We listened to The Family co-founder Oussama Ammar’s podcasts on how to become an entrepreneur and here is what we got from his first class.
There are not that many entrepreneurs on this planet, which is why those four words – entrepreneur, CEO, businessman, manager – are often indistinctively used to describe them. The first thing is that an entrepreneur is not a chief executive officer and vice versa, because a startup is not a company yet. A startup and a company don’t have the same issues to address because they just don’t have the same structure. To be a CEO means being salaried. When Tim Cook joined Apple as a CEO, he did not ground the company, but he sure became the decision-maker. People tend to believe that the entrepreneur is a power-person, but it isn’t necessarily the case.
Fundamentally, the skills that will make you a good entrepreneur aren’t the ones that will make you a good CEO. Besides, a lot of entrepreneurs hand down the lead of their company to a real CEO once they feel like they have finished building it (see Richard Branson with Virgin), because grounding a company and leading it aren’t quite the same. When you gather a team around a project, the first thing is to define who is going to be the CEO. And there can only be one, for a simple reason which is that the people you are working with should not undergo “dad said yes, mum said no” situations. For a relevant example, take the French navy: when a superior officer enters the boat deck, the inferior officer in place has to leave, and vice versa. It is meant to avoid hazardous situations in which none of the two would act when required and give orders, as they would both be thinking that the other one has got everything under control. In front of a boulder, the superior could think “the inferior can ask for a change of direction, it’s an easy thing to do” while the latter would be thinking “I don’t want to intrude in his territory and give orders while he’s on the deck.” This is why there is always only one in-charge-person on the deck, to avoid the feeling of non-liability people could get in the presence of their counterpart. The same goes for a startup, which is the place where people are going to have to execute and execute over again.
When it comes to startups, Oussama Ammar says, what matters the most is to go as fast as possible. To him, there is an undeniable trend which is that the most successful startups are the ones who made the biggest mistakes. But they usually made those mistakes so quickly that they also got over it very quickly and learnt from them. Between zero and one, there is nothing to lose, except for time. Most entrepreneurs think that they have something to lose, that is wrong. Some startupers with 50 users on their platform are already getting cold feet and start thinking to themselves: “I cannot try this; I am afraid I will risk hampering my brand”. But there is no brand yet, you just cannot stay on the same stage forever, so you have to try new things, new formulas, new ways of seeing things. If Coca Cola makes a decision, there is brand impact, but this is not the case for a startup, which is structurally in a state a permanent bankruptcy. We are pointing out the fundamental difference between a company and a startup. A chief executive’s role is to minimize risks, while the entrepreneur’s mission is to maximize opportunities. 99% of the time, nothing will happen, but if the 1% hits, then the outcome will most likely be worth the risk. You no longer need to mortgage your house to start a business today, things have changed.
Being an entrepreneur is not either being a manager. A manager operates at a level which is not relevant for a startup. The management institution has been created to address the issues a company faces when it has become too big to allow people to communicate efficiently and with no mediator. It is really complicated to communicate smoothly once you have reached a certain size, which is why you need dedicated people to reduce frictions and rationalize the relationships between people and teams so as to make them go in the same direction. If a startup needs a manager, then it is no longer a startup. The startup in itself is supposed to be informal in the way people interact. 3 years after it was founded, Google let go its 21 managers and went back to a team of 49 people because structurally it was still as startup, and investors told them that they didn’t need this many processes and reports, but rather to focus on finding their business model. Which Google did one year later. It’s anecdotal of course, but it shows that putting managers in place and implementing countless processes can put the company in contradiction with its goal at a precise moment, and this goal was to find a viable business model. You have to keep in mind that a team in a startup is a small team in which everybody provides more work than they are asked to do, otherwise you are just in a regular company. You just cannot plan ahead the amount of work you are going to have to put in. A manager has to know how to anticipate. In a startup, your worst enemy is anticipation. If you even begin to believe that you are smart enough to predict the future, then you are most likely doomed to failure. Every morning, the entrepreneur has to analyze its environment and see how the world has changed and to what extent the deal has shifted, or not, to know if the decisions he made the day before are still relevant and then adjust.
