Want to know the secret of financial success for a tech startup? Jon Fisher, successful serial entrepreneur, investor, economist, author and CEO/co-founder of the popular startup CrowdOptic, says the secret lies in understanding how the 80/20 rule applies to startups and also lies in a CEO’s ability to “be bold and buck the trend.”
Fisher, who is also an adjunct professor at the University of San Francisco, says many entrepreneurs approach their startup ventures as a quest; but he believes the better approach is to buck that trend and treat entrepreneurship as an acquired skill.
“I tell my students there’s no reason that their colleagues down the hallway studying medicine or the law get to work very hard and pretty much be handed the keys to the kingdom based on a clear road map when we entrepreneurs have our Eureka moments in the lab, but those are often followed by a lifetime of pain. I don’t think that makes any sense.”
He adds that he was raised in Silicon Valley, where the mindset is to be disruptive, build a company to last, and at least try to change the world. As hard as it is to be “good” as an entrepreneur, he believes founders/CEOs actually can be “great” at it by being bold enough to follow the path that statistics reveal — which is different from the “built to last” path.
He shared his advice in the opening keynote address for more than 250 startup CEOs attending the Silicon Valley Bank CEO Summit today. The gist of his advice: An acquisition by a world-class company is the path of least resistance to making a world-class contribution, and statistics reveal that such an acquisition has a 95 percent probability for a successful startup outcome.
Fisher studies probabilities and often makes successful predictions regarding the U.S. economy. He warned CEOs attending the SVB CEO Summit that they need to get moving quickly on taking the bold step because the most-acquisitive companies already are buying ferociously. Plus he foresees “another very powerful economic catastrophe is on the horizon, so entrepreneurs need to get out before getting clobbered.”
Avoid getting clobbered
Fisher says he gained early respect for the enterprise and the enterprise acquirer years ago from his relationship with Ray Lane, the former Oracle chairman and recent HP chairman. Lane became Fisher’s first angel investor in his first company and later invested in two other Fisher-founded companies. “I owe my career to him,” Fisher says.
That career has been successful at bucking trends and leveraging statistical probabilities. Fisher may be on his way to accomplishing an industry first: a “trifecta” in building companies from zero, which get acquired by the world’s leading companies.
His first venture was AutoReach, launched in 1993 when Fisher was still college age and the Internet was just starting to take off. It’s now owned by AutoNation, the largest automotive retail company in the world.
He got clobbered with his second company, a product of the dotcom craze. Fisher says he mistakenly raised far too much money including venture capital. After the swift market correction, the company was unable to exit successfully because it was too top heavy. Net Clerk became an asset sale to another company and returned only a fraction of the money raised.
The experience with his second company instilled in him the notion that there is really a statistical likelihood — more than a 95 percent probability — of startup outcomes.
“A venture-backed startup company will traditionally exit for between $25 – $29 million in five to seven years. Quarter after quarter, year after year, those are basically the statistics, no matter what,” Fisher explains.
After that experience he vowed to do two things: 1) never lose the control position in the companies that he founds and runs as CEO and 2) always be cognizant of market cycles.
He put those vows into practice with company #3, Bharosa, Inc., a fraud-prevention company that he sold to Oracle in the second quarter of 2007 (for an amount rumored to be around $50 million) after investing only $3 million to build it.
“If I had run that company for a few more quarters, it would have been right into the face of the financial crisis,” Fisher recalls. “That company was about Internet security for banks. Our largest customer was Wells Fargo and our second largest was National City Bank, which literally went away the next quarter. Without being at least somewhat cognizant of strategy, perhaps my third company would have gone the way of my second company. And that’s unforgivable to continually try to do good work and crash into the rocks that way.”
The 80/20 rule and statistical hard facts
Statistics reveal the likely scenario for startups; entrepreneurs that keep this foremost in mind wisely won’t raise too much money and consequently elevate their company’s valuation larger than the statistical norm, Fisher comments. “When startups raise $5, $10, $15 million, they’re betting that they’re going to be one out of 10, or sometimes one out of 100 case studies.”
His analysis reveals that the 80/20 rule applies in startup outcomes as follows:
- Out of 100 startup outcomes, 95 will be successful strategic acquisitions.
- Of 100 companies acquired, 80 will be acquired by the very small group of highly acquisitive acquirers. At most, 24 companies will be responsible for 80 out of 100 acquisitions.
Those are the odds that he explains in his book, “Strategic Entrepreneurism: Shattering the Start-up Entrepreneurial Myths.” Entrepreneurs need to bake these odds into their strategy of how their company will turn out, he says. “If you wildly exceed expectations and your company goes to the moon, all power to you. But without a strategy for the likelihood of how it’s likely going to turn out, it’s a quixotic exercise rather than a disciplined exercise.”
The economics of startup outcomes
Many startups raise an amount of money so they can continue to exist for another year. Fisher says that’s meaningless and funds should be raised only to execute a milestone. His “MO” is as follows:
- Raise less than $5 million.
- The milestone for the first million or so dollars should be to put a product into use by the right customers to prove that it works.
- The second milestone and second million should be to prove the business is repeatable and can attract more of the quintessential customers.
- The final million or so in funding should be used to prove that the business can scale, find channel partners and can take off on its own merit.
- Seek a strategic outcome of an order of magnitude around $50 million.
Do the math, he advises. If the founders own 50 percent or a majority control of the startup and sell early (usually year three) for even the minimum amount of money (about $30 million these days), their financial outcome is the same as the average financial outcome at the time of an IPO. If they exit earlier, they still receive the average proceeds they would receive by suffering the dilution necessary to build a much larger company over about nine years necessary to take it public.
