Altos Ventures Musings

More Twitter rumors - a sure sign that real pros are NOT at work

I read about the Twitter-AAPL rumors today and had a laugh. I thought the whole thing was ridiculous. I'm not talking about the AAPL deal specifically but about the circus act of Twitter and all the rumors about Twitter-Facebook, Twitter-Google, and now Twitter-Apple. 

I am willing to bet that a "news source" like TC will never get the scoop on a real acquisition - an acquisition which really matters by serious players. 

If an acquisition is going to happen, it will be kept in absolute secrecy, be executed smoothly and quickly and it will catch people by surprise. 

I'm not talking about hostile take-overs which will get a lot of press and drag on and on for months (like ORCL-PSFT) or the sad saga of MSFT-YHOO. 

Most recently, the IBM-Sun rumors reminded me of the MSFT-YHOO saga. The more press it got, the less likely I thought that it would happen. 

The most recent example of a tech deal that matters is the $7.4B ORCL-JAVA deal. Even Steve Ballmer was caught off guard by it. Another recent example is the $690mm Cisco-Pure Digital deal. Everyone was scratching their heads on that one!

Another big deal which no-one remembers now is the friendly takeover of BOBJ by SAP for a cool $6.8B. The guys who made that deal happen were pros (on both sides). 

Going off topic a bit...

I have to give credit to ORCL for all of the deals that they've successfully executed, although I think it's sad that Oracle has turned into another CA (a company that Larry Ellison used to make fun of for not innovating but acquiring maintenance revenue streams). 

I just have to admire their guts and determination in consistently executing against a clear vision and strategy over the past 6 years (that probably seems like an eternity for some Web 2.0 entrepreneurs!). 

I remember when we had Chuck Phillips speak at our annual meeting in 2002. I had no idea that he would join Oracle less than a year later and execute deals which would change the tech industry. 

If you think about it, the consolidation in the enterprise software industry that Chuck envisioned happened because he helped make it happen! Whether or not I agree with Oracle's strategy, I have to admire real pros at work. 

Twitter Envy

After what seemed like the biggest PR week ever for a start-up, I did a Google News search this morning on "Twitter" and found 1,612 news articles. It was more than twice the Google News results for Facebook, Google, Microsoft, Amazon, eBay and Yahoo! COMBINED.

Last month, Seth Godin wrote a blog post talking about the difference between PR and publicity. If great PR is the strategic crafting of a compelling story...just what is the Twitter story? Can there be a credible story without customers (not users) and how they make money?

Before you get Twitter envy and start doing dumb things (like Facebook did changing its homepage) be sure you understand what your true mission is as an entrepreneur.

An entrepreneur's mission is not to get publicity or to become famous. It is to build a company. Without revenues and profits, you cannot have a viable company.

There is no doubt that Twitter has innovative product people and great engineers to be able to handle scalability issues. But let's just see if they will still be around when their venture funding runs out and the hype dies down.

In the meantime, don't learn the wrong lessons from Twitter. Don't rush out to hire a new PR agency. I've seen plenty of companies get hyped, raise huge amounts of funding, and land speaking gigs and magazine covers all around the world. It doesn't mean they will make it. In fact, it might decrease their chances (don't confuse cause/effect).

Yes, they might get lucky and flip the company for a princely sum (as Youtube did). But I doubt they will build a successful business or a lasting company.

What is your definition of success? PR or publicity? Build your company or your reputation? Build to last or build to flip?

Burn the Ships!

The past 6 months have been two of the toughest quarters in decades. Almost every company is struggling - but some are surviving and some are not. What separates them?

I want to share an observation. There seems to be one common theme across every Silicon Valley company that I've seen go out of business. For some reason, the management of companies that abruptly shut their doors thought that they would get more funding. It could have been VC funding, debt financing or some other source of outside capital. That was their back-up plan. They were counting on it.

If you are an entrepreneur, you should have the attitude that there will be no-one to save you. There will be no outside capital. You have to generate revenues, cut costs, make the business model work - or find some way to survive until you do.

