Dominik Balogh

Smart people can recognize smart people

When you read short online biographies of successful people, they mostly start or end with a level of education, usually a university degree. Big companies’ HR bureaucracy aside, I’d like to understand what message they’d like to deliver by including this information, and in fact, it’s hard for me to recognize whether it’s a negative or positive one. It goes something along the lines:

“John Smith graduated from Harvard University with an A. B. in Computer Science. John worked at Amazon as a VP of marketing and developed a known and very successful expansion strategy. John later founded project.com and sold it to Google for $900 million after 3 years of operation, with 20 millions registered users”.

Translated:

“At school, John Smith learned from old smart people how to build a sand tower by using a beach bucket. John is also known for studying architecture on his own and building an astonishing 200-acre golf course in the middle of San Francisco with his bare hands over a period of 3 years, working 16 hours a day. Tiger Woods called the course most enjoyable and challenging he’s ever played on. The planet’s most famous golf course has been later acquired by Nike for $900 million, making John one of the hardest working, most rich and successful startup entrepreneurs in the world”.

Now, I had to strongly overexpose for the difference to be more clear - much more people can use a beach bucket and fill it with sand than those who can successfully graduate from Harvard. But my point is simple. Study is important, in some fields critical, and can also be a part of business strategy - but with the level of some people’s accomplishments, I’m personally not very sure what their degree means in the bio. Smart people recognize smart people. You are not going to ask Larry Ellison where he graduated from before you decide whether you want to conduct business with him, are you?

An entrepreneur can care and consider his graduation to be a big notable accomplishment, but before including it, he should ask himself a very basic question first: “Does my target audience care?”. I think only the dumb one does. Your target audience better be smart.

Too many great ideas

The big issue of all entrepreneurs is that they evolve very quickly. Too many great ideas magically appear in their mind. The excitement from the latest idea quickly overlaps the previous one, which could be just a few months old. All of the previous ideas suddenly don’t seem to be that great anymore and it’s getting more and more difficult to keep the attention on them.

It’s not possible to do everything. Even Virgin can’t. Filtering ideas is important, but filtering is not easy, because the greatest idea is often much more riskier than a good one. Should my company spend 1 year building a great idea to generate $10M, or should it completely devote 3 years of work to the top risky idea worth $1B while missing many other good opportunities? It doesn’t really matter whether it’s a $10M vs. $1B situation or $10,000 vs. $100,000, the point is still the same.

I guess there is no simple answer and no “ideal” strategy. Sometimes it may be smarter to stick to the previous ideas and keep enhancing them. Sometimes you need to postpone or delegate all of the previous ideas and follow just the top shower one.

But, of course, there’s always an another great idea waiting in the queue.

Waiting for the next big thing

The market is hungry for the next big thing. Obviously, nobody knows what’s the next big thing until already everybody knows it is. Investors bet on their instinct and do the trial and error business.

Let’s try to define what “the next big thing” could actually mean. A product which is:

• public
• for everybody who can use a piece of electronics with a network connection
• can scale extremely well right now
• can generate almost obnoxious revenue within 5 years
• can return 20+ times of the original amount invested

On-demand digital streaming, music, video, news with rich content, network TVs, YouTube, mobile devices, they are all a part of the next big thing. But in the jargon, even though their market is currently very large and fresh, it’s not “big enough” by the terms of our definition.

There’s no way you can turn on your TV or home stereo today, a display in a car or an app on a mobile device and enjoy any digital content by universal standards. Why?

What all of these businesses have in common is that they can’t scale well and fast enough in the current world’s establishment. They are tightly controlled or legally challenged by a very few, mostly very old fashioned vendors. If not by them, then by bureaucracy, lobbying, governments, currencies, country borders, restrictions, regulations, policies, standards and copyrights.