“If the founders continue to run that public company and it gets larger and more successful, then of course, the proceeds will eclipse those early founder proceeds,” Fisher says. “But apples to apples, I submit that by building a company this way you can make pretty much the same amount of money in a third of the time and with at least a tenth less amount of risk.”
The patent angle in being bold
Fisher says that being bold also means bucking two “insidious wind” trends, both involving advice that entrepreneurs receive “for their survival” because it’s getting more difficult to do technology startups successfully.
- Investors are getting more aggressive about pushing their portfolio CEOs/entrepreneurs to “swing more at the fences and never give up. The finance guys don’t care if nine out of 10 startups get slaughtered as long as one of the 10 gets to the moon.”
- Social, gaming and other very hot technologies are largely devoid of intellectual property. As a result “there’s a wind blowing that patents and intellectual property are clogged and should be changed or subordinated or even done away with.”
Given the statistical odds that an acquisition (especially by a very small number of the most-acquisitive companies), the “wind” about patents is particularly troubling. “The only way to get close enough to the highest-propensity acquirers — based on my experience four times in 20 years — is to have at least the threat of patents,” says Fisher.
He advises entrepreneurs that it’s critical to pay attention to what the most-acquisitive companies do and the pace of their acquisitions. “In Google’s case, for instance, it’s two acquisitions a month; and when Oracle bought my company, it was acquiring at least a company a month. You have to appreciate that they’re using a playbook. They cannot possibly do that kind of volume without subjecting their plans and processes to known quantities in how to acquire companies.”
Fisher shares three “be bold” moments related to the technology and patents of some of his companies. In his startup acquired by Oracle, his company created the “wheel,” a way to enter passwords securely using two concentric wheels. The “be bold” moment was tipping the wheel on its side to form a “slider.” Silicon Valley Bank was the first to deploy the technology.
His fourth and current company, CrowdOptic, has an app that monitors a continuous stream of GPS, compass and triangulation algorithms to find a common location where mobile users are looking in addition to where they are. The “be bold” moment came when they dialed down the the technology to make it more scalable. They figured out they could accomplish the same result by extracting the same information from images without an app.
“The world had never seen anything like either of these technologies, and that’s how one gets patents that are more important today than ever, despite what the social/gaming constituents (largely devoid of patents) would have you believe,” says Fisher.
CrowdOptic is on the disruption path again with its announcement this week that it is partnering with the Location Based Marketing Association (LBMA) to promote a ground-shifting new capability in “focus-aware” mobile technology for fans at live events. The technology will allow marketers to chart shifting momentum in crowds. LBMA will introduce projects leveraging the CrowdOptic platform beginning in the summer of 2013.
Having groundbreaking patentable technologies is critical for entrepreneurs that want to follow Fisher’s be-bold strategy for startup success. Instead of building a $3 billion stand-alone company to last, his method of operation is to build three companies to be acquired by the top company in the world.
Doesn’t he want to change the world with his software? He says yes, but he’s found that the path of least resistance is to build something good and then get that technology and team over to a company that’s already great (and hopefully to a company that’s number one in the world). “We then let them take the fruits of our labor around the world for us and let us impact the world that way.”
When he sold his startup to Oracle in 2007, the software was involved in authenticating online banking transactions for 25 million people across several very large banks. That software is now Oracle’s stand-alone identity-management product, Adaptive Access Manager. The reach of that product now six years later is certainly thousands of enterprises.
He says it’s important for entrepreneurs to understand where they fit in the ecosystem. “Larry Ellison and I do the same thing for a living,” says Fisher. “But I understand the differences in what we’ve each built and where we each are in the software ecosystem. Because of that understanding, I know how to play in this game pretty efficiently, and I don’t try to drastically overreach with my abilities or with my company. As a result, I have a very happy, very successful existence.”
Economies boom and bust, so entrepreneurs must not overreach
There are opportunity costs to startup ventures, so companies need to beware of overplaying their hand, thinking they are in a much stronger position than they are. He cites Yahoo as a classic example. For entrepreneurs that don’t need fame and their self-actualization isn’t wrapped up in trying to change the world, there are alternative ways to achieve reach for what they build. “I have many friends who didn’t recognize this and went for broke. You can do that in a casino,” warns Fisher. “It was a very difficult exercise to rebuild after my second company that didn’t do well. Increasingly more and more, with one blowout, one failure, you may not get another chance.”
In addition, Fisher advises entrepreneurs to be more cognizant of market boom-and-bust cycles. A simple, but not widely circulated index that he personally uses is that when there is a rapid correction by 25-30 percent in the number of new housing starts in the USA, there will be a statistical correlation of unemployment, and the economy will slide rapidly after that.
He believes that another powerful economic downturn, fueled by currency issues, is coming and that there are a limited number of times when mechanisms like the startup ecosystem can emerge relatively unscathed from an economic catastrophe.
He believes entrepreneurs also need to consider their country as well as their companies. “There are a few things that America does better than anyone else in the world, especially producing good technologies and companies. I respect that we have tech companies that perform at truly world-class, number-one levels.”
“I’m trying to innovate a little, putting some good products and teams in the market by turning them over to the most acquisitive tech companies (which have more cash than any in history) that can carry those technologies further,” says Fisher. He adds that if more entrepreneurs take this approach to their startup ventures, we’ll have an unprecedented boom of exits that produce a synergy that allows entrepreneurs to win and allows highly acquisitive companies a cleaner, more robust pipeline to innovation.
Click here to view on-demand streaming of Jon’s keynote at the CEO Summit.
Jon B. Fisher is the CEO of CrowdOptic and was CEO of Bharosa (now Oracle’s Adaptive Access Manager). Jon is known for making accurate predictions about the economy. His book, “Strategic Entrepreneurism: Shattering the Start-Up Entrepreneurial Myths,” is required reading for the MBA program at several schools.