This doesn't mean that entrepreneurs should not raise any debt or equity financing. It just means they should never, ever count on it.

In Silicon Valley, it almost seems as if entrepreneurs count on VC as a business model. They aspire to become adept at raising VC money and "exiting" in a few years. What ever happened to the idea of building a real business, funded by paying customers? How about building a company that can stand alone, built to last?

In a book called Predictable Irrational, I found a story that every entrepreneur should think about.

In 210 BC, a Chinese commander named Xiang Yu led his troops across the Yangtze River to attack the army of the Qin (Ch'in) dynasty. Pausing on the banks of the river for the night, his troops awakened in the morning to find, to their horror, that their ships were burning. They hurried to their feet to fight off the attackers, but soon discovered that it was Xiang Yu himself who had set their ships on fire... With their ships gone, the soldiers had no route of retreat. Winning was the only option. 

They won 9 battles in a row before defeating the mighty Qin forces.

If you are an entrepreneur and you think that you will need some more funding to survive - or thrive - I have one piece of advice for you. Burn the ships.

Fat and Happy

One of the biggest challenges that start-ups face is inertia. When you hear comments like “things are fine the way they are” or “there is no interest in making a change right now,” entrepreneurs, or any pioneer, will have a very difficult time making headway.

If you're an entrepreneur, I have good news for you. Fat and happy people are in short supply these days.

The world is ready for change. This means that you will be able to accomplish things that were simply not possible before. Isn’t this is one of the reasons that someone like Barack Obama got elected President of the United States?

Entrepreneurs are not only the agents of change, they are the beneficiaries (see creative destruction).

This is not a time to panic. This is the time to act and to take advantage of the great challenges and opportunities that lie ahead.

Over the past few months, I’ve sensed a subtle but real change in attitude. The ones who are not paralyzed seem more determined than ever. People seem more hungry, more creative, more open minded. They are also more realistic. They face problems with new resolve.

Of course, not all start-ups will do well during tumultuous economic times. But I also believe that it is during times like these, when everyone is NOT fat and happy, that the conditions are most ripe for great new companies – and perhaps great new industries - to come out of nowhere and help change the world.

The Death of Tech and Entrepreneurship?

I had an interesting chat the other day with a former venture capitalist who is now doing private equity (i.e. managing larger funds than ever before). He has given up on venture capital. Too difficult to make money, he said.

He observed that the technology industry has matured. Just look at a company like Oracle. Are they innovating or have they turned into another Computer Associates? Hard to believe that not long ago Larry Ellison used to make fun of CA for not innovating but growing by acquiring maintenance revenue streams. We also talked about the semiconductor and EDA industries. Very grim. Cadence is now trading at far below 1x revenues, yet the technical problems they have to solve are getting even harder as geometries continue to shrink.

One of the characteristics of mature industries is that it takes a lot of capital to start new businesses. For example, you cannot bootstrap a new auto company. It could take hundreds of millions, if not billions of dollars. In our own back yard, Tesla Motors is learning that lesson now (Tesla recently asked for $400 million from the government).

So, since the technology industry is maturing, his new investment thesis is that the only way to make the big bucks in high tech is to write big checks. That certainly fits well with his larger fund size that allows him to invest a lot in each company. It helps justify bigger management fees too.

That whole discussion reminded me of a quote from 1899 attributed to Charles Duell, the former commissioner of the U.S. patent office, who said "everything that can be invented has been invented" (actually, the quote is part of an urban myth. The story has been told so many times that even Ronald Reagan once used it in a speech).

I know that we are living through some difficult times, yet I remain optimistic about our future - the technology industry, entrepreneurship and venture capital. Before talking about the future, let's step back for a moment into the past.

Once upon a time, the railroad industry was thought to be "high tech." In the 1830's, rail road entrepreneurs in the U.K. were followed around by the media much as Larry and Sergey are followed around now (or Marc, Meg and Jeff during the Internet bubble).