Yes, tons of money has been made already, but still just a pathetic amount compared to the true today’s potential. Committed players are fighting their way for the sake of advantage which they’ll own when the world changes, such as iTunes, Hulu, or even YouTube. All great services which altered the business, but it’s a slow industry transformation, not an instant game changer with a clear road ahead. Much of the credit goes to Steve Jobs, but even him and all of the young geniuses are forceless. It’s very similar with the new sources of energy. Until people’s hearts are not touched anymore by the sound of a 6 liter gasoline racing engine, until new kids are born, until some companies disappear — or until the world changes rapidly — it just won’t scale.

Neither social networks are the winners, because their original concept is not for everybody and because of the prejudice of older generations. A typical computer-aware grandmother may use Google and click on AdWords even without having an e-mail address, but the current social network concept is designed by young people for the young people. It’s a little beyond the possibilities of grandma’s thinking.

Social networks work because you can find people there, that’s the whole idea. If everybody’s account would be private and prone to search and nobody would use a photo (having a friend named John Smith, good luck finding him without a picture), there would be no reason to go searching for a non-existent, hidden friend. However providers work on user privacy preferences, they default them to a configuration which won’t close their business while hoping not too many people will change it. Even Eric Schmidt is concerned enough to consider suggesting current teenagers to change their name in the adulthood. Still, social networks analyze user data for targeting just as many other providers do, so if you’d like to maintain your privacy, you better not use the internet. All people will slowly adapt to the new definition of personal privacy just as we’ve adapted to everything. But however amazingly fast-growing social networks are, they are still too complicated and slow by the terms of our definition.

Maybe the next big thing is not a single product. It could be an era, more of a part of everything we are establishing today, but much more integrated, connected via APIs and standardized. Digital media, mass social networks, electronic wallets an IDs, cloud operating systems, location awareness, worldwide business directories, gathered people’s habits, linkings and preferences. Data and tools available to users anywhere based on what they prefer, what they’re doing and where they are with much less bureaucratic limitations. We’re on the edge of slow transformation of many industries into a set of smart services from multiple companies, with business methods beyond the current possibilities. Google has the best chances to lead thanks to their gathering & targeting business strategy which they’ve been pursuing since 2001.

But they are not the only one, and they can’t acquire the whole internet and the whole mobile market.

Bigger piece of cake

It’s widely known that successful internet entrepreneurs are millionaires. They mostly became rich quickly. That statement is correct, but depending on how we understand the words “rich” and “quickly”. What media mostly mean by assigning an attribute of a young millionaire is obviously the net worth of a person, or his disposable fortune in liquid assets, not the actual cash.

But is it really liquid assets? There’s a difference in liquid assets of Steve Jobs and another very successful founder, even if their net worth is similar (e.g. Mark Zuckenberg). In a late stage startup company where venture capitalists already own a lot of stock, it’s very probable that founders own just as low as 5% of the company. If the valuation is high, that amount still represents tens or hundreds of millions. But, in the worst scenario:

• this stock may not be vested yet and may be unprotected for dilution
• stock owner is bound not to sell the assets until a specific milestone
• stock owner may not leave the company
• may be fired by board of directors before vesting, making him lose most or all of his assets
• the acquisition price when exiting can actually be low enough that founders get nothing

In a great scenario where the company is strong, each founder owns up to 30% (such as Zuckenberg allegately does), and they are not bound to outrageous terms. But until the acquisition or IPO, it’s very probable that founders haven’t directly sold much of their own stock yet under high valuation. It’s a usual restriction but at the same time mostly makes perfect sense for everybody involved.

And so, for the years until the acquisition comes, founders’ earnings are “just” average executive officer salaries. In fact, the salaries may be lower than average to keep the costs down as much as possible while the company is still heavily dependent on investments.

If 3 to 5 years can be considered a short time, if the company is doing great and if the founders are investment-smart, we can agree — internet company founders can become rich, quickly. But the point is, until the acquisition is closed, until details are publicly/SEC disclosed or until the founders are seen driving 400K+ cars (kidding), general public does not know the actual reality. Maybe the founder is going to be really wealthy. Maybe he’s not. Maybe he’ll receive a lot of acquirer’s stock. Who knows — the investment contracts are never disclosed.

The more smart founders are and the more convincing their project is, the higher chance they’ll eat a bigger piece of cake when exiting or going public.

