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INTRODUCTION THERE ARE PLENTY of reasons not to start a company. Here are just four: Odds are good that you will fail. As an investor in private companies, I have repeatedly been told that a venture capitalist is thought to have a successful track record with one big success out of ten bets. I was considered unusually successful because only half of the ones in which I invested went out of business. If you, friends, family, or others invest money in the start-up, chances are that the money will be lost. A corollary of the high odds of start-up failure is that any money invested in the start-up is likely to be spent without generating a return for investors. Unless you do a good job of preparing investors for this, you may damage important relationships when your start-up goes down. You may not have what it takes to be an entrepreneur. Considerable research has been conducted on the traits of a successful entrepreneur. But as a very small-scale entrepreneur myself, and one who has interviewed hundreds of others over the years—either for my research or to decide whether to invest—I have noticed that successful entrepreneurs seem to share several common characteristics (Chapter 9, Resources, offers more about that). Your reason to start the company may not be good enough. Based on my investing experience, I have noticed that people sometimes can’t say why they are starting a company. In at least one case, a start-up failed because the CEO realized that he was not really very interested in the product the company was trying to build. As a result, the company floundered until it ran out of money. Given the long hours and low pay required to get a start-up off the ground, be sure to have a well-thought-out and deeply felt reason for starting your company. What are some concrete reasons to start a company? Most commonly, people start companies to capture what they perceive as an irresistible opportunity or to solve a vexing problem; the entrepreneur often assumes that if he can come up with a workable product, then enough other people will buy it to make the company grow. Once you figure out a good reason to start the company, you need to make six key choices to turn your vision into a viable business. To illustrate these choices, let’s look at the case of BrewDog. James Watt and Martin Dickie, a pair of Fraserburgh, Scotland, twenty-somethings, liked to brew beer. There must be hundreds if not thousands of home beer brewers around the world. But Watt and Dickie were different. They thought it would be fun to try to turn their hobby into a real business. By May 2012, BrewDog was a successful public company that provided a world in which the co-founders wanted to work, while also feeding customers, employees, suppliers, partners, and shareholders with custom-cooked meals that satisfied their distinctive cravings. My interview with co-founder and captain, James Watt, reveals how. Why did you and your co-founder start BrewDog? BrewDog’s co-founders started the company because they were bored with their conventional jobs, disliked conventional beer and the conventional corporate cultures they represented, and wanted to do something they loved. As Watt said, “The idea to start our own brewery certainly wasn’t something we consciously set out to do.7 “I guess like any good idea it just had this natural flow about it that … kept rolling and has never really stopped. BrewDog officially began in April 2007 but it was some months before that, when [Martin and I] were having a beer that BrewDog was ‘born.’ The subject of monotony and the fact that all supermarket or big brand beers taste the same was the topic of conversation.8 “[With Martin] having just finished a degree in brewing, beer often took precedence in our conversations, but this time words became actions and we decided to try and create our own beer as a means of remedying the stuffy ales and fizzy yellow lagers that had come to dominate the UK drinks market.9 “That evening we set up a makeshift and pretty sketchy looking brewery in Martin’s garage and created the first batch of what has now become known the world over as Punk IPA.”10 Their next move was to see if anyone in the world would like what they had brewed. Watt continued, “From here we took our pilot beer to a series of open tastings and—by chance—were discovered by the late beer guru Michael Jackson at an event in Glasgow. Upon tasting our beer, Michael told us to quit our jobs and go into brewing fulltime. This is exactly what we did.”11 Their next challenge, with very little money and difficult access to more, was to build a brewery big enough to meet that demand. As Watt explained, “Both only 24 years old, we leased a building, got some scary bank loans, and poured our heart, soul, and life savings into a fledgling business we weren’t even sure would take off.”12 “BrewDog started with only $48,000 [bank loan] so the first year involved living, eating, and sleeping at the brewery—a drafty warehouse on Fraserburgh’s coastline. Exposed to the elements and running short on funds, Martin and I often worked twenty-hour shifts, … to stay afloat but also to stay warm.”13 They were delighted to learn that through a combination of media savvy and brewing skill, they were generating a wave of popularity. Watt pointed out, “Within a year, there was already a buzz beginning to form around our beers, a media buzz that was starting to brand us as a scourge to society with our ‘reckless and irresponsible’ approach to brewing. The same buzz caused other people to see our beers as wildly