Many decades later, the auto industry was thought to be "high tech"...and then there was the aerospace industry...the "electronics" industry...these thing called UNIVACs and Mainframes, etc.

Who would have thought that a college drop-out with no funding would hobble (if not topple) IBM, once the most admired company in America? IBM was so powerful that the U.S. government tried for years to break it up, just as it tried to do with Microsoft. It may try it with Google at some point too.

Sometimes, it doesn't even take a high tech wave to create enormous new companies. UPS and Wal-Mart are examples of companies that would require massive amounts of capital to compete against today (they are the two largest employers in America, not counting the government). They were both bootstrapped companies. Neither company raised any outside capital to get going and to reach profitability. They had modest beginnings...but kept growing for decades and rode various technology waves along the way.

The common theme is that entrepreneurs, over hundreds of years, have defined and re-defined what is - and what is not - the latest and greatest. "High tech" or not, entrepreneurs change the rules of the game. They help create waves (or just ride them) to help topple once dominant corporations.

It seems that great companies of every era get toppled by the next generation. Typically, the next gen seem to rise out of nowhere because they start very small, often without much fanfare. They are too small to notice - until it's too late for the incumbents. It takes less time for the average Fortune 500 company to drop off the list than it takes to grow big enough to make the list.

Destruction is all around us these days. Even companies well established for decades are dying right before our eyes, sometimes evaporating in a matter of days. We are also seeing once great, fast growing industries and once innovative, entrepreneurial companies stagnating, perhaps dying slowly. However, this doesn't mean that we're at the end.

Entrepreneurs, even those with venture funding, can't possibly match the resources of large corporations. Yet, entrepreneurs always seem to figure out ways to do the what conventional wisdom thought was impossible. I'm more optimistic about the future than ever because, as venture capitalists, we see exciting developments all around us. Let me provide a few examples.

I'm on the board of a company which saw an announcement that had strategic implications late last week. On a Friday night, the team got together and hashed out a strategy. They came up with new specs for a product. About 48 hours later, the CTO came up with a new product release (apparently, he doesn't sleep). Unbelievable. Such a thing would not be possible without the Internet infrastructure and the innovations that have come before us. A few years ago, even a team of engineers spending months may not have been able to do what a single engineer can do now in a matter of days.

Another example is a company which is using Amazon's cloud services. As they closed major deals, they were concerned about scalability. They had great software engineers who knew little about configuring routers or managing large farms of servers. Now, a software engineer can put out a new release without leaving his bedroom. The company has increased its ability to scale by 1,000x with less work than ever before. An added bonus was that this required no more up-front capital - which really helps in today's environment.

I have so many more examples. It is easier than ever to bootstrap companies. Salaries are coming down. It is easier to find people. Real-estate is getting cheaper by the week (we've seen office rental rates drop 30-50% in the past 2 months alone). In a meeting with Kanwal Rekhi this morning, he told me that the "fear of God is back. This will lead to better companies. More cost conscious. More disciplined."

I continue to be utterly amazed at what a few good engineers can produce these days. But there's more. It's not just about technology. We are seeing unexpected innovations in business models. New revenue and cost models are being created that were not possible even a few years ago (this should be a topic for a future blog post).

The bottom line is this. The pace of innovation is quickening, not slowing down. It's getting cheaper, not more expensive. Yes, if you want to start a new oil company, it will be expensive. A new auto company? Forget about it. A new ERP company? Workday is finding out that it's pretty expensive. Such ventures are not for us because we bet on entrepreneurs who bootstrap. By necessity, they don't go after opportunities that huge competitors with deep pockets go after.  

As long as I'm a venture capitalist, I will continue to bet on entrepreneurs who can do a lot with very little. They surprise us every day. They are our heroes.

The entrepreneurs we see all around us are very hungry. They will struggle - but they will not stop dreaming. They will not stop innovating. They believe. They will endure.

RIP Good Times? A Different Perspective

Rip Good Times A Different Perspective

View SlideShare presentation or Upload your own. (tags: venture capital)

I put this presentation together to encourage a group of entrepreneurs I was to speak to at a conference in Reno, NV last week.

