Today, I am sitting down with Gordon Daugherty, Managing Director of Capital Factory, Investor, and recovering Startup Executive.

 

Over a 29-year career, Gordon has worked at Startups in Strategy, Operations, Marketing, in multiple countries. Currently, he is on the board of multiple startups, and invests in some as well.  He’s the Managing Director of Capital Factory and leads the Accelerator program in downtown Austin.

 

I had the chance to interview him at the McCombs School of Business, thanks to the MSTC program, the program I am in. Thank you Mandy Reyes!

 

In this episode, we go through the common milestones in an entrepreneur’s journey, blind spots that come up at different stages, and what to do when you’re starting out. I get the chance to ask some questions I wonder about, and hear from entrepreneurs regularly:

  • What does entrepreneurs passion even come from?
  • What are bigger blocks that entrepreneur have?
  • Why would we want a cofounder? How should we start looking for one?
  • What do I need to have as a minimum in order to start convos with investors?
  • What is the difference between a product and a company? (Investors invest in companies, not in products. We might be working on something that is a product, but investors want to see the institutes that can sustain that products development,launch, and marketing)

 

Gordon knows a lot more than I ever even ask about. And I do mean, a lot. In fact, to learn even more from Gordon, check his website, shockwaveinnovations.com where has 100s of hours of content around pretty much everything entrepreneurship. If you like tactical content like we talk on this show, and want more, keep listening, but also check out shockwave innovations.

 

Ladies and gents, I hope you enjoy this episode. If you’d like to follow us on the Facebooks, Twitters, and Instagrams, we are @fireshowpodcast. If you like this podcast, leave a review on iTunes.

Hope you enjoy this episode.

Transcript

Transcript of Interview

 

Moby:  Hello, Gordon.

 

Gordon:  Hello.

 

Moby:  How are you?

 

Gordon:  I’m well. Thank you.

 

Moby:  How was your drive here this morning? It’s change hasn’t it?

 

Gordon:  It’s gotten a little bit better, the commute time got cut in half due to a relocation, so I’m happy about that.

 

Moby:  Yeah, so your commute time from your house to Capital Factory which is in the heart of downtown Austin, it got cut off and your life has become much easier.

 

Gordon:  I just got about five or six or maybe ten hours back in my week if you want to think of it that way.

 

Moby:  Oh, my God. What do you do during those hours, just listen to music or think? What do you do?

 

Gordon:  Yeah, I’ll listen to news, I’ll listen to NPR. I also will take advantage of that time to schedule some calls. One of my reserve times that I can predict that I’m probably free is 8:30 or 9:00 in the morning when I’m driving down and 4:30 or 5:00 in the afternoon when I’m driving back. So I’ll take advantage of the time.

 

Moby:  That’s awesome. So I know what you do, but for the audience. What do you do over at Capital Factory and how long have you been a part of that?

 

Gordon:  Let’s see, I joint Capital Factory about five years ago. And I have the luxury now after a 29 year professional career to spend a hundred percent of my time educating, advising and investing in tech startups. That was kind of my dreams, so I don’t consider it a job as much as near full-time hobby. A managing director and general partner there, I was managing director, I run the startup accelerator as a general partner, I’m a VC, I’m an investor. I’m having fun.

 

Moby:  Yeah, and you made that switch five years ago, right? Did you joined Capital Factory as MD or did you just work your way through and realize, “Hey, I should be an MD.”

 

Gordon:  As Josh Baird the founder and executive director evolved from a summer boot camp accelerator, that’s one Capital Factory was in the early days back to 2009. But around 2012 he and some others invested in the physical property that people know downtown as Capital Factory.

 

Moby:  Absolutely.

 

Gordon:  The physical thing. That was about the time I connected with him. I had invested in a Capital Factory startup from one of the earlier days of the accelerators, got me introduced to Josh, he suggested I join as a mentor which was part of one of my dreams anyway for my kind of next phase of my professional life.

 

That led to him asking if I would help him revamp the accelerator program, instead of a summer boot camp to a totally, totally different structure, that’s wide open, always running, always accepting applications. And as I helped him through that he asked if I’d be interested in joining as the first managing director for Capital Factory.

 

Moby:  And boom, now Capital Factory’s kind of the … I like that phrase, center of gravity for entrepreneurship in Austin. So, okay, so shifting gears a little bit how many pitches from first-time entrepreneurs do you get a week?

 

Gordon:  Well per week I’ve estimated that I’ve seen about 1500 pitches over the last 15 years or so. It ebbs and flows, we go through cycles. I think of it maybe more on a monthly basis, it’s probably 50 or so a month that I might see. It might because I’m judging a pitch competition, it might be someone coming in, a batch of interviewees to interview for our accelerator. It’s probably on the order of 30 to 50 per month.

 

Moby:  Okay, so you see in the pitch competitions you see early-stage startups where it just had … like kind of thinking out the problem and their solution for it. And then on the accelerator side people who might have traction.

