What do an entrepreneur and a venture capitalist have in common? According to Mark Suster, Partner at Upfront Ventures - a lot. He would know - prior to joining Upfront Ventures in 2007, Suster had worked with the VC firm for nearly 8 years as a two-time entrepreneur before selling his company to Salesforce.com. Just as people mistakenly view the life of an entrepreneur as being glamorous, they also wrongly believe that the days of a VC are leisurely spent.
Drawing on his experience as an entrepreneur, Suster says that the life of an entrepreneur is anything but easy, with days that are characterized by long hours, hard work, stress, travel, being apart from family and wondering if you will survive or not. The life a VC is also no stroll in the golf course. Suster attests that it's very competitive and says there is a lot of pressure to raise funds.
As a software developer, turned entrepreneur, turned VC, Suster shares his wisdom with technology start-ups on what it takes to be a successful entrepreneur and what qualities VCs are looking for.
8 Tips for Start-up Success:
1. Team first, solution second - Deal selection is based on the traits of the entrepreneur. When it comes to deciding on what idea to invest in, Suster says that 70% of the decision is based on the traits of the entrepreneur and only 30% on the solution. He is looking for someone with tenacity, domain knowledge, natural leadership ability, detail orientation and competence in their area. The team they are bringing with them is also very important. "It takes a team to build a company, not an individual," says Suster.
2. Invest in relationships - Suster says the number one source for finding new businesses to invest in, is getting referrals from other entrepreneurs who he trusts. "If someone I have worked with for years recommends someone in their space, I am going to look at them," says Suster. Referencing his most quoted blog post, "Invest in Lines, not Dots," Suster says that he is looking to make relationships early on and over time he can understand how they map to his ideal entrepreneur characteristics. Most investments he does started a long time ago with a relationship.
3. Hire people who will challenge conventional wisdom - It's important for start-up CEOs to hire people who will tell them if they think they're wrong. A CEO also needs to have the confidence to admit when they have made a wrong decision. As a CEO, you have to have your own strong true north and know your own direction. In his blog, Suster lists 11 attributes of a start-up entrepreneur. One of them is decisiveness. As an entrepreneur you have to make so many mundane and rapid decisions and even though only 70% will be correct, Suster would rather have a CEO making fast decisions and getting 30% wrong then working with a CEO that has analysis paralysis.
4. Revenue distribution and predictability matters - Why is it that enterprise software is now the darling of start-ups? Suster thinks funding goes in cycles, and SaaS has been hot for the last 18 months thanks to the public market SaaS companies that have done extremely well. There is a lot of predictability in a business that has a large amount of customers on a recurring basis, which investors love.
5. Get inside the mind of the enterprise buyer - Suster says that selling to people inside the enterprise requires "evangelical sales", noting that initially it will be the CEO that will be doing the selling because people are buying the entrepreneur, not the products. Here are the three questions that start-up CEO's need to be able to address:
- Why buy anything? You need to go to a customer and be able to identify a problem and then persuade them why your technology will solve it.
- Why buy mine? Next, you need to persuade them why they should not be using other existing large companies and/or other start-ups that are selling the same thing. This comes down to having a "USP" (Unique Selling Proposition).
- Why buy now? You need to be able to identify enough pain and perceived benefit in your solution to get enough people to buy.
6. Reference customers are crucial - Most buyers are very conservative, so you need reference customers. These are the customers that want to be seen as innovative inside their organizations. They want to be using the latest and greatest tools and they are willing to break eggs, take risks and suffer consequences to do so. Suster says that once you have them and get enough of them, the mass market will follow. "Not until after you have these references, should you hire traditional sales people to go out and sell to customers," Suster advices.
7. Purposefully and passionately chase what matters - Suster says that people who are just passionate about money do not generally make the best entrepreneurs. The best entrepreneurs are passionate about the problem they are solving. "If you are going to be spending this much time on something, it should be something you are passionate about," he says.
8 . Understand your competition - It is important to understand the unique value of what you are bringing to the table. This requires doing some basic research the competition. In an interview with Bill Gross, founder of IdeaLab, Gross says that to build a great business, "You need to make sure your product is 10x better than that of your competitors. First, you're probably exaggerating how much better it is. But also when you're developing, so is your competitor. So if you shoot for 10x better you might hit 3x better and that's super important to win." Suster agrees, "If you are not significantly better than the competition you are never going to build something truly amazing."
Suster's current investments include: Adly, awe.sm, Burstly, DataSift, Epoxy, Gravity,Maker Studios, Moonfrye, MyTime and tangibleplay.
You can watch the full interview with Mark Suster here. Please join me and Michael Krigsman every Friday at 3PM EST as we host CXOTalk - connecting with thought leaders and innovative executives who are pushing the boundaries within their companies and their fields.