It's funny how times change.

People who have been following our blogs over the past 2 years know that we've had a more pessimistic, contrarian view of the venture business, even as the number of VC investments, fund sizes, deal sizes and valuations had been going up.

Now, of course, the world is totally different. Whether or not you believed that we were in a Web 2.0 technology bubble, Sequoia declared that the good times were over and it's now time to hunker down and fight for survival. In their widely publicized "RIP Good Times" meeting, they extolled the virtues of cash conservation to all of their CEOs and told them that they had to change in order to survive.

Now, we are contrarians again.

Our companies did not need Sequoia to tell them cash is king. They had been operating that way for years. In fact, more than a third of all of our companies are on track to be profitable this quarter. Many have been maintaining profitability while growing for many years.

The reason that we feel like we are contrarians again is that we have not seen such a good environment for building companies in years. Entrepreneurs are more focused on getting to profitability and building companies based on solid fundamentals. Before, we felt like lonely voices in the VC world, which seems to be filled with people working toward billion dollar exits for money losing companies.

Over this entire year, we've noticed a trend. Some of our companies started seeing a steady flow of high quality resumes from competitors. I think it's now about to turn into a flood! It will be much easier to hire great people who are more hungry and realistic about compensation and how long it will take to build shareholder value.  

For entrepreneurs in it for the long haul, this downturn just bought them more time. Impatient VCs won't be hounding them to take more risk, to grow faster, to get more aggressive. Remember, as an entrepreneur, you have one company. You don't have a portfolio of companies. You can't afford to play venture lotto.

Remember what we said back in 2006 about Foxes and Hedgehogs in Silicon Valley?

"Foxes are great at raising capital - they thrive in bubble markets. Hedgehogs would rather bootstrap - they do far better during the inevitable crashes."

For all you hedgehogs out there, this is your time to shine!

Don't Worry, Be Scrappy

“Don’t worry” does not exactly sound like responsible advice at a time like this. After all, we often remind our CEOs of Andy Grove’s famous adage that “only the paranoid survive”.

But it is a serious piece of advice that we are giving to all of our portfolio entrepreneurs. Over the last two weeks, many of our portfolio CEOs (and fund investors) have been asking us for our take on the current financial crisis. So here it is:

The bad news

Let’s first understand that things will be bad – really bad. In fact, this downturn will almost certainly be deeper and longer than the post-Bubble “nuclear winter” of 2001-2004 that so many of us struggled through as entrepreneurs and investors. That crash was precipitated by a financial bubble seeded largely by the venture/technology markets and abetted by all-too-willing public investors. But despite the fall in IT spending and concurrent drop in the NASDAQ index, the general economy kept humming along. In the five dark years following NASDAQ’s peak on March 9 2000, the Dow Jones actually went up. In the same five year period, the national housing price index nearly doubled. Most Americans hardly noticed the Internet Bubble and crash.

Now this is a totally different story. This economic crisis is about all of us. It’s about a fundamental realignment in global asset values. Whatever happens to venture/technology will be collateral damage, but will likely be worse than what we in tech experienced after the Internet Bubble. If that felt like a nuclear winter to tech companies, this one may well be an ice age for all of us. We may be wrong about this, but we’d rather be wrong on the upside than wrong on the downside.

The good news

As an entrepreneur, there are a lot of factors that figure into your success or failure. Some you control and most you don’t. Macroeconomics is one that you certainly don’t. So if, like me, you believe in worrying only about the things you can control, then this is a great time to get focused on building your business and stop fretting about the economy (see Focus on the Controllables).

In fact, a recession is probably the best time to start a company. Great companies like Disney, GE, HP and Microsoft were all started during recessions. As the clever folks at Google like to say, “creativity loves constraints”.

Why?  Bad times can build good DNA.  A down economy does not leave room for entrepreneurial sloppiness. It forces entrepreneurs to be honest about how good their products are. It mandates financial discipline. In other words, it is a perfect time to get focused, get real and get lean.