 

Gordon:  That’s right.

 

Moby:  And with the people who are still thinking about this is my problem and I have an idea of a solution that I can solve it with, what do you see their biggest blind spots that they don’t realize that they’re missing when they’re pitching to you or even pitch competitions full of people who might want to work for them or with them?

 

Gordon:  I think the biggest thing that they … the evolution of a company to me goes through certain phases. It goes through testing for desirability, feasibility and then viability. After viability you can scale the company and become sustainable. But just let’s think of the first three phases – desirable, feasible, viable.

 

The startups tend to focus on feasible which is – can it be build? Can I build this thing? And their blind spot is they’re not testing the market for a desirable which means – does anybody even want this thing? In fact do they want it so bad that they’re willing to pay for it?

 

Startups tend to focus on feasibility – can we  build this thing?

Their blind spot is they’re not testing the market for desirability – does anybody even want this thing? Do they want it so bad that they’re willing to pay for it?

 

So I usually encourage them do some basic customer discovery, and get out there and ask some really tough questions and try and not be an eternal optimist because entrepreneurs tend to hear yes when the real answer is …

 

Moby:  Slightly delusional.

 

Gordon:  … a maybe or a no. So their blind spot is don’t just test for improve feasibility, meaning I can build it. Test for desirability.

 

Moby:  And how would someone who isn’t familiar with this field, who hasn’t start a company before, even start thinking about desirability?

 

Gordon:  Yeah, well, there are lots of articles, lots of books around this concept of customer discovery. So between concept of customer discovery which is really interviewing, get out into the market, predict who your ideal buyer persona and user personas are and get out there and talk to them.

 

Ask them open-ended questions, not yes-or-no types of questions, because yes-or-no type questions tend to get more yeses than you really should deserve. But live through a day in their life and try and go through that journey with them.

 

Moby:  Absolutely.

 

Gordon:  Of course the Lean Startup methodologies can really, really help with regards to focusing in on that most minimal thing, the minimal Viable Product concept which is very well understood now. So I’d say a combination between Lean Startup, customer discovery, and probably Peter Thiel’s book – Zero to One, which have fabulous resources.

 

Moby:  I haven’t read that one. But I need to. Something I heard which I really liked is if you’re thinking about your customers, and you haven’t built it, think about who even advertised to after you built it and how you’re going to advertise to them. And use those tenants to talk to them before you even build it.

 

Gordon:  Sure.

 

Moby:  And just do those interviews like discover their pain.

 

Gordon:  That’s right. And you can apply those marketing techniques into earlier stages. Once you have the product of course we identify buyer personas, we speak to that personas, we go through messaging and positioning. You can do that in a hypothetical sense, and then your interviews with customers essentially you’re testing what you think your marketing message might be or what your pricing might be or your customer acquisition strategy might be.

 

Moby:  So even in those early interviews do you advise entrepreneurs, early-stage, first-time entrepreneurs to not talk about their solution a lot but focus more on the problem or how the customer does the job that they want to improve?

 

Gordon:  It’s a little of everything. So I think I would suggest first getting into a day-in-the-life and confirming those pain points, right? You’re trying to solve pain, and so there’s this analogy of aspirin versus vitamin. And if you’re selling a vitamin you might be making their life healthier, if you’re selling an aspirin you’re taking away pain.

 

So part of this at the very beginning of that interview is validating the assumed pain. From there of course it does make sense to better understand that, double click on that, get into a day in the life. So how do you do it today? And then that leads into, “Well, what if I were able to deliver a solution that …” And then you fill in the blank. And then you start exploring that.

 

Moby:  So thinking about the pain and then testing whether a solution works right, how many of those 50 pitches that you see a month, in two years if you map that out how many of the same entrepreneurs are solving that problem in the same way?

 

Gordon:  Almost none of them.

 

Moby:  Yeah.

 

Gordon:  It might look like a different shade of blue or the blue might have turned to full-blown purple or even red, right? If you understand the analogy. But never, never is it the same shade of blue that they started.

 

Moby:  And is that something that people don’t realize happens a lot?

 

Gordon:  That’s a good question. I believe my feeling is the concept of a pivot is so now well communicated and understood. And I believe first time entrepreneurs probably understand that it’s not a failure to pivot. It’s actually rewarded to pivot as early as possible because you have wasted less time. Time is the most valuable resource an entrepreneur has, I mean, by far the most valuable resource for an entrepreneur is time.

 

So that’s what we’re optimizing, because when they run out of time, i.e., runway, that’s when they have to close up shop and they have to go get a regular job.

 

Moby:  True. The director of Texas Venture Labs, I’m in his class right now, actually the MSTC program. Shout-out to Mandy who supplied all this. And he said this all the time, “You’d rather spend 10% of the effort in the first three months figuring out if people are going to pay for it, then you go build it. Otherwise it’s a waste of money.”