Why earliest seed fundings should ideally be avoided

I’ve recently realized there’s actually a clear reason why “fools” made it into the FFF joke. By investing in a seed “round”, you’re just most probably a fool, no matter whether you’re actually a friend or family at the same time. Such rounds should be ideally avoided.

If an internet startup company needs $15,000 for a few months of living expenses of its two or three founders (5K for each), how could these founders run a company? What they’ve been doing until now? How comes they don’t have such amount of money already?

A person (students including) skilled and motivated enough to analyze, develop, code, manage and run a startup already has to have all these skills from an actual job, freelancing, consulting or previous business projects. That directly suggests he should also have saved some money for the new project. Sometimes it’s also possible to devote up to 20% of time to the previous income solution while working on a new startup to keep at least a basic income during initial months. It’s still a big distraction, but it may work. But in any case, if a founder doesn’t have any savings, it unfortunately means he can’t manage his money and, more importantly, his life. There’s always a way to save. Founders should never have this problem.

And so it just feels weird to invest into people with zero work or business experience and no money. Only fools could believe that such example founder could manage a profitable company. Strangely enough, they sometimes can.

I see the seed investment more as a motivation. In the earliest tech-demo stage, founders should have enough of their own money. There’s no need for offices or even employees. That’s where wealthier angels help. FFF seed investment is just a good sign that someone supports founders’ commitment. After all, Y Combinator’s initial applications aren’t meant to be seed investments either. It’s more of an upfront paid holiday invitation to keep the investment business going, to stimulate the “startup market”, to meet and to learn — with free lectures from business insiders included. It’s a very clever tool to force people to think outside the box and a filter to find out who’s worth of angels’ time.

That participating in Y Combinator’s filter provides great education, source of contacts, marketing and angel investments, that’s of course, a completely different story.

Knowledge

I recall Seth Godin’s quote that every day is a great day to start your own blog. By the time you’re thinking about it, yesterday was already late. Not having enough time to publish is just an excuse, we all know it. You need to find the time for those things which you believe they may help your business in some way.

Myself, I have been pushing the idea of starting a personal blog away for the last 3 years and always for the same reason. At any given time, it’s almost granted that you do not possess as much knowledge as someone else interested in the same field of art. There’s always someone who knows better, so why being pathetic with sharing your knowledge?

Blogging usually involves presenting one’s personal opinions, often based on one’s previous experiences in a particular field. People talk about what interest them. It’s widely known that many smart people also became rich just by blogging about their interests.

But enterpreneurs, hackers, investors, founders and nerds mostly blog to continuously produce a self-promotion, which concludes making money indirectly. By creating an array of people which are interested in the same art as you, it’s highly probable that you’re increasing your business opportunities for you or your company. You’ll eventually meet interesting people.

To be effective in approaching that business goal, you need to gain trust of your readers. But how do you gain trust? Obviously it’s not the best idea to start advising on proper drifting on a race track if you haven’t even driven a car yet. People will very soon find out, your opinions will be challenged and your efforts ignored. You need to publish your true skills, whatever skill it is. Providing advices, advices on examples from your own mistakes, or other valuable information, are all efficient tools in gaining trust. In the end, your readers can too become better in the art discussed. It’s a free lecture.

The thesis above suggests that you can always teach or make an impression only to people who are more stupid (or less educated, if you prefer) than you at any given time. Ironically, the problem is that people more educated than you are usually the ones you want to make your friends and the ones you’d like to do a hypothetical future business with. Those who feel they know more than you don’t have the time to read your opinions or advices. It’s natural that people tend to listen to those more informed and educated, not less. We constantly learn more from the environment. I bet you’ve already found yourself making fun of your own personal and professional opinions from the recent past either on your own blog or just in your mind.

So how could one possibly also teach and interest people more skilled than himself? Ironically, the answer is the same infinite loop theory which kept me from going for it sooner: at any given time, a person does not possess as much knowledge as someone else skilled in the same art. A business method which seemed very obvious to you for months or even years can be completely disproved by your colleague in ten seconds. We all keep studying forever.