cover image: “The Unicorn in Captivity.” Gift of John D. Rockefeller Jr. 1937. credit: The Met Museum Public Domain
Hunting Unicorns with Capt. Hoff
by: Karina Mendoza
Steve Hoffman, founder of Founders Space, through the many years he has run his top-rated accelerator-incubator (Forbes, Entrepreneur and Inc. Magazine,) has learned much about startups and is highly coveted for his expert knowledge in this arena. So when the call to hear his words of wisdom at an event on the topic of startups that grow up to be billion dollar companies, otherwise known as Unicorns – it is to no surprise that the Palo Alto room was sold-out, packed with would-be and soon-to-be, striving and thriving startup entrepreneurs and investors.
Capt. Hoff, Hoffman’s moniker, began the evening somewhat in a similar fashion as he did in his book’s, Make Elephants Fly, opening paragraph.
“ My goal in writing this book is to expose the process of innovation behind the world’s startup factory and its ability to reshape our lives and fortunes. I’ve spent the past decade in San Francisco working with hundreds of startup founders, helping them understand the underlying methods, models, and mind-set of Silicon Valley and put those to use in coming up with breakthrough products and services. What I can tell you is that innovation isn’t straightforward. It’s not linear. It’s an unpredictable, impractical, and incredibly difficult process, which is why so many people and companies fail at it. It’s like trying to make an elephant fly. But it’s also responsible for most of the wealth creation today, and if you aren’t innovating, you’re going to miss out.”
Startups are not for the faint of heart for it is common knowledge that in this world it is more likely to fail than it is to succeed. And on a grander scale, it is exponentially much much less likely to be one of those that ‘magically’ develops wings, that is able to leap incessantly over unending obstacles and then ascend to higher heights, ie, in the magnitude of Google or Facebook. Rare, but these unicorns do exist.
So, What does it take to be a radically successful startup? What do or should investors look for? Here are –
Capt. Hoff’s tips on Hunting Unicorns –
How to spot them as an investor, How to be one as an entrepreneur:
- CEOs need to have the charisma to be able to convince, to pull in talent and resources such as funding and media. It is the one power they possess that can fuel and bridge concepts not only the much-needed boost for the early days but also to keep them going and to take them to the next stage.
- CEOs don’t necessarily have to be the one to come up with the idea. Elon Musk and Travis Kalanick were just investors originally. They did not come up with the idea. Tesla’s original idea was from Martin Eberhard and Marc Tarpenning, and Uber’s original idea is credited to Garrett Camp for a couple of examples. Given many other unicorns’ original ideas are often proven wrong in one way or another they are consequently and essentially discarded or abandoned in their early days as part of their journey.
- CEOs keep the team going. They empower and fire them up. “If you’re CEO and you let the team give their own ideas, then they’ll own the company,” says Capt. Hoff.
- CEOs lead by doing, teaching and learning. One way Capt Hoff expands his knowledge, as do most exceptional leaders, is by reading a lot. For him that means reading an average of one book a week. Ready to recommend a whole list of favorites, the one other book that he recommends (aside from his book) is Shoedog on Phil Knight’s Nike mindset. He suggests to read a diversity of books on a wide range of topics like sociology, psychology, and design to develop a more well-rounded perspective in life which is fortuitous beyond running a business, in numerous, unimaginable ways to succeed in living life to its fullest, generally speaking.
- CEOs remember the fun factor. In fact, Capt Hoff started Founders Space just for fun. Founders Space has become full time, global, a top-rated company by media elites. They also receive thousands of startup applications each year but they get only 3% through their vetting process because they remember to have fun. This is evident in the nature of Steve Hoffman whose sunny personality embodies the word.
Team. – Capt. Hoff recommends getting to know each member one by one. He does this by having lunch with each individual in the team. There is so much insight, so much to be learned that he wouldn’t otherwise know in this simple time-tested routine.
Market and Scalability. – Startups need to be focused on a specific market upon entry point and then go from there to other markets. Investors are attracted to big startups. Because they are scalable, they have somewhere to go. Hence, so would their investment.
Customer. – The startups need to really, really know their customer. The same goes for the investor. It isn’t enough to say, for example, that the market is “women.” That’s too general. You need to filter the very broad category with more detail. In this case, Are the women – In their 20s? – Stay-at-home women? – Live in the city? As an investor, in order to figure out and discern the customer, “You have to do a market test to validate. Look for parallels if you don’t know their market,” says Capt. Hoff.