 

Gordon:  That’s correct.

 

Moby:  You’ve seen like entrepreneurship for a while now, and what do you think of this idea in the pop culture of entrepreneurship because there’s so much content around that. I mean, I have a podcast about entrepreneurship. This idea of the sole founder who has this idea in a dorm, in a shower and six years later he works, he/she works his ass off for it and then it’s a success. Do you think that’s confirmation bias?

 

Gordon:  I think it’s much like the motivation for young football players admiring their NFL stars or an Olympic athlete. So pick any kind of sport where you reach kind of a world-class level that can be motivating, inspiring, it can drive you, and I think that’s fine. In other words I think young entrepreneurs, let’s even go into high school or college students, that see Mark Zuckerberg or others that they say, “Wow, I would like to be that. I’d like to do that.”

 

I don’t think there’s anything wrong with that. That’s to me no different than an even younger child aspiring to be a fireman or a teacher or whatever, because they see a role model. That’s fine. Go down that path.

 

I believe many young professionals are served well by giving entrepreneurship a try. When you’re young you have … that is your best opportunity to experiment and try different things. You aren’t shackled and you aren’t burdened by big home mortgages and a family of three and other things where you probably do have to really know that you’re on a path that can be successful and accomplish your objectives. So I don’t have any problem with it at all.

 

I do however find many young first-time entrepreneurs essentially solving for – I want to start a startup. And so they turn over rocks and they kind of look for something and they’re just kind of looking for a problem to be solved. I find that more often than not those end up failing, because it is much, much, much harder. Did I say much harder? Than entrepreneurs think, first-time entrepreneurs think.

 

And if they don’t have a fire in their belly for the problem they’re solving, they’ll actually give up earlier with this non-passion project than if it is a true passion project. Having said that, I still think giving a tried entrepreneurship can be positive.

 

Moby:  Absolutely, so before we jump back into pitches, a question about that fire in the belly, the passion, in your observations over the years, what is that passion which is saying, “Oh, my God. I’ve seen this problem throughout my life or in the last year or two, and I’m fascinated by it and I want to solve it right away,” versus, “I just had an idea.” Like is it more like slow burning or something that comes to you right away?

 

Gordon:  I’m not sure there is a more common path to that fire in the belly. However, I do feel like it hits, it finds you, you don’t find it. You know I mean? If you wake up every morning and something’s driving you crazy or if you can fill … If you can complete the following sentence – I absolutely effing hate it when – blah. Okay, do you really, really effing hate it? Or it’s just kind of a nuisance?

 

So I think like anything could use an analogy of a musician or a poet, if I force you to write a song right now. You might be the best songwriter in the world, but if I say right now, Moby, within two hours or by the end of the day I need a song. That’s not how the best songs were written. The best songs came to somebody at 2:00 in the morning through a dream and they couldn’t help themselves but wake up and write those words down. That’s my belief, similar with finding that fire in your belly.

 

Moby:  So it’s the thing that comes to you again and again?

 

Gordon:  I think so.

 

Moby:  Just randomly? Awesome. So back again two pitches. Now I’m going to put myself in the shoes of a first-time entrepreneur. I have decided on a problem, I’m passionate about it. I’ve been thinking about it for two years and I come to you and you say, “Go and test the market.” And I’ve talked to people. And then I’m like, “Okay, it seems that people want to have this. Now what do I do? Do I go out build it, do I raise capital, do I find a co-founder? I don’t know what to do. I can read books. What do I do?

 

Gordon:  Well, I think you can get down … I described about one of an entrepreneur’s most valuable tools is the compass, not the GPS, okay? It means get down a directionally correct path pretty quickly, like just kind of start, get moving. This doesn’t obviate you from the need to actually do some planning and I’m happy to talk about that as well, because I do think it’s important.

 

But go ahead and get down a path and use your spidey senses to continue to validate and validate your various assumptions. Because as you get down that path your list of assumptions is very, very long, so what you’re trying to do is validate those assumptions as quickly as possible.

 

So I don’t have any problems with kind of starting down a path, just don’t get all the way to the goal line without finishing all of that homework you were supposed to do.

 

Moby:  Yeah, one thing I’ve heard and then I said a lot in one of my favorite organizations three-day startup, is no one is going to steal your stupid idea.

 

Gordon:  Yeah.

 

Moby:  Then go out and talk to people about your idea, get some feedback, because if you don’t tell them you will always think that you’re right.

 

Gordon:  That’s right. You’re whispering in the woods basically and nobody is really going to hear what you’re saying, nobody that you would care about or be concerned with. This is why investors aren’t going to sign the silly confidentiality agreement, and it’s why, yeah, the value you get from talking about this as much as possible and getting as much feedback as possible far outweighs the infinitesimal chance that someone is going to steal your idea and going to beat you to the punch.

 

Moby:  Absolutely, because there’s so many ideas out there. You’ve just got executed for a long time.