We easily fail to difference a businessman from an entrepreneur. People tend to deem the most successful businessmen as entrepreneurs. But most of them aren’t entrepreneurs, their story is about using capital as a leverage and building favorable ratios of power. A business person will just enter a preexisting company and help it grow or build its own with an already known and understood business model. It does not mean that they cannot come up with innovative ideas, just that they won’t change the way the industry they are getting their feet into will change the way it works fundamentally. The bakery industry is evolving, there is room for innovation, but the business model stays the same, you have to bake your bread and then sell it.
The mission of the entrepreneur is to create business models that are at once scalable, repeatable and profitable.
There is no entrepreneurship without a business model issue. That’s partly why entrepreneurship is a marginal phenomenon today. Picture yourself as a Google founder, an average 1 billion people connect to your search engine everyday but you don’t want to sell adds to make money because you think advertisements just look bad, then the issue you are facing goes straight into the entrepreneurship box. You need to figure out a business model. The money you will make out of your business model is different from the opportunity revenue, which is not sustainable. Now take Facebook: startup or company? Facebook makes money out of advertising, but it is not a scalable way of making money, at least not to them, it is just what we call an opportunity revenue. So Facebook is still a startup. The only way for Facebook to sell adds is to have sales people reaching out to prospects. For Google on the other hand, 95% of the revenues are made without any human intervention. This percentage is insignificant for Facebook. But how can a company like Facebook fail to do better? For a simple reason, which is that the team doesn’t want this model to be its business model, it is searching for something more innovating and thrilling, that’s why it is heading towards payment, certified identity and so on. Nevertheless, a businessman is someone who wants to make use of its assets, therefore he can often join forces with an entrepreneur.
Then what is an entrepreneur?
If an entrepreneur is not a CEO, not a businessman or a manager, then what what does it mean to be an entrepreneur? The mission of the entrepreneur is to create business models that are at once scalable, repeatable and profitable. An entrepreneur is trying to create a business that triggers a certain amount of fixed costs and, above all, the lowest variable cost as possible. As a reminder, scalability describes a company’s ability to grow without being hampered by its structure or the available resources. Google’s first query costed a fortune, but the one billionth query marginally didn’t cost anything: that’s what you call a scalable business. As regards the service industry, things don’t grow exponentially but linearly. Things take time, but they eventually grow if the model is scalable, even though it takes gargantuan efforts. Each new Starbucks built costs less than the previous one. But when it comes to the digital industry, a new type of entrepreneurship is emerging. It is led by people who mostly care about one thing: absolute scalability. This phenomenon mainly occurs in the digital industry because it is a domain where there are no barriers preventing you from scaling your business.
But how to build a scalable business? First thing is to build a solid founding team, with people sharing the same ambition. It is, by far, more important to find people who share a vision than people who have complementary skills. Whether you have two people with equal or unequal skills, then you are going to want to go with the one that shares your vision. Cultural consistency is the cornerstone to a functional team. People have to want to go in the same direction taking the same path altogether.
Serial-entrepreneur Steve Blank gives us a very relevant definition of what a startup is: “a startup is an organization formed to search for a repeatable and scalable business model.” It means that a startup is, by definition, built to be or become scalable. It doesn’t mean that it has to be scalable from the very beginning, but there is no question that the ultimate goal is to come up with increasing returns to scale. At the end of the day, the size does not matter to decide whether the company is a startup or not, there are both small-sized and big-sized startups. What matters is that a startup is one as long as people don’t know how and when they are going to be able to pay off their investors.
When you are doing something essentially new, you put yourself in a situation where the frontier between genius and insanity is thin. When you create, you are by definition faced with something unnatural, not obvious. Every obvious idea is already out. If you want your idea to be groundbreaking, then you are going to want it to arouse skepticism as well. Most of the time, when a new “impossible” idea comes out, it first seems to be bad, people are reluctant. But Facebook and Uber weren’t discouraged by reluctant people, otherwise they would have never followed through on their idea. You have to show your idea to the right people, not everybody has to agree with you. There are three types of persons who you should focus on: those who did or are doing something similar to what you want to do, your targeted market and the people you need to convince: the investors, the sponsors, possibly the government, the state institutions and every entity that could subsidize your startup. The last category is a dangerous one because investors are a pass/fail test. The problem arises when the second and the third category are made out of distinct people, in other words when the investors don’t belong to your targeted market.
