As the founder of Idealab, Bill Gross has advised and helped fund more than 100 companies, been involved with 300 rounds of financing of more than $3.5 billion and 35 successful IPOs and acquisitions — and that’s just since 1996. But, it’s the 40 companies that failed that Gross has learned the most from. From giving credit and sharing equity, to seeking out opposite skills and recruiting A+ talent, Gross shares the patterns to success for startups in this First Round CEO Summit talk.
More often than not, most founders start by hiring people that are most similar to them because they like them on a personal level more and feel most comfortable with them. Individuals succeed when they work with those who have complementary skills to them. Try to start by hiring those who are most unlike you and most complementary — it will be uncomfortable for a while but get used to it, you need them.
Ultimately, there are four main skill sets needed to make a startup succeed, and you need all of them on your team in large doses to build successful companies.
Entrepreneur — The idea person. The one who explores what it might take to get ideas off the ground.
Producer — The doer. The one to push projects forward and get them done. The producer is concerned with making the product, selling it, and answering customers’ questions.
Administrator — The process builder. The administrator is concerned with planning, organizing, and building out processes. They have the necessary skills to build bureaucratic processes so organizations can function effectively as they grow.
Integrator — The people person. The integrator fixes problems between people by helping address the emotional level of people. The integrator helps entrepreneurs, producers, and administrators to get along and work well together since they all view the world differently.
To take a step back, the entrepreneur always gets the company started. The entrepreneur will start with a great idea, get it going and then eventually flail and burn out if he only solely possesses the entrepreneur characteristic. After the company gets started — it could be in month two, it could be in month 10, it could be in a year — the company needs a producer skill in the mix. Now this characteristic can come from the entrepreneur if they have that skill, but you’ve got to get it. Otherwise, the actual product won’t be created; it won’t be shipped, marketed and sold.
But eventually, even with a producer and an entrepreneur, even if you start bringing products to market and making sales, eventually that company will fail too because the wheels will come off the wagon through growth. At some point, the phones will stop getting answered and customers will start getting angry and support problems will grow without someone with the administrator skill.
Now, the person with the producer characteristic might have that skill too or you might find it somewhere else. Then, even with an entrepreneur, administrator and producer, you will fail without someone with an integrator characteristic. That’s because the entrepreneur, producer and administrator often have a tough time getting along, and they might even hate each other’s guts because they have such different viewpoints. You need the integrator to bring everyone together and get everyone rowing in the same direction.
To give a concrete example, let’s say you have the extreme of these four people sitting in a room. They’re looking at the window and there’s a smudge on the window. The producer would look at the window and say, “We got to get that window clean. Let’s just have all the windows in the building cleaned as well. I’ll get someone doing that right away.” The administrator will look at that and say, “There’s a scratch on that window or a smudge there. Why don’t we have a form? When someone sees something wrong, they can fill that out. That will get sent over to HR. That will then get processed.” The entrepreneur looks at the window and sees a parking lot across the way and says, “I wonder what we could put over there?” He doesn’t even see the scratch, doesn’t see the window or anything. He’s just looking at the next frontier. The integrator looks and says, “I wonder what those three people are thinking.” They don't see the window either. They just care about the people and how they can be brought together.
You can see how different people look at the world completely differently. They look at the exact same situation and they see it from completely different angles. You want all four people in the room and all four of those people on your management team, or at least those characteristics represented at your company.
So often, founders or early employees feel threatened when more experienced or smarter people join their team. To be successful, you need these people and you need to be okay with having smarter and more knowledgeable people join your team — that should actually be your primary goal with every hire. This is obvious, but doesn't happen all that often. The most successful founding teams are able to explain to their existing team that bringing in the absolute best people will actually benefit everyone because they’re going to help build a more impactful and valuable company in the long-term.
Always treat the cash you have like it’s your last money. In Gross’ experience, many companies he worked with that failed were working on products that were one to two years ahead of their time. If they had been able to cut back and stay lean until the market had ripened for their product, they would have likely had a good chance at success.
Firing someone is one of the hardest and most emotionally difficult things you’re required to do as a CEO — but it's necessary. Everyone says to fire fast, but so few are able to do it. Almost always, mediocre or poor performers are left to linger — often being let go many months after they should have been. As soon as you have any inkling that someone isn’t the right fit, have the courage to show him or her the door respectfully. Your team and company are relying on you to make the call.