 

Gordon:  Yeah, 85 people are already working on your idea. Don’t be disillusioned. They’re working on it in different ways, slightly different shapes and sizes and flavors or whatever. So don’t worry about that. Just if you can come up with a solid idea, solid product, solid business plan it really is going to come down to execution, right? Like so whoever eventually executes the best is the one that’s going to win. It’s not necessarily the one that has the best idea first. It’s going to end up in an execution match.

 

I mean, if you talk about building a company to a exit of 200 million, 500 million, a billion or let’s say reaching an IPO, it’s about execution. That part’s about execution.

 

Moby:  It’s not just the idea that you keep thinking about in your car.

 

Gordon:  No, no, no way.

 

Moby:  So how many times in the last month or actually a year have you heard someone say this, “You know that company; I had that idea two years ago.”

 

Gordon:  Sure.

 

Moby:  How many times have you heard?

 

Gordon:  I’m a little guilty about myself, although I am not the zero to one entrepreneur. I do occasionally have ideas, and I’ll kind of jot them down. I’ll outline a simple business plan. Or sometimes I’ll see something tangentially related to that, and I’ll fall into that trap like, “Oh, I had an idea just like that.” No, it wasn’t quite like that, but yeah, it happens. And I think that’s okay. Nothing wrong with that.

 

Moby:  Okay, so we talked about kind of the blind spots that first-time entrepreneurs can have about their product. And some assumptions about entrepreneurship that they might have like, “You know what? People might steal my idea.” Or, “Oh, my God. This is so unique.” Jumping into … and so I’ve done some customer discovery. I have talked to my customers and I might have a word typed, it might be pen and paper, and now I’m thinking, “I need a co-founder.” Why is it important to have a team rather than be a sole founder? Because I’ve heard that a lot.

 

Gordon:  A lot of people think it’s because of the workload that happens, right? When you’re a solo entrepreneur you’re of course wearing every hat. It is a little bit partly about splitting duties and being more efficient, more effective and moving a little bit faster. It’s also about complementing your skills. I mean, I’m going to talk about first-time entrepreneurs, and when I say first-time entrepreneurs that usually means young entrepreneurs. There are of course people like me, I’m 52 years old and yes I might quit my career and try my hand at entrepreneurship.

 

But I think mostly we’re talking about young entrepreneurs. And when you’re a young entrepreneur your skills and experience of course are limited, even if you did have a few years of a job, it would have been probably in a singular function. So you have a lot of blind spots and naiveté regarding what can be done and how to do things.

 

So you hear of the technical co-founder and the business co-founder. Well, at least what you’re trying to do there is recognize that it’s less likely the business co-founder is super steeped in the technology aspects and vice versa.

 

I actually think the biggest advantage of the co-founder is to get a different way of thinking. You think differently than I do, your personality is different than mine. I might be a little on the conservative side, you might be on the aggressive side. And the debates that you and I have are actually the most valuable attribute of two co-founders instead of you just doing it your way.

 

By me bringing my perspectives and my methods and my experiences you will be stronger … together we will be stronger and have higher odds of success.

 

Moby:  And how much of that is just the emotional support? I mean, it’s 1:00AM and you’re like, “Oh, my God. I don’t know if this is going to last another month.” How much of that helps? How much is having a partner helps with that?

 

Gordon:  That’s right. In that way it’s much like any relationship. Two people that are in a serious relationship, because as your co-founders, I mean you’re not quite married but you’re probably …

 

Moby:  You’re kind of married.

 

Gordon:  You’re engaged at least, let’s say you’re engaged. And the example that you gave is a little bit more like the way relationships are. If I’m having a down day my wife picks me up and vice versa. If I’m charging down, I’m a competitor in swimming and whatnot, and if I’m kind of losing motivation before a national championship and I’m, “Nah, I don’t think I’m going to go swim workout today.” My wife might say, “Well, hey, Nationals are 30 days away. You set a goal for this kind of time. Do you really want it?”

 

So in that way you’re supporting each other and you’re hoping that both of you aren’t having super down days or down weeks and both want to quit, that might be telling. You’re hoping that if one is down the other one’s up.

 

Moby:  Can you tell … So a lot of co-found relationships do goes up, can you tell after 30 minutes with a team that there is a deep communication problem here?

 

Gordon:  It’s hard. It is one of the hardest things to test for and that’s because we as human beings are able to put on a particular face. When you’re in there selling to a customer the best salespeople are able to have their company come across as much bigger and much further along than they are and product is much stronger and less bug free, right, or more bug free.

 

And in that way when two co-founders are pitching investors or maybe pitching me to join our accelerator, they have their Sunday suit on, and they’re looking sharp and they’re keying off each other and they’re lovey dovey to use the couple analogy. But in reality we know couples have fights too.

