"Pick the one thing that is of burning importance to the customer then delight them with a compelling solution."
"Customers will only buy a simple product with a singular value proposition."
What about iPhone, probably the most profitable product of the last 5 years? Is it really that focused?
I don't think that many people in 2006 would have said: my phone is not enough like a computer. I would have said that cell phone call quality and battery life sucks, so give me something that will hold charge for a week, has the quality of a land line, is ultra light, small, can be dropped, etc. That would have been focused.
Steve Jobs said it was 3 products I think... it's a phone, an ipod, and a computer in your pocket. It's this thing where you can play music, surf the web, call your friends, text them, take notes, download apps, and the interface is better than predecessors because you can use your finger.
Not to say their advice is wrong... it's just that thing kind of advice is applicable in limited ways. It sounds like conventional wisdom, and isn't one of their points to challenge conventional wisdom? :)
The advice is for startups. No startup could have released the iPhone as its first product. Imagine the dev cost!
Apple's first product - the Apple I - was an assembled circuit board. Basically a motherboard. Very targeted audience, very narrow scope of value for the first release. They layered on functionality from there. The iPhone came almost 30 years later.
> give me something that will hold charge for a week, has the quality of a land line, is ultra light, small, can be dropped
I would pay dearly for such a phone. I don't need "apps" when I'm on the road; I need something small and durable that can survive anything (including being put in water).
I don't carry a purse and find it hard to make room for a smart phone, esp. newer ones which are only getting bigger and bigger.
I had hoped Nokia would make that phone, but they too seem to be only interested in the smart phone business. Too bad.
You can get a waterproof phone. My friend has the one below and he lost it at the beach, we called the phone a few hours later after he realised that it was missing and the person who answered said he found it in the sea and couldn't believe it was still working.
The fact that the iPhone was able to be "3-in-1" worked because Apple already had a leading reputation in 2 of those categories (i.e. MP3 players and one other).
They were stretching to enter the "phone" category, and it turned out to be a huge bet that paid off incredibly well.
I think all startup/business advice can be qualified with "...unless you're Steve Jobs."
I think it's generally good advice, but if you have the wherewithal to execute a combination product to perfection, then you'll win. The point is that people who focus on any one aspect of your combination product usually will do better.
Think toaster/microwaves or scan/copy/fax machines.
Also, Apple has been a "several"-hundred billion dollar company for a few years. They have the clout to do things that are not in same universe as several-hundred thousand dollar startups.
The left-hand side: Pretty good, and most would do well to follow this advice. Remember, however, this was written by a VC firm. This isn't a list of things good companies do, it's a list of things that Sequoia portfolio companies do when they make Sequoia money. To be fair, the overlap is notable. Just remember where the incentives are for a piece like this.
The right-hand side: Steve Blank aptly defines a startup as "an organization formed to search for a repeatable and scalable business model." So a business plan written by a startup is, by definition, all lies. They're a fine exercise as long as you're grounded by the fact that you'll end up with 20 slides of pure bullshit. (Read: Don't put real effort into writing business plans, build a company instead.)
You can't validate a business idea on paper, but you can invalidate one. If you can't make the numbers add up in your best case, then you can save yourself a lot of time building a product that's destined to flop. What a business plan shows is that you know how to invalidate structurally flawed ideas and that you've found a starting point that appears to at least be numerically plausible.
For example, if you work out that your best theory for acquiring customers costs you $20, but their best-case total lifetime value is $15, you have a business model that you can throw out.
You're absolutely right. Like I said, it's a good exercise. A business plan that works on paper is, roughly speaking, a necessary but insufficient condition for success. So as such, you shouldn't bring it to a meeting with an investor or whatever and present it as proof that your business will work. The only thing it proves is you can dream up some numbers that result in an up-and-to-the-right graph.
What proves a business works is traction and revenue. Walking into Sequoia with "I've thought really hard about my startup and I'm pretty sure it'll work," is far less compelling than "my business is currently working and I need your money to scale it."
The only way to invalidate an idea is to prove that people don't want the product. While I wouldn't always bet on a business that has a proven demand, I definitely would not bet against one.
A great example is Instagram: I wouldn't have bet on that product because it seemed destined to make no money, but since so many people liked it they somehow found an exit.
That's nonsense. So long as we're talking about the mechanics of the idea, which is implicit when talking about a business plan, then yes, you most certainly can invalidate an idea. Just because people would like to have something doesn't mean you can either produce that or make money selling it at the price point they'd like to buy it at.
I'd like a hand-cranked machine that takes my daily garbage and spits out Ferraris in under 10 minutes and I'd like to pay $5 for this machine. I'm sure I can demonstrate demand quite easily. Will you fund it?
I was operating under the assumption of reasonable execution risk. If you can't even get the product out the door then you'll definitely fail. My main point was that it's hard to disprove ideas that are feasible and are something people want. To pursue such an idea is a gamble; to not pursue is also a gamble. I've unfortunately been wrong in both ways ;)
And how would you arrive at that assumption? Generally speaking a simple business plan is what states those risks and explains these essentials of your execution plan.
This "no business plan" crap everyone parrots is getting tired for me. Situations change, good companies learn and of course plans change. Just because a bunch of hipsters decided business plans aren't cool doesn't change the reality that, in general, failing to plan == planning to fail.