Take Palantir for example, a private American software and service company specialized in big data analysis. Today they are used by governments for counter terrorism issues, but also by private companies in the financial and healthcare industry. To put it differently: they got really big. The technology behind this company was developed in a French laboratory by French researchers 3 years before being launched. The French researchers went to Oséo, a public investment fund for SME, and presented them their idea. But the investors didn’t understand a thing to the pitch. The mistake the researchers made was to tell their potential investors their real story straightaway and not the one that they just wanted to hear. Palantir’s founders made a smarter move, they went directly to Peter Thiel, who was the right person for the idea, and he gave them 30 million dollars to get them started. But the danger when you start telling people the story they want to hear is that at some point, you tend to start believing in this version as well, so you have to deal with this state of permanent schizophrenia. So your best shot is to find investors that match your target. The worst situation would be to have to change your project for real, and that is exactly why an irrelevant ecosystem can be fatal.
You can destroy a big-budget marketing campaign just by massively lambasting it on the internet, and you can also see a small-budget campaign go viral in the blink of an eye.
We are no longer in the 1995-2000s, the bubble has exploded, you cannot reproduce what the “bubble entrepreneurs” achieved then because the deal is just no longer the same. Today, the level of the investment has dramatically decreased, you need to prove your worth and profitability before even seeing the color of the money investors are willing to lend you, you have to give them infinite guarantee to be trusted. There is no doubt that the Silicon Valley is a very favorable place to build a startup, but it has become increasingly competitive. That’s where being in another country plays its part, because you can get a good financial valuation for your startup. In the tech industry, the valuation is very high and offers great opportunities as what is valued is rather the talent of the people you have in your team and your strategic position than your turnover. Facebook put in 19 billion dollars to buy out WhatsApp, they didn’t think twice because what they feared was not to be paying too much money for something which was worth less, but rather that WhatsApp could be bought out by another company and eventually become prejudicial to Facebook’s strategic position on the market.
Today, when it comes to the tech, the world is heading towards a single market. B2B French businesses for example have a lot less difficulties to find clients in the US with a phone call than in France with an actual meeting. It just costs less money. This is a global opportunity which has to be thought of, just because you are in a given country doesn’t mean this country is your number one potential market. Social networks have changed the roots of distribution throughout the world. For a long time, controlling distribution meant having a hold on the economic barriers to entry, it meant you found value in being the one entity able to reach out to a client. But today you can reach out to people instantly and with great resonance through social networks. You can destroy a big-budget marketing campaign just by massively lambasting it on the internet, and you can also see a small-budget campaign go viral in the blink of an eye.
In 1995, Windows would have allocated 800 million dollars for advertising and 80 billion dollars in the product itself. Things no longer work that way today. The satisfaction scale is immediate; you can hardly fool the consumer. Your product just has to be good.
Scales have been multiplied on the internet, what used to be a niche can suddenly become a huge market. Growth opportunities have become gigantic. Facebook’s goal today it to reach 6 billion users. All you need to do is to provide something that works, you don’t need to spend ages justifying that a digital revolution is happening anymore. It is a given. It doesn’t mean your product is going to be skyrocketing the minute you launch it, it could stay on the ground for years, just like Air Bnb did during 36 months, but once it has finally fired, everything goes exponentially fast and big. When Uber showed their project to investors, they were banking on one billion dollar turnover after one year, they never expected to make 20.
So what is a startup? It is a business in a state of permanent bankruptcy that only holds through the determination of its founders. By definition, a business which doesn’t know yet how to make money is on the verge of bankruptcy. The only way to be successful is to find a predictive way of being profitable with a healthy business model.