 

So what I try to do is I try to ask some questions to tease out, “Hey, tell me about a recent argument where maybe you thought the company should go left, and you thought the company should go right. Surely that’s happened in the last month. Just tell me about one of those situations.” And I’ll keep kind of pressing a little bit like, “No, come on, Joe, you really disagreed with Sally on this one. Like did you get into a knock-down drag-out. I don’t need to dig into your personal business, but I’m really try to understand how do you handle crucial conversations and very, very difficult decisions.”

 

I try to test for it because I’ve had of my angel investing portfolio of about 14 investments, four or five have already died. And a majority of those that died I can point to what I call co-founder funk as a significant contributing factor. So it is important.

 

Moby:  How … and as you probably know we’re kind of jumping from one topic in the kind of a roadmap like in that direction, I’m really fascinated by this – how can you … and this maybe he’s going into relationships, but how do if the partner you pick for a start-up is the right one? Because if your relationship with them screws up, it’s over, or you have to start from scratch.

 

Gordon:  It is the risk of trying to find a co-founder by going to a happy hour and assuming that just with a handshake and a 20-minute conversation you’re going to find a co-founder. You might and there’s nothing wrong with using that to kind of come up with potential candidates. But it’s very similar to assuming you’re going to meet your eventual … meet your spouse and make a decision getting married from meeting them in a bar in one date or something.

 

Of course love at first sight does happen, you hear about it, more often than not you date for a year or two or five. Now I already mentioned that startups most valuable resource is time, so we don’t have a year or two or five to find our co-founder. This is why a lot of times the more successful co-founding teams have known each other or the recommendations from others that know them kind of are helping to do a personality match.

 

Back to relationships if I’m going to recommend a potential mate for you, the better I know you the better I’m probably going to do on introducing you to someone that could be a future mate, right? No magic ingredients, but it’s really, really hard

 

Moby:  I heard this from one of my friends, Sakeet, where you said build yourself up before you need it. He was talking about having a support network before you go out and you screw up and then you’re like calling people. So even before you start … Right now if you don’t have an idea, if you’re not working on something but you’re so interested on entrepreneurship you could start building your network right now.

 

Gordon:  That’s right.

 

Moby:  Going to happy hour so that you might know that person for a year.

 

Gordon:  That’s right. And there’s … the other beauty in this particular regard is very few first-time entrepreneurs have the capital resources to bring on a very early team or even just one or two co-founders, full-time and pay them. So many times in that bootstrap phase it’s part-time work.

 

So you get a chance to try before you buy. We’re working on this idea, but both of us have paying jobs because we have to pay the bills. We’re working on this on nights and weekends and we’re getting to know each other over the course of these two months, three months, maybe six months before we finally commit somebody to give us a little bit of money. And then one of us can come on full-time but we’re still getting to know each other. So you do have a honeymoon period to use the analogy.

 

Moby:  And no wonder there’s so many events that are called co-founder dating.

 

Gordon:  Dating.

 

Moby:  Yeah, exactly. So now, again putting myself in the shoes of a first-time entrepreneur, I have thought about my problem, I thought about my solution and I’m doing a B2B business. And I’m talking to two people about, “Hey, I’m interested. Are you interested?” I’m done MBA and you know programming. This is cool, right? And I got an email from two people – what kind of a verbal thinking that, “Hey, when you build that product, let me know. I might just buy it.” And I’m thinking, “Oh, my God. I can quit my job and be rich and all of that.” Now what? When I start building it on the side and I think I have two three potential customers I can sell it to, but I don’t have enough money to build past the MVP. What do I do? Do I start pitch competitions, go pitch to investors?

 

Gordon:  Well, this is where the friends and family around is so popular. And it’s because it takes so little capital to get a product in the market that angel investors usually are waiting until you’ve got a shipping product and your first customers. Or maybe really, really, really close. But your question is even earlier than that, right?

 

And this is why the friends and family, they know you, they trust you, part of it of course is they want to support your journey. And if they have the financial means to do that, as long as you’ll explain to them that the odds are kind of high, probably pretty high that you’re not going to ever give them their money back. And if they still would like to support your journey then that’s okay.

 

But they know you and that’s why fifty thousand or a hundred thousand from friends and family is actually fairly common. First-time entrepreneurs don’t have the financial resources to do it themselves. They’re too early in their financial career. So that’s perhaps a way of getting a little bit of money.

 

If you can build kind of a semi crappy MVP, but that solves a significant pain you might actually be able to get some customers to pay you a little bit of money for this crappy MVP. Not a lot of money but that actually … that by itself is validating to early investors, the fact that you took this crappy looking thing and convince somebody to pay you a little bit of money for it.

 

Crowd funding could come in, right? Not every product is suitable for a crowd funding campaign, but by putting this idea up there and letting the crowd decide if they want it give you a little bit of money. Well, could you raise 25,000 or a $100,000 on some crowd funding portal? Now you got a little bit of money and you have validation for those angel investors that said, “Without even building it I raise this much money.”

 

Moby:  Your revenue is the best source of funding.