After the giddy NASDAQ highs of March 2000, it took most people way too long to come to grips with reality. I had personally just joined the venture business and my first company, Evolve Software, went public in August 2000 – a full half year after the peak. Most companies did not start cutting back until late 2001 and by then it was too late. The smart and lucky ones survived the ensuing five years and some became big winners. But most companies just ran out of money and ran out of time.

The rules

Plenty of smart people have already made prudent recommendations to their teams about what to do in this environment, so I won't repeat. See in particular Sequoia’s doom and gloom presentation to their portfolio CEOs earlier this week and Jason Calacanis’ email. But let me summarize with just two simple rules that we've tried to impress upon all of our CEOs:

Rule #1: Don’t run out of cash.

Rule #2: See Rule #1.

Then, go out and build the next great company.

Financial Weapons of Mass Destruction

The events of this past week made me scrap the article I was working on to write about the crisis in financial markets.

Warren Buffet first wrote about "Financial Weapons of Mass Destruction" in Berkshire Hathaway's 2002 annual report. When it was published in March of 2003, there was quite a bit of press coverage, as there is every year after he publishes his annual letter to shareholders.

In an article written by the BBC, Buffet warned of "time bombs." It seems like the first of many bombs went off a couple of years ago, with the decline of the housing market (and housing stocks), leading up to many more bombs in the past few weeks.

If you read his words, Buffet is quite vivid. His warning was not about the housing bubble or sub-prime loans or even the trillion dollars in CMOs (Collateralized Mortgage Obligations), the pass-thru assets which helped create the mess in the banking industry. Buffet was criticizing ALL derivatives.

Warren Buffet thought some derivatives contracts must have been devised by "madmen." Charlie Munger would say it was sheer lunacy. Buffet talked about "mass destruction" and "spirals that can lead to corporate meltdowns" such as the one which took down LTCM in 1998. Buffet warned of "huge scale fraud" and compared the ENTIRE derivatives business to "hell...easy to enter but almost impossible to exit."

Despite the simplicity and clarity of Buffet's words, few people listened. Even now, people don't seem to understand the magnitude of the potential problems that lay ahead in the global financial system. The derivatives market has grown exponentially since 1998, the year LTCM blew up. The global derivatives market is now more than $500 TRILLION, up more than 10x since Buffet's initial warnings.

So my question is this: how is a $700B or even a $1 Trillion bailout by the US Government in the mortgage market going to make a dent in the overall $500 TRILLION dollar market of even more complex, esoteric derivatives contracts???

How depressing. This is why, as a VC, I don't usually think about or comment on macroeconomic issues. Entrepreneurs and VCs build one tiny little business at a time...and once in a while some of those turn out to be winners that impact the lives of millions of people.

Believe it or not, I'm still quite optimistic about our future. We will get through this. This is nothing like disease, famine or war (at least, there is no war on our soil). There are many companies that are still growing and generating profits and cashflow here in Silicon Valley and around the world.

Most start-ups have no exposure to derivativew contracts and little exposure to the overall financial markets. Yes, the IPO market is closed (for now) but if you have a company which generates cash, you will be fine.

For example, one of our companies - one which has been private for more than 10 years - recently issued a cash dividend which paid out more than our entire investment, just as they did last year. They generate multiples of that dividend in free cashflow every year. Every acquisition they've ever made was paid in cash so I'd suspect that they can continue to fuel organic growth as well as future acquisitions. If they continue to generate cash and pay out more than invested capital every year, it would not be so bad, would it?

If you are counting on bubbles or "madmen" to pay crazy prices for your company when you raise capital or when you try to "exit" you will be sorely disappointed in the coming years. You might even wind up in unemployed lines along with those well educated investment bankers. But if you have a real business, one which delivers value to customers who will keep coming back over and over again, I suspect that you will do just fine. Just keep focused on what you are doing and don't get distracted by the macro issues that seem to swing paper valuations wildly day to day.