Often entrepreneurs, by their very definition, can get overly optimistic about where the company is going and what they’re going to accomplish in a short amount of time. You need to be able to meet the promises you make — it’s a competitive advantage. It’s better to set realistic goals and exceed them than set unrealistic goals and not meet expectations. This is particularly important when recruiting and selling your company to future hires.
In an effort to set the right kind of expectations and also ensure potential hires want to join Gross' companies for the right reason, after he sells the candidate on the opportunity hard, he always spends time “un-recruiting” — essentially listing out all the reasons (risks) why the recruit shouldn’t join. Ultimately this strategy leads to a better culture filled with people who are missionaries vs. mercenaries.
When starting a company, it’s incredibly easy to try and always make the perfect decision every time. But you’re almost always better off with a decision that’s 80% right but made swiftly vs. a decision that’s 100% right made slowly. As a startup, you’re in the business of moving quickly, so make the best quick decisions you can. Always bias toward speed.
As a founder, it’s easy to be stubborn and hold onto your beliefs at all costs. But you should take a “low inertia” approach to leadership, meaning when you see something better or smarter, just switch to it. Don’t be afraid to change course or change your mind when new information or better ideas are presented. Be comfortable being wrong some of the time and be open to change. Admit when you make a mistake and tell your entire team why you’re moving on and why you’re doing something differently. It’s the only way to make the best decisions, be agile and gain the trust of your team.
This is an obvious one, but is so often forgotten. Give credit where credit is due. Give credit to other people all the time in your company, around your company, to your board members, to everybody you can.
Your team will follow the incentives you put in place. If your people see that when someone takes a smart risk and fails, they’re punished, they simply won’t take risks. Your job as the founder and CEO is to reduce the cost of failure across your organization. You need to set up structures that make it very clear that it’s okay to take smart risks, regardless of the outcome.
If the failure was due to poor execution, of course, that should never be okay. But if the failure was just simply a bold idea that didn’t work out, you should embrace this and do everything in your power to reduce the cost of this failure. Also, simply telling stories about past failures in front of your entire company really makes people comfortable about taking big risks now. Make this part of your culture.
It’s now become commonplace with modern lean startup methodology, but you need to iterate like crazy. Try things out in different ways to see what works. Find ways to test the core proposition without trying to build out the whole product and the associated systems.
While building Cars Direct, which was started in 1999, Gross put this mantra into action — long before anyone was talking about “lean startups.” Gross and his team were trying to figure out a way to test if people would buy cars online — something that had never been done. Remember, 1999 was a time when people were scared of just putting credit cards online to purchase books or music — let alone cars. Gross and his team had 90 days and $80,000 to figure out whether people would buy cars online, and if people wouldn’t, then they weren’t going to start the company.
A few weeks after the start of the project, the executive running the test came back to Bill to give an update and said, “I’m far along in talks with Ford. I’m trying to get a source and supply of cars.” Gross quickly responded, “We don’t need to worry about getting cars. We might not even go forward with this. Don’t worry about figuring out how to scale the business, just test the core proposition: Will someone buy a car online?
The executive agreed and then came back to Gross in a month and said, “I’m working on the car configurators so people can use drop downs to configure all their options.” Again, Gross snapped back, “We don’t need to make a configurator! Just let them type in what they want. We’re going to take that print out, drive down to the Honda Auto Mall in Monrovia, buy the car at retail, and sell it to them at cost. We’re going to lose $4,000 on each car. We don’t care about that. We’re just trying to find out if someone will go through with it.”
On the 80th day, with 10 days to go, Gross said, “Just put the site live and let’s just see what happens.” On a Thursday night, he went home and the site went live. When he came back on Friday morning he asked for an update and his team let him know they sold four cars that night. Surprised, Gross said, “Hurry up and turn the site off! We don’t want to sell any more cars.” They had proven what they wanted to find out, which was four people would put in their credit card to buy a car, which Gross' team then went and bought and delivered on a flat bed truck. They completed the experience and learned most of what they needed to know in order to decide whether or not to pursue the idea.
After the test, Gross and team built the site, figured out how to actually source the cars, acquire the customers and scale the business — and eventually Cars Direct was sold to Hellman & Friedman for $600 million.
At the very beginning, just find out does the customer want what you’re selling? And figure out the cheapest and fastest way to get that answer.