 

Gordon:  Yeah, for sure it is. Absolutely, not diluted and validating.

 

Moby:  Exactly. So if I have a company and I’m at that stage where, “Yes, people are going to say that we’ll buy your …” People are saying, “I’m going to buy your MVP.” Is it wrong for me to just say, “Okay, I need investment right now.” Or should I focus on bootstrapping? Is that different between saying I’m going to go after investing versus I’m going to bootstrap it and raise from my customers? Is that more of a base on the person value like the entrepreneur’s values or more of a, “Okay, I just can’t build this company in the first year without two million right now.”

 

Gordon:  Yeah, I think it depends on the severity of the pain and your efficacy on alleviating the pain. What I’m saying is for the customer to part with their money and put it into your pocket instead of keeping it in theirs, I think it has to be a pretty significant pain, right?

 

Now the crowd funding offerings usually it’s not that much money that they’re contributing. But if I have a particular cancer and you tell me that you’re six months away from solving that, and I have a chance to be one of the first ten to receive that treatment but I need to give you $1,000 first, okay, that’s probably something I’m going to consider.

 

If it’s a lightweight thing that kind of makes my life a little bit better, well I’m not going to give you $1,000 and hope that you actually build it just to maybe be in your first ten. So I think maybe that’s where it falls down in terms of being able to get customers to part with their money before you actually deliver a product.

 

Moby:  And … what was I thinking? You said something that sparked something in mind. I forgot. Anyway, so it’s time to execute, right? Yes, I just got 10K, 20K from early customers, two to five, and I’m excited. My work ethic is fantastic right now. My co-founder comes over after my full-time job or I might even have quit and I have some savings. What blind spots exist right now when I’m almost about to bring out my MVP?

 

Gordon:  I think probably if I’m going to predict a couple of your first blind spots, the first one is you are focused on building a product not a company. And you feel like, “Now that I’ve built this product, okay, I’m there.” No, you have a product you don’t have a company. And to build it … and by the way that is something investors care about. Investors care about you building a successful company, not a successful product. So it’s another blind spot in your dialogue with investors.

 

Moby:  What’s the difference?

 

Gordon:  A company is a business plan, and a business plan has a market and a problem solved and a target customer and a customer acquisition strategy and it does have a product that you sell for a certain price. It has a support model, it has a plan for scaling the business beyond just two or three or five customers, but getting to thousands or tens of thousands of customers.

 

A company is people and a company has a culture and a company has a management system and a company has physical offices and reporting and metrics and oversight with boards of directors. I mean, that’s a company. And a product is just such a small but super important sliver of that, but it’s just a portion of the company.

 

So to me it starts with strategy. And there was a guy named Dr. Chen that was a former chairman or CEO of TSMC, a semiconductor company that said, “Strategy without execution is pointless. But execution without strategy is aimless.” And where does strategy comes from? I think strategy comes from just basic planning. And entrepreneurs most of them don’t want a plan.

 

In fact entrepreneurs hear this adage of – don’t waste your time on a business plan. And what that means is we used to write 40 and 50-page business plans before we could get funded, and we don’t do that anymore, right? The business plan is in a pitch deck.

 

But I wrote an article that’s titled – don’t waste your time on a business plan “doesn’t mean don’t plan.” And Ben Franklin is the one that said, “If you fail to plan, you are planning to fail.” And so I do believe there is a planning element to this and I do also believe startups can get down this directionally correct path while they are planning this company.

 

So it’s a big, big blind spot. You’ve got to figure out how to do some planning. This is where advisors can help you, because young entrepreneurs, they don’t know what planning sessions look like – how do I do a strategy session? How do I do a plan? Well, get some advisors to help you.

 

Moby:  Yeah, it’s like … I mean you’ll constantly have to learn. So if you’re a technical founder and three months down the line someone says to you, “Hey, we need some revenue model.” Like, “Where do I go?” But that’s where things like Capital Factory meet-ups and even people you know who’ve done this before come in. Throughout this kind of a road map how important is coaching in every step of the way?

 

Gordon:  It’s one of the biggest advantages that entrepreneurial scene has seen evolve over the last let’s say decade or so. Ten years ago the concepts of incubators and co-working spaces with accelerator programs and this concept of startup mentoring and formal advising, I’ve been advising startups for about 17 years so of course I knew the concept of being an advisor to a startup. But it is so prolific now. They’re all over the place.

 

And yes, there’s good advisors and bad advisers and you get to decide what good versus bad means. But there are a lot of them. There are programs you can join, there are boot camps you can go through, there are meet-ups that you can participate in. I produced a video library called Founders Academy that’s out there. I mean, it’s just … there’s resources galore and that didn’t exist 10 or 20 years ago.

 

And so shame on a first-time entrepreneur for not tapping into that. I mean you got to go beyond reading textbooks. I mean, I mentioned Zero to One is a fabulous book and there’s lots of others. But wow, there is nothing better than real personal coaching and advice from someone that’s been in the trenches, has scars in their back, can tell stories, can ask you difficult questions, very valuable.

