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10 Reasons Why Seemingly Promising Companies go off the Rails - David Sacks

David Sacks
Co-Founder at Craft Ventures
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2020 Startup Grind Global Conference
February 12, 2020, Redwood City, CA, USA
2020 Startup Grind Global Conference
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10 Reasons Why Seemingly Promising Companies go off the Rails - David Sacks
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About speaker

David Sacks
Co-Founder at Craft Ventures

David Sacks is co-founder and general partner at Craft. He has been a successful tech entrepreneur and investor for two decades. David was founder/CEO of Yammer, which was acquired by Microsoft for $1.2 billion in 2012. Previously, he was COO and product leader of PayPal during the famed “PayPal Mafia” founding era. He also served as interim CEO of Zenefits in 2016

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A Keynote presentation by David Sacks, Co-founder + General Partner at Craft Ventures about How Promising Companies go off the Rails.


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All right. How's everyone doing today? Good, whatever. I want whenever I meet with Founders, you don't ask how they're doing. The answer is always, you know, great. We're killing it you're crushing it and then every investor update I ever got you a hundred. I'm just so you know, it's it's always the same we're doing great and then a few months later, you're not running so that the founders like how you doing? How's the companies like office over what you're telling it what happened? It's like now we're out of money. And that's crazy. You guys are just crushing. It is a few months ago.

And it seems like you know, this is a this is a common problem with start upset. They seem like it's working and then somehow the off the rails and I can really happen at any stage, you know in the past year we've seen a bunch of companies that were weeks away from like yelling, you know, they were supposed to be big IPOs and then like they just implode on the the verge of of IPO. There's like a lot of other sessions probably advise you guys and how to find product Market fit, which is definitely the number one thing that starts have to do. But what I

thought I'd spend my time doing is walking through the reasons about 10 of them. Can I catalogued hear that pitfalls that starts often you do fall into so that you guys can maybe avoid some of these problems and so this is the presentation called how not to go off the rails. I'm going to kind of walk through some of these things. So number one is the problem of negative gross margins negative unique Nama Sushi in this a lot lately with so-called Tekken able business has businesses that operate in the physical world and a business

that has negative unique nomics is basically selling a product for less than what it cost. So they're losing money. Not just that kind of the corporate level because they say every stop is impossible, but they're actually losing money on every transaction, which means that no matter how big they get there still going to be on profitable. Now, I'm asleep on the selling dollar bills for for $0.90 and nothing will make you look like you've got a great business then $17 bills for $90.90. It'll be a thriving business. But then as soon as you raise the price of the correct level you don't

have any business and so it's very important for startups. I think that especially the ones are operating in the physical world to always be understanding and not just their burn but also what kinds of money are they losing again? Losing money at the corporate level corporate overhead is okay. All Stripes do but make sure that you're unique atomics are are positive it will be seen is that you're trying to re-engineer or do you need comics with business that's already add scale is a really hard thing to do. You're trying to find the scale model when you're ready operating at

scales for the contradiction in terms and starts. I think would be well-advised to make sure that they're unicomics work before they go into kind of hyper scaling mode. Phone number to I'd say that one of the top reasons why startups going to stall out is because they find it hard to acquire customers distribution is usually the most difficult problem for start to to to solve and see what happens. If they start over paying on cock the kind of hide the fact that they can't grow and then the reason why they can't grow is the low-hanging fruit has dried up, you

know, maybe they went to a you know to a startup accelerator incubator and they got all their classmates to sign up and it looks like there's a lot of growth but then they graduate and suddenly it gets much harder, you know, maybe your initial mode of customer acquisition is email marketing and you run out of email list, you know the war you've got a viral feature but the the virality started rise up and so this sort of problem of the initial saturation of a What time the initial distribution Channel causing your cock and cum prohibitive is a is a very common problem.