innovative, contemporary, and making progressive changes and twists to long outmoded classic beer styles. Many people are still making their mind up over which brush to tar us with.”14 Had you previously worked for other companies? Both BrewDog co-founders had earned university degrees and gone to work at conventional firms. But for different reasons, they did not feel that they fit. Dickie seems to have gotten more benefit from his education than Watt. As Watt explained, “Martin and I had both been to university in the years before BrewDog’s conception and … studied very different subjects. I, for example, [became] bogged down in the rather tedious world of law while Martin … pursued brewing and consequently was working at a number of different breweries in England. After graduating [I] managed to get a place at a law firm but within two weeks [I] walked out.”15 If so, what did you like about working there? What frustrated you about it? Watt’s revulsion with law was visceral and he quit his job quickly. He said, “Law—in a word—is dull and there was a big part of me that totally panicked thinking ‘f*ck is this it?’ The last thing I wanted to do with the next forty years of my life was to sit behind a desk, sorting out paperwork and other people’s problems, constrained by a nine-to-five and a smart casual wardrobe. When I quit I didn’t know what I would do, but literally a week later Martin and I started experimenting with beer, so I wasn’t stuck watching daytime TV for long.”16 What were the factors that led you to decide to turn your hobby—home brewing beer—into a business? Watt and Dickie founded BrewDog because they were passionate about it and they thought the consequences of failure were minimal. Watt said, “The opportunity to do something both Martin and I were genuinely passionate about was the main driving factor. Passion, drive, and determination are the key ingredients when starting any business, so it was just as well we felt that way about beer.17 “We also wanted to see if we could make a change. Martin and I were both in the perfect position to take that gamble—young enough and stupid enough to take big risks which—should they fail—wouldn’t change our lives too dramatically.”18 They found out in retrospect that there had been a big opportunity, but they did not have any idea it would be so significant when they decided to launch BrewDog. According to Watt, “Even now I’m surprised our business managed to stay afloat and [has] achieved some incredible things—exporting to over twenty-seven countries, being stocked in the UK’s largest supermarkets, and having 1,300 shareholders invest in our brewery because they share in our vision, to name but a few.”19 When you decided to start the company, what were the most important values you wanted to represent in your product and your relationships with others? BrewDog is driven by a passion to create good-tasting beer in a very different way from its corporate brewer competitors. As Watt explained, “Passion is the key value—we want people who drink our beer to get a sense that it’s been produced by people who genuinely love beer. As the old BrewDog adage goes—‘we’re selfish because we only create beers we like.’ If you aren’t 100 percent interested or committed to your product then you’re setting yourself up for a fall.”20 “BrewDog is also the antithesis of corporate culture. Our staff aren’t so much staff but more like family—dogs included—so it’s pretty difficult to implement any kind of regulation when your employees are friends and your office is essentially a 24/7 parlor of chaos.”21 Nevertheless, the founders needed procedures to help manage their growth. As Watt explained, “That said, it’s far from a frat party in a brewery. The business is growing so quickly that we can often barely keep up in terms of the number of people we need as well as the internal procedure and infrastructure that are key to keep the whole thing from falling down around us.22 “The growth of BrewDog means the rest of the team and I spend a lot of time putting out fires, whether that’s explaining to a loyal customer that their beer isn’t ready yet or trying to get our online store fully stocked.”23 BrewDog’s beer-manufacturing approach reflects that anti-big–company ethos. According to Watt, “The problem with beer is that it’s a completely organic product in that it takes time to grow and mature. If we were an automated, machine-driven multinational with millions of pounds at our disposal, then we could quite happily pump our beers full of artificial flavorings and chemicals to get them out the door as quickly as possible.24 “Thankfully, however, that’s not the way we operate and we spend our time focusing on redefining the industry whilst beating our customers from our front door with a stick.”25 BrewDog remains highly motivated to persuade people who buy corporate-brewed beer to switch to their crafted product. Watt said, “For us, everything comes back to one simple thing, one overarching ambition, one guiding light: to make other people as passionate about great craft beer as we are. We want to show people there is an alternative to monotone corporate beers and introduce them to a completely new approach to beer and elevate the status of beer in our culture.26 “Drinkers in Scotland are constrained by lack of choice. Seduced by the monolithic corporate brewers that have huge advertising budgets. Brainwashed by vindictive lies perpetrated with the veracity of pseudopropaganda. They can’t help but be sucked down the rabbit hole. We are on a mission to open as many people’s eyes as possible. This single