 

Moby:  Absolutely, there’s so much information out there that you … if you come in front of an investor and they ask you about your business structure, if you say, “I don’t know.” That means you have any search on YouTube.

 

Gordon:  That’s right.

 

Moby:  Yeah, you have a huge library of videos around that one.

 

Gordon:  Shockwave Innovations? Yeah. I don’t know how this happened exactly actually, but as I give advice this goes back about 15 years ago, if I was asked the same question twice over some period of time I decided well I’ll just write it down. If more than once somebody’s asked me how do I write a business plan, “Okay, I’m just going to write down what are Gordon’s theories on writing a business plan?”

 

So I started publishing documents and articles. This is before the days of blogging, of course that turned into a blog. I’ve now got about 150 or 160 articles that are published at Shockwave Innovations. I found that it’s a personal passion.

 

What I like about it is it’s a test for me. It’s a test to figure out what do I know or think I know. Is it interesting? Is it valuable? Can I communicate it in a way that’s consumable by others that haven’t been in that movie before? So it’s a test for me but now I’ve built up all this content that then translated into producing a video library by the name Founders Academy. It’s got more than 40 modules of video. There’s some universities that are using it to replace the entrepreneurship textbook. It’s a passion project.

 

Moby:  Absolutely, and it’s very comprehensive.

 

Gordon:  Thank you.

 

Moby:  So what are … And back to that execution part, and you mentioned the blind spot that is investors are looking for a company and not a product. What are the most common elements of a company then investors prod on and be like, “Tell me more about that. No, no, give me more details that entrepreneurs may not think of on the first go.”

 

Gordon:  Well, so let’s go back to the evolution of the company that I mentioned we talked about – desirable, feasible, viable. When you’re talking to investors they are mostly testing for viability. They’re testing for a lot of things, they’re testing for the founding team and do they have drive and passion, are they smart and all those kind of things.

 

But from really am I going to get a return on my investment, is there a chance that I’m going to get my money back or hopefully a lot better. I need to know is there a viable business here.

 

When we talk about viable businesses were basically … We’re not talking about can this be a billion-dollar company, we’re just talking about basic viability. Can I come up with or can this startup come up with a customer acquisition method that is efficient and effective enough to achieve lifetime value from a customer that is considerably greater than the cost to acquire the customer. It’s the LTV greater than CAC, greater than customer acquisition cost.

 

And of course three times and five times greater is better than just 1.2 times greater. But that’s one of the biggest things that they’re going to double click into which is – how are you going to acquire customers? And don’t just say we’re going to do some Facebook Ads. No, no, give them more on that. Is this a zero touch acquisition, light touch, is it heavy touch? What methods are you going to use? What have you tested so far? Why do you think this is an efficient way to acquire customers?

 

It usually doesn’t work out like the startup thinks it will. This is why investors are also testing for market size. Larger markets allow you to pivot and adjust. You thought you were going to sell into the high end of the market with a heavy touch sales model, oops, that’s not working. So a down scaled version of the product sold to small medium business with inside sales could work.

 

Slightly different customer targets, slightly different industries, slightly different use case. This is what large markets bring us. So I think testing for viability and market size are a couple key things.

 

Moby:  And customer acquisition – how does that change from the first six months where … we’re kind of talking to five, ten customers. You’ve built something. Brilliant, we’re 18 months into this journey. And now people are asking me, “Tell me your customer acquisition journey for the next year.” How does that change? How does the scale of that change?

 

Gordon:  That’s right. So it starts with the founders serving as the sales team. Remember it’s just you and me and maybe we hired one or two others, but if we hired one or two others they were probably engineers, they probably weren’t salespeople. We usually don’t hire salespeople first. I actually think it’s good for the founders to be the first salespeople. The valuable insights that you gain and having doors shut in your face and hearing those objections directly from the customers.

 

Now if your self-service then we don’t get quite that advantage. If we’re self-service we’re not hearing from the customers as much, but there may be your different ways to get that feedback.

 

What you’re talking about here is now we’re a year or 18 months into it. We have convinced customers to buy it and we feel like we do have some viability. Now what we’re moving is to the next phase which is scalability – can we scale this company? The final stage is sustainability, right? So we are viable, then we’re scalable, and finally if we make this work we’re sustainable.

 

It’s possible that we build a sustainable business that’s not scalable and that’s what we call a lifestyle business. I can sustain this forever, but it’s only going to make $10,000 a month. It’s interesting income, but it’s not going to be a billion-dollar company.

 

But let’s put that aside. When we move to scalability now we’re scaling that customer acquisition model, and if it’s self-service it means we’re dialing up those inbound marketing programs. We’re finding ways to be more efficient of moving them through the funnel and nurturing them and having lower dropout rates or abandonment rates when they get to the shopping cart if you will.

