There’s a .00006% Chance of Building a Billion Dollar Company: How This Man Did It
David Friedberg was driving home from his job at Google, stuck in traffic in the pouring rain. On the side of the road, he noticed a bike rental shop for tourists, shuttered early due to the weather. The next day, he saw the same thing, and the next — for a week. “It got to the point where I’m sure the guy who owned the place wasn’t even showing up — no one wants to ride bikes in the rain. And I thought to myself, that’s a pretty crappy business.”
But then he thought about it more. “It occurred to me that whether or not this guy was making money in a given month was based on how many days it rained. That’s actually a huge problem.” Digging a little deeper, Friedberg discovered that upwards of 70% of businesses are affected by the weather every year — a simple stat that gave birth to an idea: an insurance service for companies that would pay out when bad weather was on the way.
At the time, he didn’t know anything about the insurance — or really the weather, for that matter. But he founded the company anyway and called it Weatherbill. Last week, he sold it for $1 billion.
Today, it’s better known as The Climate Corporation, a service used by thousands of farmers across the country to protect their income against nasty weather — and the Valley’s most recent success story. But this victory was hard won. In fact, right before unveiling the company’s rebrand in 2011, Friedberg gave a Stanford Entrepreneurship Corner talk about exactly how hard it was, and what it taught him about entrepreneurship — all before he had glimpse of his eventual happy ending.
Never Say ‘I Want to Do a Startup’
For Friedberg, anything worth doing has to start with a deserving problem. The desire to build companies isn’t enough to get you through the process.
Saying you’re going to do a startup or you want to be a ‘serial entrepreneur’ has about as much meaning as saying ‘I’m going to jump off a plane.’
“Why would you undertake any activity where you get your ass kicked every day, don’t get paid enough, and suffer through years of misery only to maybe find a problem worth solving?” he says.
The only reason to do this is if you feel passionate about changing the world in a meaningful way. You have to start with a problem that really impacts people’s lives and then present a solution they actually want. This is how he felt about Weatherbill.
Starting with the Bike Hut on the Embarcadero in San Francisco, Friedberg saw a country full of businesses big and small losing millions of dollars due to the weather. Beyond that, he saw livelihoods lost that could be protected by the right business model. That’s what kept him driving hard through the red tape, through years of poor market fit, through endless investor rejections.
Just look at the numbers, he says: “There’s a 0.00006% chance of building a company that will grow to be worth more than a billion dollars. Even if you do raise money and sell a company or take it public, your median time to doing that is probably 49 months. Assuming there are three founders, your median expected payoff would be $300,000 each — that’s the equivalent of $73,000 a year. And the probability of making nothing is 67%. So if your motivation for doing a startup is financial reward, you’re better off going to Google, a hedge fund, choosing a career with stable income potential.”
As you can tell, Friedberg is somewhat of a numbers guy. And in his work, he’s all about finding the data he needs to get the job done. In order to learn everything you need to know — in order to survive tough break after tough break — you have to be committed to a long view of success. In his case, that’s also how you win at a business you started off knowing nothing about.
So then, where do you start?
Get Rid of Luck
“When you say you got lucky, you got lucky because you didn’t know what was going to happen. The corollary is, if you know what’s going to happen, then there is no luck. There’s also no uncertainty and no risk,” Friedberg says. “In this context, shouldn’t your objective be to always know what’s going to happen? To always remove the unknowns?”
That’s the fundamental premise of how to think about building a business: figure out what you don’t know and then know it.
If you make this your goal, at the end of the day you’ll be left with truth and facts. You’ll know what’s going to happen and how to achieve what you want. This is, of course, an ideal, but one worth striving for. “Every business has some degree of inherent risk,” Friedberg says. In fact, there’s a lot you probably don’t know. A brief sampling:
- Where is your market headed?
- What do your competitors have waiting in the wings?
- Will people buy your product? Can you sell it at a particular price point?
- Can you keep your operating costs low enough to sustain profit margins?
- Are you actually adding value to people’s lives? Will they come back for more?
- Can I recruit the engineers I need to build an even better product?
“These are only some of the risks and uncertainties when you’re in the early stage, but the more of those you can identify, the easier it’s going to be for you to take them off the table,” he says. “Identify the unknown. Mitigate the unknown. Only then can you enable the outcomes you want, and that’s how you increase the value of your company.”
There are a lot of ways to bust open unknowns. Start with an ever-growing list of questions in the right-hand column of a spreadsheet and design tactics to move them into the left ‘known’ column. Ask your advisors and investors and customers the right questions, build things to test and be scientific and intentional about how you deploy them to your users.
In the case of WeatherBill, the first unknown Friedberg needed to eliminate was whether the business model could work. The idea wasn’t a simple one. It went something like this: Weather can be bad for business. Luckily, weather can be statistically modeled. So, it stands to reason that an insurance product could be designed to cover a business against weather-related losses, transferring the risk to a third party.
Also important to the model: there’d be no claims process or proof of loss because the weather could easily be monitored through multiple data feeds. To test his theory he built a prototype and used his own money to buy weather data from 200 stations going back 30 years. He also developed a formula for pricing coverage. This was enough to bag $300,000 in seed funding. At this point, he felt pretty good about what he knew. Good enough to quit his job at Google, leaving a considerable amount of stock on the table.
