Monday, April 23, 2012

Invert, always invert

Charlie Munger (Warren Buffet's long-time partner) is full of pithy maxims for investors, but one in particular has been ringing in my ears lately:

"Think forwards and backwards -- invert, always invert"

By "inverting", he means coming at any problem from (at least) two different and opposing angles. This is good advice in any situation, but especially for entrepreneurs who are wrestling with hard strategic decisions.

Here are three specific examples:

1. Fundraising

Every startup business idea I've ever seen looks great in Year Five -- with massive revenues, fat margins and negligible selling costs. But it's the rare team that can tell a convincing story about how that massive success gets built brick-by-brick, with just three guys (or gals) nobody's ever heard of and a little bit of running code that doesn't look anything like the snazzy version in the mockups.

On the flip side, sometimes I come across incredibly disciplined operators who can tell me with astounding accuracy what their Customer Acquisition Cost (CAC), Lifetime Value (LTV) and Monthly Recurring Revenue (MRR) will be next month, but fail completely to paint a convincing picture of the big exciting future that awaits them (and their investors) as they grow.

The right answer -- "invert, always invert" -- is that you have to do both.

The most successful fundraising pitches are able to convey the kind of long-term, strategic future for the business that gets greedy investors drooling, while at the same time demonstrating that the team has the insight, discipline and skills to build that business from the ground up. Either one or the other isn't enough -- you have to tell both stories together.


2. Go-to-Market Strategy

In a world of costless software innovation -- and resulting hypercompetition -- building a great product that solves a problem for your customers is less than half the battle. Winning teams know how to apply the same level of creativity and passion to their sales and distribution efforts as they do to product development.

All too often I come across teams that have just one trick in their distribution bag, and it's usually the kind of Hail Mary strategy that's both rare and exceedingly difficult to pull off ("we're gonna go viral man!").

Very few teams are able to articulate a credible distribution approach that includes both "bottom up", one-customer-at-a-time cultivation of loyal users, and "top down" market development approaches like channel sales, content marketing, and partner-based cross-selling.

The need to "invert, always invert" your go-to-market strategy is particularly acute in enterprise software.

The great equalizers for enterprise startups -- consumerization and self-provisioning -- have opened the door to consumer-style "freemium" selling approaches that target individual users rather than CTOs and procurement officers. But that doesn't mean that top-down selling isn't still a good idea: the best enterprise tools deliver significant value to end-users and workgroups, but also create accelerating cost, transparency and business intelligence gains when rolled out company-wide.

The smartest enterprise startups find a way to "invert" their sales efforts, complementing single-user freemium offerings with strategic sales outreach higher up the organizational stack to clear the way for faster, more profitable rollouts across the enterprise.


3. Exit Strategy

In the weird, coded world of investor / entrepreneur communications, exit is a loaded topic.

If the founding team seems too focused on it, investors worry that the team is greedy and short-sighted, with unrealistic expectations about how hard and long the journey of business-building really is. But if the founders don't come in with a wild-eyed vision for massive strategic impact in their chosen industry, investors worry that the founders are just building a "lifestyle business" that will never pay off.

Since most angel and venture liquidity comes via M&A, this little dance always strikes me as an elaborate zen archery ritual. The truth of the matter is that every entrepreneur -- and every investor who backs high-risk ventures -- lives the Stockdale Paradox every day:
"You must never confuse faith that you will prevail in the end – which you can never afford to lose – with the discipline to confront the most brutal facts of your current reality, whatever they might be."
The Goliaths may vary by industry, but there is a little bit of David in every startup founder. The day-to-day grind of shipping code and delighting customers is the bedrock of startup success, but it never hurts to remind yourself -- and your team -- which lumbering behemoth you aim to scare the pants off as you travel the bumpy road to startup success.

---------------------------

As it turns out, Charlie Munger's maxim -- "invert, always invert" -- is the rule, not the exception for startup founders. Every day, many times a day, you will be whipsawed between the extremes of love and fear, elation and despair, bottom up and top down.

Learning how to invert like a master while keeping your own equilibrium is one of the most difficult and powerful Jedi mind tricks a founder can learn.