And what I would say about this is the best way to deal with this is from a very early stage. Make sure you you're attributing your leads correctly understand your your lie after abuse and what channel is your leaves are coming from and make sure not to confuse them. So for example, like one of the problems that we see a lot is that your the inbound leads are the Glengarry leads. They close a very high rate the outbound very low quality. And if you're kind of blending these things together, you might have an exaggerated sense of how good the outbound leaves are he might serve over scale

that game we seen that happen before. Phone number three The Leaky bucket Archer. Nothing ever knows about turn on but has to be talked about sharing is is it can be a real pain for sausages is a time bomb your sales can be going great. But you know if it still doesn't come up for Renewal until your later. You just won't know about this this time bomb in any other sales people aren't necessarily incentivize to avoid sales that are likely to turn because they just want to close everything. They can answer this problem can manifest itself down stream and customer support a long time

down the road that the rules of thumb I like to have around this. Is it to look at retention on on a logo basis Enterprise customers are short of that the highest retaining they should retain about 95% of the time 85% pure S&B customers and started destroying the most definitions of them, but they're going about a second Flight 25 set logo retention, but we like to see in all these cases is that on a dollar basis you have dollar attention over a hundred percent meaning that your expansion from The customers who retain outweighs the charge customers and if you can't do that, you might want to

slow down your growth so that you can fix your product. Customer for I think of a lot of real jumping is is an external dependency that turns into an existential risk. You see this a lot. Obviously when the road gets pulled out from under startups are operating on somebody else's platform or it could be a Biz Dev dependency. I kind of like operating on on platforms better than operating on sort of contracts. Ironically you like having no just just operating base on an API relationship. I think of you a lot better than operating based on a sort of contractual

relationship. But what I would tell you is that you've got to try and avoid these fists of dependencies, I think trying to convince a big company to do something is just it just as a killer for startups are too slow and depending on other stars to do things for you is very risky because it starts change your mind a lot and they're kind of kind of flaky so I would say it voices. Dependencies platforms are good race on two platforms to sort of bootstrap your company, but then at some point you've got to race off them to diversify this rash. So the rock can't get pulled out from under you.

MC5 regulatory we've seen you do a number of high-profile starts going to go off the rails because I'm part of some sort of regulatory problem. And when I say here is that regulatory issues tend to fall into kind of black widen and gray areas it a lot of startups are in Gray areas because they're innovating they're disrupting and their Innovation wasn't taking into account the time the laws were written and so frequently, it's it's gray what I would tell you is that If what you're doing is in a gray area. I think that's fine. I think she should do it. But you need to Advocate very early on

for why what you're doing is in the public interest. Don't try to talk to hide it try to explain to people that your interpretation of the law is the correct one by the same token if what you're doing is a black letter violation the law don't do it. You know, I think starts think they can get away with it because in the first year, so no one's really paying attention, but as they get bigger people will definitely pay attention to certain like the Napster problem. So if it's a black leather violation, don't do it great do it, but but advocate Area number 6 sales compliance you in the sales

department seems to be the locus of a lot of problems for companies that have kind of gone off the rails and I think part of this is a large part is because sales, stated differently than the rest of the company the wrestler companies come stay with Equity kind of playing the internet game where a sales is typically Encore delete instead of plans. I have to make Florida Runner incredible pressure to either make for it or get fired and that can lead to some some bad behaviors unless they're not like tightly-controlled. So like one of them that we've kind of mentions the turn problem sales

people are incentivized to hit a number but you know how they hit that number is less highly regulated. You have to make sure that they're not over promising things to customers of his. Otherwise I cussed her will just become a turn Palm down the road some early if if you're a highly regulated company and you have to you know, you have to engage in a sort of Highly regulated tivities. You should have a team outside of the sales department. That sort of monitoring the compliance because sales doesn't really have a great incentive to to do its own to do compliance on itself. Number 7

mechanical turn away. This is a version of the gross margin problem. You know, I think this is where the company is doing things by hand instead of with with software and I think some of the worst advice that's being passed around Silicon Valley these days is that start should do things that don't scale. I don't quite understand why people say this I think the whole point of a technology companies to figure out the most elegant scale them all you can but this advice I think becomes really toxic when I fast during startup tries to essentially cover up gaps in its