Competition. – If, when competition still does it the old way, if through the technology new competition comes in with a lower price, that’s called disruption. – or easier, or more efficient, or capture market share. What is your secret sauce that nobody else is doing? For example, Snapchat. Their features make their product better, not just different, better. They need to be “1) Exponentially better that they will just leave the competition. Or, 2) Totally different, not incrementally better. Core value has to be 1) or 2).” Is 2nd place fine? Capt Hoff won’t invest in a runner-up because “it’s winner-take-all. Winner takes 80% of the market. If you aren’t going to be #1 then that means they’re going to be down exponentially.”
Business model. – How do you make money to pay for your costs to keep afloat at the very least? Capt. Hoff says, “Either 1) Customer pays you. Or, 2) Advertiser pays you directly or indirectly (as an affiliate.)
- If it’s from the customer, then ideally it’s over their lifetime. And, it cannot be by a slim margin. So it’s, either 1) a lot of money upfront, like a car purchase, or, 2) a little money but giving you over and over as recurring revenue.” “Startups sometimes works on Kickstarter but if there’s not enough to get the engine going, the startup will fail,” Capt. Hoff warns. Alexa and Google Home are exceptions, at give-away prices, because they are an extension of their online store.
- If advertising, then it needs volume. If it won’t scale then No, don’t bother advertising and just focus on the revenue stream. As an investor, Capt Hoff prefers B2B or enterprise software because they only need a few customers and they can pay a lot of money. Startups can directly validate the service with a few meetings. If B2C then they have to be very big. B2B is software SAAS vs. hardware, or hardware and software combined. It’s about “How deeply can you monetize this software and leverage this platform? The really, really good B2B’s are the ones with platforms. Citing Salesforce, “It is hard to use and costly but they created a platform, a software ecosystem platform,” Capt Hoff said. “Startups bootstrap, grow organic, put money into a fund. Incubators are not good investments. Invest in the fund behind the incubator instead,” he added.
Patents. – “In a lot of startups, patents are worthless garbage. They aren’t patenting anything super-valuable. Sometimes they are window-dressing for investors,” Capt. Hoff said. What he cares about is the business model that works, the patents, not so much. “Facebook and Uber had no patents initially. When FB IPO’d that was the time they got 50 patents. You could always buy, file later. Don’t worry about patents in the beginning,” Capt. Hoff said.
Design. – Matters. Huge. Important. “Your startup will be judged by your product’s design, website design, Powerpoint presentation, by everything you show.” Offer the user experience UX that competitors aren’t giving.
Media. – Media attention is a marketing engine that money cannot buy.
Practice Due Diligence. – For investors, Capt. Hoff advocates, “Make sure they are real,” and “Interview everyone.” For startups, “Create a Dropbox with a “Due Diligence” folder ready for investors.”
Fun factor. – “The only way to do great work is to love what you do.” – Steve Jobs. The journey of a startup will have days of headaches, heartaches, frustration, misery, anguish and pain. Resillience happens if and when you don’t even have to remember that you enjoy doing what you do.
On Finding Opportunities –
- In Pain. Solving a problem that pains you and many other people. Not just any other pain though. It “has to be a gushing blood, hair-on-fire extreme value problem for the customer to value solution very highly.”
- Define the need. Create a new opportunity that is non-existent where you will define the need.
- Watch the technology waves. The Internet, mobile, CRISPR, DNA tech, nanotech, blockchain, AI waves have so much power. But,” Capt. Hoff warns, “if there’s no business, it will fail. What tech does is it opens a door. It is up to the entrepreneur to find a solution to a problem then that’s the chance to create a business.”
On Angels and VCs: – “An Angel has a dollar limit whereas an investor (VC) will stick with the company until the end. If a VC refuses to come in the next round then there’s a problem. Tier 1 investors stick to the end. Others are opportunistic. Early stage investors are small funds,” he says.
Traits of Unicorn founders. – They stand out by the power of their habits.
- They are go-getters. They don’t stop, are obsessive. If they come to a wall or obstacle, they figure out a way around it. They. Will. Figure. It. Out. They have to do this and will not let anything stand in their way.
- They are good leaders.
- They get the right people.
- They tend to be really optimistic, unrealistically optimistic.
- They own all the problems. Case in point, Elon Musk. He went through a lot of failures but he just keeps going over and over and over.
- They are knowledge-hungry. They want to know about everything. They are super-curious. They need to push beyond what everyone knows to find the opportunities out there. They are voracious readers.
In closing, a challenge among VCs today is that they have too much money in their hands and too few companies to invest in. With the industrial revolution becoming global in recent years, it won’t be a surprise to find more and more unicorns born from emerging markets and making their mark in mainstream global technology. It won’t happen overnight. It may start as needing help in accessing the US market for sales and marketing or Silicon Valley’s advanced R&D and large-scale funding. As certain as there will be more of these winged beasts, the billion, perhaps, the trillion dollar question is where are they and will they be coming from?