goal is what gets us through pretty much anything.”27 Its marketing approach also reflects this anti-corporate bias. As Watt explained, “Whether it is wrangling with industry regulators, pushing the boundaries in high ABV [alcohol by volume] brewing, smashing bottles of generic beer with a baseball bat, or doing a Saturday morning tasting at a local street market. This is why we work sixteen-hour days and why we only hire the most committed and passionate craft beer fans to work at BrewDog.”28 The six hungry start-up strategy choices in Figure I.1 illustrate BrewDog’s story, as follows: 1. Set goals. Watt and Dickie started BrewDog because they enjoyed making beer, they did not like working in corporate settings, and they wanted to create a working world for themselves and others who shared their passion for making craft beer. To make this vision a reality, they created a series of short-term goals—representing small, but ever-higher-stakes bets on BrewDog’s future. If they could achieve these goals, they might be able to take the company to a higher level. Here is how they sequenced their goals: Goal 1: Find something to do after they quit their corporate jobs. Goal 2: After realizing that crafting beer was a good thing for them to do, create some buzz among influential beer bloggers. Goal 3: Get a distributor in the country where they had created buzz. Goal 4: Convince a bank to lend them money to build a facility that satisfies customer demand. 2. Pick markets. The co-founders picked the craft beer market because they liked making and drinking craft beer. They initially hoped to sell it in Scotland but ran into a brick wall. Instead of giving up, they decided to try sending samples of the product to a beer blogger in Sweden who loved the product. The blogger’s influential review opened up Sweden to BrewDog’s products. 3. Raise capital. BrewDog was able to cobble together capital in a fairly unusual way. It got a bank loan for its initial operations and then sold shares of stock to 1,300 of its customers in an innovative program called “Equity for Punks.” BrewDog also raised capital by trying to delay payments to suppliers while speeding up cash collections from its distributor customers. BrewDog pays suppliers for their raw materials—such as hops, malt, and bottles—when they are ordered, but it typically has to wait sixty days to get paid by its distributors. To speed up customer payments, BrewDog offers a 3 percent discount to those who pay within ten days. But these customers are in the minority—most of them must pay before BrewDog ships its product to them. Only “rock solid” partners—such as those in Sweden and Norway (which are government-owned) do not have to pay before BrewDog delivers. 4. Build team. Watt makes it very clear that the values that drive BrewDog’s efforts to gain market share—a passionate devotion to making high-quality, craft beer and an anti-corporate bias—also influence the kind of people BrewDog hires. Moreover, Watts suggests that this anti-corporate bias means that BrewDog’s work environment demands very long hours and may not be as efficient as that of a large corporation. 5. Gain share. BrewDog’s values and comparatively weak capital base led it to gain share through so-called guerrilla marketing techniques. It produces very clever and humorous videos that are inexpensive to produce and tend to attract many viewers through viral growth. Watt noted that a one-page magazine advertisement in the United Kingdom might reach a few potential customers for $8,000; however, BrewDog was able to reach 250,000 people around the world with a humorous YouTube-style video that it created for $2,400. Meanwhile, its initial market in Sweden was a result of sending a sample of its product to a prominent beer blogger there whose endorsement of the product made it much easier for Watts to sign up a big distributor in that market. 6. Adapt to change. BrewDog is trying to expand to more countries, and everywhere it wants to go there is plenty of competition. But Watt has a corporate North Star that helps him navigate these churning waters—his passionate belief in making a craft beer that its founders and customers crave. BrewDog’s battle for survival is typical of start-ups. Since they are born scrambling to come up with the cash to keep going, they cannot afford to wed themselves to old ways of running a business. To that end, different questions keep start-up CEOs up at night and the answers differ from the prescriptions provided by Michael E. Porter, Bishop William Lawrence University Professor at Harvard Business School (HBS), whom I mentioned in the preface. He is a leading authority on company strategy and the competitiveness of nations and regions. And I worked at his consulting firm, Monitor Company, and directly with him on two projects. While I have great respect for his ideas and intellect, there are important differences between his ideas and the concerns and concepts most pressing to entrepreneurs. Table I.1 summarizes these differences. The most important of these differences is that since they sprout from a hunger to create a new world with scant resources, all start-up choices are shaped by different pressures from those in large organizations. For example, start-ups choose where to compete not based on analysis of impersonal factors but on their own skills and passions. Start-ups shape their choices as to where and how to compete based on their limited capital. And they use the power of their mission and long-term goals to make up for their inability to pay high salaries when recruiting their