The macroeconomic problems we face today are issues that even Warren Buffet can't figure out. That hasn't stopped him from going about his business every day. Those hedgehogs just keep moving forward one step at a time. Since that BBC article in 2003, Buffet has increased his net worth by more than 50% to overtake Bill Gates as the wealthiest person in the world.

Ousting the Founder

I was shocked to learn this week that Diane Greene, the co-founder and CEO of VMWare was ousted. I was not alone. Except for senior management (who found out very late, the night before) the employees of VMWare read about it, just like I did on Tuesday morning.

I guess $1.3B in revenues, $14B market cap, 50% growth rate and market dominance was not good enough for the board/EMC. One slight miss in one quarter and BANG! You're out. Perhaps the board believed industry pundits and worried about competition from Microsoft. So they brought in a "heavy hitter"...former Microsoft exec Paul Maritz as CEO.

I'd guess that the more likely reason was that Diane Green was a difficult person to deal with. There is no doubt that she was a controversial CEO. It was her way or the highway and she churned through senior execs (especially in sales and marketing). She never gave much respect to the folks at EMC either (who owned the vast majority of the stock - and controlled the board).

Some other hard-headed, "controversial" founder/CEOs that come to mind are Bill Gates, Larry Ellison, and Steve Jobs. These founders may be difficult to deal with but I'd rather go with them than take my chances with a new hired gun CEO.

Over the years, we've observed that it's difficult, if not impossible, to match the passion and commitment that founders bring to their companies. It's not just a job for them. It's deeply personal. The difference in commitment is akin to the differences you might observe between missionaries and mercenaries (or hedgehogs versus foxes).

Look, I have nothing against Paul. I'm sure he's a very smart, capable and hard working guy. But this whole situation reminded me of the time Steve Jobs was ousted from Apple more than 20 years ago.

As co-founder and CEO, Diane Green built one of the all time great successes in Silicon Valley. Very, very few companies ever reach $1B in revenues. Even fewer in the technology industry. Even fewer in the software industry. And even fewer ever exceed $10B in market cap.

Why the hell would you fire her?? No, don't tell me...I've heard all the reasons. VCs oust founders all the time. I've been in plenty of board level discussions around this topic!

It's almost a rite of passage in Silicon Valley. As a founder, you start a company, get VCs to fund you, recruit a "world class" management team...and eventually, find your replacement (or get ousted).

What people seem to miss, however, is that just about every great company ever created - in technology as well as low-tech, was built by a founder (or a CEO who happened to join the company very early in its growth phase) and a team of dedicated people who grew with their companies.

I don't believe in "world class" management in the generic sense. "World class" in what??

What I believe in is people who learn on the job and become - over time - the best at what they do. Along the way, they make plenty of mistakes. But that's part of the learning (and perhaps the luck of it - because the mistakes happen to be not fatal for the survivors).

Think about it. Some examples of great companies led by founders for decades are GE, UPS, FedEx, Wal-Mart, Southwest Airlines, HP, Intel, SAP, SAS, Apple, Oracle, Microsoft, Adobe, Sun, Dell, Qualcomm, Broadcom, Nvidia, Dolby, Amazon.com, Salesforce.com, etc.

There are some great companies where the original founder(s) did not grow the company but the CEO who grew the business to $1B+ in revenues joined very early on in the life of the company (typically below $10mm in sales): IBM, McDonald's, Starbucks, Veritas, Cisco and Google are examples.

It'll be interesting to see what happens. Even a founder hanging on to the bitter end won't save some companies (i.e. Wang, DEC). But I'd rather take my chances with the founder who built a $1B business from scratch than go with someone new.

The average tenure of the CEOs in our three largest companies is 9 years. They learned on the job. None of them had been CEO before we started working with them. None had much experience in their industry - the market did not exist, and the technology and business models had not yet been invented. But they are guys who took us this far (average sales of nearly $90mm this year) and we will gladly stick with them as long as they still want the job.