product by throwing bodies at the problem that is essentially you're faking Prada capabilities by using humans. And you know, these bodies are basically Cox and they will cause a gross margin problem. It will also cause a cultural Palm because the company becomes dependent on sort of altering the size of the farm instead of like in innovating the product and so I would say it's okay to do this to some degree, but try not to let it become Too much of a problem. Number 8 solder psychology ideas are really big one in a way founder of psychology is at the root of it seems like all

these companies that all the high-profile come off the rails Founders all kind of just got the same way. It's like crazy and aggressive Visionary and you know, when everything is going kind of up and to the right, it's like good crazy, but then when things in fluid is like bad crazy and so kind of what what kind of explains this this this weird dichotomy were crazy and sometimes good in and sometimes bad and I think the answer is that the truth is that Founders have to be much more aggressive much crazier. If you will more Visionary, then that's really the average person in those

qualities are necessary and get rewarded by the world up to a certain point and I think we're used to think of the world is operating on a normal distribution. It doesn't you know, I think these qualities get rewarded took to a great degree, but then suddenly You go too far and the founder pushes things too far and they go off the rails. And so that the curve doesn't look like a a bell curve. It actually looks like some sort of shark jumping type type curb. What I would say is that Founders need to have some of these qualities Visionary kind of aggressive crazy qualities, but

you got to learn to balance your psychology and it's good to have people around you can help make sure that you're not kind of losing perspective and you're not kind of on your way to two going off the rails. There's a kind of company culture version of this problem. And the I think the simplest way to understand company culture as a microcosm of the founder of psychology. Whatever is happening in the founders had will be writ large across the company if the founders hyper-competitive the company culture becomes very competitive. If the founder is very corporate that the culture becomes kind

of Stuffy if the founder is kind of War like the found that the company culture me very aggressive and the founder is kind of cuts Corners the company culture can become Reckless and what I say is that that the founders Behavior gets role model. Do you have crazy founder equals crazy culture? And what you want to do is not just balance neuropsychology. You want to balance your founding team. And so that the that the sort of the hive mind of the company is is sort of had psychological balance do it and I do so sad that values most mature overtime the things that will work for you in the early

stages may not work for you later. Facebook changed its motto for move fast and break things to move fast and build scalable infrastructure because you just can't get away with Things you can get away with when you're when you're bigger bigger company. Macro shock number 10. So this in a way is a trigger for a lot of the reappraisals I go on because normally when a company has these problems it's because you're not internally recognize and the the reappraisal happens usually because of some sort of external event. So we've seen lately as company goes out for IPO and one of

the company thought it was doing great. They were drinking the Kool-Aid and then all the sudden you're the public markets sort of pop the bubble or it can be it could be any fundraising around your company goes out to try to raise money and all the sudden they you do investors kind of pop this the sort of this bubble. And yeah, we saw this round the. Come crash it can happen to any sector that's sort of hot for a while and then falls out of favor, you know, like you said something like crypto. Where are you guys felt like all the rules got suspended because there's a hot space in terms of

rules about how much revenue should have our users you should have and what happens is when the space is no longer hot. Reapply novice when you got to show Revenue you've got to show real users. And so that the bubble the bubble gets gets popped. Doubt, you know, this is where the parade of horribles and I want to kind of couch this and this is kind of number 11 come out ization. This is the Red Queen effect where it's not as it feels that the startup that you were moving really fast or stay in the same place because of competition near there's always lots of sharks that are seemingly

chasing us some kind of on our tail isn't something we cause and something that can happen to us if we don't move fast enough and I think this is one of the the big dilemmas about this disorder presentation is yes, or is this parade of horribles I can happen, but if you don't move fast enough that you'll your idea will get the maltiest competitors or when the market and so really but I'm urging this presentation is not taking No Rest, you have to take rest you have to move fast, but it's to have a a a sort of more balanced view of the debt that you're accumulating sort of the that the

cultural. The operational debt the gross margin debt and so on so that you can pay down this debt over time and set up a how many become a problem. So acute that you're sharp goes off the rails. Thank you. Thank everyone.

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