive, I don't have the right team, but I KNOW my idea is going to work, if I have to personally speak to every real estate agent, accountant, and wedding professional in the entire country.

Bootstrapping my way up is easier than convincing VC's that I'm fundable, and that is fine.

It's going to work because I need it to work, and I'll never give up.

I think you left out a third category: serial entrepreneurs that haven't hit it big yet.

They've already learned all the tough lessons so they won't make the stupid mistakes the children make, but they're still lean and hungry and motivated.

If you haven't tried and failed yet, you're just not the right material.

Guy, you would be considered a serial entrepreneur...have you become what you stated in your post? Has any of what you described interfered with you building Truemors?

Just some thoughts.
5tacos

I think a lot of entrepreneurs in general, serial or not, equate loyalty with talent, and that is their biggest error.

Great post Guy. I think you got your point across very well. As for me... Well I'm still trying to be an Entrepreneur and get out of this accounting industry.. So boring..SOMEONE HELP!!!

But if (when) I ever become successful, I will try to remember this post, so I could learn from it. And from some of the comments here too. I can already see some of the things that I would do from this post.

I could see myself hiring my buddies who helped me the 1st time. I respect and care for my friends opinions.. Well I would still think they would push the boundaries... So is it bad to rehire old friends or not?

Great post, GK. Right on the money. As Gekko said, "Give me kids that are poor, smart and hungry."

You have to remember there are exceptions e.g. Max Levchin he seems to be working damn hard, but becoming as successful as Paypal will be a very big challenge.

Been there done that - this blog states the lessons learned

I think you've got it right this time.

I started a very successful company when I was 21 and sold it at 27, when it had 300 employees and I was bored to death of it.

My track record since has been mixed. It's very hard to focus when you have a substantial financial cushion. I focused just as much on keeping my nest egg as growing it, and ended up doing neither.

After 20 years of unfocused attention to my various start ups, I am now relatively broke. I mean the house is paid for, the kids are in private school, but we now fly commercial and sit in the back unless there's a cheap upgrade.

The good news is that I'm focused again and my current venture, which has been languishing for three years, is now starting to take off.

Reading your post is, in a certain way, a strong call to arm, but I feel that there is an inconsistency between your words and the guidelines of Garage. Isn't it right that you suggest that...
"...the founders have to have the credibility to launch the company..."
I do not think that this is the picture of two guys in a garage.

...just my 2 cents...

***********

"Credibility" can = undergraduate degree in computer science. We do not say "proven management ability."

Guy

Full feeds again! Thank you Sir!

Good post, but I wouldn't be so sure to assume YouTube has since proved its business model. They can't hide behind the DMCA and sell ads, and the networks don't want to pay to put their content up.. they can compete or just sign up a free account.

One of my favorite serial entrepreneurs is Bill Nguyen, who founded OneBox, Seven, and now LaLa. If I remember correctly from one of his past interviews, he mentioned that one of his rules in starting a new company is that he never hires the same people from his past biz ventures--which I thought was kind of odd, but interesting...

Mr.K, I think it will be totally awesome if you can do a series of Q&As or short interviews with your favorite serial entrepreneurs :)

Why does it sound like it reminds me of few people I met? ;-)

At the same time, a lot of VCs would argue that they don't want to have to pay for the education of a 1st time entrepreneur. I pay for Wharton -- education costs money. Similarly, entrepreneurs pay for lessons learned in building their companies.

That being said, it's good to see some confidence in the power of young, motivated, not famous entrepreneurs (I'd probably put myself in this category). I'd also argue that the idea of a 1st time entrepreneur isn't always the same as someone who has had entrepreneurial tendencies/background/skills and just never taken the next leap to apply them.

It's kind of crazy to think though through that list of companies you mentioned, but we all know how many VCs laughed at Google and turned them down.

Like any area, you are going to have poor VCs, mediocre VCs, and the exceptional top quartile. Maybe the highest returns come when you are able to close the deal that no one else wanted to take because they all chose to play it safe and go with the proven serial guys.


Just some thoughts from a 19 year old building his 1st significant startup.

Cheers,

Boris

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