teams. Ultimately, start-ups can gain market share—not through one of Porter’s generic strategies—only through the recognition that they must offer customers a huge leap in value over competing products in order to overcome the risk to a customer of building a business relationship with a potentially ethereal supplier. WHY START-UPS MATTER TO THE ECONOMY The typical start-up is a pretty fragile economic entity. So it might surprise you to learn that start-ups play a critical role in creating new jobs for the U.S. economy. Between 1977 and 2009 nearly all the roughly two to three million new jobs created each year were contributed by start-ups. Big companies contributed no net new jobs. Dane Stangler, a research manager at the Kauffman Foundation, explained his views on the importance of start-ups and provided the data to back them up. According to Stangler, there are about 500,000 new businesses created annually.29 These new firms help maintain a total of two million start-ups—at 30 percent there are more of them than any other type of company. And between 48 and 50 percent of start-ups survive to their fifth year. If you net out job turnover, those start-ups create about two net new jobs every year. Stangler points out that there are good reasons the start-ups produce most of the net new jobs. First, there are more of them. Second, the larger and older businesses tend to hire many people during economic upturns and then terminate them during periods of economic contraction and expansion. Stangler suggests that large companies and start-ups have different attitudes toward innovation. The large companies invest in incremental technologies that have more controllable risks—and predictable returns. By contrast, start-ups invest in breakthrough innovation. The different incentive structures for managers and investors help explain why. After all, even when a large company encourages risk-taking, there are limits to how much money a bet on innovation can lose before the person responsible for it pays a career price. By contrast, for a start-up, it is understood at the beginning that there is a one-in-ten chance of hitting it big, and if that happens, the reward will be a massive return on investment. An interesting feature of start-ups is how they’re financed. Stangler estimates that between 1 and 3 percent of the financing for start-ups comes from VC firms. And that comes later in their development. Stangler cites a 2009 study by Paul Kedrosky, Right-Sizing the U.S. Venture Capital Industry, which found that 16 percent of the 900 Inc. 100 companies between 1997 and 2007 took VC.30 During a start-up’s initial stages, the funds come from friends, family, and founders. As a start-up grows, the money comes from bank loans, credit cards, and, before 2008, home equity. And only if the start-up has reached a further stage of development does it get equity investment. Duke University researcher Vivek Wadhwa has surveyed thousands of students from China and India who returned home after getting their degrees in America. They ran into so much difficulty trying to make a go of it here that they started their companies back home instead. And China is taking steps to encourage its natives to return home to start their businesses. Graduates of research universities such as MIT and Stanford account for a huge number of start-ups. In February 2009, MIT professor Edward B. Roberts and Charles Eesley discovered that MIT alumni started 25,800 active companies that employ about 3.3 million people and generate global sales of $2 trillion.31 Eesley is currently conducting a similar study to estimate the economic impact of Stanford.32 The final reason start-ups matter is somewhat theoretical, but quite interesting. According to Stangler, for a company or a society there are diminishing returns to complexity. Initially, investment in more complexity generates an attractive return. But eventually, more complexity produces negative returns. In Stangler’s view, start-ups reset the complexity curve. Through breakthrough technological innovation, they extend the productivity frontier of companies and society. And they create new opportunities to make high-return investments in increased complexity before those diminishing returns again set in. HOW HUNGRY START-UP STRATEGY WILL BENEFIT YOU If you agree that start-ups are important, then Hungry Start-Up Strategy will help you. This book provides different benefits to different groups of readers, including: Entrepreneurs. Start-up CEOs and their management teams will learn how best to make six key strategic choices, how capital providers view them, and the kinds of big companies that can train them before they launch their ventures. Entrepreneurship professors and students. Business schools that teach entrepreneurship will have a new approach to strategy that complements traditional strategy frameworks. And students will benefit from advice on whether they are cut out to be entrepreneurs. Capital providers. Venture capitalists, banks, and angel investors will use the book to attract potential portfolio companies and to show them how to achieve their goals. Big companies. CEOs of large companies—particularly those that are threatened by upstart competitors and changing technologies—will learn how a handful of large companies are incorporating start-up strategies into their own organizations to create and capture growth opportunities while meeting quarterly performance targets. Welcome to the world of the hungry start-up. If this introduction has increased your appetite to learn more, may the rest of this book sate your hunger.