What he still didn’t know was how hard it would be to raise more money. Shopping the idea around Sand Hill Road, he was told over and over again that his business model was too untested, too challenging to buy into — that the market he was going after was too broad, and that he’d need to refine his plan. Only with the help of angels and some post-IPO Googler friends was he able to string together enough to prep for launch. Again, things seemed to be on track.
“When we launched in 2007, we'd been working 24-7 with no sleep for months, and we really believed that we’d put up this great website, and 70% of the world’s businesses who had problems with the weather would show up and say, ‘Finally, here’s the product I’ve always wanted to buy. Let me pull out my credit card,'” Friendberg recalls. “Of course, no one bought.”
So what was the problem? Limited data? They expanded from 200 to 400 weather stations. No change. They started going to industry conferences, talking to energy companies about the weather-derivatives market, and meeting with potential clients one on one. “We were literally out there saying hey Mr. Construction Company, doesn’t rain cause delays in your operations? Hey Mr. Farmer, if there’s a freeze, you lose your whole citrus crop, right?”
Cold calling is something that’s pretty critical, and something you can’t be afraid to do if you’re dealing with customers. You have to do it to understand what your customers want.
Through this process, the team was able to eliminate another unknown: People do actually want this type of product. Weatherbill was able to close sales — about $2 million that became its lifeblood later on — but only after doing tailored analysis for every single client. “We were using our own website to sell products to people who wouldn’t go to our website because they needed handholding for the technology to work for them. We had proof of technology, but we didn’t know how to turn it into a product yet.” Friedberg was willing to do things that didn’t scale – but ultimately closed the sale.
The issue was market fit. And after cold calling travel agencies, outdoor food stands and tourist bus companies, Friedberg and his team realized they were spread too thin. “We learned a lot about customers in a bunch of different markets, but we couldn’t go deep enough to provide a solution any of them wanted.”
After hundreds of calls, they busted the mother of all unknowns. Here they thought they had a dead ringer: ski resorts would be a top customer. They had to be. But it turned out they weren’t even dependent on the weather — they could make their own snow if they needed to. It was time for Weatherbill to rethink its model. They needed to find just one sector highly-impacted by weather that would yield a steady stream of customers.
“In 2009, we made the decision to focus the entire business around agriculture,” he says. “I told the team, we’re going to focus on farmers because if we do it the right way, we’ll build a product that they can use over and over again. It was the market with the best opportunity for us to build a scalable business.”
In the end, it took well over two years to find the right gap in the market. And through it all, Friedberg was candid about holes in his knowledge not only with his employees, but also the people and firms who had helped him cobble together that first vital funding. Don’t be afraid to tip your hand about it, he says. Ignorance can be a strength.
“We said outright here’s all the stuff we don’t know, and here’s all the stuff we’re starting to know,” Friedberg says. “The more transparent you are about this, the more your team will believe in your mission, the more aligned everyone in the company will be, and the more investors will believe in you being the right kind of person to execute on the opportunity in front of you.”
Total transparency about what’s working and what’s not makes it clear to everyone how you are going to succeed.
This need, to ditch luck in favor of clarity is the first part of building any strong business. The second part is more tactical — a perennial phase Friedberg lovingly refers to as “the grind.”
Stop Worrying and Learn to Love the Grind
Once Weatherbill zeroed in on weather insurance for farmers, they got started building a product that would fit that audience’s needs. The first thing they did was switch out their 400 weather stations for close to 1 million individual weather monitoring grids. “No one cares about rainfall 150 miles away, they want it to be measured at their location. That was a big reason a lot of people weren’t buying, and that’s when we realized the technology needed to measure the weather more locally. Today we use Doppler radar and satellite imagery, and all sorts of things that can pinpoint the weather at your exact location.”
A lot of work went into getting the company from point A to point B — but not only in terms of the technology. Friedberg and his small team had multiple learning curves to climb, including agriculture and the insurance business. He’s emphatic that you can’t back away from the challenge presented by research — heavy, nearly insurmountable research. Even if you are an expert in a particular area, you’ll need to learn so much more to be effective.
“None of us came from an agricultural background. None of us came from an insurance background. And it turns out farmers won’t buy your product unless it’s written on licensed insurance paper. So we essentially had to figure out how to build an insurance company. That meant getting regulatory approvals in 51 jurisdictions just so we could issue checks when weather occurred — it was all a big hustle but it had to be, and it worked.” Sometimes there just aren’t any shortcuts.
The Weatherbill team realized how important it was to initiate their customers into the tech slowly and thoughtfully. Sure, they would get them using their website, but by learning how to draw up insurance papers, they were able to meet farmers in a place they recognized and felt comfortable with.
In 2010, WeatherBill launched its Total Weather Insurance Program — finally a model that worked, that scaled, that met industry regulations. People could buy the product every season, and sale after sale closed on the website every day. “Suddenly we had a product that every farmer wanted to buy, so we were able to raise a bunch of money on the basis of how quickly we were growing.”