I'd rather take my chances with the people who built the business and grew their companies than the "professionals" - the hired guns - the mercenaries - coming in, after the fact, to "fix" things or to "take it to the next level."

We tell all of our companies this - if you want to build the leader in your industry, you have to have the world's leading experts in your field working for you. But do NOT expect to find them outside of your company. Someone senior from the outside won't come in to show you the way. They won't save you.

Think about it. If you can go outside and hire a CEO or other very senior executives to come in to YOUR company and tell you what to do and how to do it - better than you - then you've created nothing special. There is no secret sauce and you have NO CHANCE of building a truly great company.

We like to tell all of our companies this - the world's leading experts in your business will be the people you develop. The young people you hire today will be your future leaders. Five to ten years from now, they will BE the world's leading experts in your business. You will have to figure it out - together - along the way.

Don't count on those mythical "world class" managers to come in to save the day. Not only are there no guarantees, I believe they will end up hurting your chances of building a special, lasting company. If you do try to hire them anyway...good luck. What I will guarantee is this - they will negotiate HARD for a nice severance package.

Failing Fast

Lately, I’ve been telling all our companies to fail.  Fast.

It’s not that I’ve decided to throw in the towel. Quite the contrary. After doing startups for a dozen years, I’ve come to believe that the best way to maximize the chance of a big success is to fail often and fail fast.

Thomas Edison was one of history’s most successful failures. He failed more than a thousand times before inventing the incandescent light bulb. When Edison finally figured it out, he famously said: “I didn’t fail a thousand times. The light bulb was an invention with a thousand steps.”

The idea of taking a thousand steps is core to our investment philosophy here at Altos.  We’ve come to understand that every company goes through a series learning processes – about new markets, products, distribution strategies, etc. My partner Brendon wrote a great post on the fact that there is just no substitute for time when going through these learning cycles. Sometimes, the outcome of learning means tweaking the product to meet unforeseen customer needs; other times it means completely scrapping the business model and starting fresh. In fact some of our most successful companies started with one business and ended up with something entirely different. Put a smart, tenacious team against a big market opportunity with enough operating runway, and you have a decent formula for success.

Failing fast is even more imperative in the world of Web-based software and services. Back when I was a rookie product manager, I’d spend months perfecting product requirements documents (PRDs) that would disappear into an engineering organization only to emerge months or years later as a finished software product. Nowadays, that one-shot, monolithic approach is just not a competitive option.

Failing fast requires companies to think about perfecting their products differently. To quote LinkedIn founder Reid Hoffman, “If you are not embarrassed by the first version of your product, you’ve probably launched too late.” Perfecting a product the first time out is impossible, but getting it out and iterating a thousand times just might get you close.

Some of our best development teams cull user feedback into new priorities to build/test/release on a weekly cycle. It doesn’t really matter whether they are using newer lightweight tools like Ruby on Rails and Adobe Flex or “heavier” Microsoft-centric stacks. The key is to obsessively listen to and incorporate feedback from Web users who aren’t afraid to tell you if their release sucks (or not). Keep what sticks, toss what stinks.

Of course, just failing a lot is no guarantee for success. There are plenty of teams that just fail all the way to a big fat zero. These teams either spend too much time and money failing or don’t fail in the right ways. Let me elaborate:

One corollary to failing fast is failing cheaper. Josh Kopelman has a good post (and investment model) on this, so I’ll let that him tell you all about it.

A second corollary to failing fast is failing well. Systems that fail well compartmentalize and minimize a failure so that it does not impact the whole system – for instance, a sealed chamber in the hold of a cargo ship that allows a single area to absorb damage without flooding the entire hold. Failing well is a lesson most of us learned in high school chemistry lab: isolating experimental variables by using a scientific control. Similarly, start-up teams that fail well run multiple experiments to get small, controlled failures. These teams understand that failure is a desirable and necessary byproduct of the learning process. They are humble, smart and fast.

So don’t be afraid to fail. Don’t even be afraid to be embarrassed. It’s all just part of being successful.