 

If it’s a sales organization we are refining and enhancing our sales process, and our sales methodology. We’re bringing in tools like Salesforce.com or HubSpot to do marketing automation. We’re really, we’re building a machine, we’re building a well-oiled customer acquisition machine. That’s how you scale.

 

Moby:  And then how many companies … So I can imagine, I can imagine myself thinking, “Okay, it’s been two years,” and I know we’re jumped in the roadmap, I just love thinking in terms of this kind of timeline. It’s been two years, I’ve been able to raise money, I’m growing, but how many companies still fail after that two-year mark?

 

Gordon:  Well, I think of it a little less than time duration. And more on maybe revenue plateaus, because I mean I’ve seen many startups go into what I’ll refer to as cockroach mode, and it’s not my term, I stole it from somebody that don’t know and I can’t give credit to. But I’ve seen companies going to cockroach mode for three years, four years, five years.

 

Moby:  Survive.

 

Gordon:  Absolutely, I’m on the board of directors of a company that were five years into it and we’ve just finally now gotten on good footing. We had to go into cockroach mode because our customer acquisition model was massively broken. We couldn’t afford the sales model that was needed to convince the customers that we targeted to buy. So we had to scale way back and go very, very slow. Now we’ve finally reached a good point, we’re going to start dialing up. But it took five years. So it’s a little less about … and this company’s going to be fine. I feel good about the company. But it took five years.

 

I think it’s more a start-up might think once they get to a million dollars in revenue, “Ah, I got it.” And they really celebrate a million. And it’s kind of funny and I find that I live in this world now, and I do also celebrate getting to a million. I mean, while the odds of succeeding now when you’ve gotten to a million are dramatically improved, but boy, you have not made it at all. Believe me.

 

I joined a company at four or five million dollars of revenue; we grew it over a few years to 36 and took it public. But, wow, the challenges that we hit along the way and we were losing money at a certain time, we could have crashed and burned as $20 million company. You go through big recessions, I mean, we went through the 2000-2001 dot-com crash, almost killed the company, but luckily we survived. So there’s all of these factors that can cause you to go sideways after reaching a million dollars.

 

Moby:  Just when you think you’ve become strong someone stronger comes and punches you in the face.

 

Gordon:  Absolutely, the world changes. And the other thing that happens is you’re a $10 million company and as especially as you are 30 to 50 the way you operate is very, very different. You will have a turnover in the management team. It’s very unlikely that these glass-breaking entrepreneurs that started the company will have the personality and the skills and the management style to successfully carry the company through those phases. It does happen.

 

And of course we love to celebrate the Bill Gates and Mark Zuckerbergs of the world that we’re able to hold on to the company. That’s one, one thousandth of 1%. So even those kind of things like a total change out of the management company, management system, that can be a big disruption that can take you sideways.

 

Moby:  You can never know what’s going to happen.

 

Gordon:  It is never easy. It’s easy after you’ve sold your company for $500,000 and you’ve taken a couple months off, and now your heart rate’s back to normal then it’s easy for a little while. Until then it is just hard in different ways. So get used to hard.

 

Moby:  Get used to hard. What’s the last piece of advice you’d like to leave listeners with or even viewers actually? We’ve got this great set up.

 

Gordon:  That’s a good question. I do have a lot of advice. I think one other piece of advice I commonly give this, I find that entrepreneurs one of their blind spots is this infatuation with dilution. You and I start out with 50/50, and I get this 50% ownership edged into my brain for some reason. And I somehow can’t realize that over time when we build this great company it’s worth a half a billion dollars I’m not going to have 50% of it.

 

But for some reason when we’re 50/50 I kind of imagine like, “Well, maybe I’ll have 30% and we’ll exit 30% of $500 million. Wow. How much money? I’m going to have an island I’m going to be able to buy.” And so we get hyper focused and infatuated with dilution and we lose sight of optimizing for growth instead of dilution.

 

And I say this because we might be facing three potential investors that want to fund our company. This one dilutes us 21%, this one would delude us 22%, and this offer dilutes us 30%. And we get infatuated with this difference between 20% and 21, maybe the investor that dilutes us 21% is the best partner that really has resources and networks and other success stories in our industry.

 

And what I tell an entrepreneur in those cases is optimized for growth not dilution. Now there’s 30% or 40% dilution, well, yeah, that that might be ridiculous. So I’m not saying don’t think about it, but optimize for growth not dilution if we’re down to miniscule percentages.

 

Moby:  Yeah, better to have a smaller piece of an actual existing pie than the whole piece of a pie that doesn’t exist except in your head.

 

Gordon:  The only equity percentage, in other words the number sign next to your name with a percentage sign after it. The only time that really matters is when we exit and having a half a billion dollar exit versus a little $10 million punch out, okay, big difference, right?

 

Moby:  Yeah. Thank you so much for this, Gordon. This is a pleasure.

 

Gordon:  Thanks a lot. Thank you.