This is the grind’s payoff: growth, buy-in, credibility. When Friedberg first started out, he talked about the billion dollar opportunity weather insurance presented. But it was only when Weatherbill focused its efforts and invested in making its technology useful that the true potential became apparent: It turns out weather insurance for farmers represents $20 billion in revenue per year in the U.S. alone, and more than half of the farmers who were offered the company's product chose to buy it because of its ease and value-add.
What had been lacking before, Friedberg says, was self-awareness.
“You have to be brutally self-honest and self-aware as you go through this process. We’ve had to change what we’re doing and how we’re doing it so many times during the development of this business. You can’t get stuck in one place.”
This can get pretty personal.
“In order to succeed, you’re going to have to recruit people to help you do all the research and testing you can’t do on your own, and in order to do that you have to be self-aware about what you’re good at, what your team is good at, and whether you have the people you need to accomplish your goals.”
When his team hit high-velocity growth, Friedberg decided a name change was in order. That’s when Weatherbill became The Climate Corporation: emblematic of maturation, with a nod toward continuing evolution. “You have to see every day as a new challenge and as a potential solution to that challenge. As long as you keep living every day like that, you’ll progress,” he says. “That’s why ‘founder’ isn’t really a title I like. A lot of founders cling to that title and to that role because it’s what they know and it’s their baby. But you need to avoid that. I call myself the CEO of the company today, and I know I might not necessarily be the best CEO of the company tomorrow.”
Making progress as you scale requires perpetual change. This gets harder and harder as a company grows, but it doesn’t stop being important. “Early on, you take risks all the time on new things, but having them not work out is sort of counterintuitive to what people consider to be success,” Friedberg says. “When you take risks, odds are you’re going to fail. Successful people don’t like to fail. So the challenge with innovating as you scale is that you have to get people in the mindset that failure is part of the process — it’s part of this iterative process of grinding.”
Innovation is the only sustainable competitive advantage a company can have.
Here, he points to two examples from different eras: RIM and the Wright Brothers.
“We could spend hours talking about all the companies that have failed because they didn’t or couldn’t follow an innovative path,” he says. “You could say, well RIM didn’t innovate as fast and as well as Apple innovated with its OS, so that’s why Blackberry failed.” This, he says, is what happens when scale gets in the way of change.
Early-stage companies have the benefit of being able to iterate and fail fast — but they need to keep it going once they start to grow. They need to be the Wright Brothers, Friedberg argues.
- Start with a big problem: “We need to get into the sky. How do we do it?”
- Break it into smaller, knowable unknowns: “They knew they didn’t know the drag coefficient or the optimal wing design, and they set out to solve both.”
- Grind and innovate: “They taught themselves engineering principles, and designed prototypes of flexible wings to test. They knew they needed to tactically implement a solution to test quickly, so they built a wind tunnel. Suddenly they could test over 200 wing designs, and finally they arrived at a better wing that worked. It wasn’t a breakthrough, it was the grind.”
The big difference is, when you’re running a startup, you’re not just looking to take that first flight. It’s your job to do it over and over again.
There is No Dearth of Problems to Be Solved
While a lot of articles have asserted that innovation in Silicon Valley is dead, Friedberg argues that people just aren’t looking hard enough for problems worth solving.
“I hear so many people saying things like, ‘Oh we can build a photo sharing app for students at Stanford!’ or ‘We can do something like X for Y!’” Friedberg says. “But just look around. There are problems in the world today that are more substantial than anything we’ve ever faced in history — and it’s not just in software, or in California, or for your peers.”
For those who dare to be disruptive, he has some advice: “When you look at the markets in the world today, you can probably break it apart market-by-market and say, ‘Here’s something fundamentally flawed with the way businesses in this market are operating.’ Ask yourself, what are they doing wrong? Beyond that, how are governments not operating efficiently? When you look at it this way, there are 100,000 different ways to break apart the opportunity that exists for you to solve the big problems of today. It might take more than a weekend in the library or on the Internet to see, but they're there.”
More importantly, now is a critical time for young, smart entrepreneurs to be breaking these problems apart. “If information was once the grist for ideas, over the last decade it has become competition for them — we have started to prefer knowing things over thinking because knowing has more immediate value,” Friedberg says. “This keeps us in a loop. It keeps us connected to our friends and our cohort, and this implies a society that no longer thinks big.”
We’re facing global stagnation in economic development, and innovation is the only way out.
In Friedberg’s context, The Climate Corporation may have started out as an idea with big, nebulous potential, but it ended up touching a multitude of companies, jobs, lives. And all of these people touch millions more by producing food for the masses. Given his experience, he sees a future where venture capital and entrepreneurs will be even more aligned to take on non-traditional problems like Weatherbill brought to the table. Especially now, with the proof of a major exit under his belt.
“There are a lot of problems out there that can and should be solved, and not just because it'll be great for you, but because it’ll be great for everyone,” Friedberg says. “Once you have this premise — once you’ve found the right thing to do — the strategy is to first know what you don’t know, the tactic is to grind, and the value is to remember: there are plenty of places to innovate.”
Click here to watch the original video of David Friedberg's Stanford Entrepreneurship Corner talk.