The art of becoming successful

Fred Wilson has written 2 excellent posts on his personal success/failure rate as a venture capitalist, and on the reasons why early stage ventures fail. It is good reading material, especially if you are not in the venture capital business yourself. His most important reasons why ventures fail are:

1) It was a dumb idea and we realized it early on and killed the investment. I’ve only been involved in one investment in this category personally although I’ve lived through a bunch like this over the years in the partnerships I’ve been in.
2) It was a decent idea but directionally incorrect, it was hugely overfunded, the burn rate was taken to levels way beyond reason, and it became impossible to adapt the business in a financially viable manner.

He goes on and talks about his most important lessen drawn fro these failures:

So it’s pretty clear to me that most venture backed investments don’t fail because the business plan was flawed. In my experience at least 2/3 of all business plans we back are flawed.

Most venture backed investments fail because the venture capital is used to scale the business before the correct business plan is discovered. That scale/burn rate becomes the cancer that kills the business.

There is so much truth in this. Most of us have had a “great” idea before, thinking this would change the world we are living in now. I know I have, many times. But the interesting thing about it  is that it really isn’t about the idea or the business plan that matters. It is about execution and discovery. Willing to let go of your initial idea’s and discovering what actually works. Setting up a successful  business is really an art. It takes great skill  and adaptation to become successful. While I write this, I’m listening to Michael Hedges in the background. Talking about skill, check out the way he masters his guitar.

One of my favorite books is “Good to great” written by Jim Collins.  In his book Jim explores why some companies are able to make the leap from being a good company to becoming a great company. One of the things I always remember about this book is the idea that great leaders first create a great team of people, before they figure out where the bus(-iness) is going. He goes on and describes 3 key characteristics of companies that made the leap, in a concept which he calls the hedgehog concept:

More precisely, a Hedgehog Concept is a simple, crystalline concept that flows from deep understanding about the intersection of the following three circles:

1. What you can be the best in the world at (and, equally important, what you cannot be the best in the world at). This discerning standard goes far beyond core competence. Just because you possess a core competence doesn’t necessarily mean you can be the best in the world at it. Conversely, what you can be the best at might not even be something in which you are currently engaged.

2. What drives your economic engine. All the good-to-great companies attained piercing insight into how to most effectively generate sustained and robust cash flow and profitability. In particular, they discovered the single denominator—profit per x—that had the greatest impact on their economics. (It would be cash flow per x in the social sector.)

3. What you are deeply passionate about. The good-to-great companies focused on those activities that ignited their passion. The idea here is not to stimulate passion but to discover what makes you passionate.

I was thinking about these things this morning, after a long weekend of Facebook backlashing. Mark Zuckerberg and his team are having a hard time at the moment, and a lot of bloggers are getting into the “after success comes the backlash” modus.  I wonder if Fred, who is not very hard on them, would consider investing in Facebook a success or failure. My guess is that it is a success, given the enormous growth and valuation of Facebook. But It might become a failure if Facebook isn’t able to turn the sentiment around.

Their main concern shouldn’t be the user walking away at this point. Their concern should be advertisers turning away. Advertisement is the main business driver for Facebook, and if companies like Coke are now “reconsidering” others might follow. And what to think of the questions Dana Boyd asks herself in “who clicks on ads and what might this mean“. In her post she writes about a study done by Global Advertisement Strategy:

What did we learn? A lot. We learned that most people do not click on ads, and those that do are by no means representative of Web users at large.

Ninety-nine percent of Web users do not click on ads on a monthly basis. Of the 1% that do, most only click once a month. Less than two tenths of one percent click more often. That tiny percentage makes up the vast majority of banner ad clicks.

Who are these “heavy clickers”? They are predominantly female, indexing at a rate almost double the male population. They are older. They are predominantly Midwesterners, with some concentrations in Mid-Atlantic States and in New England. What kinds of content do they like to view when they are on the Web? Not surprisingly, they look at sweepstakes far more than any other kind of content. Yes, these are the same people that tend to open direct mail and love to talk to telemarketers.

What does all of this mean? It means that while clickers may be valuable audiences, they are by no means representative of the Web at large. Focusing campaigns to optimize on clicks means skewing campaigns to optimize on middle-aged women from the Midwest. If these folks are not your target, then you should be ignoring the click-rate and looking deeper, to what audience your impressions are being delivered, and what audiences are converting (there is a large body of evidence that shows that click-rates and conversion rates rarely correlate with each other).

If your business model is about advertisement and click throughs, then you better figure out a way to extend this to other populations than just middle-aged women from the Midwest.

I have always felt that the metric itself is becoming less useful. With all of these things in mind I wonder if Facebook has the strength to work on their own hedgehog concept. They are already a good company. Few have seen such an incredible growth rate in such short time. But the question to be answered is, will they become a great company? I think they have a lot of great things in place. An incredible user base, application API’s, great people on board. And there is a huge advertisement market in place, where unfortunately Google right now takes up 75% of all ad revenues. All they need to do is figure out where to take their bus. If SocialAds and Beacon aren’t it, they better figure out what it should be. I vote for opening up their platform and resetting the balance between user value and advertiser value. That is really what their business should be about. It’s a balancing act.

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About vanelsas

See my about page, http://vanelsas.wordpress.com/about/ ;-)
This entry was posted in Beacon, business model, Facebook, Fred Wilson, Jim Collins, on-line advertisement, SocialAds and tagged , , , , , , , , . Bookmark the permalink.

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