I wouldn't bet on anyone who couldn't answer those questions on the right. We are not talking some 100 page MBA bullshit, we are talking understanding what it is you are setting out to do. This is very, very basic stuff right here.
Nice list and all, but I find myself wondering just how many of these elements of sustainable companies were exhibited by (Sequoia-funded) Color Labs...
The threshold requirements for unknown entrepreneurs submitting business plans from the public are a lot higher than it is for entrepreneurs who have been previously funded and have had success.
My point is that Color Labs was obviously a dud when it was funded by Sequoia[1] -- and that it almost certainly satisfied none or nearly none of Sequoia's own putative criteria. They are certainly entitled to their duds -- but when they are of Color's magnitude, it makes it a little hard to endure their sanctimoniousness around building sustainable businesses.
Color was pictures plus ___location, that's true. Instagram is also just pictures and filters, which is equally dumb but turned out pretty well from an investor's point of view.
However, you make a good point. Neither Color nor Instagram were/are "sustainable businesses". Sequoia just wants a return. Google is a sustainable business, and if you build one, Sequoia will get their return. You can also just get a bunch of users and flip it to Facebook. They'll get their return then too. And I'd bet Sequoia doesn't really give a crap which way you do it.
It may be and your might have encountered an exception(s), but as whole the venture industry has clear economic drivers and generally people's behavior matches the underlying incentives.
Of course, my point excludes the examples of non-ethical behavior.
It's easy to say after the fact that Colors was a dud, because it ended up turning out that way. Instagram, which is similar, ended up being a good investment.
My point is that VC financing is high-risk, so things that you may think of as being high risk investments, or "duds", are probably potential investments.
VCs also have to deal with the agency effect. If five firms jump on one startup and your firm doesn't, and that startup ends up being successful/gets a return, you stand to lose your clients as a VC.
It's not that easy to say Color is/was a dud considering that it is still around and has enough money in the bank to support its efforts for a decent period longer.
The situation with Color was uniquely transparent that it was ridiculous.
This wasn't some "oh the business idea seemed good, but the team just couldn't get their act together", or, "turned out they attacked the market opportunity from the wrong angle and didn't pivot in time"...
No, this was:
"GEOLOCATION MOBILE SOCIAL INSTAGRAM PICTURES CONCERTS!"
Don't even try to worm out of this and pretend there was any reason to take Color seriously.
I mean, I'm not defending Color. It was a terrible app and an even more terrible business. Sequoia invested in the team because they liked them. They gave a bag of money to people they thought could make good use of it, and it didn't pan out.
This one page succinctly conveys what any entrepreneur should think when building a startup be at starting phase or fundraising phase.
Btw, Sequoia has one of the best "about us" page (http://www.sequoiacap.com/about). It's focused on their customers (showing entrepreneur's pictures in early days and how they serve entrepreneurs) rather than glorifying their ninja investing skills.
That's what I'm getting from clicking that link. (They have "China" left of the search bar at the top - maybe because I'm in Australia, they think I'm in China, and so don't show the /about.) Also, their "Meebo Bar" almost completely obscures their links at the bottom of the page.
Most of the ideas advice is obvious-but-good-to-be-reminded-of, apart from "Rich Customers". That is one legitimate approach (and fair enough if that's what Sequoia wants) - but it's not appropriate for all startups.
Another approach is to target (1) a niche market (2) with no money (3) to do something that doesn't matter. pg argues that's how Facebook, Microsoft and Apple began
http://paulgraham.com/swan.html
It seems likely that most revolutionary startups began this way (especially when the customer doesn't feel pain); whereas incremental startups address rich people's problems.
LARGE MARKETS
Address existing markets poised for rapid growth or change. A market on the path to a $1B potential allows for error and time for real margins to develop.
RICH CUSTOMERS
Target customers who will move fast and pay a premium for a unique offering.
Sure, I too would love to invest only on huge markets composed only by the world's 1%.
INFERNO
Start with only a little money. It forces discipline and focus. A huge market with customers yearning for a product developed by great engineers requires very little firepower.
Majority of Sequoia companies become billion dollar businesses and sequoia invests few million in them. In fact for companies like Yahoo it started with few hundred thousands. So what they are saying is not wrong.
Here's an idea: avoid funding 1 company per year and blanket fund with minimal due diligence a whole batch for <$30,000 each so long as they have a business plan (as seen in article) meeting those objectives (as seen in article.)
"Pick the one thing that is of burning importance to the customer then delight them with a compelling solution."
"Customers will only buy a simple product with a singular value proposition."
What about iPhone, probably the most profitable product of the last 5 years? Is it really that focused?
I don't think that many people in 2006 would have said: my phone is not enough like a computer. I would have said that cell phone call quality and battery life sucks, so give me something that will hold charge for a week, has the quality of a land line, is ultra light, small, can be dropped, etc. That would have been focused.
Steve Jobs said it was 3 products I think... it's a phone, an ipod, and a computer in your pocket. It's this thing where you can play music, surf the web, call your friends, text them, take notes, download apps, and the interface is better than predecessors because you can use your finger.
Not to say their advice is wrong... it's just that thing kind of advice is applicable in limited ways. It sounds like conventional wisdom, and isn't one of their points to challenge conventional wisdom? :)